Citigroup Stakes, U.S. Mutuals, EFSF Bonds: Compliance

Citigroup Inc., the third-biggest U.S. bank by assets, will let managers of its hedge funds own part of the business ahead of rules that limit shareholders’ cash in the unit, Chief Operating Officer John Havens said.

Employees in the Citi Capital Advisors division, or CCA, will get a “significant” stake in managing the funds, Havens said in an interview. This will increase, he said, as New York-based Citigroup withdraws its own money and attracts outside investors to comply with the Volcker rule, which restricts deposit-taking banks from making bets with their own capital.

Havens and Chief Executive Officer Vikram Pandit, 55, are seeking to replace the company’s cash in CCA with funds from outsiders as regulators draft the Volcker rule’s final language. The proposed rule would prohibit banks from owning more than 3 percent of hedge funds and private-equity funds and from investing more than 3 percent of Tier 1 capital in the funds.

Former Morgan Stanley executives Jonathan Dorfman and James O’Brien run CCA, which managed $18.2 billion in private-equity, venture-capital and hedge funds, Citigroup said in August.

Citigroup had at least $5 billion in the funds, a person familiar with the matter said in May. The company also invested about $800 million of its money in internal private-equity and hedge funds in the third quarter, according to a November regulatory filing.

Attracting external capital would help Citigroup withdraw its money without forcing the closure of funds that hold mostly company cash. Citigroup didn’t provide details about how it would divest its ownership of the hedge-fund unit.

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Compliance Policy

U.S. Mutuals May Struggle to Stay Afloat Under Fed Dividend Rule

Mutual savings banks say they will have difficulty retaining capital, attracting investors and even staying afloat under a new Federal Reserve rule requiring depositors each year to approve a dividend waiver.

In short, mutual bank managers say, the new rule may make it less attractive to invest in mutual holding companies -- the entities that own the typically small, consumer-service oriented banks. That could lead to decreased capital, pressure to convert to an all-stock company and ultimately, the absorption of community-oriented mutual holding companies into big-name banks.

Mutual banks are thrifts whose majority owners are depositors and whose minority owners are public shareholders.

For decades, the former Office of Thrift Supervision allowed a mutual holding company to waive its yearly dividend -- which meant the holding company could avoid a large tax bill, provide investors assurance it could meet its income-to-dividend test and retain and attract public shareholders, who contribute real capital to the institution and receive the dividend instead.

Under the Dodd-Frank Act, the Federal Reserve now helps to govern mutual banks. Under an interim Fed rule, a mutual holding company can no longer waive the dividends it owes itself unless a majority of the bank’s depositors vote to allow the waiver. The new requirement is in effect even as the Fed reviews comments on it.

In the comment letters, mutual bank managers point out that most depositors won’t understand the waiver issue and will probably reject it. Ultimately, the managers warn, the dividend-waiver issue could erode their capital levels and scare away investors.

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Turkey Proposes Laws for Bank Regulator Chiefs, Insider Trading

The Turkish government will allow the heads of the banking regulator and the fund which insures deposits and manages failed banks to serve a second term in office, according to draft legislation submitted to parliament yesterday.

Tevfik Bilgin ’s six-year term as chairman of the Ankara-based banking regulator will end in April. Sakir Ercan Gul, who has headed the Istanbul-based Savings Deposit Insurance Fund since February 2010, will complete his term at the end of this month.

Separately, Turkey will introduce tougher penalties for manipulation of financial markets and insider trading, Sabah newspaper reported, citing a draft for a new capital markets law.

The law foresees jail sentences of between three and six years for those found guilty of insider trading or spreading false information and then profiting from it, Sabah said.

The new law will include more specific definitions of the kind of publications, including material from the Internet, that are subject to it, Sabah said. That may lead to penalties for foreign institutions that have written reports recently that affected markets, the newspaper said, without specifying them.

Compliance Action

UBS Turning Whistle-Blower in Libor Probe Pressures Rivals

UBS AG’s decision to become first-confessor as regulators probe the alleged manipulation of interest rates will ratchet up the risks for other banks that set the benchmark for $360 trillion of securities worldwide.

The bank is seeking to insulate itself from the biggest possible fines from the investigation by turning itself in to regulators before its competitors to gain leniency, lawyers said. The plan still leaves the Zurich-based lender vulnerable to lawsuits from clients and raises the potential antitrust penalties for its competitors.

UBS, already facing scrutiny of its internal controls after posting a $2.3 billion loss from unauthorized trading last year, is trying to shorten the probe against itself by cooperating. Its disclosure to regulators that employees colluded to rig the London interbank offered rate is likely to renew calls for regulators to overhaul the way firms set the rate.

UBS disclosed in a July filing it had got conditional immunity from the U.S. Justice Department in its probe of Libor. In February, the bank said it received similar immunity from the Swiss Competition Commission. Spokesman Richard Morton declined to comment on the lender’s leniency agreements.

By making the first disclosure to regulators, the lender will make it harder for competitors including JPMorgan Chase & Co. and Citigroup Inc. to claim similar protection. UBS’s competitors could face higher penalties for not coming forward earlier, said Steven Francis, a regulatory lawyer at Reynolds Porter Chamberlain in London.

Brian Marchiony, a London-based JPMorgan spokesman, and Jeffrey French, a spokesman for Citigroup in London, declined to comment on the investigations.

Libor is derived from a survey of banks conducted daily for the British Bankers’ Association in London.

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U.K. FSA Is Reviewing Cross-Border Allegations in Libor Probe

Britain’s Financial Services Authority is investigating “significant cross-border allegations in regards to Libor.”

Tracey McDermott, the regulator’s acting head of enforcement, publicly disclosed the probe for the first time in a speech in London today.

The U.K. regulator is probing whether banks’ proprietary-trading desks exploited information they had about the direction of Libor to trade interest-rate derivatives, potentially defrauding their firms’ counterparties, two people familiar have said.

The U.K. FSA is investigating whether banks’ Libor submissions reflected their actual cost of borrowing and is scrutinizing market data for potential anomalies, another person familiar with the investigation said. The watchdog is scanning e-mails between bankers for code words that could be used to manipulate Libor, a person familiar with the case has said.

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European Sovereign Bond Protection Facility Launched, EFSF Says

The European Financial Stability Facility said it has launched a program that will be able to provide partial insurance for sovereign bonds of a euro-area nation.

The European Sovereign Bond Protection Facility would offer insurance certificates for newly issued debt. The certificates would give the holder an amount of fixed-credit protection of 20 percent to 30 percent of the principal amount of the sovereign bond, the EFSF said.

The partial risk protection is designed to be used primarily under precautionary programs and is aimed at increasing demand for new issues of euro-area nations and lowering funding costs, the EFSF said. The program is one of two leveraging mechanisms in development and must be requested in order to be used.

Bristol Myers Squibb Gets Subpoena for Abilify Information

Bristol-Myers Squibb Co. said it received a subpoena from the U.S. attorney’s office in New York asking for information about sales and marketing of its second-best-selling drug, Abilify, used to treat schizophrenia and other mood disorders.

“It’s not possible at this time to assess the outcome of this matter or its potential impact on the company,” the New York-based firm said in a filing Feb. 17 with the U.S. Securities and Exchange Commission. The subpoena was received last month.

The Abilify antipsychotic drug generated $2.8 billion in revenue in 2011, second after the blood thinner Plavix in the company’s portfolio, according to data compiled by Bloomberg.

Laura Hortas, a company spokeswoman, declined to comment on the subpoena beyond the company’s statement.


Expert Networker John Kinnucan Charged; Barnetson Pleads Guilty

John Kinnucan, the Broadband Research LLC founder who said he refused to secretly record a money manager in a nationwide U.S. probe of insider trading, was charged with participating in a securities fraud scheme.

Kinnucan, 54, was charged with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud and two counts of securities fraud in a federal complaint unsealed Feb. 17 in federal court in New York.

He was arrested at his home in Portland, Oregon, on Feb. 16, and is being held in jail, according to the Federal Bureau of Investigation. He was scheduled to appear before a federal magistrate in Oregon Feb. 17, the U.S. said.

Kinnucan used “financial incentives,” and other inducements to persuade public company insiders to reveal their employer’s secrets, Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case, said in a statement.

Kinnucan allegedly paid one source of illegal tips $27,500 and invested $25,000 in the business of a second source. He also provided inside information to his clients on the understanding they’d use the tips to execute transactions, according to the statements in a criminal complaint filed in U.S. District Court in New York.

In the complaint, prosecutors said that between 2008 and 2010, Kinnucan allegedly obtained nonpublic information such as quarterly revenue numbers from co-conspirators who worked at publicly-traded companies such as F5 Networks Inc., Sandisk Corp. and Flextronics International Ltd.

Ellen Davis, a spokeswoman for Bharara’s office, declined to comment on Kinnucan’s arrest.

The U.S. Securities and Exchange Commission also brought a parallel civil case against Kinnucan Feb. 17 in a complaint filed in Manhattan federal court.

Nathaniel Burney, a New York lawyer who has represented Kinnucan, said in a phone interview last week that he is no longer his defense lawyer and declined to comment further on the matter, citing attorney-client privilege. Kinnucan said in a Feb. 14 e-mail that he was representing himself.

Separately, former SanDisk Corp. executive Donald Barnetson pleaded guilty Feb. 17 to participating in a securities fraud scheme with Kinnucan.

Barnetson, 37, pleaded guilty in federal court in Manhattan Feb. 17 to one count of conspiracy to commit securities and wire fraud. He faces as long as five years in prison and was ordered released on $50,000 bond.

Lee Flanagin, a spokesman for Milpitas, California-based SanDisk, said Barnetson left the company in early 2011.

The criminal case is U.S. v. Kinnucan, 12-MAG-424, and the civil case is SEC v. Kinnucan, 12-CV-1230, Southern District of New York (Manhattan).

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Iran Starts Trial in $2.6 Billion Bank Fraud Case, Press TV Says

Iran started the trial of 32 people charged with involvement in a $2.6 billion banking fraud, the biggest in the country’s history, Press TV reported, citing Prosecutor General Abbas Jafari-Dolatabadi.

The trial opened in the Islamic Revolution Court in Tehran Feb. 19, with Jafari-Dolatabadi saying the defendants are part of “a well-organized group which has conducted criminal actions in the guise of an investment company to undermine the economic security of the society,” Press TV said.

The defendants, who weren’t identified, were involved in efforts to provide forged documents to get loans with the aim of buying state-owned companies that were being privatized and to open up letters of credit to transfer large amounts of money abroad, Press TV said, citing the indictment.

Owners of the Aria Investment Development Co., which is at the center of the controversy, allegedly bribed managers of banks to get loans and letters of credit, the report said. The company has more than 35 affiliates that are active in diverse business activities, it said. The equivalent of $2.6 billion was withdrawn from the country’s banking system and deposited in a personal account, Press TV said.


Tilman Says Dodd-Frank and Volcker Rules Won’t Help

Leo Tilman, president of L.M. Tilman & Co., talked about risk strategies and corporate behavior, as well as his views on the Volcker rule.

He spoke with Tom Keene on Bloomberg Television’s “Surveillance Midday.”

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Bloomberg’s Cohan Says Arbitration Doesn’t Work

Bloomberg columnist William D. Cohan said arbitration on Wall Street “is all a fiction.” Cohan talked with Bloomberg’s Ken Prewitt on Bloomberg Radio’s “Bloomberg Surveillance.” They were joined by Gerard Cassidy, an analyst with RBC Capital Markets.

Cohan is a Bloomberg View columnist. The opinions expressed are his own.

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Comings and Goings

Citigroup Appoints New Japan Markets Head After Libor Suspension

Citigroup Inc. appointed a new head of its Japanese markets business as Chief Executive Officer Vikram Pandit seeks to rebuild in the country after receiving the third regulatory punishment in seven years in December.

Suneel Bakhshi was appointed president and CEO of Citigroup Global Markets Japan, according to a statement on the New York-based bank’s website. Bakhshi is currently chief risk officer of Citigroup’s commercial bank, according to the statement.

Bakhshi is taking over duties from Brian Mccappin, who the bank said in December would resign after the unit was banned for two weeks from trading tied to the London and Tokyo interbank offered rates. Citigroup staff attempted to improperly influence the rates, the Japanese Financial Services Agency said. The bank was also suspended from soliciting sales of certain products to retail customers after failing to fully explain their risk.

Citigroup said Mccappin would resign after regulators announced the ban, and apologized to customers in a statement in response to the FSA’s allegations.

James “Jamie” Forese, head of Citigroup’s securities and banking unit, said in an internal memorandum obtained by Bloomberg News that Bakhshi has held several senior positions in trading, banking, and risk management during his 30-year career at Citigroup.

Danielle Romero-Apsilos, a spokeswoman for Citigroup, confirmed the memo’s contents. Shuntaro Higashi, the unit’s interim president and CEO, will continue as chairman of the business, according to the statement.