Egan-Jones, Deutsche Bank-FERC, Insurer Group: Compliance

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Egan-Jones Ratings Co. was barred from grading government debt and asset-backed securities for 18 months after settling charges it made material misstatements to the U.S. Securities and Exchange Commission.

Egan-Jones misled the regulator by asserting it had been ranking the two asset classes since 1995 when registering for so-called Nationally Recognized Statistical Rating Organization status, the SEC said yesterday in a statement. In fact, the Haverford, Pennsylvania-based company started rating the debt in 2008, the year it applied for the designation.

The SEC evaluates and decides which companies can issue NRSRO grades, which allows investors to meet regulatory requirements. The financial watchdog began using ratings in its rules in 1975, specifying that the only companies whose rankings could be used were Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Ten companies now carry the designation.

“Egan Jones is very pleased to announce that the firm has settled its issues with the SEC on mutually agreeable terms,” Bill Hassiepen, co-head of the ratings desk, said in an e-mailed statement. “Egan Jones remains an NRSRO for all of its Corporate, Bank/Finance, and Insurance Ratings and will re-apply for NRSRO designation in relatively short order.”

Egan-Jones, which was first accused of making the misrepresentations last April, must conduct a self-review and implement policies that correct issues identified in the order, according to the statement. In its July 2008 application, Egan-Jones said it had 150 outstanding ABS issuer ratings and 50 government grades.

Compliance Policy

EU Allows Some Nations to Design Broad Tax on Financial Trades

European Union finance ministers gave the green light for a group of interested member states to move forward with designing a financial-transaction tax that may bring in as much as 35 billion euros ($47 billion) a year.

Now that the finance chiefs have signed off, EU Tax Commissioner Algirdas Semeta said he’ll present a plan for the tax -- a broad-based levy on shares, bonds, derivatives, repurchase agreements and other instruments -- in the next few weeks. Eleven countries have committed to take part.

The initiative will be based on a prior transaction-tax proposal for all 27 EU nations that failed to gain support, with officials taking a fresh look at whether to exclude certain trades like primary market purchases of sovereign bonds. The prior plan aimed to target trading all over the world that involved at least one firm whose headquarters resided in the tax application zone, and also to discourage speculative high-frequency trades.

A so-called weighed majority of EU finance ministers backed the measure yesterday in a Brussels meeting. The U.K., home to Europe’s largest financial center, abstained along with Malta, the Czech Republic and Luxembourg, Finnish Finance Minister Jutta Urpilainen told reporters.

The countries that have signed on to the plan are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

Compliance Action

Deutsche Bank Pays $1.6 Million to End U.S. Energy-Market Probe

Deutsche Bank AG agreed to pay $1.6 million to end a dispute with the U.S., backing away from a showdown with the Federal Energy Regulatory Commission that said a unit of the bank manipulated California’s power markets.

The bank within 10 days will pay the U.S. a civil penalty of $1.5 million and surrender $172,645 plus interest to California’s grid operator, the agency said yesterday in a statement. The penalties are similar to FERC’s proposed remedy last year after accusing the bank of trading violations in 2010.

“We are pleased to have reached a settlement and put this matter behind us,” Renee Calabro, a Deutsche Bank spokeswoman in New York, said in a phone interview.

The settlement ends a dispute that Frankfurt-based Deutsche Bank had said would test the FERC’s enforcement powers, enhanced by Congress in 2005 following trading violations by other companies.

Deutsche Bank was prepared to challenge the accusations in court, even though “the cost of defending the case is likely to exceed the amount” sought by the FERC, the trading unit’s lawyers said in a Nov. 5 filing with the regulator.

Germany’s BaFin to Investigate False Weidmann Resignation Rumor

German financial regulator BaFin said it will investigate whether a false rumor about Bundesbank President Jens Weidmann resigning, posted on the social media platform Twitter, was spread to manipulate the market.

BaFin spokeswoman Dominika Kula said by telephone from Bonn yesterday that it will be a “routine investigation.” Earlier, the Bundesbank said it couldn’t rule out that the rumor was used to manipulate the market.

The euro, which had dropped, recovered after the Bundesbank said there was no foundation to the speculation.

Swiss Banks Vie for Declared American Assets Amid U.S. Tax Probe

Swiss wealth managers are resuming the fight for American clients four years after the U.S. sued UBS AG in a case that undermined banking secrecy and triggered the withdrawal of billions of dollars from Zurich and Geneva.

UBS expects to report assets at its Securities and Exchange Commission-registered business rose 20 percent to $4.6 billion last year, even as more recent market entrants, including Syz & Co. Group and Reyl Group, vie with Switzerland’s biggest bank for Americans who can prove their funds are declared.

SEC-registered banks are competing for $40 billion of American assets in the Alpine country as a U.S. Department of Justice tax-evasion probe embroils at least 11 Swiss firms.

While profit margins on SEC-regulated assets are smaller than on traditional offshore funds, the U.S. retains its importance as the largest asset management market in the world, Eric Syz, a managing partner of Syz & Co. Group, said in an interview.

North American offshore assets in Switzerland have slumped 70 percent since 2009 and only a third of the remaining assets may be managed by SEC-registered advisers, according to Boston Consulting.

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Schroders Employee Among FSA Insider-Trading Probe Arrests

An employee at Schroders Plc, Europe’s largest publicly traded money manager, was arrested along with four others as part of a U.K. insider-trading probe.

Damian Clarke, an equity trader at Schroders, was among two men and three women arrested by the Financial Services Authority, according to a person familiar with the investigation. The FSA searched four locations in London and the north of England, the watchdog said in an e-mailed statement yesterday.

The arrests come as the FSA scored a conviction in its biggest insider-trading case. Paul Milsom, the former Legal and General Group Plc equities trader, pleaded guilty last week to passing inside information to an independent stockbroker.

The suspects are being questioned in custody, the FSA said. Clarke wasn’t available to take a call at his office at Schroders in London.

The regulator charged five other individuals last year as part of the investigation into the front-running of block trades, known as Operation Tabernula, Latin for little tavern.

Tabernula, conducted along with the U.K. Serious Organised Crime Agency, is the “largest and most complex insider dealing investigation to date,” the regulator has said.


Gupta Says in His Appeal Trial Judge Hampered Defense Case

Ex-Goldman Sachs Group Inc. director Rajat Gupta asked a federal appeals court for a new insider-trading trial, arguing that evidence in his favor was kept from the jury and evidence against him was wrongly allowed.

Gupta, 64, who sat on the board of New York-based Goldman Sachs and Cincinnati-based Procter & Gamble Co., was sentenced to two years in prison after being convicted of passing information he gathered at board meetings to Galleon Group LLC co-founder Raj Rajaratnam.

U.S. District Judge Jed Rakoff in Manhattan erred when he allowed the government to present wiretaps of conversations not involving Gupta and limited Gupta’s defense case by barring evidence that Rajaratnam had alternative sources of nonpublic information about Goldman Sachs, defense lawyers Gary Naftalis and Seth Waxman said Jan. 18 in court papers.

The defense lawyers wrote that the trial court’s application of the evidence rules “left the jury with a distorted picture, in which Gupta was accused by the self-serving hearsay of a known fabulist beyond Gupta’s power to cross-examine.”

In a rare move, a federal appeals court in Manhattan in December granted Gupta’s request to remain free while he fights his conviction.

The case is U.S. v. Gupta, 12-4448, U.S. Court of Appeals for the Second Circuit (Manhattan).

Allen Stanford’s CFO James Davis Gets Five-Year Prison Term

Former Stanford Financial Group Co. finance chief James M. Davis was sentenced to five years in federal prison for his role in a 20-year, $7-billion international fraud scheme.

U.S. District Judge David Hittner in Houston also sentenced Davis, who faced as long as 30 years in prison, to three years of post-release probation. The court also imposed a $1 billion money judgment against Davis.

Prosecutors had sought a 10-year term for Davis, 64, who pleaded guilty to felony charges in 2009 and testified against financier R. Allen Stanford, who is serving a 110-year sentence in a federal prison in Florida. Davis’s attorney asked the judge to cap the sentence at four years, citing his client’s cooperation and remorse.

Stanford’s business empire included the Antigua-based Stanford International Bank Ltd. which offered certificates of deposit and the Houston-based Stanford Group Co. brokerage that sold them. In a trial before Hittner last year, Stanford was found guilty of lying to investors about what the bank was doing with their money. He is appealing his conviction.

Davis was the second-highest ranking member of the Stanford organization.

The case is U.S. v. Davis, 09-cr-335, U.S. District Court, Southern District of Texas (Houston).

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Bank Splits Should Be Paired With Shadow Bank Curbs, Koenig Says

Germany’s top markets regulator said a plan to split bank trading and deposit-taking activities would need to be paired with other measures to supervise global financial activities.

Bafin President Elke Koenig told reporters regulation of the banking industry can only be effective if entities that provide so-called shadow banking, including money market funds, are globally supervised as well.

Her comments come after the regulator asked Deutsche Bank AG, Germany’s biggest bank, to simulate a split of its consumer banking and trading businesses, according to two people familiar with the matter. A European Union-commissioned group last year called for banks to put trading and deposit-taking activities into separately capitalized units.

“A structural division alone isn’t enough to rid the world of systemic risks,” Koenig said at the regulator’s annual New Year’s reception yesterday.

She also questioned whether efforts to reform the way interest benchmarks such as the London interbank offered rate and Euribor will be successful.

“We not only need to work on a general restructure of the systems, we also need to work on a substitute for the system,” Koenig said.

Deutsche Bank’s Jain Sickened by Libor Manipulation Scandal

Deutsche Bank AG co-Chief Executive Officer Anshu Jain said he was sickened by the manipulation of interbank lending rates.

“The Libor affair sickens us all,” Jain told clients and investors during a panel discussion in Koenigstein, a town near Germany’s financial capital Frankfurt, late in the day on Jan.

21. “I don’t think any CEO thought this was a possibility. It sickens me the most of all the scandals.”

Regulators from Canada to Switzerland are investigating whether more than a dozen banks, including Deutsche Bank, were colluding to rig the rate. Deutsche Bank says it has set aside reserves for possible financial damages related to Libor, without specifying their value.

Jain, 50, declined to comment in detail about the alleged rigging of Libor, the benchmark for more than $300 trillion of securities, citing ongoing probes and litigation. It is clear that the level of wrongdoing varied across banks, he said.

Deutsche Bank said in July that an internal investigation found misconduct by individual employees, though no wrongdoing by any current or former members of the board.

Bankers’ Pragmatism Reigns as Davos Convenes Post-Election

Wall Street leaders descending on Davos this week will drink cocktails at Hotel Schatzalp, consort with Nobel laureates and try to “reshape” capitalism, as the World Economic Forum’s website puts it.

They won’t be doing it with as much vitriol as in previous years, when financiers including Blackstone Group LP Chief Executive Officer Stephen Schwarzman lashed out at government leaders, according to interviews with seven executives of firms with ties to the banking industry who are attending the annual Swiss Alpine meeting.

Following the second inauguration this week of President Barack Obama, whose re-election Wall Street spent a record amount to prevent, financial elites gathering in Davos say overt antagonism has fallen out of fashion.

Executives know they have to live with four more years of Obama and will be making fewer “big, loud public statements,” said Hans-Paul Buerkner, chairman and former CEO of Boston Consulting Group Inc., which advises global banks on strategy and costs.

Mitt Romney’s loss in the presidential campaign to a champion of financial regulation wasn’t Wall Street’s only disappointment. Citigroup CEO Vikram Pandit, co-chairman of last year’s meeting, was ousted in October following setbacks with regulators. Barclays CEO Robert Diamond, who said at Davos in 2012 that politicians arguing against pay for failed bankers should also talk about rewarding success, left in July after the London-based firm was fined 290 million pounds ($460 million) for rigging global interest rates.

“Business people are usually quite pragmatic,” Buerkner said. “They are not politicians, they are not ideologists, they want to do as well as possible.”

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Comings and Goings

Levitt Says White Would Be ‘Tough, Smart’ SEC Chairwoman

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said former U.S. Attorney Mary Jo White would be a tough and smart SEC chairwoman.

Levitt talked with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”

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Nelson to Run Insurer Watchdog Group After Supporting Obama Plan

The National Association of Insurance Commissioners named ex-Democratic Senator Ben Nelson to be its chief executive officer as the regulators’ group tackles U.S. President Barack Obama’s health-care overhaul.

Nelson’s duties will include working with U.S. and international agencies as overseers increase their scrutiny on financial firms, the NAIC said yesterday in a statement. A former industry executive, Nebraska governor and state regulator, he was one of the more conservative Democrats in the Senate.

Nelson provided the 60th vote needed to help push the health legislation through the Senate. He secured a provision exempting Nebraska from paying for expanded Medicaid coverage, derided by Republicans as the “Cornhusker Kickback.” Nelson, 71, later asked the provision be dropped and that all states get equal treatment.

State commissioners are shaping their health-insurance markets to comply with the 2010 Patient Protection and Affordable Care Act. NAIC committees have considered standards for the online insurance exchanges mandated by the law.

Enrollment in the exchanges must begin by Oct. 1 for plans that will take effect next year.

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