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Libor E-Mails, Fannie-Freddie Survival, Finra: Compliance

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Oct. 16 (Bloomberg) -- A Deutsche Bank AG employee said clients never like to know how they were “screwed” in an e-mail concerning a 2007 swap deal that is at the center of a U.K. court fight over whether banks can be sued for manipulation of benchmark interest rates.

The e-mail was disclosed in court documents on the first day of an appeal hearing in London where Indian property firm Unitech Ltd. is seeking to invalidate an interest-rate swap and loans with Deutsche Bank because of alleged rigging of the London interbank offered rate. The case is being heard with a similar case Guardian Care Homes filed against Barclays Plc.

“No one likes to know he got screwed,” Sanjay Agarwal, Deutsche Bank’s Mumbai-based head of Indian corporate finance, said in a 2007 e-mail referring to the swap deal that was cited in Unitech’s court documents.

Unitech and Guardian say they wouldn’t have signed the swap deals with the banks if they had known about Libor-related misconduct, which became a global scandal when London-based Barclays was fined by U.K. and U.S. regulators last year.

The e-mails from Deutsche Bank, Germany’s largest lender, also show employees talking about Unitech’s understanding of the contracts. The Indian company was “outrightly ‘uneducated,’” according to another 2007 e-mail by a Deutsche Bank employee. “The client does whatever we tell him to,” another Deutsche Bank employee said.

Kathryn Hanes, a spokeswoman for Frankfurt-based Deutsche Bank, said the e-mails were “irrelevant” to the hearing.

“The communications cited by the defendant have been taken out of context, are irrelevant to the appeals court hearing, and are another attempt to divert attention from its unpaid debt and the recent High Court ruling that we, along with the other lenders, are entitled to have an outstanding loan repaid,” Hanes said in an e-mail.

Agarwal didn’t respond to an e-mail seeking comment on the e-mails.

Unitech hasn’t repaid a $150 million loan to a group of lenders and owes $11 million for the swap, Deutsche Bank said in the case last year.

The appeals hearing will decide whether companies can argue that Libor-fixing means their contracts aren’t valid, or whether they must prove a loss and seek damages.

The cases are: Graiseley Properties Ltd & Ors. v. Barclays Bank Plc, High Court of Justice, Queen’s Bench Division, Commercial Court, 12-1259; and Deutsche Bank AG & Ors v. Unitech Global Limited & Anr, High Court of Justice, Queen’s Bench Division, Commercial Court, 11-1199 (X1Q6M1JRB282).

Compliance Policy

Fannie Mae Survival Back on Table as Congress Drafts Plan

The consensus in Washington that Fannie Mae and Freddie Mac should be dismantled is weakening amid opposition from hedge funds, regional banks and others who could benefit if the companies survive in some form.

President Barack Obama and lawmakers from both parties have called for the two mortgage-finance companies to be replaced by a new U.S. housing system. While the official position hasn’t changed, a bipartisan group of U.S. senators writing legislation is grappling with how to ensure that changes to Fannie Mae and Freddie Mac don’t disrupt the recovering housing market.

Some Democrats said they are leery of engineering a switch that would liquidate the government-sponsored enterprises, or GSEs, leaving it to private entities to risk their own capital on home loans.

Since they almost collapsed during the 2008 credit crisis, the two companies have drawn $187.5 billion from taxpayers and have been considered too politically toxic to be preserved. While the U.S. holds controlling stakes, the outcome will affect private investors including hedge funds Perry Capital and Paulson & Co., which have accumulated preferred shares and have spent months lobbying for Fannie Mae and Freddie Mac to be recapitalized.

The hedge funds gained little traction in early meetings on Capitol Hill. As the legislative process advances and involves a wider group of lawmakers, some are listening to the preservation argument.

Driving investor hopes and the change in tone are the record profits Fannie Mae and Freddie Mac have been posting as the housing market rebounds from the worst recession since the 1930s. The companies are required to send almost all of those profits back to the Treasury.

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Fallon Backs Exempting Small U.K. Companies From Labor Rules

Business Minister Michael Fallon signaled support for exempting Britain’s smallest companies from some employment regulations, arguing it would encourage them to hire staff.

Fallon, a Conservative member of Prime Minister David Cameron’s coalition government, offered his view at a news conference in London yesterday, citing the example of the U.S. in the 1980s, where small businesses were “successfully” exempted. He spoke alongside former Diageo Plc Chief Executive Officer Paul Walsh, who’s advising the government on cutting regulation. Walsh said small firms should be freed from all rules.

Fallon’s office later said he supports keeping some labor rules, such as the minimum wage and basic safety protections. Still, his comments highlight the divide within the coalition about the way to promote growth. Liberal Democrat members of the government, including Fallon’s boss, Business Secretary Vince Cable, have in the past blocked moves to reduce employment protections.

Fallon and Walsh were speaking at an event to mark the publication of a report written by six business leaders on reducing European Union regulation. They urged that micro-enterprises -- those employing fewer than 10 people -- should be exempt from “all EU employment law.”

Finra Publishes Conflicts of Interest Report on Broker-Dealers

The Financial Industry Regulatory Authority published a report on conflicts of interest in the broker-dealer industry, according to a statement on its website.

The report highlights effective conflicts management practices that may go beyond current regulatory requirements and identify potential problem areas, Finra Chief Executive Officer Richard Ketchum said in the statement.

Among the identified considerations are making independent decisions in wealth management about products offered without regard to proprietary products of the firm, and “minimizing conflicts in compensation structures between customer and broker or firm interests where possible,” according to the statement.

Compliance Action

JPMorgan Said to Reach Settlement With CFTC in Whale Trade Probe

JPMorgan Chase & Co. has agreed to pay about $100 million to resolve the Commodity Futures Trading Commission’s probe into the firm’s botched derivatives bets last year, according to people briefed on the matter.

The deal, which would bring the bank’s total settlements in the episode to more than $1 billion, may be announced as early as this week, the people said, asking not to be named because the talks were confidential. The accord would resolve a CFTC assertion that the trading amounted to a “manipulative device,” the people said. CFTC Chairman Gary Gensler and Joseph Evangelisti, a spokesman for the company, declined to comment.

JPMorgan agreed last month to pay $920 million to resolve related U.S. and U.K. probes into its internal controls and handling of the trades, which inflicted at least $6.2 billion in losses last year. The New York-based firm said at the time that the CFTC also threatened to bring a case. That inquiry had looked into whether the trades manipulated markets, a person with knowledge of the matter said then.

The accords don’t end all of the investigations of the transactions managed by Bruno Iksil, the Frenchman known as the London Whale because of the size of his bets. The Securities and Exchange Commission has said its inquiry remains open while the U.S. Justice Department runs a parallel probe. Iksil, who prosecutors have said is cooperating with their case, hasn’t been charged.

The CFTC’s civil settlement stipulates JPMorgan admit to wrongdoing on one day last year, one of the people said. The Wall Street Journal reported the settlement amount yesterday, and the New York Times reported the proposed admission.

The firm has yet to resolve state and federal probes into its mortgage-bond sales, including a criminal inquiry.

Orient Says Japanese Gangsters Got Loans by Hiding Criminal Ties

Orient Corp., the Japanese consumer credit firm being probed for lending to crime groups with Mizuho Financial Group Inc., said it’s cooperating with police to prosecute gangsters who obtained loans fraudulently.

The company is in talks with lawyers to consider action against borrowers who signed 37 loan contracts by falsely declaring they have no gang ties, Orient said in a statement on its website today. It is seeking to cancel the transactions.

Tokyo-based Orient submitted a report to the trade ministry today clarifying its role in lending to yakuza mobsters with Mizuho, its biggest shareholder. Japan’s financial regulator last month ordered Mizuho to improve compliance for failing to break off loans made to the gangs through Orient.

The consumer credit firm pledged to promptly recall or terminate loans to gangsters, most of which were made before October 2009, according to the statement. It identified 147 loans tied to the organizations, of which 37 were made based on false declarations.

In March 2011, Orient started requiring borrowers to sign documents certifying they have no affiliation with criminal gangs in order to qualify for loans, said Daisuke Muraoka, a company spokesman.

The Financial Services Agency ordered Mizuho, Japan’s third-biggest bank by market value, to improve compliance on Sept. 27 after finding that it failed to take sufficient steps to break off 230 transactions valued at about 200 million yen ($2 million) made through Orient.

Moody’s Clashes With Treasury’s Lew on Prioritizing Payments

The U.S. will likely prioritize debt payments ahead of other obligations, should Congress fail to raise the nation’s $16.7 trillion debt ceiling, according to Moody’s Investors Service. Treasury has signaled less optimism on the department’s ability to “pick and choose” payments.

Moody’s, which rates the U.S. a stable Aaa grade, reiterated Oct. 14 that it expects the debt ceiling to be raised, averting a default. The company also expects “that the U.S. government will pay interest and principal on its debt even if the statutory debt limit isn’t raised.” Fitch Ratings and Standard & Poor’s, which haven’t published comments on Treasury’s ability to prioritize payments, have also said they expect the U.S. to avoid default.

While default may threaten to spark a financial crisis exceeding that seen in 2008, the S&P 500 Index of stocks has traded at an almost one-month high in a bet that Democrats and Republicans will decline to test that outcome. Treasury Secretary Jacob J. Lew said anyone suggesting the U.S. system can be reconfigured to only make some payments doesn’t understand its architecture and that doing so is “default by another name.”

Lew has told Congress extraordinary measures being used to avoid breaching the debt ceiling “will be exhausted no later than Oct. 17” and officials will have about $30 billion in cash to pay obligations.

While prioritizing debt payments over obligations wouldn’t be a default, it would “damage perceptions of U.S. sovereign creditworthiness,” said Fitch, which has a negative outlook on the U.S. ranking.

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Barclays Joins Lloyds as Most-Complained About Banks, FCA Says

Barclays Plc and Lloyds Banking Group Plc received the most customer complaints of financial services firms in the U.K. during the first half of the year, the markets regulator said.

Barclays reported 370,733 complaints, the Financial Conduct Authority, based in London, said today. Lloyds received the second-highest number of complaints with 253,735. Bank of Scotland Plc, a unit of Lloyds, also faced 222,249 complaints.

Consumer complaints reported to the FCA by firms fell by 500,000 in the first half of this year from the previous six months to 2.9 million.

Ashok Vaswani, the chief executive officer of Barclays’s retail and business banking, said the number of complaints the firm receives is “reducing sustainably.” The bank will publish complaints data every three months “with additional information on how we are tackling their root causes,” Vaswani said in an e-mailed statement.

Complaints over the sale of payment-protection insurance, or PPI, accounted for 81 percent of claims, Lloyds said in a statement.

“As a group, we now receive fewer banking complaints per thousand accounts than any other major bank,” said Martin Dodd, customer service director at Lloyds.

Courts

Mark Cuban’s Desire to Win Led Him to Break Law, SEC Lawyer Says

Mark Cuban’s defense rested and the prosecution presented its closing argument yesterday in the trial of the U.S. Securities and Exchange Commission’s claim that the billionaire acted on nonpublic information when he sold shares of Mamma.com.

Cuban’s “desire to win, that competitive edge that makes him successful,” led him to engage in illegal insider trading, SEC lawyer Jan Folena told a federal jury in Dallas.

The trial of the billionaire owner of pro basketball’s Dallas Mavericks started Sept. 30.

The SEC claims Cuban sold his 6.3 percent stake in Mamma.com in 2004 to avoid a $750,000 loss after learning non-public information that would have diluted the value of his shares, the SEC said.

Cuban, 55, who also owns the high-definition television network HDNet and the Landmark Theatre cinema chain, has denied the allegations. Before selling his shares he was Mamma.com’s biggest investor, which is now known as Copernic Inc.

The SEC is seeking disgorgement of his alleged ill-gotten gains and unspecified monetary penalties.

Former Mamma.com Chief Executive Officer Guy Faure allegedly told Cuban in a June 2004 phone call of the company’s plans for a private investment in public equity, or PIPE transaction.

In a recording played for the jury, Faure testified that he told Cuban the information was confidential and also testified that the billionaire was upset at the end of their eight-minute conversation.

Folena referred to that discussion in her closing yesterday and asked the jury to find Cuban liable, saying he failed to play by the rules.

Erik Sirri, who led the SEC’s division of market regulation and trading from 2006 to 2009, testified as an expert witness for Cuban yesterday. He said that in his opinion, the information about the PIPE “was public before Mr. Cuban traded.”

The case is Securities and Exchange Commission v. Cuban, 08-cv-02050, U.S. District Court, Northern District of Texas (Dallas).

Interviews/Speeches

SEC Issuing JOBS Act Study on Disclosure Rules Soon, White Says

The U.S. Securities and Exchange Commission will release its study of the impact of JOBS Act on disclosure rules soon, said Chairman Mary Jo White.

The study is only a “first step” in the agency’s review of requirements, she said. White made the remarks at the National Association of Corporate Directors conference.

Investors may be subject to “information overload” if too much information is disclosed, she said. It can be difficult to glean the “most relevant” information, she added.

“I am raising the question here and internally at the SEC as to whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us,” White said.

The Internet may end the need for some mandatory disclosures. More work and consideration is needed on disclosure rules, the agency chairman said.

The JOBS Act requires the SEC to analyze the agency’s disclosure regulations and weigh simplification of rules.

To contact the reporter on this story: Carla Main in Jersey City, New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.