Tourre Rests, Policing Bonus CoCos, Deloitte: Compliance

July 30 (Bloomberg) -- Fabrice Tourre, the former Goldman Sachs Group Inc. vice president facing civil fraud claims for his role in a failed $1 billion investment tied to the housing market collapse, rested his defense without calling any witnesses, shortly after the Securities and Exchange Commission wrapped up its case against him.

The SEC rested yesterday after presenting video testimony from a former Goldman Sachs salesman in London, the last of 11 witnesses the agency presented during the past two weeks. Tourre, who had raised the possibility of calling additional witnesses, including hedge fund billionaire John Paulson, decided over the weekend not to do so.

U.S. District Judge Katherine Forrest sent the nine jurors in the case home early, telling them to return for five hours of closing arguments today in Manhattan federal court. They’re scheduled to begin considering the case tomorrow. Forrest denied Tourre’s motion to dismiss the case against him yesterday, ruling that the SEC has presented enough evidence for the case to go to the jury.

The SEC claims Tourre intentionally misled participants in a 2007 deal known as Abacus about the role played by Paulson’s hedge fund, Paulson & Co. The SEC claims Tourre hid that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus, then made a billion-dollar bet it would fail.

Paulson wasn’t charged with any wrongdoing.

Tourre testified about the Abacus deal before a U.S. Senate subcommittee in April 2010 alongside other Goldman Sachs executives. The firm, which is paying Tourre’s legal fees, settled SEC allegations for $550 million in July 2010, a record at the time. Tourre faces unspecified money penalties and a possible ban from the securities industry. Goldman Sachs, which settled the allegations against it, faces little additional risk from a finding of wrongdoing against Tourre.

Throughout the trial, some of the jurors appeared distracted or drowsy as witnesses were questioned about esoteric financial matters including the structure of CDOs and credit default swaps.

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

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Compliance Policy

Regulators Face Scrutiny on Banks’ Commodities at Senate Hearing

U.S. banks’ ownership and trading of physical commodities will face further scrutiny today when the heads of the Commodity Futures Trading Commission and Securities and Exchange Commission testify before lawmakers.

Senator Sherrod Brown, the Ohio Democrat who led a hearing on the issue last week, said he plans to question the CFTC’s Gary Gensler and the SEC’s Mary Jo White on their oversight when the two chairmen appear before the chamber’s Banking Committee on implementation of Dodd-Frank Act reforms.

JPMorgan Chase & Co. is among lenders facing political pressure after the Federal Reserve said this month it will review a decade-old decision letting them trade commodities regarded as complementary to banking. JPMorgan, which was accused yesterday by the Federal Energy Regulatory Commission of manipulating power markets in 2010 and 2011, said on July 26 that it plans to sell or spin off holdings including warehouses, stakes in power plants and traders of gas, power and coal.

Meghan Dubyak, a spokesman for Brown, said the senator hopes to use today’s hearing to examine the CFTC’s authority to address anti-competitive practices such as aluminum hoarding and to encourage the agency to act.

White and Gensler are also expected to face questions from the panel about implementation of Dodd-Frank’s derivatives rules, the status of the Volcker rule ban on banks’ proprietary trading and the SEC’s revised rule for money-market mutual funds.

Goldman Sachs Group Inc. and Morgan Stanley were in commodities businesses before converting to bank holding companies during the 2008 credit crisis. The Wall Street firms are permitted under a 1999 law to keep commodities businesses they were in before 1997.

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EU Regulators Seek to Police Use of CoCos in Banker Bonuses

Banks in the European Union face limits on how they can use securities such as contingent convertible bonds in bonus awards, as regulators seek to crack down on any attempts by lenders to avoid the full force of EU pay curbs.

The European Banking Authority published draft rules that would prevent banks from offering staff dividends on contingent capital instruments, such as CoCo bonds, that are out of step with those available to outside investors, the agency said in an e-mailed statement yesterday. The measures would also require holders of the securities to face a real risk of losses if the bank’s performance plunges.

Securities issued as part of bonus awards “should take account of the institutions’ long-term interests and incentivize prudent risk-taking of staff,” the EBA said. “In this respect, these instruments must have a sufficient maturity to cater for deferral and retention arrangements.”

The EU this year bolstered its banker pay rules, already among the toughest in the world, to include a ban on bonuses more than twice as large as salaries. The updated law, set to take effect from January, gives banks more scope to use CoCos and other contingent capital to meet an existing EU requirement that at least half of a bonus award must be in shares or other non-cash instruments.

CoCos are a form of fixed-income security that automatically converts into ordinary shares if a bank’s capital falls through a pre-determined floor. This type of bond can mimic the clawback rules applied to cash bonus awards by ensuring bankers face losses if a company fails to perform as strongly as expected.

Banks have already taken nascent steps to use contingent capital instruments in pay packages. The EU legislation requires the EBA to define rules of the road to prevent such instruments being used in a way that undermines the bonus curbs. The draft EBA rules include minimum capital levels at which writedowns, or conversions of the debt into equity, must happen, in order to ensure that the risk of losses is real.

EU rules cover categories of staff identified by the bloc’s regulations as material risk takers. The EBA said it would seek views on the plans until Oct. 29, and hold a hearing on Oct. 3.

EU Bank-Capital Rules Face Compliance Probe by Basel Group

European Union bank-capital rules, already criticized by global regulators, face another international probe just months after they start to take effect next year.

The Basel Committee on Banking Supervision will review how well the EU has applied its standards, Wayne Byres, the group’s secretary general, said in an interview. An earlier investigation, based on a draft version of the EU plans, pointed to loopholes and triggered a rebuttal from Michel Barnier, the bloc’s financial services chief.

The EU emerged bruised from last year’s process that cast doubt on its claims to be fully in line with a global pact to beef up banks’ defenses against financial crises. While the Basel group has also indicated that the U.S. will face a follow-up review, the chances that the EU will be judged non-compliant because of the flexibility afforded to banks, Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. said in an e-mail.

The EU is set to phase in its version of the Basel accord starting in January, and the rules will fully apply as of 2019. Basel III requires banks to hold capital equivalent to at least 7 percent of their risk weighted assets, while also meeting an indebtedness limit and liquidity requirements.

In last year’s scorecard, published in October, the committee concluded that the EU’s proposals were not specific enough in limiting the range of instruments banks may count as core capital and also said lenders were given too much scope to label government debt as risk free -- so escaping holding capital against it.

The future impact of Basel rules on EU lenders was underscored by data published by the European Banking Authority in March. It said EU banks would have needed an extra 112.4 billion euros ($149 billion) in their core reserves to meet the Basel bank capital rules had the standards been enforced in mid-2012.

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Compliance Action

Deloitte Ignored Ethics Before MG Rover Collapse, Tribunal Says

Deloitte LLP disregarded ethical codes while advising on transactions involving the now-defunct U.K. car company MG Rover Group Ltd., an accounting tribunal said yesterday.

Deloitte and one of its former partners didn’t consider conflicts of interest and failed to safeguard against “self-interest” in advising both MG Rover and Phoenix Venture Holdings Ltd., its parent company at the time, the Financial Reporting Council Tribunal ruled, according to a statement on its website.

“Deloitte’s advice, which itself was not criticized, helped to generate over 650 million pounds ($998 million) of value for the MG Rover Group, keeping the company alive for five years longer than might have been the case and securing 5,000 jobs in the West Midlands during this period,” James Igoe, a spokesman for Deloitte, said in a statement on the tribunal’s decision.

MG Rover went bankrupt in 2005 with 1.3 billion pounds of debt and some 6,000 people lost their jobs. Nanjing Automobile Group Corp., a state-owned Chinese company, bought the assets of MG Rover in July of that year for about $97 million.

Barclays Said to Lose in Bid to Get More Time for Capital

Barclays Plc, Britain’s second-largest bank by assets, won’t get the extra time it was seeking to meet regulators’ demands to boost capital, according to a person with direct knowledge of the situation.

The Prudential Regulation Authority has told the lender it won’t get until the end of 2014 to increase capital to at least 3 percent of assets, said the person, who asked not to be identified because the move hasn’t been made public. The bank, which holds the least capital as a proportion of its assets of Britain’s four biggest banks, is considering selling new stock or contingent convertible bonds to plug the gap, two people with knowledge of the talks said.

To meet the ratio this year, the bank will have to raise either 7 billion pounds ($11 billion) in equity or cut 240 billion pounds of assets, analysts estimate. The bank was one of only two to miss the regulator’s target in June. Nationwide Building Society, the country’s biggest customer-owned lender, was given until the end of 2015 to make up the shortfall.

Barclays said in a statement it has held talks with the PRA and will update the market when it reports earnings today.

Deutsche Bank AG and Credit Suisse Group AG, Barclays’s corporate brokers, are already preparing for a potential share sale, according to another person with knowledge of the talks.

Officials at Barclays, Deutsche Bank, Credit Suisse and the PRA in London declined to comment.

Indiana School District Settles Claims Over Misled Investors

The U.S. Securities and Exchange Commission accused an Indiana school district of falsely telling investors the district had been properly providing annual financial information in its prior bond offerings.

City Securities Corp., which underwrote a West Clark Community Schools 2007 bond offering, agreed to pay almost $580,000 to resolve the SEC’s claims. The school district also settled the claims, agreeing to cease violating securities law.

The SEC also accused Randy Ruhl, head of the public finance and municipal bond department at Indianapolis-based City Securities, of providing improper gifts and gratuities to representatives of municipal-bond issuers and charging back those and other expenses under the guise of costs for printing and preparing official statements.

To settle the claims, Ruhl agreed to pay about $38,000 and to be barred from working as a supervisor at any municipal securities dealer, investment adviser or broker, the SEC said.

The school district, Ruhl and City Securities settled the claims without admitting or denying wrongdoing.

Michael Gillenwater, a lawyer for West Clark Community Schools, declined to comment. A call to Ronald Kane, an attorney for Ruhl, wasn’t immediately returned.

Jeffrey Bailey, an attorney for City Securities, said in an interview that the firm has made several improvements in its procedures and is “a stronger and better organization today than it was a few years ago.”

AIG to Shut Bank Accounts, Return Funds Amid Dodd-Frank Pressure

American International Group Inc. will return funds to customers of its banking unit and shut their accounts as the Dodd-Frank Act places limits on insurers with deposit-taking units.

The bank made the announcement in a letter to customers, stating that accounts would be closed “automatically” as of Sept. 30 and funds, with interest owed, returned to customers.

AIG is joining Principal Financial Group Inc. in narrowing its focus ahead of rules that limit proprietary trading and investments in private-equity or hedge funds by insurers with bank units. MetLife Inc., Hartford Financial Services Group Inc. and Allstate Corp. have sold deposits or retreated from banking as regulators increase oversight.

“AIG Federal Savings Bank is currently undergoing an orderly transition from a traditional savings bank to a trust only thrift,” Jon Diat, a spokesman for the New York-based insurer, said in an e-mail yesterday.

Robert Benmosche, AIG’s chief executive officer, said last year that the insurer was weighing whether to shutter its bank to limit the effects of the Volcker rule. AIG is a savings and loan holding company, and some of the restrictions may apply to the company even if it ends its bank status, according to the insurer’s annual report.

The bank had 30 employees and $920.5 million in assets as of March 31, according to Federal Deposit Insurance Corp. data. The Wilmington, Delaware-based unit offered products including mortgages and certificates of deposit through its website and over the phone.

AIG, which offers property-casualty coverage, life insurance and investment products, had about $548.9 billion in assets as of March 31.

Diat didn’t immediately respond to questions about AIG’s plans for its bank assets.


Adoboli Loses Bid to Appeal Unauthorized Trading Conviction

Former UBS AG trader Kweku Adoboli lost his first attempt to appeal his conviction for causing a $2.3 billion loss through unauthorized trading.

Permission to appeal was turned down by a London judge on June 25, according to court records made available this week. Adoboli is seeking a hearing to ask in person for an appeal, which won’t happen until after Oct. 1, Michael Duncan, a spokesman for the U.K. court system, said in an e-mail.

Adoboli was convicted in November of two counts of fraud for causing the loss at the bank’s London unit. He argued at trial that managers at the Swiss bank pushed him to take too many risks and that rule-breaking at the bank was rampant. While he admitted causing the loss, he said it wasn’t done dishonestly. Adoboli was ordered to serve at least half of a seven-year prison sentence.

He is serving his sentence at Verne Prison on the Isle of Portland, a small island off the south coast of Dorset, England, that was once a military barracks. He has joined the choir and taken on a volunteer role at the prison.

While the 10-member jury was unanimous in finding Adoboli guilty of one count of fraud during the period in which the loss was caused, jurors didn’t reach unanimous decisions on the remaining fraud count and on four counts of false accounting.

He was convicted 9-1 on the second fraud charge, which dated back to 2008, and acquitted on the false accounting charges.

Adoboli, who worked for UBS since leaving college, was accused of hiding the risk of his trades by booking fake hedges and storing profits in a secret account to cover the costs of running the bank’s exchange-traded-funds desk.

Jenna Ward, a London-based spokeswoman for UBS, and Paul Lennon, a lawyer for Adoboli, declined to immediately comment.

Bharara Seeks Cohen Civil Case Stay Pending Criminal Outcome

Manhattan U.S. Attorney Preet Bharara asked an administrative judge to stay the Securities and Exchange Commission’s action against billionaire Steven A. Cohen until related criminal cases against his hedge fund and two former employees are resolved.

In a document dated July 26, Bharara said the SEC enforcement staff doesn’t object to postponing the administrative proceeding, which it filed on July 19 alleging that Cohen failed to supervise two portfolio managers who now face criminal insider trading charges.

Bharara last week announced related criminal charges against Cohen’s Stamford, Connecticut-based hedge fund SAC Capital Advisors LP, calling it “a veritable magnet for market cheaters” and saying the fund was being held responsible for insider trading by seven portfolio managers and analysts who worked there. Cohen hasn’t personally been charged criminally and has said that he will fight the SEC’s administrative action.

Bharara said in the motion that the civil and criminal proceedings will involve many of the same witnesses and other evidence. Therefore, having both proceed at the same time “will substantially prejudice the pending criminal prosecutions and hinder” the criminal enforcement of the securities laws at issue, Bharara said.

SEC spokesman John Nester and Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment.

The SEC’s Chief administrative law judge Brenda P. Murray had scheduled an initial hearing in Cohen’s matter for Aug. 26.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this report: Michael Hytha at

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