SEC Suits, Sukuk ‘Lessons’, Volcker Loopholes: Compliance

The U.S. Supreme Court signaled it may tighten the time limits that apply when the Securities and Exchange Commission and other government agencies seek to impose fines on people and companies accused of fraud.

Hearing arguments yesterday in Washington, justices across the court’s ideological divide voiced doubt about the Obama administration’s position in a case involving market timing, the practice of making frequent, short-term trades at the expense of other investors.

The issue is whether the five-year window for suits had expired by the time the SEC sued two Gabelli Funds LLC officials, saying they secretly allowed market timing by a client. The Obama administration says the window opens only after the government has reason to know about a fraud -- an approach several justices said would reverse hundreds of years of practice and give federal enforcers too much power.

A federal appeals court in New York said the suit against Marc J. Gabelli and Bruce Alpert could go forward, agreeing with the Obama administration’s approach.

The case raises issues similar to those addressed by the Supreme Court in 2010, when it ruled that the two-year period for shareholder fraud suits doesn’t begin until investors have indications of intentional company wrongdoing. The new case concerns SEC enforcement actions, rather than private suits.

It affects only the power of agencies to seek fines, not their ability to seek “disgorgement” -- that is, to force those who engage in fraud to give back the money. The SEC complaint, filed in 2008, centers on conduct that took place from 1999 to 2002. At the time of the alleged wrongdoing, Gabelli was the portfolio manager for the Gabelli Global Growth Fund and Alpert was chief operating officer of Gabelli Funds.

Both men deny any wrongdoing.

Gabelli and Alpert’s lawyer, Lewis Liman, told the justices that the issue might be different had the SEC accused his clients of taking steps to conceal their activities.

“There’s no allegation whatsoever that anything was hidden from the government,” Liman said.

The case, which the court will decide by June, is Gabelli v. SEC, 11-1274.

Compliance Policy

Deutsche Bank, DTCC Urge Rejection of Chicago Mercantile Plan

Deutsche Bank, Depository Trust & Clearing Corp. and the Securities Industry and Financial Markets Association are urging a federal agency to reject a proposal by the Chicago Mercantile Exchange concerning trade data.

The Chicago Mercantile Exchange proposed having data for trades guaranteed by its clearinghouse sent to its own so-called swaps-data repository, according to comment letters filed with the U.S. Commodity Futures Trading Commission.

Deutsche Bank said the proposed rule would lead to “fragmented, weakened and costly swap reporting infrastructure with few corresponding benefits to market participants or regulators.”

The Depository Trust said the rule would undermine Dodd-Frank and decrease transparency. Intercontinental Exchange and the Commodity Markets Council support the rule change. They said the CFTC should approve the Chicago Mercantile Exchange’s proposed amendment.

The Commodity Markets Council said the rule would foster “efficient and cost effective reporting of cleared swaps.”

CFTC Chairman Gary Gensler, when asked about the rule in November, declined to say if he supports the Chicago Mercantile Exchange’s proposed policy.

Japan Regulator Drafts Tougher Safety Rules, Nikkei Says

Japan’s Nuclear Regulation Authority has proposed new measures against natural disasters, as well as other events such as airplane crashes and terror attacks, Nikkei reported.

Exceptions to the new rules will allow some idled reactors to come back online, according to Nikkei.

The new steps include cooling systems 100 meters from reactors and a filtered vent system to allow containment vessel pressure reduction, Nikkei reported.

The regulator is expected to begin discussion of the proposals Jan. 11, and will publish a framework for the rules this month. Finalization of the rules is expected in July, following public discussion, Nikkei said.

Compliance Action

Banks’ $8.5 Billion Deal Kills Review That Never Saw Results

A foreclosure-review system that failed to compensate mistreated borrowers has been mostly scrapped in an $8.5 billion agreement with the largest U.S. mortgage servicers.

U.S. regulators’ deal Jan. 7 with 10 mortgage servicers replaces a case-by-case assessment of flawed foreclosures that lasted almost two years. The Independent Foreclosure Review process -- agreed to by 14 servicers in a 2011 settlement -- has so far cost the servicers more than $1.5 billion in fees to consultants handling the cases.

Lenders including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. must now provide $5.2 billion in mortgage assistance and $3.3 billion in direct payments to wronged borrowers, the Office of the Comptroller of the Currency and the Federal Reserve said in a statement. This largest cash payout to those harmed by bad foreclosures during the subprime mortgage crisis is also meant to help people with current home-loan struggles.

Costs from faulty home loans and foreclosures since 2007 total more than $88 billion for the biggest U.S. home lenders, according to data compiled by Bloomberg. Bank of America, which ranked No. 1 in mortgages before the 2008 credit crisis, has borne the biggest burden with at least $45 billion of expenses.

The review process was intended to “fix what was broken,” said Comptroller of the Currency Thomas Curry, adding that the settlement brings a “significant change in direction” and will meet the original objective faster.

The third-party consultants, including Promontory Financial Group LLC, PricewaterhouseCoopers LLP and Ernst & Young LLP, will lose their jobs reviewing the files for the 10 servicers. Promontory, the Washington-based firm that reviewed files for Bank of America, Wells Fargo and PNC, said in a statement that it “is ceasing essentially all review work immediately. We will, of course, cooperate with regulators and servicers to ensure a smooth transition to the new remediation approach.”

The agreement drew criticism from Representative Elijah Cummings of Maryland, the top Democrat of the House Oversight and Government Reform Committee, who expressed concerns that the settlement will allow banks to “sweep past abuses under the rug.”

The accord is meant to speed up payments to borrowers who otherwise would have continued to wait under the case-by-case review.

For more, click here.

UBS in Process of Rooting Out Negative Elements, Orcel Says

UBS AG is in the process of rooting out “negative elements” of its corporate culture after Switzerland’s largest bank was fined $1.5 billion by regulators for trying to rig global interest rates, said Andrea Orcel, chief executive officer of the investment bank.

The UBS settlement is the second in the investigation of global interest rates after Barclays Plc in June agreed to pay 290 million pounds ($466 million). Regulators have sought information from more than a dozen banks that set rates in the U.S., Europe and Japan to make their finances appear healthier. More than $300 trillion of loans, mortgages, financial products and contracts are linked to Libor.

Orcel said the staff involved in manipulating Libor were “dismissed, penalized or reprimanded.” About 18 people have lost their jobs and the bank has “taken action” against 40 people, said Andrew Williams, global head of compliance at UBS.

Williams also told lawmakers the impact former trader Tom Hayes, one of two UBS traders charged by prosecutors, had on the business “is currently being studied” and that he wasn’t affected by claw-backs because “all his deferred compensation was forfeited” when he joined Citigroup Inc. He “wouldn’t have had anything to claw back,” Williams said.

“Clearly his conduct was reprehensible and we are all disgusted by it,” he said at the hearing.

Hayes joined UBS in 2006 and worked at the Swiss lender until 2009, when he joined Citigroup. He was dismissed by Citigroup less than a year later for involvement in suspected rate-rigging, a person with knowledge of the matter said.

UBS, based in Zurich, has received conditional immunity for cooperating with investigations from U.S., Swiss, and Canadian authorities.

Finra Fraud Referrals Reached Record in 2012, Ketchum Says

The Financial Industry Regulatory Authority referred a record 692 cases involving potential fraud to law-enforcement agencies last year, according to Richard Ketchum, chief executive officer and chairman of Wall Street’s self-funded regulator.

Referrals to the Securities and Exchange Commission and other organizations outpaced 2011, when more than 650 were made, Finra said in an e-mailed statement. A record 347 involved insider trading last year, compared with 286 through mid-December 2011. The increases came as Finra and the SEC focused on risk-based examinations to pursue fraud and manipulative activity, Ketchum said in a telephone interview.

Finra and the SEC revamped the way they conduct inspections in the wake of Bernard Madoff’s Ponzi scheme, discovered in 2008, and the credit crisis that started the prior year, Ketchum said. Problems are now addressed more rapidly, he said.

Firms were ordered to repay more money to investors harmed by brokers’ improper practices last year, though fines fell, according to the statement. Restitution climbed to $34 million from $19 million in 2011 and fines declined 5 percent to $68 million.

The number of brokers Finra oversees has declined annually since it was formed in 2007 as smaller firms shut down and the securities industry contracted. The regulator was responsible in November for monitoring 4,319 brokers, 14 percent fewer than the 5,005 under its supervision five years earlier.

For more, click here.


Ex-Primary Global Executive’s Conspiracy Conviction Upheld

Former Primary Global Research LLC executive James Fleishman’s 2011 conviction for being part of an insider-trading scheme to help pass confidential information on publicly traded companies to fund managers was upheld yesterday by a federal appeals court in Manhattan.

Fleishman, 43, was convicted after trial in federal court in New York of two separate conspiracy charges for what the U.S. said was a scheme to obtain and pass along confidential information from technology company employees who moonlighted as consultants for Primary Global, a so-called expert-networking firm.

Fleishman is serving a 2 1/2-year term at the federal prison in Florence, Colorado.

In their ruling, the appeals court rejected Fleishman’s argument that his right to testify at trial was “impermissibly chilled” by a government subpoena that required him to produce all of his personal diaries if he took the stand in his own defense.

Fleishman’s lawyer, Benjamin Coleman, didn’t return a voice-mail message seeking comment on the case.

The lower court case is U.S. v. Nguyen, 11-cr-32, U.S. District Court, Southern District of New York (Manhattan) the appeals case is U.S. v. Nguyen, 12-94, 2nd U.S. Circuit Court of Appeals (Manhattan).

MF Global U.K. Clients May Get Back 60% After Deal With U.S.

Former customers of MF Global Holdings Ltd.’s U.K. arm will get about 60 percent of their money returned from the defunct brokerage after settling a dispute with the company’s U.S.-based units.

Unsecured creditors will also receive a payment of around 20 percent of the value of their claims following the agreement on Dec. 22, the administrators for MF Global’s U.K. arm said. U.K. customers were previously told they might receive as little as 26 cents on the dollar.

The deal needs to be approved by U.S. bankruptcy courts.

MF Global filed the eighth-largest U.S. bankruptcy on Oct. 31, 2011, after getting margin calls and bank demands for money at its brokerage following its investment in the debt of troubled European economies. Legal disputes have tied up assets worth more than $1 billion, hindering repayment of the brokerage’s clients and creditors.

Two Ex-HBOS Managers Charged in $56 Million Business Loan Fraud

Two former employees of HBOS Plc along with six others were charged by U.K. prosecutors over business loans made through a retail bank for around 35 million pounds ($56.2 million).

The pair, described as senior managers for the bank, were charged yesterday with conspiracy to corrupt, fraudulent trading and money laundering, according to an e-mailed statement from the Crown Prosecution Service. The men were given gifts by financial advisers to administer loans for companies having difficulties between 2003 and 2010, according to the charges.

HBOS was taken over by Lloyd’s Banking Group Plc in 2009.


Barofsky Says Volcker Rule Loopholes Need to Be Removed

Neil Barofsky, former special inspector for the U.S. Treasury’s Troubled Asset Relief Program and a Bloomberg Television contributing editor, talked about a secretive Goldman Sachs Group Inc. unit called Multi-Strategy Investing that wagers about $1 billion of the firm’s own funds on the stocks and bonds of companies.

Barofsky spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.” Bloomberg’s Max Abelson also speaks.

For the video, click here.

Canada Systemically Important Banks May Need More Common Equity

Canadian banks that are deemed “systemically important” may be required to carry more capital, the head of regulation at the country’s banking watchdog said.

Mark Zelmer made the remarks yesterday in a speech in Toronto on the agency’s priorities.

He said the Office of the Superintendent of Financial Institutions will announce “within a few months” which banks will receive the designation.

Any bank receiving it “can also expect some additional prudential requirements, including having to carry more common equity,” said Zelmer, assistant superintendent in charge of regulation, according to a transcript of the speech. “The extra capital requirements will take effect in January 2016.”

Comings and Goings

Hong Kong Taking Sukuk Lessons, Staffing Up, Before New Law

Maybank Kim Eng Holdings Ltd. and Clifford Chance LLP are training Hong Kong staff for the city’s first sukuk sales before lawmakers review a bill to give the debt equal tax treatment.

Maybank, the world’s third-largest Islamic bond arranger in 2012, has been preparing its investment banking teams in Hong Kong and China to chase Shariah-compliant deals, Chief Executive Officer Tengku Zafrul Tengku Abdul Aziz said in a Jan. 4 interview. Clifford Chance, the U.K.’s highest grossing law firm, has moved a sukuk specialist from Dubai to the city, Qudeer Latif, the company’s head of global Islamic finance, said before the bill is first debated by the Legislative Council tomorrow.

Demand for debt that complies with the Koran’s ban on interest will triple to $950 billion by 2017, Ernst & Young LLP said in a Dec. 10 report, compared with the $211 billion of the notes outstanding as of June 2012, Bank Negara Malaysia data show.

Secretary for Financial Services and the Treasury K.C. Chan will present a bill to the Legislative Council today that will exempt sukuk sellers from paying tax on the transfer of underlying assets for four Islamic debt structures, he said in a Dec. 28 statement. This will pave the way for issuers in China and the Middle East to tap Shariah-compliant markets via Hong Kong, and develop the city’s asset-management business by increasing product variety, he said in the statement.

Standard Chartered Plc has been preparing staff in Dubai and Malaysia to handle Chinese clients that have expressed a preference to sell sukuk as soon as the tax changes come into effect, Sabir Ahmed, regional head of Islamic origination in Kuala Lumpur, wrote in a Jan. 4 e-mail.

For more, click here.