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BofA Civil Probes, Deutsche Bank, BNY Mellon: Compliance

Oct. 23 (Bloomberg) -- Bank of America Corp., sued by U.S. attorneys in August over an $850 million mortgage bond, faces three more Justice Department civil probes over mortgage-backed securities, according to two people with direct knowledge of the situation.

U.S. attorneys offices in Georgia and California are examining potential violations tied to Countrywide Financial Corp., the subprime lender Bank of America bought in 2008, said the people, who asked not to be identified because the inquiries aren’t public. U.S. attorneys in New Jersey are looking into deals involving Merrill Lynch & Co., purchased by the firm in 2009, the people said.

If claims are brought, Bank of America would join JPMorgan Chase & Co. in dealing with government demands that it resolve liabilities inherited after buying weakened rivals at the government’s urging during the credit crisis. JPMorgan, the biggest U.S. bank, reached a tentative $13 billion agreement last week to end civil claims over mortgage-bond sales.

Bank of America is being scrutinized for violations of the Financial Institution Reform, Recovery and Enforcement Act of 1989, or FIRREA, an outgrowth of the savings-and-loan crisis, according to the people. The Justice Department cited that statute in its August lawsuit against the firm, which is the nation’s second-largest lender after JPMorgan.

The law allows the government to sue an individual or group for fraud that affects a federally insured financial institution. It carries a 10-year statute of limitations.

Bill Halldin, a spokesman for Bank of America, declined to comment on the pending inquiries. Spokesmen for the three U.S. attorneys offices and the Justice Department declined to comment or didn’t immediately respond to telephone calls and e-mails.

The lender wrote in an Aug. 1 regulatory filing that it’s cooperating with state and federal probes into how home loans were bought, bundled and then sold to investors.

The Justice Department’s August case is U.S. v. Bank of America Corp., 13-cv-00446, U.S. District Court, Western District of North Carolina (Charlotte).

For more, click here.

Compliance Policy

High-Frequency Trading Targeted in EU Deal, Lawmaker Says

European Parliament lawmakers have reached a draft deal with national governments on high-frequency trading curbs as part of a push to toughen the bloc’s financial market rulebook, said the chief legislator working on the plans.

The provisional deal, reached by legislators and officials from Lithuania, which holds the EU’s rotating presidency, includes a so-called tick size regime limiting the minimum size of price movements on financial markets, said Markus Ferber, the lawmaker leading on the measure.

High-frequency trading in stocks came under increased regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

The practice involves using powerful technology and complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues. Companies active in high-frequency trading have warned that interfering with their strategies would raise investor costs and harm financial stability.

Key elements of the draft deal were reached at a meeting of officials and lawmakers last week, Ferber said two days ago.

Under the provisional agreement, “traders will have to have their algorithms tested on venues and authorized by regulators to minimize systemic risk,” Ferber said in the e-mail. “Moreover, we introduced circuit breakers that will stop the trading process if price volatility gets too high.”

“Preliminary” agreement has been reached “on a possible compromise package,” Lithuania, which holds the rotating presidency of the EU, said in a note to national officials dated Oct. 21.

While EU parliament lawmakers secured some of the curbs they had sought on high-frequency trading, they have also had to give up some of their goals, including EU-wide penalty fees for traders who cancel excessively large numbers of orders, according to the document.

A representative for the Lithuanian EU presidency in Brussels declined to comment.

ECB Capital Definition Tougher in Stress Test Than Review

The European Central Bank said it will use stricter rules when stress testing banks’ balance sheets next year than it will to study their assets, as it seeks to prove its credentials as the region’s financial supervisor.

While the ECB confirmed that it will require lenders to have a capital ratio of 8 percent, what qualifies as capital will change over the course of the three-part assessment, the central bank said in an e-mailed statement. The capital definition applicable on Jan. 1 will be used for the asset-quality review and the definition in force “at the end of the horizon” of the stress test will be used in that evaluation, it said.

Ignazio Angeloni, who is head of the ECB’s financial stability directorate, said today in Frankfurt that officials haven’t yet decided on a timeframe or on details for the stress test. The European Union is gradually phasing in global capital standards known as Basel III, a process which is due to be completed by 2019.

The ECB said the 8 percent capital requirement will include a common equity tier 1 ratio of 4.5 percent.

The ECB will commence its study in November and conclude the exercise in October 2014 before assuming supervisory powers over the region’s banks. It will execute a preliminary risk check early next year to identify asset portfolios needing further examination, followed by a full review of the quality of banks’ balance sheets. The European Banking Authority will then help conduct a stress test in the course of 2014 as well as an assessment of their sovereign debt holdings.

Health-Care False Claims Cases Reap $18.3 Billion, Report Shows

Federal and state governments recovered $18.3 billion between 2008 and 2012 from lawsuits and criminal cases claiming health-care companies overbilled, according to an advocacy group that encourages whistle-blowers.

Taxpayers Against Fraud, a Washington-based group, released a study showing total health-care recoveries, excluding whistle-blower payments, rose to $5.8 billion last year from $1.5 billion in 2008. Those totals include criminal fines and state false claims recoveries, two figures not normally tallied.

The health-care recoveries involve dozens of companies, including Pfizer Inc., the world’s biggest drugmaker; GlaxoSmithKline Plc, the biggest U.K. drugmaker; Merck & Co., the second-biggest U.S. drugmaker by sales; and McKesson Corp., the largest U.S. pharmaceutical distributor. Many of the settlements involve corporate integrity agreements pledging compliance with the law.

Most cases were filed under the federal False Claims Act, which lets citizens sue on behalf of the government and share in any recovery. Twenty-nine states have similar laws. Most of the recoveries by the U.S. between 1987 and 2012 were in health-care cases, where the government recovered $24.1 billion, according to Justice Department statistics.

Whistle-blowing is increasing in other sectors, including finance and taxation.

EU Creates Expert Group to Study How to Tax Digital Companies

European Union experts will study how to tax “the digital economy” and recommend next steps for making sure technology companies pay their fair share, the European Commission said.

A high-level expert group will be assembled to identify problems and recommend solutions. The Brussels-based commission then will make proposals on how to implement the recommendations.

EU leaders meeting in Brussels this week will seek to coordinate views on efforts to tackle tax avoidance and tax base erosion. According to draft conclusions for the Oct. 24-25 summit, the EU is considering action on issues specific to the digital economy, like different tax rates for physical and electronic products.

The commission said the expert panel will be comprised of up to seven members, who will be “internationally renowned experts” on taxes and on the technology and online sales sectors. The group “will be chaired by a person of political profile with relevant background,” the EU said.

Compliance Action

SAC to Close London Office, Cuts 6 U.S. Money Managers

SAC Capital Advisors LP plans to shut down its London office as the $14 billion hedge-fund firm founded by Steven A. Cohen scales back in the face of insider-trading allegations by U.S. prosecutors.

SAC, based in Stamford, Connecticut, will close the U.K. office by the end of the year, President Tom Conheeney wrote in a memo sent to employees yesterday. The firm this week cut six investment professionals in the U.S., Conheeney wrote. Katherine Burton reports on Bloomberg Television’s “Market Makers.”

For the video, click here.

Fed Terminates Enforcement Action Against BNY Mellon Collateral

The Federal Reserve terminated an enforcement action against Bank of New York Mellon Corp. initiated last year after the world’s largest custody bank misstated collateral pledged to a government lending program.

The action, which included a $6 million fine, was terminated effective Oct. 16, the central bank said in a statement issued yesterday in Washington.

Some collateral the bank pledged to the Federal Reserve Bank of Boston in 2008 was ineligible for the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, a program set up to help ease the credit squeeze during the financial crisis, the Fed said in an April 2012 statement. As a result, BNY Mellon received more in loans than it should have, the Fed said.

The bank agreed to submit a plan to the Fed to improve its procedures and employee training, the Fed said last year.

Deutsche Bank Starts Electronic Trading System for U.S. Options

Deutsche Bank AG is introducing an electronic platform for investors to trade options on single stocks, equity indexes and exchange-traded funds across U.S. derivatives exchanges.

The system will give clients access to automated trading across all 12 American options venues, including exchanges operated by CBOE Holdings Inc., NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets Inc., according to a statement from Germany’s biggest bank. The system will be part of Deutsche Bank’s Autobahn platform that includes tools for transactions in stocks, bonds, commodities and foreign exchange.

Deutsche Bank’s expansion into electronic options trading shows the bank is seeking to tap into growing demand for options at a time when U.S. equity volume declines for a fourth straight year. Options volume in the U.S. has surged fivefold in the last decade.

Four UBS Employees Are Suspects in German Tax Evasion Probe

Prosecutors in Mannheim, Germany, said four UBS AG employees are now suspects in a probe of whether the bank helped clients evade taxes by sending money to Switzerland.

The probe has been pending since 2012 and investigators are now targeting four employees, according to Mannheim prosecutors’ spokesman Peter Lintz, who commented by phone.

Prosecutors raided employees’ homes Oct. 8 and UBS Frankfurt offices from Oct. 8 to Oct. 17. More raids took place earlier this year, Lintz said.

The probe also targets a dozen clients. Some have turned themselves in to get leniency, Lintz said.

UBS is fully cooperating with the authorities, the company said in a statement. Internal investigations regarding the probe’s allegations haven’t revealed any evidence of misconduct at UBS’s German unit, it said in the statement. The company doesn’t support clients in activities that could circumvent tax obligations, UBS said.

Yakuza Mobsters Increasingly Watched by Regulators

The yakuza, Japan’s organized-crime syndicates that have reaped billions from activities ranging from extortion to human trafficking, are finding their ranks decimated by authorities employing methods similar to those used to jail Al Capone: going after their money.

Japan’s Financial Services Agency delivered the latest blow, last month ordering Mizuho Financial Group Inc. to improve compliance and then demanding that top executives report by Oct. 28 what they knew and when about a consumer-credit affiliate found making loans to crime groups.

The regulator’s slap adds to pressure from yakuza-exclusion ordinances enacted nationwide in 2011 making it illegal to do business with gang members, as well as a U.S. executive order that year requiring financial institutions to freeze yakuza assets. The U.S. Treasury Department so far has frozen about $55,000 of yakuza holdings including two Japan-issued American Express cards, according to documents obtained by Bloomberg News under the Freedom of Information Act.

The impact on yakuza ranks is showing: Membership plunged 11 percent to 70,300 in 2011 and fell another 10 percent to 63,200 last year, following annual declines of about 3 percent or less since 2004, when rosters reached the decade’s high of 87,000, according to Japan’s National Police Agency data.

While the gangs themselves aren’t illegal in Japan, violating the exclusion ordinances -- which also require customers seeking financial and other services to attest to non-association with a criminal enterprise -- could come with a fine or a year in jail. Police investigated 164 possible violators since the laws went into effect, the data show.

Police also arrested more than 24,000 yakuza members last year for a variety of suspected crimes, according to the agency’s website. The yakuza have diversified their business interests in recent years into finance, construction and waste disposal, according to a police report.

Alarmed by yakuza involvement in securities trading, the Japan Securities Dealers Association in 2010 began requiring members to take steps to exclude the gangs from the industry.

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Interviews/Speeches/Hearings

White Urges CEOs and Boards to Bolster SEC’s Compliance Efforts

The U.S. Securities and Exchange Commission is calling on corporate executives and boards to strengthen internal compliance programs as funding constraints limit the agency’s reach, SEC Chairman Mary Jo White said.

White made the remarks yesterday in a speech at a National Society of Compliance Professionals conference in Washington.

SEC officials are meeting with chief executive officers, senior business managers, heads of compliance, and chairmen of audit and risk committees to assess whether the “tone at the top” of companies discourages wrongdoing, White said in prepared remarks. Agency officials evaluate whether compliance personnel have the standing, authority and resources to do their jobs.

White’s remarks come about a month after the SEC leveled a $200 million penalty against JPMorgan & Chase Co. to resolve claims the New York-based bank had inadequate internal controls related to the London Whale trading that led to $6.2 billion in losses last year. The penalty was the biggest the agency has imposed related to internal controls.

The SEC issued guidance to compliance officials last month to allay concerns that they could be subject to enforcement action for giving legal advice on how to deal with misconduct internally at their companies. Inspectors who conduct routine examinations of investment advisers are working more closely with the SEC enforcement unit, White said.

“We do not want you to be concerned that by engaging, you will somehow be arbitrarily construed to be a supervisor, and expose yourselves to potential supervisory liability,” she said.

Consob Chief Vegas Says Tobin Tax Discourages Investments

The domestic tax on currency trades that cross borders, known as the Tobin Tax, discourages investments, Italian market regulator Consob’s Chief Giuseppe Vegas said.

He made the remarks in front of the Chamber of Deputies’ finance committee.

Vegas said research conducted abroad shows the Tobin Tax is harmful for investments if similar laws are not applied at the same time in other countries.

He also commented on the Italian banking system, saying it was hurt by the debt crisis. There’s a need to remove obstacles that stop companies from obtaining access to capital markets, he said.

International investors are returning to peripheral markets, Vegas said. Italian banks’ close links to companies can hurt efficient credit allocation and foreign investments, according to Vegas.

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

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

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