Galleon, JPMorgan, Goldman, Fannie, Freddie: Compliance
G. Robert Blakey, the law professor who helped draft the U.S. wiretap statute, may submit a brief supporting imprisoned hedge fund manager Raj Rajaratnam’s effort to overturn his conviction for insider trading, a U.S. appeals court ruled.
Blakey, who teaches at Notre Dame Law School in Indiana, supports a rehearing of the case against the Galleon Group LLC co-founder, whose conviction was upheld in June by the appeals court in New York. He was granted the right to submit written arguments yesterday.
Rajaratnam, who’s serving an 11-year term at the Federal Medical Center Devens in Ayers, Massachusetts, on July 24 asked for a hearing before the full U.S. Court of Appeals in New York. His conviction was upheld by a three-judge panel.
Rajaratnam, 56, was convicted of directing the biggest hedge fund insider-trading scheme in U.S. history. It was the first such case in which investigators tapped targets’ phone conversations, a tactic used in organized-crime probes.
Jurors listened to more than 45 wiretap recordings, on some of which Rajaratnam can be heard gathering nonpublic information from his sources.
Blakely, who is viewed as the architect of the wiretap statute, called the secret recordings “a method of last resort” in court papers submitted with his request to file the brief on Rajaratnam’s behalf.
The appeal is U.S. v. Rajaratnam, 11-04416, U.S. Court of Appeals for the Second Circuit (Manhattan).
S&P Said to Face SEC Probe on 2011 Commercial-Mortgage Bond
Standard & Poor’s is facing scrutiny from the U.S. Securities and Exchange Commission for how it rated a commercial-mortgage bond in 2011, three people with knowledge of the matter, but who weren’t authorized to speak publicly, said.
The inquiry extends beyond a U.S. Justice Department lawsuit against New York-based McGraw Hill Financial Inc. (MHFI) and its S&P unit. Massachusetts has also looked into S&P’s post-crisis methods, Bloomberg News reported Feb. 21.
“We reviewed the application of our CMBS methodology and determined that the approach used for new transactions rated in 2011 produced results that were consistent with Standard & Poor’s rating definitions and resulted in no ratings changes,” Ed Sweeney, an S&P spokesman, said in an e-mailed statement.
John Nester, an SEC spokesman in Washington, declined to comment on whether the agency was scrutinizing the deal, which was first reported by Dow Jones Newswires.
The Justice Department sued S&P Feb. 4 in federal court in Los Angeles, accusing the company of inflating ratings to win business on bonds backed by home loans made to the riskiest borrowers from September 2004 to October 2007. The U.S. is seeking more than $5 billion in damages, or more than five years of profit.
S&P denies the allegations and said in a Feb. 5 statement it will defend itself “vigorously.”
Ex-Baker & McKenzie Partner Sentenced to 2 Years for Fraud
Former Baker & McKenzie LLP partner Martin Weisberg, who admitted to stealing from a client and taking part in a $55 million securities fraud, was sentenced to two years in prison, the U.S. said.
Weisberg, 62, pleaded guilty to conspiracy and money laundering in May 2012 after prosecutors alleged he skimmed $1.3 million in interest from an escrow account for a hedge fund client, SIAM Capital Management. Separately, Weisberg joined a scheme to manipulate the stock price of technology firms Xybernaut Corp. and Ramp Corp. prosecutors said.
“Instead of using his talents to provide wise counsel, he lied to and stole from his own clients, lied to the Securities and Exchange Commission, and betrayed the investing public,” Brooklyn U.S. Attorney Loretta Lynch said in a statement.
U.S. District Judge Nicholas Garaufis in Brooklyn, New York, also ordered Weisberg to pay $297,500 in restitution and $250,000 in forfeiture, according to prosecutors.
Weisberg left Baker & McKenzie in October 2007 at the time of his arrest in the securities case. Previously, he had worked at firms including Cravath, Swaine & Moore LLP, Morgan Lewis & Bockius, and Shea & Gould, according to a memorandum filed by his lawyers in March.
Richard Albert, a lawyer for Weisberg, declined to comment on the sentence.
The case is U.S. v. Saltsman, 07-cr-641, U.S. District Court, Eastern District of New York (Brooklyn).
JPMorgan Faces Criminal Probe as Bank Says U.S. Faults MBS Sales
JPMorgan Chase & Co. (JPM), the biggest U.S. bank, said it’s under both civil and criminal investigation for practices tied to sales of mortgage-backed bonds.
The Justice Department’s civil division told the bank in May of its preliminary finding after examining securities tied to subprime and Alt-A loans, which were sold to investors from 2005 through 2007, JPMorgan said Aug. 7. The office of U.S. Attorney Benjamin Wagner in Sacramento, California, has been conducting civil and criminal inquiries, the bank said.
“It would be a major decision for them to indict a major U.S. bank, and frankly I would not predict it,” said John Coffee, a professor at Columbia Law School in New York. “You can often bring dual investigations, civil and criminal, in order to maximize pressure for a global civil resolution.”
Investigators are seeking to wrap up years-long probes of abuses that fueled the housing collapse and led global credit markets to freeze in 2008. This week, the Justice Department and Securities and Exchange Commission sued Bank of America Corp., the nation’s second-biggest lender, accusing it of misleading investors in an $850 million mortgage-backed bond.
The U.S. is investigating JPMorgan under the Financial Institutions Reform, Recovery and Enforcement Act, according to a person briefed on the matter, requesting anonymity because details of the inquiry aren’t public.
The 1989 law, known as FIRREA, allows the government to seek civil penalties for losses to federally insured financial firms. The Bank of America case cited the same statute.
Lauren Horwood, a spokeswoman for Wagner in Sacramento, declined to comment on the bank’s disclosures.
JPMorgan “continues to respond to other MBS-related regulatory inquiries,” the New York-based company wrote in a regulatory filing listing investigations.
Joe Evangelisti, a company spokesman, declined to comment. Charlotte, North Carolina-based Bank of America has said buyers of its mortgage bonds were sophisticated investors with ample access to underlying data.
Federal prosecutors are reluctant to bring criminal charges against a large bank that’s tightly interconnected with other firms because it could endanger national or global economies, U.S. Attorney General Eric Holder told a Senate Judiciary Committee hearing in March.
Goldman Sachs Cooperating With U.S. Credit Derivatives Inquiry
Goldman Sachs (GS) Group Inc., the fifth-largest U.S. bank by assets, said it’s cooperating with the U.S. Department of Justice’s four-year-old antitrust probe into the credit-default swaps market.
The firm has received civil investigative demands related to the investigation, New York-based Goldman Sachs said in a regulatory filing today. The bank was among more than a dozen financial institutions accused by the European Union last month of colluding to curb competition in credit derivatives.
Morgan Stanley (MS) and Citigroup Inc. also said in filings last week that they were cooperating with the probe. The Justice Department sent civil investigative notices in July 2009 to the banks that own London-based Markit Group Ltd., a provider of data on derivatives and bonds, to find out if they had unfair access to price information, three people familiar with the matter said at the time.
Markit’s shareholders included Goldman Sachs, JPMorgan Chase & Co., Bank of America Corp., and Royal Bank of Scotland Group Plc, according to filings with the U.K.’s Companies House at the time. Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.
MetLife Says Bank May Face Fine as U.S. Probes Foreclosures
MetLife Inc. (MET), the largest U.S. life insurer, said it may face fines amid a government review of foreclosures at its bank unit.
The bank received a request in May from the U.S. Department of Justice for information on payments the lender made to law firms tied to foreclosures, the New York-based insurer said in a filing yesterday. Expenses were submitted to Fannie Mae (FNMA), Freddie Mac (FMCC) and the U.S. Department of Housing and Urban Development for reimbursement, according to the filing.
“It is possible that various state or federal regulatory and law enforcement authorities may seek monetary penalties from MetLife Bank relating to foreclosure practices,” the insurer said in the filing.
The probe adds to U.S. scrutiny of a business that MetLife has been exiting as it seeks to focus on insurance and retirement products. The company said last year that the Justice Department, led by Attorney General Eric Holder, made a civil investigative demand in a review of mortgages insured by the Federal Housing Administration.
John Calagna, a spokesman for MetLife, declined to comment.
SAC’s Cohen Shouldn’t Get Evidence in SEC Case, Prosecutor Says
SAC Capital Advisors LP founder Steven A. Cohen shouldn’t get evidence in a U.S. Securities and Exchange Commission administrative proceeding until criminal cases tied to his hedge fund conclude, a prosecutor said.
Cohen, the billionaire founder of Stamford, Connecticut-based SAC, was accused July 19 in an administrative action of failing to supervise two employees facing criminal charges of insider trading. On July 25, Manhattan U.S. Attorney Preet Bharara indicted SAC and filed a separate money-laundering lawsuit against the fund.
The SEC alleged Cohen, 57, received “highly suspicious” information that should have caused any reasonable hedge-fund manager to investigate the basis for trades. Prosecutors said the fund reaped hundreds of millions of dollars in illicit profit from insider-trading schemes involving at least eight employees including the two facing charges, former SAC fund manager Mathew Martoma and Michael Steinberg, a fund manager at SAC’s Sigma Capital unit.
While Cohen doesn’t oppose the request to postpone the SEC case, he asked to be given prompt access to the agency’s investigative records. His lawyers said he would be “severely prejudiced” with “insufficient time” to adequately review the vast number of documents collected by the SEC, which outnumber those in prosecutors’ custody.
“Both arguments are incorrect,” Assistant U.S. Attorney Antonia Apps, who is prosecuting SAC and Steinberg, said in a memo filed yesterday in the SEC case. “The U.S. Attorney respectfully submits that the public interest would best be served by staying the administrative proceeding pending prosecution of the related criminal cases.”
Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment on the filing.
The cases are U.S. v. SAC Capital Advisors LP, 13-cr-00541; U.S. v. SAC Capital Advisors LP 13-cv-05182, U.S. District Court, Southern District of New York (Manhattan). The administrative proceeding is In the matter of Steven A. Cohen, 3015382, U.S. Securities and Exchange Commission.
Obama Says Private Capital Should Take Lead Mortgage Role
President Barack Obama is calling for private capital to take the lead role in the nation’s mortgage market with the U.S. government continuing to provide a backstop only against catastrophic risk.
The president for the first time is endorsing an approach to remake the housing finance system as Fannie Mae and Freddie Mac are wound down. He said the government still must play a role to preserve broad access to 30-year, fixed-rate mortgages that underpin the market.
“You can’t have a situation in which the government is underwriting and guaranteeing all the mortgage lending that’s taking place around the country and big profits are being made by these quasi-private institutions,” Obama said. Congress should pass housing legislation by the end of the year, he said.
The president’s remarks yesterday came during a question and answer session in Los Angeles moderated by Spencer Rascoff, chief executive officer of Zillow Inc (Z), operator of the largest real-estate information website.
A reduced government role would likely mean that mortgages would become more expensive as the costs of covering risk are shifted from taxpayers to borrowers. A Senate bill containing Obama’s approach would increase interest rates by between 50 and 75 basis points for a typical borrower with a 30-year fixed rate loan, a 20 percent down payment, and a 750 credit score, according to a report by Moody’s Analytics.
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Concessions Seen in Telefonica-KPN German Merger for EU Nod
Telefonica SA (TEF) and Royal KPN NV (KPN)’s bid to combine their German assets has become an acid test for a telecommunications industry anxious over whether regulators will allow deals carriers say they need to spur growth.
Already Germany’s phone regulator has given Telefonica’s O2 and KPN’s E-Plus units two weeks to turn over details of wireless frequencies so it can determine they’d be “efficiently used,” and that the merger won’t hamper competition, according to a July 25 letter from the Bonn-based agency.
The letter raised the prospect of a surrender of some airwaves, which could water down the benefits of the 8.1 billion-euro ($10.8 billion) transaction and by extension inhibit other carriers from attempting similar consolidation moves, which regulators have said are key to rationalizing the 28-nation European Union market. Approval of the deal will probably come with conditions such as asset disposals, according to competition lawyer Paul Hughes.
“You’re looking at a reduction in the big players from four to three,” said Hughes, European competition counsel at Steptoe & Johnson LLP in Brussels. “No doubt, there will be remedies required in the form of making available access to wholesale network for virtual mobile telephony companies, for making spectrum available to other players.”
The EU telecommunications market is inundated with carriers spread over 28 countries. That creates a sevenfold difference in the price of a domestic mobile call between the priciest and cheapest markets across a region less than half the size of the U.S., according to a statement Aug. 6 from Neelie Kroes, who is in charge of the digital agenda for the European Commission, the EU’s executive arm in Brussels.
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In the Courts
JPMorgan Sued With Goldman Sachs in Aluminum Antitrust Case
JPMorgan Chase & Co., the biggest U.S. bank, was sued with Goldman Sachs Group Inc. and Glencore Xstrata Plc (GLEN) over claims they restrained aluminum supplies and drove up prices.
The complaint was filed by a Jacksonville, Florida, direct purchaser, Master Screens Inc., and by individual plaintiff Daniel Price Bart of Tallahassee, who is described in the filing as a “purchaser of beverages sold in aluminum cans.”
The banks and Glencore are accused in the complaint filed yesterday in federal court in Tallahassee of racketeering and conspiring with the London Metal Exchange, hoarding aluminum in Detroit-area warehouses and violating federal antitrust laws. Goldman Sachs was first sued over similar claims by a Michigan company on Aug. 1.
“There are no queues at our warehouses and we believe this suit has no merit,” Brian Marchiony, a spokesman for New York-based JPMorgan Chase, said in an e-mail.
“We believe this suit is without merit and we intend to vigorously contest it,” Michael DuVally, a spokesman for New York-based Goldman Sachs, said in an e-mail. “We also note that aluminum prices are down 40 percent from their peak in 2006.”
Charles Watenphul, a spokesman for Baar, Switzerland-based commodities group Glencore, declined to comment.
The Florida case is Master Screens Inc. v. Goldman Sachs Group Inc., 13-cv-00431, U.S. District Court, Northern District of Florida (Tallahassee). The Michigan case is Superior Extrusion Inc. v. Goldman Sachs Group Inc., 13-cv-13315, U.S. District Court, Eastern District of Michigan (Detroit). The Louisiana case is River Parish Contractors Inc. v. Goldman Sachs Group Inc., 13-cv-05267, U.S. District Court, Eastern District of Louisiana (New Orleans).
Nuveen Funds Sue AIG, Executives Claiming Securities Fraud
Twenty-five Nuveen Investments Inc. funds sued American International Group Inc. (AIG), claiming the company and executives committed securities fraud leading to the U.S. financial crisis that intensified in 2008.
Also named Aug. 6 as defendants in a 237-page complaint in federal court in Chicago were former Chief Executive Officer Martin J. Sullivan, ex-Chief Financial Officer Steven Bensinger and Joseph Cassano, who led the AIG Financial Products unit.
“Plaintiffs suffered tens of billions of dollars in losses, at least, based on false and materially misleading statements that AIG, certain of its executives, directors, underwriters and outside auditor made,” according to the complaint.
The funds accused the company, Sullivan and others of violating Illinois and federal securities laws, common law fraud and unjust enrichment. They asked for unspecified money damages.
Matthew Gallagher, a spokesman for New York-based AIG, declined to comment immediately on the allegations.
The case is Dow 30 Enhanced Premium & Income Fund v. American International Group Inc., 13-cv-05612, U.S. District Court, Northern District of Illinois (Chicago).
Publishers Object to U.S. Request in Apple E-Book Pricing Case
Publishers who previously settled an antitrust lawsuit with the U.S. Justice Department over pricing of electronic books filed an objection to the government’s bid to force Apple Inc. (AAPL) to terminate existing contracts with them.
HarperCollins Publishers LLC, Hachette Book Group Inc., Simon & Schuster Inc. and two others claimed in the objection yesterday that they would be punished by the proposed order. The government’s proposal would force Apple to find new ways of making deals with publishers to distribute e-books.
The proposal would “effectively eliminate the use of the agency model” for selling and distributing e-books for a period of five years, the publishers said in the filing in federal court in Manhattan. Under the agency model, publishers, not retailers, set book prices.
“The provisions do not impose any limitation on Apple’s pricing behavior at all,” lawyers for the publishers wrote. “Rather, under the guise of punishing Apple, they effectively punish the settling defendants by prohibiting agreements with Apple using an agency model.”
U.S. District Judge Denise Cote ruled in July that Cupertino, California-based Apple, the world’s largest technology company, violated U.S. antitrust law by fixing e-book prices.
The five publishers were also defendants in the lawsuit, which was brought by the U.S. government and 33 state attorneys general. The publishers, Verlagsgruppe Georg von Holtzbrinck GmbH’s Macmillan unit, CBS Corp. (CBS)’s Simon & Schuster, Lagardere SCA (MMB)’s Hachette Book Group, Pearson Plc (PSON)’s Penguin unit and News Corp.’s HarperCollins, settled with the government for a total of at least $164 million.
A sixth publisher, Random House Inc., didn’t sign an agency agreement with Apple and wasn’t involved in the U.S. suit. Penguin was merged with Random House this year.
Gina Talamona, a spokeswoman for the Justice Department, said in an e-mail that the proposed court order doesn’t modify the terms of the settlement reached with the publishers.
If approved by the court, the order “would prohibit Apple from entering agreements that limit retail price competition during a reset period,” she said.
The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District Court, Southern District of New York (Manhattan).
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