Corzine Sued, Shifting Bank Losses, Imaging3: Compliance

The Commodity Futures Trading Commission sued former MF Global Holdings Ltd. Chief Executive Officer Jon Corzine for failing to properly oversee the company as it spiraled toward bankruptcy in 2011.

The regulator also sued MF Global’s former assistant treasurer Edith O’Brien and said it reached a settlement with a unit of the company, MF Global Inc., to pay all funds due to customers and impose a $100 million penalty. The settlement is subject to court approval.

MF Global’s collapse led to billions of dollars in missing client funds at the broker dealer and the eighth-biggest bankruptcy in U.S. history.

Corzine, who once served as a New Jersey senator and governor and was a co-chairman of Goldman Sachs Group Inc., presided over MF Global before it filed for bankruptcy on Oct. 31, 2011. Wrong-way $6.3 billion trades on bonds of some of Europe’s most-indebted nations helped destroy the company and its brokerage unit, MF Global Inc.

Corzine, 66, has been faulted by members of Congress, former customers and the trustees overseeing the wind-down of MF Global. While the Federal Bureau of Investigation started a probe of the events leading to the bankruptcy, no charges were filed in the case.

Steve Goldberg, a spokesman for Corzine, said before the complaint was filed that Corzine wasn’t informed customer funds were at risk or were being used improperly. There is no evidence he failed to work with management to try and turn around a failing company, he said.

Goldberg said Corzine was subject to “political pressure to hold someone liable” for the failure of the firm.

The CFTC itself has been blamed at times for contributing to MF Global’s downfall. The regulator, chaired by Corzine’s ex- Goldman Sachs colleague Gary Gensler at the time of MF Global’s collapse, failed to coordinate with the Securities and Exchange Commission, according to a 101-page report last November by U.S. House Republicans.

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Compliance Policy

Key Features of Bank Resolution Rules Deal Reached by EU Nations

EU nations agreed on a framework for bank restructuring and resolution. The deal, which now must be negotiated with the European Parliament, spells out private-investor losses and conditions for receiving aid.

Regulators will be required to write down creditors in order of seniority until losses reach 8 percent of the distressed bank’s liabilities, with some ability to shift losses among private investors. Above that threshold, they could grant exemptions and turn to national backstops instead of following the formula.

The deal offers room for regulators, after notifying the European Commission, to exempt some creditors and shift the burden to others.

Among the rules, nations will be required to set up funds, financed through levies on banks that are big enough to cover

1.3 percent of insured deposits of each country’s banks. Resolution funds will be treated differently than deposit guarantee funds, in terms of conditions for when governments can deploy the money.

If a nation’s resolution fund is twice the size required by the new rules, nations can take advantage of emergency rules that change the loss threshold to 20 percent of risk-weighted assets.

EU financial services chief Michel Barnier wants to see a year-end finish. The new rules would take effect in 2018.

Parliament and nations disagree on when countries can nationalize their banks, when to start the new bail-in rules, and when national deposit-guarantee funds should be in line to absorb losses.

South Africa’s PIC Wins Approval to Boost African Bank Stake

South Africa’s Public Investment Corp., the continent’s biggest fund manager, said it won approval from the central bank to increase its stake in African Bank Investments Ltd. up to 24 percent.

PIC, which is owned by the South African government, said any increase will depend on “views of third-party asset managers that manage funds” on its behalf as well as the bank’s weighting within the indexes its tracker funds follow, according to an e-mailed response to questions today. The fund manager last month raised its stake to above 15 percent after the stock tumbled on bad loans to lower-income people, making it liable to participate in a bailout in case of default.

A spokeswoman at South Africa’s central bank, who asked not to be named in line with the bank’s policy, was unable to comment immediately when contacted on her mobile phone today.

Fund Manager Bonus Curbs Lead to Split Before EU Parliament Vote

European Parliament lawmakers will vote next week on rules to curb fund manager bonuses, amid a split within the assembly over how far the EU should go in regulating pay.

The plans, which would ban managers of so-called UCITS funds from receiving bonuses worth more than their fixed pay, were narrowly adopted earlier this year by the parliament’s economic and monetary affairs committee. The vote will pit Christian Democrats, Conservatives and Liberals against Socialists and Greens in a tally that lawmakers say is too close to call because some parties face internal schisms.

The draft rules for fund managers go beyond planned EU curbs on banker pay that would allow bonuses of twice fixed salary. European asset-management firms are concerned the proposal, which may affect two-thirds of senior fund managers, will lead to a bidding war for their top traders, increasing fixed costs and making the industry more vulnerable to market downturns.

Parliament is weighing whether to add the bonus rules, as well as curbs on payment of performance fees, to a draft law proposed by Michel Barnier, the EU’s financial services chief, to toughen UCITS regulation. The draft law must be approved by the parliament and national governments before it can take effect.

Legislators are set to debate the plans on July 2, before voting the following day.

Compliance Action

Global Cartel Fines Dip; Libor Probe May Bring Results Soon

Global criminal cartel fines dipped during the first part of the year in a pause before hefty penalties are likely to be imposed in probes of Libor and car parts, law firm Allen & Overy LLP said.

The penalties so far this year have totaled $677 million, less than a fifth of the more than $5 billion levied during 2012, the firm said in a report yesterday. The drop-off was most pronounced at the two biggest antitrust regulators, the U.S. and European Union.

Allen & Overy partner John Terzaken said the EU is likely to levy large fines later this year in probes of car parts and the London interbank offered rate, where it lags behind its U.S. colleagues. The U.S. and U.K. have already fined three banks about $2.5 billion in the Libor probes and almost $1 billion in fines have been issued in the U.S. and Japan in the investigation of auto-parts makers.

Separately, the European Union’s antitrust chief said a probe into rigging of benchmark interest rates may bring results soon, warning that manipulating benchmarks such as Libor and oil reference prices risks “systemic damage.”

The European Commission treats the rigging allegations as “a priority” because, “if confirmed, they cause systemic damage to the economy,” EU Competition Commissioner Joaquin Almunia said in a speech in Madrid yesterday.

Barclays Plc, Deutsche Bank AG, UBS AG and Royal Bank of Scotland Group Plc are among banks and brokerages that have been quizzed by the EU in a probe about manipulation of lending rates that may have helped them and others generate profits from derivatives trades.

Royal Dutch Shell Plc, BP Plc, Statoil ASA and Platts, the oil-price data collector owned by McGraw Hill Financial Inc., are being investigated by Almunia’s antitrust department at the European Commission on price fixing concerns.

Mark Carney, the next Bank of England governor, said global regulators will set up a task force with banks in a bid to repair or replace tarnished benchmarks in the wake of Libor and other rate-rigging scandals.

U.S. Bank to Reimburse Military Customers as CFPB Cracks Down

U.S. Bancorp and a partner company will reimburse about $6.5 million to members of the military who used an auto loan program under terms of a settlement announced yesterday with the U.S. Consumer Financial Protection Bureau.

The program “failed to properly disclose costs associated with repaying auto loans” made to service members, the CFPB’s director, Richard Cordray, said in an e-mailed statement.

The case involves a lending program at U.S. Bancorp called Military Installment Loans and Educational Services, or Miles, that allows young service members with minimal credit history to finance an auto purchase.

The Minneapolis-based bank will reimburse customers $3.2 million, while its partner, Lexington, Kentucky-based Dealers’ Financial Services will pay $3.3 million. The CFPB said the money will go to more than 50,000 service members, providing an average reimbursement of less than $130 per customer.

Tom Joyce, a spokesman for U.S. Bancorp, said the bank will end its program, while noting that it wasn’t fined by CFPB. “At U.S. Bank, we have high expectations for ourselves and our company’s product offerings, and we apologize for any confusion this program may have caused our customers,” Joyce said in an e-mail.

DFS didn’t immediately respond to a call seeking comment.

China CSRC Lists 164 Shanghai IPO; Steps Up Fraud Crackdown

The China Securities Regulatory Commission said 10 applications were approved of 164 companies that have submitted applications for initial public offerings on the Shanghai exchange as of June 27.

Thirty of 298 companies that have submitted applications for an IPO on the Shenzhen exchange were approved as of June 27. Forty-three applications out of 244 companies that submitted applications for IPOs on Shenzhen’s Chinext board were approved as of June 20.

Separately, China’s securities regulator pledged to intensify its battle against securities fraud, extracting a “heavy price” from those who break the rules, as a freeze on new stock sales stretches into its ninth month.

Zhuang Xinyi, vice chairman of the Commission, said at a conference in Shanghai today that the agency will “consistently and relentlessly enforce the law,” and maintain a “zero tolerance” policy toward misconduct such as market manipulation and insider trading.’’

Zhuang’s comments follow the CSRC rebuke or punishment of at least three brokerages in the past two months for inadequate due diligence on initial public offerings.

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Imaging3 Sued by SEC for Misleading Investors About FDA Denial

Imaging3 Inc., a medical-imaging device firm, and its founder were sued by U.S. regulators over claims they misled investors about Federal Drug Administration rejection of a scanner that produced 3-D images.

Dean Janes, founder and chief executive officer of Burbank, California-based Imaging3, falsely told investors in a November 2010 conference call that the FDA didn’t raise safety and quality concerns in denying approval for the scanner, the Securities and Exchange Commission said yesterday in a complaint filed in U.S. District Court in California.

After an investor obtained the FDA’s denial letter and posted it on the Internet in early 2011, Janes used his personal social media page to mischaracterize the regulator’s position, the SEC said. Janes and his company didn’t officially issue the full text of the FDA’s denial letter until earlier this year, the SEC said.

A phone call to Mark Richardson, an attorney for Imaging3 and Janes, wasn’t immediately returned. A phone call to Janes’s office at Imaging3 wasn’t immediately returned.

The case is U.S. Securities and Exchange Commission v. Imaging3 Inc., et al., 13-cv-04616, U.S. District Court, Central District of California (Los Angeles).


A Closer Look With Arthur Levitt: Ketchum and Brodsky

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, interviews Richard Ketchum, the chairman and chief executive officer of the Financial Industry Regulatory Authority, and William Brodsky, chairman of the Chicago Board Options Exchange.

They discussed market fairness and market transparency and the question of whether we are “over-regulated in America.”

The three spoke on Bloomberg Radio’s “A Closer Look With Arthur Levitt.

For the audio, click here.

Comings and Goings

SEC Nominees Say Agency Must Finish Dodd-Frank, Jobs Act Rules

Two U.S. Senate staff members nominated to join the Securities and Exchange Commission said yesterday the agency should focus on finishing rules mandated by Congress.

Kara M. Stein, a Democrat, and Michael Piwowar, a Republican, told the Senate Banking Committee the SEC must complete the required rulemaking, much of it a response to the financial crisis, even as it studies how to address an evolving and complex electronic market for equities trading.

Stein and Piwowar would join the SEC as it adapts to a new agenda under Chairman Mary Jo White, who says the agency’s rulemaking priorities are prescribed by the Dodd-Frank Act of 2010 and the Jumpstart Our Business Startups Act of 2012. The SEC is preparing to vote on rules that would allow equity crowdfunding and advertising for investors by hedge funds. Both rules are required by the Jobs Act.

Stein would replace Elisse B. Walter as a Democratic commissioner and Piwowar would succeed Troy A. Paredes as a Republican appointee on the five-member commission that oversees U.S. capital markets. The nominations of Stein and Piwowar are uncontroversial, and both are expected to win Senate confirmation, possibly as soon as July. The committee will vote on their nominations at a future hearing.

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FHFA Nominee Faces Senate Skepticism of Skills to Oversee GSEs

U.S. Representative Mel Watt faced lawmakers skeptical of his knowledge of housing-finance issues yesterday when he appeared at a Senate Banking Committee hearing on his nomination to oversee Fannie Mae and Freddie Mac.

Watt, 67, a North Carolina Democrat, offered a bipartisan plan to eliminate the two U.S.-owned companies and replace them with a government reinsurer.

The Federal Housing Finance Agency has explicit authority to help low-income buyers, he told the Senate Banking Committee panel. The agency shouldn’t make or guarantee loans that can’t be paid, he said.

He added that Fannie and Freddie should be subject to the qualified residential mortgage rule, if they are ongoing, and the two should only back loans meeting the qualified mortgage rule.

The Watt nomination is President Barack Obama’s second attempt to fill the FHFA post held since 2009 by Acting Director Edward J. DeMarco, who has been criticized by Democratic lawmakers and consumer-advocacy groups for doing too little to help homeowners struggling in the wake of the financial crisis. The president’s first choice, former North Carolina banking commissioner Joseph Smith, withdrew in 2011 amid Republican opposition.

Watt’s chances of gaining confirmation remain unclear. He would need support from at least five Republicans to gain the 60 votes needed for Senate confirmation if he’s backed by all 55 lawmakers who caucus with the Democrats in the 100-member body. Only one Republican, Senator Richard Burr from North Carolina, has endorsed him.

Senate Banking Committee’s top Republican, Mike Crapo of Idaho, said his concerns about Obama’s choice of Watt, to lead the FHFA reflect the ‘‘political nature” of the nomination.

His concern isn’t a reflection on Watt, who has had a “long and successful” career in Congress and is “well liked,” Crapo said in opening comments at the hearing. His concerns “reflect the unique position of the FHFA director,” who has almost “unchecked power” over mortgage market, Crapo said.

Watt, 67, backed a measure that would let bankruptcy judges force lenders to cut principal owed on mortgages -- a tactic that he called a legal “sledgehammer” against banks. Republicans say they will attack that position, his past support for Fannie Mae and Freddie Mac, and his qualifications for the job. Watt has served in Congress since 1992.

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