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Swaps Phase-Out Delay, Gilt Moves, MF Rogue: Compliance

July 17 (Bloomberg) -- Deutsche Bank AG, the European continent’s biggest bank, is among lenders given an extra two years by the Federal Reserve to separate derivatives trading from U.S. units that get government backing.

The Fed, in letters posted to its website this week, said Frankfurt-based Deutsche Bank, Standard Chartered Plc, Societe Generale SA, Canadian Imperial Bank of Commerce, Bank of Montreal, Toronto-Dominion Bank, Credit Agricole SA, Natixis SA and Bank of Nova Scotia must determine whether to halt swaps activity or move it to properly capitalized affiliates. Under the Dodd-Frank Act swaps push-out rule, interest-rate and some credit swaps can still be traded inside the banks.

“The potential impact of granting a 24-month transition period is less adverse than the potential impact of denying the transition period,” Robert Frierson, secretary of the Fed board of governors, wrote in the letters, delaying a deadline that otherwise required the push-out from yesterday. Forcing the banks to cut off trades sooner could risk “operational problems and market disruption,” he wrote.

Dodd-Frank, enacted in 2010, expanded swaps oversight as U.S. lawmakers sought to make markets less vulnerable after the 2008 credit crisis. The push-out rule, included in the law by former Senator Blanche Lincoln, requires that equity, some commodity and non-cleared credit derivatives be walled off from bank units with access to deposit insurance and the Fed’s discount window.

The Fed’s letters are almost identical to those the central bank sent to U.S. companies such as Goldman Sachs Group Inc. and Bank of New York Mellon Corp.

The Office of the Comptroller of the Currency granted the two-year phase-out period last month to national banks it oversees, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Morgan Stanley.

Compliance Policy

EU Plans Card Fee Caps to Build on Antitrust Probes

Banks and payment-card providers would face caps on the transaction fees they can demand from retailers under European Union plans to rein in charges that have been attacked by regulators as anticompetitive.

The European Commission, the 28-nation EU’s executive arm, will propose that interchange fees paid by retailers on card transactions should be capped at 0.2 percent for debit card payments and 0.3 percent for credit cards, according to draft plans obtained by Bloomberg News. The caps would initially apply to cross-border transactions, and then be expanded to also cover domestic payments after two years.

Retailers have long opposed the extra costs associated with accepting credit and debit cards. The amounts are set by MasterCard Inc. and Visa Inc., which own the payment networks and pass the money to the banks.

The fees “restrict competition as they inflate the cost of card acceptance by merchants without leading to benefits for consumers,” according to the document.

The commission proposal, by seeking to use legislation to limit such fees, marks an expansion in the EU’s assault against the practice. The agency has said that it will publish the plans on July 24. They would require approval by governments and the European Parliament before they take effect.

Antitrust probes opened by EU and national authorities “may not lead to sufficiently comprehensive and timely results to unlock the market integration and innovation that are necessary,” according to the document. Despite the investigations, “card schemes operating in the EU currently do not seem willing pro-actively to adjust their practices.”

For more, click here.

Compliance Action

Barclays, Traders Fined $488 Million Amid U.S. Energy Probe

Barclays Plc and four former traders must pay a combined $487.9 million in fines and penalties, the U.S. Federal Energy Regulatory Commission said in an order tied to an investigation of alleged manipulation of energy markets.

The agency directed the company and traders to pay $453 million in civil penalties to the U.S. Treasury within 30 days, according to the order issued yesterday. The London-based bank also must surrender $34.9 million in profits, to be distributed to programs that help low-income homeowners pay energy bills in California, Arizona, Oregon and Washington, the FERC said.

FERC’s move is part of a crackdown by global regulators on alleged rigging of benchmarks used in markets from crude oil to currencies. The penalties, which the agency first proposed Oct. 31, stem from an investigation in the FERC’s crackdown on market manipulation.

“We believe that our trading was legitimate and in compliance with applicable law,” Marc Hazelton, a Barclays spokesman, said yesterday in a statement. “We intend to vigorously defend this matter.”

He said the bank believes the penalty is without basis and that the FERC order is a “one-sided document, and does not reflect a balanced and full description of the facts or the applicable legal standard.”

The FERC determined that the Barclays traders manipulated markets in the Western U.S. from November 2006 to December 2008. The employees made transactions in fixed-price products -- often at a loss -- with the intent of moving an index to benefit the bank’s other bets on swaps, according to the FERC.

The evidence “demonstrates that the intentional amassing of the positions and trading to influence price were not based on normal supply and demand fundamentals, but rather on the intent to effect a scheme to manipulate the physical markets in order to benefit the financial swaps,” the agency wrote in its order. Swaps are derivative instruments used to hedge risks or for speculation.

The watchdog’s staff estimated that the misconduct caused $139 million “in harm to the market.” Their actions “demonstrate an affirmative, coordinated and intentional effort to carry out a manipulative scheme,” violating U.S. law and FERC rules, the agency said in the statement.

The FERC directed Barclays to pay $435 million in penalties and Scott Connelly, former head of its North American power-trading desk, to pay $15 million, for allegedly directing the manipulation of electric energy prices.

Todd Mullins, an attorney for Connelly with McGuire Woods LLP in Washington, declined to comment on the order. In a Dec. 14 filing with the agency, Connelly’s attorneys said there was no proof that he had violated the law and that the conclusions of FERC staff were inconsistent with the facts.

The FERC also levied fines of $1 million each on former Barclays traders Daniel Brin, Karen Levine and Ryan Smith. Brin declined to comment yesterday. The agency used instant messages and e-mails sent by the former traders to bolster its case against them.

For a Bloomberg Television report, click here.

U.K. Regulator Studying Gilt Moves During QE Buying, Fisher Says

Britain’s Financial Conduct Authority is studying price moves in the gilts market as the central bank carried out purchases under its quantitative-easing program, Bank of England Markets Director Paul Fisher said.

The Bank of England passed information to the U.K. financial regulator, Fisher told lawmakers on the Treasury Committee in London yesterday. It related to central bank bond buying being carried out in a reverse auction on Oct. 10, 2011.

The Bank of England has bought 375 billion pounds ($567 billion) of gilts under its quantitative-easing plan designed to spur growth by capping bond yields. The FCA is already investigating manipulation of benchmarks for interest rates and foreign-exchange rates.

“We can’t comment on specific or potential investigations,” the FCA said in a statement. “We are aware of the comments that’ve been made.”

The Bank of England rejected all bids on Oct. 10, 2011, for notes due August 2017, citing “significant changes in its yields in the run up to the auction.”

Singapore’s MAS Says Local Banks Not at Risk Amid Moody’s Cut

The Monetary Authority of Singapore said in an e-mailed statement that banks have conducted stress tests on their own and had tests coordinated by the central bank, and have “adequate buffers” to cope with higher interest rates.

The MAS has been monitoring risks, including those for the property market, it said in the statement. The authority has been concerned about over-borrowing, it said.

The MAS has taken steps on property risks, including stamp duties and loan ratios, according to the statement.

Moody’s downgraded its outlook for Singapore’s banking system to negative from stable yesterday.


Tourre Jurors Endure Witness Explaining CDOs From A to Zzzz

Throughout yesterday morning, jurors struggled to pay attention to the complex testimony on CDOs inside the Manhattan federal courthouse where former Goldman Sachs Group Inc. vice president Fabrice Tourre is being tried for securities fraud.

Some rubbed their eyes. One’s eyes were closed, head propped on a hand, while others looked at the clock as an expert testified about CDOs, synthetic CDOs and CDOs of CDOs.

The U.S. Securities and Exchange Commission sued Tourre and Goldman Sachs in 2010 over Abacus 2007-AC1, a synthetic CDO investors used to bet on mortgage bonds. They lost more than $1 billion on the wager. New York-based Goldman Sachs paid a then-record $550 million to settle the case.

Dwight M. Jaffee, a professor of banking, finance and real estate, was called to the stand to explain how CDOs work.

John “Sean” Coffey and Pamela Chepiga, Tourre’s lead lawyers in the trial, have argued that a synthetic CDO like Abacus requires short investors to match up with all the long positions that are sold. As a result, they contend, it was natural for Paulson to have input into the portfolio of residential mortgage-backed securities underlying Abacus.

Before beginning cross-examination, an SEC lawyer used a PowerPoint presentation to help him explain a CDO as a sinking cargo ship, with the equity and mezzanine investors the first to take on water. Not long after the super-senior deck flooded, the animated ship was shown sinking to the bottom.

Later, U.S. District Judge Katherine Forrest tried to rephrase one of Coffey’s questions to Jaffee about a failing CDO, apparently using the wrong aquatic metaphor, and was told by Coffey that “flood” would be a more appropriate term than “waterfall.”

CDOs are debt securities backed -- or collateralized -- by assets including pools of mortgage bonds and other asset-backed securities. A synthetic CDO, by contrast, doesn’t directly hold mortgage securities. It’s linked to the performance of such assets and allows investors to use credit default swaps to bet on their performance.

The SEC claims Tourre concealed the role of Paulson & Co., the hedge fund run by billionaire John Paulson, in selecting the assets in the Abacus portfolio -- assets that Paulson was betting would fail.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Morgan Stanley Deserves Repayment From Skowron, Court Rules

Morgan Stanley is entitled to $10.2 million in restitution from Joseph “Chip” Skowron, a former hedge fund manager serving a five-year prison term for insider trading, a U.S. appeals court ruled.

Skowron, 44, asked the U.S. Court of Appeals in Manhattan to overturn a restitution order imposed by a judge after he pleaded guilty to conspiring to commit securities fraud and obstruct justice. U.S. District Judge Denise Cote said Skowron owed the New York-based bank 20 percent of his salary from 2007 to 2010, or $6.4 million, and $3.8 million in legal fees.

The appellate court yesterday upheld Cote’s ruling that the compensation is bank property because Skowron “manifestly failed to provide the honest services for which Morgan Stanley compensated him.” Skowron was a manager at Morgan Stanley’s FrontPoint Partners LLC until he was charged in April 2011 with using inside information to avoid $30 million in losses.

The bank also deserves payment of its legal fees stemming from a Securities and Exchange Commission investigation, according to the panel.

Skowron in August 2011 admitted helping FrontPoint avoid more than $30 million in trading losses on Human Genome Sciences Inc., a pharmaceutical firm acquired by GlaxoSmithKline Plc.

Skowron’s attorney Joshua H. Epstein didn’t immediately return a call seeking comment on the ruling.

“We are very, very pleased with the outcome,” Morgan Stanley’s attorney Kevin Marino said in a phone interview.

The district court case is U.S. v. Skowron, 11-cr-00699, U.S. District Court, Southern District of New York (Manhattan). The appeal is U.S. v. Skowron, 12-1284, U.S. Court of Appeals for the Second Circuit (Manhattan). Morgan Stanley’s suit is Morgan Stanley v. Skowron, 12-cv-8016, U.S. District Court, Southern District of New York (Manhattan).

AIG Can Probe Rogue Trader’s Employment Status at MF Global

An American International Group Inc. unit and other insurers can probe whether a “rogue trader” was an employee of MF Global Holdings Inc. as part of a lawsuit over liabilities for losses tied to the company’s collapse, a New York appeals court ruled.

A five-judge appellate panel in Manhattan yesterday ruled that while MF Global suffered a “direct financial loss” as a result of the trader’s actions, it wasn’t clear that he was an employee as he was paid by commission. The judges modified a lower-court ruling to allow AIG to seek evidence on his status.

The trader, Evan Brent Dooley, was sentenced to five years in prison in April for making unlawful unauthorized trades that caused the now-defunct futures firm to lose more than $141 million in 2008.

MF Global submitted a claim for the loss to insurers including New York-based AIG’s New Hampshire Insurance unit, which denied coverage based on the fact that MF Global didn’t suffer a “direct financial loss” and that Dooley wasn’t an employee, according to court filings. The insurer, together with others, sued MF Global to obtain a declaration that they were not responsible for the loss.

An MF Global spokeswoman, Beth Sussman, didn’t comment immediately on the decision. Jon Diat, a spokesman for AIG, didn’t immediately respond to a message seeking comment.

The case is New Hampshire Insurance Co. v. MF Global Inc., 601621/2009, New York State Supreme Court, New York County (Manhattan).

Ex-Commerzbank Official Gets Probation in IRS Conflict Case

A former U.S. Internal Revenue Service employee was sentenced to three years’ probation for passing information about a tax-fraud audit to Commerzbank AG while he was working to get a job with the Frankfurt-based bank.

Dennis Lerner, 60, pleaded guilty in March to a count of criminal conflict of interest and illegally disclosing federal income-tax information. Prosecutors said that while he was managing an IRS audit of Commerzbank and involved in negotiating a $210 million settlement of tax-fraud charges, he sought a job with the company.

Prosecutors said that the U.S. was investigating Commerzbank in connection with about $1 billion in allegedly unreported income and that shortly after an accord was reached, Lerner left his position and “immediately after resigning” began working at Commerzbank as its tax director.

In court yesterday in Manhattan, Lerner apologized to his family as well as the government, saying he used “very poor judgment.”

Assistant U.S. Attorney Randall Jackson said that prison was warranted and that U.S. sentencing guidelines recommend a term of four to 10 months in prison. U.S. District Judge John Keenan took Lerner’s poor health, including a heart condition, into account in fashioning the sentence.

Margarita Thiel, a Commerzbank spokeswoman, declined to comment on Lerner’s sentencing.

The case is U.S. v. Lerner, 12-cr-00952, U.S. District Court, Southern District of New York (Manhattan).

S&P Loses Final Ruling on Bid to Dismiss U.S. Fraud Lawsuit

McGraw Hill Financial Inc.’s Standard & Poor’s unit lost its bid to dismiss a fraud lawsuit by the U.S. Justice Department.

U.S. District Judge David Carter in Santa Ana, California, affirmed his tentative decision of July 8, denying S&P’s request to throw out the allegation the ratings company misled investors in residential mortgage-backed securities and collateralized-debt obligations.

In his decision, the judge didn’t rule on the merits of the government’s claims that S&P lied to investors about its ratings being objective and free of conflicts of interest. He disagreed with S&P that, assuming everything the Justice Department said in the complaint were true, the government’s allegations failed to reach the legal threshold to make a viable fraud claim.

Carter rejected S&P’s arguments that its assurances were mere “puffery.”

“The government has sufficiently pleaded the intent required to support its fraud claims,” Carter wrote in his ruling issued yesterday. “Any disputes over the veracity of these claims, or contested facts, are properly challenged at a later stage of litigation.”

The Justice Department seeks as much as $5 billion in civil penalties for losses to federally insured financial institutions that relied on S&P’s investment-grade ratings for mortgage-backed securities and CDOs. The value of many of the securities linked to risky, subprime mortgages was wiped out by a surge in defaults and the collapse of the U.S. housing market starting in 2007.

The case is U.S. v. McGraw-Hill Cos., 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).


Levitt Discusses Dodd-Frank Act, Wall Street Corruption

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, discussed the Dodd-Frank Wall Street Reform and Consumer Protection Act, and its effectiveness in reducing corruption on Wall Street. Levitt talked with Bloomberg’s Tom Keene and Sara Eisen on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Comings and Goings

SEC Reaches Union Deal That Includes 5-Day Telecommute Benefit

The U.S. Securities and Exchange Commission has agreed on a new contract with its union that will allow some employees to telecommute as many as five days a week and expands child-care subsidies.

The agreement with the SEC’s chapter of the National Treasury Employees Union also will permit new flexible work schedules that allow employees to vary their hours and includes new rules for furloughs caused by federal budget cuts. A collective-bargaining agreement covers non-management employees, according to the union’s website.

The deal was announced to SEC employees on July 12 in an e-mail from SEC Chairman Mary Jo White and union president Greg Gilman, according to a copy of the message obtained yesterday.

SEC spokesman Judy Burns didn’t immediately respond to a request for comment on the deal.

SEC Enforcement Unit’s Lench Is Leaving Agency After 23 Years

Kenneth R. Lench, chief of the Securities and Exchange Commission Enforcement Division’s Structured and New Products Unit, is leaving the agency for private industry after more than 23 years of service.

Lench will leave the SEC at the end of this month, the agency said in an e-mailed statement.

FDIC Director of Office of Minority, Women Inclusion to Retire

D. Michael Collins, director of the Federal Deposit Insurance Corp.’s Office of Minority and Women Inclusion since 1999, will retire effective Aug. 3, according to a statement issued by the office.

Melodee Brooks, currently senior deputy director, was named acting director.

To contact the reporter on this story: Carla Main in New York at

To contact the editor responsible for this story: Andrew Dunn at

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