Insider Trading, IRS Amnesty, Antitrust: Compliance
Former SAC Capital Advisors LP junior portfolio managers Noah Freeman and Donald Longueuil were charged with insider trading while working at the $12 billion hedge fund, the latest round of charges in a nationwide crackdown by federal prosecutors.
Longueuil, who worked at SAC Capital unit CR Intrinsic from July 2008 to July 2010, was arrested yesterday; Freeman, who worked at SAC Capital from June 2008 to January 2010, pleaded guilty Feb. 7 as part of a cooperation agreement with prosecutors.
Two others charged by Manhattan federal prosecutors were Samir Barai, the founder of Barai Capital Management, who surrendered to authorities yesterday, and Jason Pflaum, who worked for Barai and pleaded guilty Feb. 7 as part of a cooperation deal.
The arrests in what prosecutors called a four-year scheme signal an expansion of a 16-month attack on insider trading on Wall Street that U.S. Attorney Preet Bharara has said is “rampant.” The criminal complaint refers to six hedge funds, which it doesn’t name, that employed the defendants or executed trades.
“We are outraged by the alleged actions of two former employees, which required active circumvention of our compliance policies and are egregious violations of our ethical standards,” Stamford, Connecticut-based SAC said yesterday in a statement. SAC also said in its statement that the two were dismissed in 2010 for “poor performance.”
The charges are connected to earlier arrests of eight employees or consultants at Primary Global LLC, a Mountain View, California-based firm that links investors with employees of public companies who work as consultants. Barai got inside tips from Primary Global consultants Anthony Longoria and Winifred Jiau, both of whom were previously charged, yesterday’s complaint says.
Janice Fedarcyk, who heads the New York office of the Federal Bureau of Investigation, said the investigation will continue for “some time” and that more arrests will be coming.
The U.S. Securities and Exchange Commission yesterday filed a related civil suit, accusing the four of earning more than $30 million in insider trades of companies including Advanced Micro Devices Inc. (AMD), Marvell Technology Group Ltd., Seagate Technology Plc, Western Digital Corp. and Fairchild Semiconductor International Inc.
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IRS Announces Amnesty to Declare Offshore Accounts
U.S. taxpayers with hidden offshore accounts will have a second chance to disclose them to the government without being criminally prosecuted, the Internal Revenue Service said.
The new voluntary disclosure program will require those who come forward to pay as much as 25 percent of the highest annual amount in the account from 2003 through 2010, plus back taxes, interest and other tax penalties for those years. The program expires Aug. 31.
“It gives people a chance to come in before we find them,” IRS commissioner Douglas Shulman said yesterday on a conference call with reporters. He said the IRS is continuing to investigate “a number of” overseas banks, and that some of the inquiries are at “quite advanced” stages.
The program is part of the U.S. government’s efforts to crack down on offshore accounts. A similar program that ended in October 2009 attracted about 15,000 taxpayers who avoided prosecution by paying taxes on six years of undeclared income, plus a 20 percent penalty.
The first 2,000 cases closed have generated almost $400 million in revenue, Shulman said.
Another 3,000 taxpayers declared their accounts after the initial program ended. They will be eligible for the new program, which has less-generous terms, said Shulman, who said Dec. 9 that the IRS was considering a second disclosure period.
Barbara Kaplan, an attorney at Greenberg Traurig LLP in New York, said she doesn’t expect as large a response from taxpayers this time -- unless the IRS announces investigations involving specific banks.
“Until the pressure is really on and it’s public, people who didn’t opt in before are not going to opt in now,” she said.
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Fed Requests Comments on Proposals for Dodd-Frank Law
The Federal Reserve requested comment on proposed rules about “systemically important” companies required by the Dodd-Frank Wall Street Reform and Consumer Protection Act overhauling U.S. financial regulation.
The central bank said in a statement yesterday in Washington that it is requesting comment on two rules. The first determines whether a company is “significantly engaged in financial activities,” and the second defines the terms “significant nonbank financial company” and “significant bank holding company.”
The Dodd-Frank Act, signed into law by President Barack Obama in July, requires the Fed to define terms that the Financial Stability Oversight Council, chaired by the Secretary of the Treasury, will use in determining which companies are “systemically important” and subject to additional regulation.
The law defines a company as “significantly engaged in financial activities” if 85 percent or more of its revenue or assets are related to activities deemed to be financial in nature under the Bank Holding Company Act, the Fed said.
The rule proposes making this determination from a two-year test based on consolidated financial statements.
The central bank, taking a usual step in rule-making, is requesting that comment be submitted by March 30.
The authority of designating a firm as “systemically important” rests with the Financial Stability Oversight Council. One criteria the council may use in designating this status is whether a company is engaged in relationships with other “significant” financial companies.
The proposal defines “significant” as a bank holding company or non-bank financial firm with more than $50 billion in total consolidated assets.
The Dodd-Frank legislation already established $50 billion as the threshold at which bank holding companies require additional supervision.
Allstate Sells Bank to Discover Financial as Regulations Tighten
Allstate Corp. (ALL), the largest publicly traded U.S. home and auto insurer, is exiting the banking business and will sell about $1.1 billion in deposits to Discover Financial Services (DFS) as regulators increase scrutiny of the industry.
Discover will provide savings accounts, certificates of deposit and money-market products to Allstate customers, the Northbrook, Illinois-based insurer said yesterday in a statement.
Allstate, regulated by state insurance commissioners, has been subject to additional oversight by the Office of Thrift Supervision because of its banking business. The Fed will be taking greater authority over the financial industry after the passage of the Dodd-Frank Act last year.
Allstate Chief Executive Officer Thomas Wilson met in October with representatives of the Federal Reserve Bank of Chicago for a discussion on changes in regulation. Wilson has focused the Allstate Financial unit on life insurance and retirement and investment products.
“That, combined with the changing regulatory environment, led us to the determination that operating Allstate Bank is no longer core to our long-term strategy,” said Matthew Winter, CEO of Allstate Financial, in the statement.
Pimco Caught Up as Managed-Futures Funds Face Restrictions
Pacific Investment Management Co. and Fidelity Investments may be caught up in a regulatory push to safeguard investors in mutual funds that employ commodity strategies used mainly by hedge funds.
Under a proposal by the U.S. Commodity Futures Trading Commission, mutual funds using futures to bet on rising and falling prices, such as JPMorgan Chase & Co. (JPM)’s $472 million Highbridge Dynamic Commodities Strategy Fund and Cliff Asness’s $1 billion AQR Managed Futures Strategy Fund, would face new marketing rules. The change may also affect commodity mutual funds that use swaps or options, including the $25.2 billion Pimco Commodity RealReturn (PCRIX) Fund and the $8.3 billion Fidelity Series Commodity Strategy Fund.
“The whole catastrophic period between 2007 and 2009 has completely changed the environment,” Burton Greenwald, an independent mutual-fund consultant based in Philadelphia, said in an interview. “Some of these alternative strategies are just far more complex than a conventional equity or fixed-income fund, and it’s inevitable that they’ll get more regulatory scrutiny in this environment.”
Fund companies have seen money in commodity and managed-futures mutual funds double since the 2008 global financial crisis. Regulators are moving to limit distribution and improve disclosure after managed-futures funds, originally a hedge-fund strategy, started targeting individual investors three years ago amid increasing demand for assets that are less correlated to stocks and bonds.
Fund companies are crying foul. The effort to re-regulate commodity funds comes from private pools and trading advisers trying to protect their business models and fees, Philip Liu, general counsel for Denver-based Equinox Fund Management LLC, wrote in an Oct. 18 letter to the CFTC, as the agency was considering an earlier version of the proposal. Equinox is the registered investment adviser to the MutualHedge Frontier Legends Fund.
“The idea that this is a wild-eyed risky investment just doesn’t hold water,” Jon Sundt, chief executive officer of Altegris Investment Inc. in La Jolla, California, said in an interview. The company’s Altegris Managed Futures Strategy Fund opened in August and has $328 million under management.
Fidelity Investments, the largest U.S. mutual-fund company, and several competitors also oppose the plan, saying it would raise costs to consumers and may extend to target-date retirement funds that invest in commodities as part of a broad mix. The U.S. Securities and Exchange Commission already regulates such products under the Investment Company Act of 1940, making the CFTC rules “superfluous,” Fidelity said.
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Ceres Says EPA’s Rules Will Add 1.5 Million Jobs
Two Environmental Protection Agency rules opposed by business groups will create almost 1.46 million jobs by 2015, according to an alliance of environmentalists and investment funds.
The regulations will prompt almost $200 billion in capital spending from 2011 to 2015 and spawn jobs as power companies cut air pollution and build cleaner plants, according to the study by Ceres, whose members seek to fight global climate change.
Ceres says its members have almost $10 trillion under management. Members include the California Public Employees’ Retirement System, the largest U.S. public pension fund, the Illinois State Board of Retirement and the New York City Comptroller’s Office, according to the group’s website.
President Barack Obama’s EPA is under fire from business groups such as the U.S. Chamber of Commerce as well as Republican lawmakers who say its rules threaten to stall U.S. economic recovery and job growth. Boston-based Ceres said clean-air laws bolster employment and prosperity.
The report focuses on the EPA’s proposed “transport” rule targeting pollution crossing state lines and the agency’s proposed limits on emissions from industrial boilers.
With Republicans in control of the House and gaining seats in the Senate after November’s election, the EPA is under increasing scrutiny from those who say the agency hinders business.
When Representative Darrell Issa, a California Republican, asked companies to identify which regulations his House Oversight and Government Reform Committee should investigate, 57 of 111 rules cited were issued by the EPA.
The National Mining Association, a critic of the EPA, questioned the Ceres study.
“I’m not sure how they derive this fanciful notion that net jobs would be created in this economy that’s limping along at more than 9 percent unemployment and shows no signs of adding jobs significantly this year,” said Luke Popovich, spokesman for the Washington-based trade group that represents coal producers such as Peabody Energy Corp. and Alpha Natural Resources Inc. (ANR)
Senator Tom Carper, a Delaware Democrat, praised the Ceres study. “This report affirms what I have been saying for years - -working to achieve healthy air will result in a healthy economy,” Carper, chairman of the Senate Subcommittee on Clean Air and Nuclear Safety, said in an e-mailed statement.
U.S. Lawmakers Probe Exchange Security After Nasdaq Breach
U.S. House Republicans are seeking information on computer-network security from regulators and executives from 10 exchanges and clearinghouses amid claims of possible computer hacking into a Nasdaq OMX Group Inc. (NDAQ) website.
“The world must have confidence in the technological security of our financial markets,” Representatives Spencer Bachus of Alabama and Scott Garrett of New Jersey said in the letter dated Feb. 8.
Bachus, the chairman of the House Financial Services Committee, and Garrett, who leads the panel’s capital markets subcommittee, asked recipients to describe -- without divulging specific information about their own networks -- what they’re doing “to ensure the ongoing integrity and security of exchange trading systems and clearinghouses.” The lawmakers asked that responses be delivered by Feb. 28.
Nasdaq OMX, the second-largest U.S. exchange operator by market value, said in a Feb. 5 statement that it discovered suspicious files in its web-based Directors Desk application and “immediately conducted an investigation, which included outside forensic firms and U.S. law enforcement.”
None of Nasdaq OMX’s trading platforms were “compromised” by the files, the New York-based company said.
Bachus and Garrett sent copies of the letter to Nasdaq OMX Chief Executive Officer Robert Greifeld, as well as Terrence Duffy, the executive chairman of CME Group Inc. (CME), and William Brodsky, the CEO of the Chicago Board Options Exchange Inc. The letter also was addressed to CEO Duncan Niederauer of NYSE Euronext, the largest U.S. exchange operator, and six other executives.
UBS Units to Buy Back $1.5 Billion in Auction-Rate Securities
Two UBS AG (UBSN) units resolved allegations that they failed fully to disclose the risks of auction rate securities sold in New Jersey by agreeing to a $1.5 billion buyback, state Attorney General Paula T. Dow said.
“Disclosure of material facts to the investing public is not only the law, but is necessary for consumers to make fully informed decisions about investing their hard-earned money,” Dow said in a statement announcing the agreement.
In addition to the repurchases by UBS Securities LLC and UBS Financial Services Inc., Zurich-based UBS will pay New Jersey $3.7 million in civil penalties, representing the state’s pro rata share of an agreement negotiated by a multistate task force of regulators, Dow said.
Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions. Underwriters and broker-dealers have been sued since the February 2008 collapse of the $330 billion market for auction-rate securities.
UBS, according to Dow, marketed the investments as safe and liquid when they were actually long-term investments subject to the since-failed auction process.
“UBS is pleased this matter has been resolved,” the investment bank said in an e-mailed statement. “This is part of UBS’s ongoing effort to restore liquidity to its ARS clients who were adversely affected by the failure of the ARS market.”
The New Jersey buybacks are part of the Swiss bank’s 2008 agreement with the North American Securities Administrators Association under which it pledged to purchase $18.6 billion worth of auction-rate securities from institutional investors and private clients, UBS said in a press statement then.
Daimler Said to Face Questions in French EADS Probe
Daimler AG (DAI), which owns a 15 percent stake in European Aeronautic, Defence & Space Co., will be questioned as soon as today by Paris judges leading an almost five-year-old probe into insider trading at EADS, according to a person familiar with the case.
Judges Serge Tournaire and Xavier Blanc are looking into Daimler’s decision to sell a 7.5 percent stake in EADS in April 2006, two months before EADS announced production delays on the A380, the world’s biggest passenger plane. The judges will meet with Daimler officials today, said the person, who declined to be identified because the discussions are private.
Lagardere (MMB) SCA, like Daimler a founding stakeholder in EADS, sold a 7.5 percent stake at the same time as Daimler in 2006 and was charged Jan. 27 in the investigation. The criminal inquiry continued after the French financial regulator, the Autorite des Marches Financiers, cleared current and former EADS officials, Daimler and Lagardere in 2009 in the probe, saying there was no privileged information.
“Daimler will cooperate,” said Florian Martens, a spokesman for Stuttgart, Germany-based Daimler. “We’re confident that the matter will be resolved in the same way as the AMF investigation.”
Lagardere Chief Executive Officer Arnaud Lagardere has said the allegations are baseless and that the Paris-based publisher won’t make any provisions for a possible criminal sanction.
Airgas Improperly Using Takeover Defense, Suitor Says
Airgas Inc. (ARG), the gas company fighting a $5.9 billion hostile buyout bid, is improperly using an anti-takeover defense to bar investors from accepting any offer, lawyers for Air Products & Chemicals Inc. (APD) told a judge.
A majority of Airgas shareholders want to accept Air Products’ $70-a-share offer and are being wrongfully blocked by the company’s poison-pill takeover defense, Kenneth Nachbar, one of Air Products’ lawyers, said in closing arguments in the case. Air Products is seeking to have Airgas’s poison pill thrown out.
By using the defense to frustrate investors, Airgas executives are “protecting shareholders from themselves,” Nachbar told Delaware Chancery Court Judge William B. Chandler III in Georgetown, Delaware.
Chandler said he was “reluctant” to rule yesterday from the bench and instead will issue a written opinion in the next few days.
Marc Wolinsky, a New York-based lawyer for Airgas, countered that the company directors are keeping the pill in place so the gas company can continue to generate good earnings from its businesses.
Air Products, which has been pursuing Radnor, Pennsylvania-based Airgas for more than a year, raised its bid on Dec. 9 from $65.50 a share to $70 and called it the company’s “best and final offer.” Airgas rejected the offer that same month. Allentown, Pennsylvania-based Air Products raised its bid after the Delaware Supreme Court ruled that Airgas shareholders couldn’t force the company to hold an annual meeting in January.
Air Products officials had hoped to use that meeting to replace three more Airgas directors with their own nominees, win control of the board and have the poison-pill defense deactivated.
Airgas is the largest packaged-gas provider in the U.S. Air Products is the second-biggest U.S. industrial-gas producer, behind Danbury, Connecticut-based Praxair Inc. (PX)
Air Products lawyers contend Airgas executives have improperly erected multiple anti-takeover defenses to give themselves the tools to rebuff all buyout offers without shareholders’ support.
Chandler must decide whether Airgas officials are acting reasonably by refusing to deactivate the poison pill, which is designed to make hostile takeovers of the gas distributor prohibitively expensive.
The case is Air Products and Chemicals Inc. v. Airgas Inc., CA5249, Delaware Chancery Court (Wilmington).
Robert Bosch Settles Antitrust Suit Against SGL Carbon
Terms of the accord are private and neither company was ordered to pay the other’s costs in the case, Justice Gerald Barling wrote Feb. 7 in a notice on the website of the Competition Appeal Tribunal in London.
Stuttgart, Germany-based Robert Bosch’s settlement doesn’t involve other customers or cartel participants in the four-year-old lawsuit by Valeo SA (FR), France’s second-largest car-parts maker, and St. Louis-based Emerson Electric Co. (EMR) Other defendants in the case include Morgan Crucible Co. and Schunk GmbH.
The companies sued after the European Union in 2003 fined Wiesbaden, Germany-based SGL and other cartel members a total of 101 million euros ($137 million) for fixing prices on graphite products from 1988 to 1999. While Morgan Crucible received immunity from the fines because it was the first to cooperate, its former Chief Executive Officer Ian Norris was sentenced to 18 months in prison in a U.S. case over his role in the cartel.
“SGL Group had no relevant sales with the two remaining claimants, Emerson and Valeo,” SGL spokeswoman Corinna Gemein said in an e-mail.
Robert Bosch spokesman Achim Schneider confirmed the settlement and declined to comment further when reached by phone.
Authorities began investigating price-fixing in the industry in 1997, prompting SGL to pay $145 million to the U.S. to head off criminal indictments. France’s Carbone Lorraine SA and Austria’s Hoffmann & Co. were also involved in the cartel.
In a related case, the cartel members were sued in London in December by Deutsche Bahn AG and other rail companies in Britain, Germany and Italy, seeking to recover overpayments for carbon and graphite products.
Citigroup, Ally Class-Action Foreclosure Suit Dropped
Kentucky homeowners dropped a possible class-action lawsuit which accused units of Citigroup Inc. (C) and Ally Financial Inc. (ALLY) of conspiring with Mortgage Electronic Registration Systems Inc. to falsely foreclose on loans.
Heather Boone McKeever, the Lexington, Kentucky, lawyer who sued on behalf of the homeowners, said yesterday by e-mail that she dropped the case Feb. 3 because as a solo practitioner she wouldn’t be able to clear the “necessary hurdles” for maintaining a federal class action and she couldn’t interest a larger law firm. She said she continues to advise the plaintiffs in their individual state-court cases.
“My plan is to try to keep the cases in state court by filing class-action counterclaims against the individual creditors and MERS in each family’s action,” she said.
The lawsuit, filed as a civil-racketeering case on behalf of all Kentucky homeowners facing foreclosure, also named as a defendant Reston, Virginia-based MERS, the company that handles mortgage transfers among member banks.
MERS and banks have been accused in at least two other federal suits of violating the Racketeer Influenced and Corrupt Organizations Act. A Florida case was thrown out Jan. 31 by a judge in Miami. Another was filed in Brooklyn, New York.
The Kentucky homeowners filed their complaint Sept. 28 in Louisville. They claimed that through MERS the banks are foreclosing on homes even when they don’t hold titles to the properties. The suit was dismissed without prejudice, meaning that the homeowners can refile it.
The case is Foster v. Mortgage Electronic Registration Systems Inc., 10-cv-611, U.S. District Court, Western District of Kentucky (Louisville).
Antitrust Trial Involving News Corp. Unit Begins
In opening remarks, a lawyer said that a News Corp. (NWSA) unit disparaged a smaller rival and broke antitrust law while attempting to dominate the U.S. in-store advertising market.
The rival, Insignia (ISIG) Systems Inc., sued News America Marketing In-Store Inc. in federal court in Minneapolis in 2004, alleging violations of U.S. antitrust law and the Lanham Act, which prohibits unfair disparagement of competitors.
“This trial will show how News set out to be not just the largest company, it wants to be the only company that can put the sign in the aisle,” Julian Solotorovsky, Minneapolis-based Insignia’s lawyer, said yesterday at the start of the trial. “News is using illegal conduct to obtain a monopoly.”
News Corp. previously settled unfair-competition suits brought by two other rivals in the in-store advertising and promotions market. The New York-based company agreed last year to pay $500 million to Valassis Communications Inc. It paid $29.5 million in 2009 to settle a claim of anticompetitive behavior brought by Floorgraphics Inc.
News Corp. has denied any unfair or illegal behavior.
“News America Marketing continues to view Insignia’s allegations as meritless,” Laura Richards, vice president of the company, said in an e-mailed statement. The company “looks forward to showing at trial that it was Insignia’s own faulty business model that caused its business to fail,” she said.
“Competition is alive and well in the in-store advertising market,” Richard L. Stone, News America’s attorney, said in his opening statement yesterday. “Insignia is asking you to make News America pay for all of its problems.”
“News America has been losing tens of millions of dollars to its competitors,” Stone told the jury. “Doesn’t sound like a monopoly, does it?”
News Corp. competes in stores with Insignia to run promotions for food companies including Sara Lee Corp., putting signs on shelves, ads in shopping carts and coupons at checkout counters. The companies create and sell in-store advertising and promotional materials to consumer-goods companies for placement in stores and buy placement rights from retailers.
News America’s promotional materials include in-store machines that dispense coupons and shelf signs with product prices. Insignia’s primary product is a shelf sign, called Pop Signs, designed to attract customers at point of purchase, according to court filings.
Insignia claims that News America entered into exclusive contracts with retailers, paid the stores to boycott Insignia and used predatory pricing and bundling of advertising and promotion products, in violation of U.S. antitrust law.
The case is Insignia Systems Inc. v. News America Marketing In-Store Inc., 04-cv-04213, U.S. District Court for the District of Minnesota (Minneapolis).
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WaMu Judge Allows Probe of Insider-Trading Claims
Washington Mutual Inc. (WM) shareholders won a judge’s permission to question hedge funds about allegations they used confidential information to trade in the bankrupt company’s securities.
U.S. Bankruptcy Judge Mary F. Walrath approved the investigation yesterday at a hearing in Wilmington, Delaware. Authorizing depositions and document subpoenas may be the only way to determine whether the hedge funds violated bankruptcy rules on insider trading, she said.
“The allegation that troubles the court is that you used that information to trade in the debtors’ securities,” Walrath told a lawyer for one of the four hedge funds. “I don’t know of anybody who feels that is proper.”
After Seattle-based WaMu filed for bankruptcy in 2008, hedge funds bought debt securities, some for pennies on the dollar, issued by the bank holding company and its former banking unit, Washington Mutual Bank. The hedge funds then battled each other, shareholders, creditors, regulators and JPMorgan Chase & Co., about how to divide the company’s assets.
WaMu ended most of the battles last year by agreeing to split billions of dollars in cash and tax refunds among its creditors, including the hedge funds, JPMorgan and the Federal Deposit Insurance Corp. The settlement is the central feature of the company’s plan to end its bankruptcy by paying more than $7 billion to creditors.
A committee of shareholders will investigate allegations of insider trading made against Appaloosa Management LP, Owl Creek Asset Management LP, Centerbridge Partners LP and Aurelius Capital Management LP. The hedge funds denied the allegations yesterday and in previously filed court papers. At their request, Walrath agreed to limit the inquiry.
“We feel highly confident there will be no issue, but it will be extremely expensive to litigate,” Thomas Moers Mayer, an attorney for Aurelius, told Walrath during the hearing. The hedge funds don’t need to turn over any business plans they may have for WaMu once the bankruptcy case ends and an insurance unit is reorganized, Walrath said.
WaMu filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to New York-based JPMorgan for $1.9 billion. Washington Mutual Bank was the biggest bank to fail in U.S. history, with more than 2,200 branches and $188 billion in deposits.
The case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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