Tax-Dodge Crackdown, ‘Big’ Insurers, Tourre: Compliance

The Organization for Economic Cooperation and Development proposed a blueprint for cracking down on tax-dodging strategies used by companies such as Google Inc., Apple Inc. and Yahoo! Inc.

German Finance Minister Wolfgang Schaeuble called the OECD’s plan a “major step.” The proposal aims to develop rules over the next two years preventing companies from escaping taxes by putting patent rights into shell companies, taking interest deductions in one country without reporting taxable profit in another, and forcing them to disclose to regulators where they report their income around the world.

The 40-page report will complement efforts by deficit-laden governments to increase revenue they collect from profitable enterprises. It follows hearings in the U.S. and U.K. revealing how companies avoided billions in taxes by attributing profits to mailbox subsidiaries in places like Bermuda and the Cayman Islands.

The U.K. Parliament has held three hearings since November on corporate tax dodging -- examining strategies used by Google, Amazon and Starbucks Corp. In May, the U.S. Senate held a hearing on Apple’s offshore tax strategies. The companies all say they’ve complied with international tax laws.

A pair of the OECD proposals calls for rules to make it harder to shift profits by assigning intellectual property, such as patent rights, to offshore units. Under current law, such offshore subsidiaries can take credit for profits arising from patents developed in countries like the U.S. and U.K. -- generally with cash the parent companies provided to them in the first place.

Mountain View, California-based Google, for example, has avoided as much as $2 billion in worldwide income taxes annually by attributing profits to a subsidiary in Bermuda that holds the rights to its intellectual property for sales outside the U.S., as reported by Bloomberg News in December.

The OECD is a government-funded think tank that was charged by the G-20 to tackle the issue.

For more, click here, and click here.

Compliance Policy

China Regulators to Allow More Banks to Sell ABS, Reuters Says

China will allow more banks to sell asset-backed securities to support economic growth, Reuters reported, citing unidentified people.

The rules from the country’s banking and securities regulators will also scrap a quota on such issuances, Reuters reported. The government will control the pace of securitization to avoid risks, according to the report.

The State Council urged banks in June to better use existing credit and step up efforts to contain financial risks. The China Securities Regulatory Commission said Feb. 26 it would allow more firms to develop asset-backed securities businesses with the goal of boosting liquidity.

The securities regulator didn’t immediately respond to faxed questions seeking comment July 19. Calls to the China Banking Regulatory Commission’s news department weren’t immediately answered.

Chinese regulators reined in the money supply in June in an effort to force investors to shift funds out of shadow banking, which allows lenders to bypass controls and capital requirements.

Compliance Action

SEC Tries Last Ditch Move to Put SAC’s Cohen Out of Business

In an administrative action that constitutes its first formal salvo against billionaire Steven Cohen, the U.S. Securities and Exchange Commission alleged he failed to supervise two wayward portfolio managers and ignored “red flags” at his company.

The agency stops short of accusing the owner of SAC Capital Advisors LP of insider trading. While the proceeding may result in his being barred from managing other people’s money, it won’t carry the potential penalties available if the SEC had sued him. It also pales in comparison to a grand jury indictment for securities fraud, and the 20-year prison term a conviction could bring.

Instead, the SEC claim that Cohen should have known two of his subordinates were using material, non-public information to rack up hundreds of millions of dollars in trading profits will be easier to prove. The regulator will have a lesser burden of proof and won’t have to deal with all of the protections afforded a defendant in a lawsuit, let alone a prosecution.

The SEC, which seeks to ban Cohen from the financial industry for life in the non-court action, alleged he received “highly suspicious” information that should have caused any reasonable hedge-fund manager to investigate the basis for trades by subordinates Mathew Martoma and Michael Steinberg.

SAC spokesman Jonathan Gasthalter has said the agency’s action against Cohen “has no merit.” Kevin Callahan, a spokesman for the SEC, didn’t return a call seeking comment.

SAC oversees $15 billion, about 60 percent of which is money from Cohen and employees. Cohen, whose net worth is estimated at about $9 billion by the Bloomberg Billionaires Index, has returned 25 percent a year in his funds since founding his firm in 1992, after taking half of the profits in fees, a record unsurpassed by other equity hedge-fund managers.

SAC portfolio manager Martoma, 39, was charged by the U.S. in November with insider trading. Prosecutors accused him of helping Cohen’s Stamford, Connecticut-based hedge fund reap at least $276 million by trading on illicit tips about an Alzheimer’s drug.

The nature of the agency’s action against Cohen, in effect a disciplinary action that occurs internally, caught many by surprise, since it comes after years of scrutiny by federal authorities, both civil and criminal.

The SEC proceeding against Cohen was brought July 19, just days before the agency faced a five-year statute-of-limitations deadline stemming from trades sparked by Martoma’s tips made in late July 2008.

The agency action now puts the regulator at the forefront of the U.S. investigation of Cohen and his hedge fund.

For more, click here.

For a Bloomberg Television Report, click here.

SEC Accuses Miami of Misleading Investors in Muni Offerings

The U.S. Securities and Exchange Commission accused the city of Miami and Michael Boudreaux, a former budget director, with securities fraud related to several municipal bond offerings about four years ago.

Florida’s second-largest city and Boudreaux shifted money from a projects account to the general fund to mask budget gaps and win higher grades from ratings companies on three 2009 debt sales totaling $153.5 million, the SEC said July 19. Boudreaux’s lawyer said he’s being made into a scapegoat.

In 2010, the SEC began cracking down on state and local governments for not giving investors accurate information about their financial condition prior to bond sales, focusing on pension deficits. Since then, Illinois and New Jersey have both settled with the agency over such issues. The agency has since broadened its focus beyond retiree obligations, as in Miami.

The agency said in a court complaint that Miami had been ordered to stop violating anti-fraud laws in 2003.

Ivan Harris, a lawyer for the city, said it would contest the SEC’s claims.

“The city disputes these charges, and looks forward to demonstrating in a court of law that they are without merit,” Harris, with Morgan Lewis & Bockius LLP’s Miami office, said by e-mail. The agency is seeking civil and monetary penalties.

The SEC is blaming Boudreaux for decisions made by higher-ranking officials, the former budget chief’s lawyer, Michael Pizzi, said by telephone. Boudreaux sued the city after he was fired in 2010, attributing his dismissal to his cooperation with the agency’s investigation into the transfers. The case was dismissed in state court, records show. Pizzi said it is in abeyance pending the outcome of the SEC case.

“They should charge every budget director in America who ever made a budget transfer,” Pizzi said. “This is a ridiculous extension of SEC authority that puts the SEC in the position of micromanaging municipal budgets.”

Pizzi described the charges as “absurd.”

An attempt to reach Carlos Migoya, the former Miami city manager who fired Boudreaux in 2010, through a message left with Beba Luzarraga, an aide, wasn’t successful.

The SEC’s move reflects the agency’s continuing drive to require state and municipal debt issuers, as well as officials of those entities, to accurately depict their financial condition.

Falcone’s SEC Settlement Said Rejected by White as Too Lenient

The future of billionaire hedge-fund manager Philip Falcone was up in the air after a proposed $18 million settlement with the U.S. Securities and Exchange Commission was rejected by Chairman Mary Jo White as too lenient, according to two people with knowledge of the matter.

White, a former Wall Street defense lawyer, and Democrats Luis A. Aguilar and Elisse B. Walter, in a 3-to-1 vote, were concerned that Falcone wasn’t barred from serving as officer or director of a public company, said the people, asking not to be named because the deliberations aren’t public. The SEC informed Falcone’s Harbinger Capital Partners LLC of the decision July 18, according to a filing from Harbinger Group Inc.

Under the agreement, Falcone would have been barred for two years from investing client money to settle claims that he improperly borrowed money from his fund to pay personal taxes. It would have allowed him to remain chief executive officer of Harbinger Group, a company he modeled on Warren Buffett’s Berkshire Hathaway Inc. Harbinger disclosed the terms of the agreement on May 9, before the commission had voted on it and about one month after White was sworn in as SEC chairman, pledging to run a “bold and unrelenting” enforcement program.

White also questioned why the proposed settlement lacked an injunction, or an order not to violate securities laws, which is characteristic of most SEC settlements and can be used as a basis for future sanctions should the person not comply with the agreement, one of the people said.

SEC spokesman Kevin Callahan declined to comment.

Falcone’s Harbinger Capital hedge fund would have paid about $18 million in disgorgement, interest and penalties to resolve the SEC claims. The agreement wouldn’t have required Falcone to admit or deny the SEC’s allegations, according to the May filing. The agreement also would have ended, at least temporarily, a 12-year career as hedge-fund manager for Falcone.

The SEC attorneys and Falcone can still reach an alternative agreement addressing the commissioners’ concerns. Any settlement agreed to by the commission would still need to be approved by the court.

Falcone, 51, said previously that he planned to move away from hedge-fund investing, where clients can pull out their money at regular intervals, and instead use Harbinger Group to finance long-term investments.

Falcone didn’t immediately return an e-mail and phone call seeking a comment.

None of the SEC’s actions were brought against Harbinger Group or its subsidiaries, according to the filing.

Allianz Joins AIG on FSB’s List of Too-Big-to-Fail Insurers

American International Group Inc. and Allianz SE are among insurers deemed systemically important by global financial rule makers, meaning they may face tougher capital standards and tighter regulation.

The list of nine too-big-to-fail insurers, including MetLife Inc. and Prudential Financial Inc. in the U.S. and France’s Axa SA, was published late in the day on July 18 by the Financial Stability Board, the Basel, Switzerland-based body set up by the Group of 20 nations.

The FSB, led by Bank of England Governor Mark Carney, is coordinating global regulators’ response to the worst financial crisis since the Great Depression to prevent a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. and bailout of AIG.

Also on the list are Prudential Plc and Aviva Plc of the U.K., China’s Ping An Insurance Group Co. and Italy’s Assicurazioni Generali SpA.

Insurers identified as too big to fail will have to draw up recovery and resolution plans to limit the economic fallout should they go bust, the International Association of Insurance Supervisors said.

Implementation details for higher “loss absorbency requirements” are to be developed by the end of 2015 and will apply from January 2019, the FSB said. The nine companies on the list, which will be revised every year, will immediately face stricter supervision, the FSB said.

“Even though we continue to be of the opinion that the insurance business in general and Allianz in particular does not represent a systemic risk, we acknowledge the decision of the FSB and will continue to support its efforts for more stable financial markets,” Dieter Wemmer, chief financial officer of Munich-based Allianz, said in a statement July 19. “We are well positioned to manage the new requirements.”

“Our expectation is that the FSB will rely on regulators in the U.S. to implement G-SII policy measures for U.S.- headquartered companies,” Bob DeFillippo, a spokesman for Prudential Financial, said in a statement using an abbreviation for global systemically important insurers. “Prudential will remain engaged at both the global and domestic level on developing regulatory standards that are beneficial to consumers and preserve competition.”

“AIG looks forward to working with our international, federal and state regulators to develop a regulatory framework for large global insurers that is both robust and consistent,” Jon Diat, a spokesman for the New York-based company, said in a statement.

MetLife is reviewing the proposed policy measures, said John Calagna, a spokesman for the New York-based company.

Ping An will continue to augment its operational management standards and risk management capability, the insurer said July 19, adding that its solvency is above regulatory requirement.

Generali said it was put on the list because of its non-insurance activities.

Axa declined to comment.


Tourre Jurors Hear Phone Call Misstating Paulson Role in Deal

Jurors in the U.S. Securities and Exchange Commission’s case against Fabrice Tourre heard a much-fought-over phone call the SEC is using as evidence that Tourre misled a key participant in the 2007 transaction at the center of the fraud case against him.

An SEC lawyer on July 19 played a recording of the phone call between Gail Kreitman, a former Goldman Sachs Group Inc. saleswoman, and an employee of ACA Management LLC, the firm that was paid to select the 90 mortgage-backed securities underlying the deal known as Abacus 2007-AC1.

The SEC claims Tourre, 34, a former Goldman Sachs vice president, hid from investors in the deal the role of the Paulson & Co. hedge fund in helping select the assets, which it was betting would fail. Tourre also misled ACA into thinking Paulson, run by billionaire John Paulson, was making an equity investment in Abacus, rather than taking a purely short position, the SEC claims.

Evidence presented in the case shows Paulson never considered an equity investment in Abacus. The SEC claims that Tourre falsely told Kreitman that Paulson was long, not short. Lawyers for Tourre lost a pretrial bid to bar the recording from the trial.

Jurors are scheduled to hear this week from Laura Schwartz, the SEC’s star witness, who was the senior ACA executive on the Abacus deal, and from Tourre himself. Paulson is expected to testify as a witness for Tourre, possibly on Aug. 1.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

RP Martin Brokers Conspired With UBS, HSBC Workers, SFO Says

Two former RP Martin Holdings Ltd. brokers charged over manipulation of the London interbank offered rate conspired with employees at UBS AG, Tullett Prebon Plc, Rabobank Groep and HSBC Holdings Plc, U.K. prosecutors alleged in court papers.

Terry Farr, 41, and James Gilmour, 48, were charged with conspiring with employees of the firms and Tom Hayes, a former UBS trader in Tokyo who was arrested with the two men in December, over a three-year period. Farr was also charged with conspiring to rig yen Libor after Hayes had left UBS and was working for Citigroup Inc., from the end of 2009 until September


Farr and Gilmour appeared July 19 in court for the first time since being charged and they will appear at a July 30 hearing.

Hayes was charged with eight counts of conspiracy to defraud by the SFO last month. He has also been charged by the U.S. Justice Department, which is running a parallel criminal investigation.

“It is regrettable that of all the very many organizations and individuals who may have contributed to the failings of Libor-setting, the SFO has chosen to charge Mr. Farr, an unqualified interbank broker who had no responsibility whatsoever for setting Libor rates, a minnow in a very large pond, for doing what he believed to be his job,” his lawyers at Bindmans LLP said in an e-mailed statement earlier this week.

A lawyer for Gilmour, Sean Curran, declined to comment. Farr’s lawyers declined to comment beyond their previous statement.

Dominik Von Arx, a spokesman for Zurich-based UBS, and Jezz Farr, a spokesman for London-based HSBC, declined to comment on the hearing. Calls to Tullet Prebon and RP Martin weren’t immediately returned.

Roelina Bolding, a spokeswoman for Netherlands-based Rabobank, didn’t immediately respond to a request for comment.

Ex-ISoft Executives Won’t Be Retried as U.K. FCA Case Collapses

The former chief executive officer and two former directors of iSoft Group Plc, who were accused by the U.K. finance regulator of lying to the market about revenue, won’t be retried after the case collapsed for the second time.

Timothy Whiston, the former CEO of the software company, Stephen Graham, the company’s ex-commercial director, and John Whelan, its former finance director, won’t face a third trial, lawyers for the U.K. Financial Conduct Authority told a London criminal court today. Patrick Cryne, the former chairman of the company, also won’t be prosecuted.

The case is “now stale,” Richard Latham, a lawyer for the FCA, told the court and a third trial would be a great public expense.


Julius Baer Sees U.S.-Swiss Tax Accord in ‘Next Weeks’

Boris Collardi, chief executive officer of Julius Baer Group Ltd., talked about the U.S.-Swiss tax accord.

He also spoke about the company’s first-half profit reported today, and financial regulation.

Collardi spoke from Zurich with Anna Edwards on Bloomberg Television’s “Countdown.”

For the video, click here.

Comings and Goings

Ex-CFPB Leader Raj Date Rejoins Board of Peer-to-Peer Lender

Raj Date, the former deputy director of the U.S. Consumer Financial Protection Bureau, has rejoined the board of online peer-to-peer lender Prosper Marketplace Inc. as the industry braces for increased scrutiny from regulators.

Date, 42, becomes the fourth board member at Prosper, a closely held startup that arranges loans of $2,000 to $35,000 to help consumers consolidate debt or remodel a home, the San Francisco-based company said July 19 in a statement. Date stepped down from the board in September 2010 to join the government.

Peer-to-peer Internet lenders are attracting capital and talent as they compete with brick-and-mortar banks for consumer loans. They raise money from retail and institutional investors and then provide loans to consumers, collecting servicing and origination fees.

Date runs Fenway Summer LLC, a Washington-based consulting firm.

Before it's here, it's on the Bloomberg Terminal.