EBA Big Bank Data, Collateral, Panther Fined: Compliance

July 23 (Bloomberg) -- The European Union’s top banking regulator will reveal data on the sovereign debt and types of capital held by the bloc’s biggest lenders as it forgoes a stress test for a second year.

The European Banking Authority, set up in 2011 to harmonize banking rules, may publish the data as early as October and include additional information on banks’ cross-border investments across the EU. The agency has previously revealed lenders’ holdings of European sovereign debt as part of annual stress tests.

The EBA scrapped the 2013 exam in favor of a review of lenders’ asset quality led by the European Central Bank, which will become the euro area’s chief banking supervisor. European leaders last year decided that the central bank should become a regulator in a bid to ease the currency bloc’s fiscal crisis by breaking the link between bank solvency and national public finances.

Eight banks failed the 2011 exams, which were criticized for failing to catch problems at other lenders, with a combined shortfall of 2.5 billion euros ($3.3 billion).

Investors expected as many as 15 banks to fail and raise 29 billion euros after assessments, according to a survey by Goldman Sachs Group Inc.

The EBA yesterday told banks to hold on to the capital raised through the past year, because it “is essential for maintaining the flow of lending to the real economy,” Andrea Enria, chairman of the EBA, said in an e-mailed statement.

Regulators have sought to increase transparency in banking. Lenders face requirements to publish information about their buffers of liquid assets to be drawn on in a crisis, under rules proposed by the Basel Committee on Banking Standards last week.

Compliance Policy

Australia Dark Equity Trading Slumps After Regulator Clamps Down

Dark equity trading slumped in Australia after the securities regulator introduced a rule in May banning such trades unless they beat the best public quote.

Volumes of dark trades plunged 40 percent from the previous two months after an Australian Securities and Investments Commission rule was enforced on May 26, said Calissa Aldridge, a senior specialist in ASIC’s financial market infrastructure unit, referring to non-block transactions. The regulator now requires such trades to achieve a better price than public venues by at least one tick size, or occur within the midpoint between bids and offers. Dark pools are private venues that don’t display prices until after trades take place.

Dark trading had accounted for 25 percent to 30 percent of Australian equity market volume, according to an ASIC study released in March. The venues were set up to allow investors to buy and sell large parcels of shares without having news of their orders move the price. The rule implemented in May is only applicable to below block-size trades.

U.S. exchanges want the Securities and Exchange Commission to pass a similar “trade-at” rule, which would require brokers to route an order to an exchange unless they can improve on the best public quote by a defined amount. Since Canada imposed such a rule last year, quoted spreads and volatility have fallen, the chief executive officers of NYSE Euronext Inc. and Nasdaq OMX told SEC Chairman Mary Jo White during a presentation May 1.

Under the stewardship of Chairman Greg Medcraft, ASIC has proposed that operators of crossing systems that match orders away from the public exchange must make information about their system publicly available.

One-Third of Banks Will Use Low-Quality Collateral If It’s Cheap

One in three financial institutions would accept “low-quality, complex and opaque” collateral to back trades provided that it’s “cheap,” according to a survey from the operator of Switzerland’s exchange and clearinghouse.

More than half -- 57 percent -- of the 60 industry participants surveyed on behalf of SIX Group said that the cost of collateral was more important than its quality. About 48 percent of the respondents answered that securitizing and repackaging existing securities to create pools of collateral would increase risk, possibly leading to another financial crisis. Some 43 percent said they wanted “simple, high quality, liquid and easy to value” collateral, the survey found.

Institutions may need as much as $6.7 trillion in additional collateral to satisfy new bank capital rules and swaps-clearing mandates, securities-industry consultancy Finadium LLC said in December. The lack of cost-effective assets to back swaps trades has prompted some market users to exchange lower-rated securities for cash or highly rated securities, the Concord, Massachusetts-based firm specializing in securities lending and collateral management said. It described the practice as collateral transformation.

Vanson Bourne conducted the survey on SIX Group’s behalf in December, interviewing industry participants in the U.K., France and Germany.

Compliance Action

Panther, Coscia Fined Over High-Frequency Trading Algorithms

Panther Energy Trading LLC and sole owner Michael Coscia will pay $4.5 million to U.S. and U.K. regulators to resolve allegations that they used high-frequency trading algorithms that manipulated commodities markets.

Panther, based in Red Bank, New Jersey, and Coscia used a computer algorithm that placed and quickly canceled bids and offers in futures contracts for commodities including oil, metals, interest rates and foreign currencies, the U.S. Commodity Futures Trading Commission said in a statement yesterday. The enforcement action was the CFTC’s first under Dodd-Frank Act authority to target disruptive trading practices.

“By placing the large buy orders, Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell,” the agency said its statement.

Panther and Coscia must pay $2.8 million in fines and disgorgement of profits to the CFTC, $903,000 to the U.K. Financial Conduct Authority and $800,000 in fines to CME Group Inc., owner of the world’s largest derivatives market. The CFTC also banned Panther and Coscia from trading for a year.

Richard Reibman, who represents Panther and Coscia as a Chicago-based partner at Thompson Coburn LLP law firm, declined to comment on the facts of the case. “I would say from an industry perspective that prop trading firms are adapting to the fact that the Dodd-Frank Act reaches beyond swaps regulation,” he said in a telephone interview yesterday.

Moody’s Cuts No Barrier to Tunisia Sukuk Demand Using New Law

Tunisia, which passed a law last week to allow Islamic bond sales, will push ahead with plans to raise as much as $600 million in the fourth quarter even after ratings downgrades this year spurred borrowing costs.

The yield on Tunisia’s 4.5 percent non-Islamic euro-denominated bonds maturing in June 2020 has risen 21 basis points in Tunis since Moody’s Investors Service cut the country’s rating further into junk on May 29. A majority of parliamentary members passed Tunisia’s first sukuk law on July 17.

Tunisia is seeking funds to finance projects as the nation’s budget deficit is projected to widen to 6.4 percent this year from 4.4 percent in 2012, according to International Monetary Fund forecasts. Global sales of Islamic bonds, which comply with the religion’s ban on interest, have dropped 27 percent so far this year to $20 billion after concern the U.S. would reduce its bond-buying program hurt demand.

Seeking to attract investors in the predominately Muslim Gulf Cooperation Council and Asian countries such as Malaysia, North African governments expedited drafting of sukuk legislation in the past year. In the GCC, new sukuk supply has dried up, with no sales taking place in June for the first time in 10 months and only one offering so far in July.

Tunisia plans to sell sukuk in November or December that mature in five to 10 years, according to Chaker Soltani, director-general of the North African country’s Finance Ministry.


SEC Sues China Intelligent Lighting for Fraudulent Offering

The U.S. Securities and Exchange Commission sued China Intelligent Lighting & Electronics Inc. and NIVS IntelliMedia Technology Group Inc. over an alleged scheme to divert more than $29 million from investors in 2010.

China Intelligent Lighting, based in Guangdong, China, and Huizhou-based NIVS IntelliMedia Technology Group and their chief executive officers made false representations and raised funds in initial public offerings in 2010, according to the complaint filed yesterday in federal court in Manhattan.

China Lighting raised $7.6 million for an IPO in June 2010 while NIV raised $21.5 million in a public offering in April 2010, according to the complaint.

The suit alleges that the defendants “falsified bank and accounting records” and made “made false and misleading filings with the commission,” according to the complaint.

The two companies, who used the same auditor, furthered the scheme by providing the auditor with false bank and accounting records, the SEC alleged.

After regulators began scrutinizing the companies, the auditor who worked for both companies resigned in March 2011 and both China Intelligent Lighting and NIV have failed to file periodic reports since then, the SEC alleged.

The SEC opened the investigation in. The SEC suit includes claims of violations of securities laws, aiding and abetting and falsification of books and records. Regulators seek an order for disgorgement of all ill-gotten gains.

The case is U.S. Securities and Exchange Commission v. China Intelligent Lighting and Electronics Inc., 13-cv-05079, U.S. District Court, Southern District of New York (Manhattan).

Ex-Goldman Saleswoman Called by SEC to Bury Tourre With Praise

An ex-colleague of Fabrice Tourre heaped praise on the former Goldman Sachs Group Inc. vice president, saying she was “very impressed” with his detailed knowledge of the complicated mortgage-backed investments he created and sold.

Gail Kreitman, a former saleswoman at the bank, in testimony yesterday in Manhattan federal court described Tourre as a “trusted member of my team.”

The compliments, however, weren’t ones Tourre was fishing for. The Securities and Exchange Commission, in its fraud suit against Tourre, alleged he conned ACA Management LLC -- through Kreitman -- into lending its name to a 2007 transaction at the center of the case, one that ended up collapsing in a $1 billion loss for investors when the housing market imploded.

Kreitman, called by the SEC to the witness stand, was a Goldman Sachs saleswoman on ACA’s account. She testified that, while frequently depending on Tourre for details of the deal, she couldn’t remember who gave her a key piece of information aimed at getting ACA involved. By evoking Tourre’s competent reputation as part of their examination of Kreitman, SEC lawyers sought to convince jurors it was he.

Last week, an SEC lawyer played a recorded telephone call in which Kreitman told a former ACA employee, Lucas Westreich, that New York-based Goldman Sachs planned to place “a hundred percent of the equity” in the transaction with the hedge fund run by billionaire John Paulson.

The SEC alleged Paulson’s fund never intended to invest in the transaction, a synthetic collateralized debt obligation known as Abacus 2007-AC1. Instead, Paulson selected assets for the deal and bet they would fail, the regulator claimed.

Tourre, 34, allegedly misstated the role of Paulson & Co., the regulator claimed in its lawsuit. Tourre has denied any wrongdoing.

Kreitman testified she doesn’t remember who told her Paulson was expected to take the equity stake in Abacus.

The SEC claims Paulson, which in 2006 and 2007 was making huge bets against the subprime mortgage market, never intended to invest in Abacus.

The SEC’s star witness, Laura Schwartz, the senior ACA executive on the transaction, is scheduled to testify as early as today. Tourre himself may take the stand later this week.

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

Morgan Drexen Says U.S. Consumer Agency Is Unconstitutional

Morgan Drexen Inc., a provider of legal support services to lawyers, sued to block a probe by the U.S. Consumer Financial Protection Bureau, arguing the agency established by the Dodd-Frank Act of 2010 is unconstitutional.

The CFPB lacks the accountability required for a government office by the Constitution and has the unlawful authority to take enforcement actions involving unfair, deceptive or abusive practices without properly defining the terms, according to the lawsuit.

Morgan Drexen said in the complaint, filed yesterday in federal court in Washington, that the CFPB has claimed attorneys working with the company are in violation of a telemarketing sales rule because of the way they’re paid in bankruptcy cases.

The CFPB doesn’t have jurisdiction “over the law practices of the attorneys supported by Morgan Drexen.” The company also disputed the agency’s characterization of how firm fees are collected, according to the complaint.

The case is Morgan Drexen v. Consumer Financial Protection Bureau, 13-cv-01112, U.S. District Court, District of Columbia (Washington).

Miami Denies SEC Lawsuit Claim of Fraud in Bond Offerings

The city of Miami denied claims in a lawsuit by the U.S. Securities and Exchange Commission that it engaged in securities fraud with municipal bond offerings by exaggerating the health of its general fund.

The disputed transactions, carried out during the 2007 and 2008 fiscal years, were disclosed fully, complied with accounting rules and were approved by outside auditors, Florida’s biggest city said yesterday in a statement. The transactions were made “to address budgetary shortfalls,” during the global financial crisis, according to the statement.

The SEC sued Miami and an ex-budget director July 19 as part of a three-year crackdown on state and local governments for not providing bond investors with accurate information about pension liabilities. Illinois and New Jersey settled with the agency after similar investigations.

The case is SEC v. City of Miami, 1:13-cv-22600, U.S. District Court, Southern District of Florida (Miami).


Burns, Kaufman Comment on SEC Pursuit of SAC’s Cohen

Douglas Burns, a former federal prosecutor, talked about the U.S. Securities and Exchange Commission’s administrative action against SAC Capital Advisors LP founder Steven Cohen.

Burns said the probe of Cohen is like a “poker game.”

He spoke with Deirdre Bolton, Sara Eisen and Sheelah Kolhatkar on Bloomberg Television’s “Market Makers.”

For the video, click here.

Separately, former U.S. Senator Ted Kaufman, a Delaware Democrat, also talked about the administrative action against Cohen, saying he applauded SEC Chairman Mary Jo White for her pursuit of Cohen and her role as an enforcer, while more needs to be done on the regulatory side.

In addition, Kaufman discussed the outlook for U.S. banking regulation. He spoke with Betty Liu on Bloomberg Television’s “In the Loop.”

For the video, click here.

Kotz Discusses SEC Charges Against Sac’s Steven Cohen

H. David Kotz, former inspector general of the U.S. Securities and Exchange Commission and director of Berkeley Research Group LLC, discussed the SEC’s charges against Steven Cohen, owner of SAC Capital Advisors LP. Kotz talked with Bloomberg’s Kathleen Hays on Bloomberg Radio’s “The Hays Advantage.”

For the audio, click here.

Comings and Goings/Executive Pay

RBS Sued by Fired Emerging-Markets Rates Head Over Bonus

Royal Bank of Scotland Group Plc’s former head of emerging-market rates, Lee Tze Kiang, sued the lender claiming his bonus was wrongly forfeited when he went to work for a hedge fund firm after he was fired.

Lee, dismissed in June 2012 after an investigation into two traders he supervised, said in filings in Singapore’s High Court that he had alerted RBS to their irregular activities. He’s seeking at least S$3.2 million ($2.5 million).

RBS, which plans to claw back 302 million pounds ($463 million) from bankers to help pay U.S. fines over interest-rate rigging, said in its defense filed July 1 that its rules provide for deferred awards not to vest if the beneficiary engages in competitive activity. It denied Lee’s assertion in his May 28 lawsuit that the provision is unenforceable and void.

“Unfortunately, Singapore’s labor laws allow employers to terminate without justification relatively easily,” Lee said in a phone interview yesterday.

Patricia Choo, a Singapore-based spokeswoman for RBS, declined to comment on the case.

Lee said in his lawsuit that he alerted his superiors to the irregular activity, which started before he managed the two employees. He said in a July 15 filing that the U.S. fines against RBS are unrelated to any business unit or profit center he worked in at the bank and are “inconsistent” with his claim.

The case is Lee Tze Kiang v. The Royal Bank of Scotland Plc, S478/2013, Singapore High Court.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net

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