Tourre Liable, BofA, SIFMA on SROs, Citigroup: Compliance

Fabrice Tourre, the former Goldman Sachs Group Inc. vice president on trial for his role in a failed $1 billion investment, was found liable on six of seven claims by a jury in Manhattan.

The verdict is a victory for the government in one of the most high-profile trials to come out of the financial crisis of 2007-2008. The U.S. Securities and Exchange Commission accused Tourre, 34, of intentionally misleading participants in a 2007 deal known as Abacus about the role played by Paulson & Co., the hedge fund of billionaire John Paulson.

The jury’s finding of wrongdoing may help Goldman Sachs customers in lawsuits against the bank over losses tied to the transaction. Tourre faces unspecified money penalties and a possible ban from the securities industry.

The SEC claimed Tourre hid the fact that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus, then made a billion-dollar bet it would fail.

At trial, the SEC presented testimony from 11 witnesses over two weeks. Tourre didn’t call any witnesses, relying instead on his lawyers’ questioning of the witnesses called by the SEC, including Tourre himself.

“We are obviously gratified by the jury’s verdict and appreciate their hard work,” Matthew Martens, the lead SEC lawyer, said.

“As a firm, we remain focused on being more transparent, more accountable, and more responsive to the needs of our clients,” Michael DuVally, a Goldman Sachs spokesman, said in a statement.

“We’re declining comment as the case is still ongoing,” Chris Kittredge, a spokesman for Tourre at Sard Verbinnen & Co. in New York, said in a statement.

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

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Compliance Action

Swaps Probe Finds Banks Manipulated Rate at Expense of Retirees

U.S. investigators have uncovered evidence that banks reaped millions of dollars in trading profits at the expense of companies and pension funds by manipulating a benchmark for interest-rate derivatives.

Recorded telephone calls and e-mails reviewed by the Commodity Futures Trading Commission show that traders at Wall Street banks instructed ICAP Plc brokers in Jersey City, New Jersey, to buy or sell as many interest-rate swaps as necessary to move the benchmark rate, known as ISDAfix, to a predetermined level, according to a person with knowledge of the matter.

By rigging the measure, the banks stood to profit on separate derivatives trades they had with clients who were seeking to hedge against moves in interest rates. Banks sought to change the value of the swaps because the ISDAfix rate sets prices for the other derivatives, which are used by firms from the California Public Employees’ Retirement System to Pacific Investment Management Co., said the person, who asked not to be identified because the details aren’t public.

That may run afoul of the 2010 Dodd-Frank Act, which bars traders from intentionally interfering with the “orderly execution” of transactions that determine settlement prices.

The phone calls and e-mails emerging since Bloomberg News first reported in April on the rigging of ISDAfix add to growing evidence that banks have gained financially by distorting key financial gauges in world markets on everything from interest rates to currencies to commodities.

The revelations show the manipulation of the London interbank offered rate, or Libor, a benchmark for $300 trillion of securities, may be the tip of the iceberg.

For more, click here.

BofA Says DOJ, SEC May Seek Sanctions Over Jumbo-Loan Securities

Bank of America Corp. said the Department of Justice and Securities and Exchange Commission have warned that they may bring civil claims over the lender’s handling of securitizations backed by jumbo mortgages.

SEC investigators also have said they are considering recommending the agency file a complaint over Merrill Lynch’s involvement in collateralized debt obligations, the Charlotte, North Carolina-based lender said yesterday in a regulatory filing. The New York Attorney General’s Office may bring claims against Merrill Lynch over residential mortgage-backed instruments, the firm said.

The bank “has been in active discussions with senior staff of each government entity in connection with the respective investigations and to explain why the threatened civil charges are not appropriate,” Bank of America said.

The firm said it also expects a $1.1 billion charge to income tax expense in the third quarter after changes in the U.K. corporate income tax rate.

New York Resort Owners Charged With $96 Million Ponzi Fraud

A money manager and a real estate developer already facing a regulator’s fraud lawsuit were charged with running a $96 million Ponzi scheme and diverting the proceeds to their New York beachfront resort.

Brian R. Callahan, 43, and his brother-in-law Adam J. Manson, 41, were charged in a 24-count indictment unsealed yesterday in federal court in Central Islip, New York. They pleaded not guilty and were released on bond.

The men are accused of telling investors that their money was going into hedge funds and other investment vehicles while actually much of it was going to the unprofitable 117-unit Panoramic View Resort & Residences in Montauk.

“The defendants used one of Long Island’s landmarks, the Panoramic View Resort, to perpetrate a wide-ranging fraud,” U.S. Attorney Loretta Lynch said yesterday in a statement about the scheme, which purportedly took place from 2006 to 2012 and involved more than 40 investors. “To conceal their status as business failures, the defendants employed all the tricks in the typical con man’s bag.”

Callahan, of Old Westbury, and Manson, of New York, were partners in Distinctive Ventures, a real estate investment firm that purchased the resort in January 2007 for about $38 million, according to the indictment. Callahan, a former securities broker who was sanctioned by regulators in 2009, was also managing a group of offshore investment funds, for which he was soliciting money from investors, the U.S. said.

“It’s unfortunate that the government decided to escalate it,” Robert Anello, a lawyer for Manson, said in a phone interview yesterday.

A lawyer for Callahan, Robert Knuts, didn’t immediately respond to a call and e-mails seeking comment on the charges.

The criminal case is U.S. v. Callahan; the civil case is Securities and Exchange Commission v. Callahan, 12-cv-01065, both in U.S. District Court, Eastern District of New York (Central Islip).

For more, click here.

Avon Says U.S. Rejects $12 Million Offer to Settle Probes

Avon Products Inc., the world’s largest door-to-door cosmetics seller, said the U.S. rejected the company’s offer to pay $12 million to resolve investigations into whether executives bribed foreign officials.

The Justice Department and the Securities and Exchange Commission rejected an offer made in June, including the payment of monetary penalties, the company said yesterday in its quarterly filing with the SEC. Avon said it expects a counteroffer.

“There can be no assurance that a settlement with the SEC and the DOJ will be reached or, if a settlement is reached, the timing of any such settlement or the terms of any such settlement,” New York-based Avon said. Recent discussions suggest the amount will be higher than $12 million, it said.

Avon and the government have been investigating whether ex-employees in China and other countries bribed officials in violation of U.S. law.

In regulatory filings in 2011, Avon disclosed the firing of four executives suspected of paying bribes in China. The company is conducting an internal investigation along with the government.

Liechtenstein Bank to Pay $23.8 Million in U.S. Tax Deal

Liechtensteinische Landesbank AG, the oldest bank in the Alpine principality, won’t be prosecuted by the U.S. government after agreeing to pay $23.8 million and admitting it helped American clients evade taxes.

The bank, based in Vaduz, admitted using secret accounts from 2001 to 2011 to help clients hide as much as $341 million from the Internal Revenue Service. It gave the U.S. Justice Department files on more than 200 secret accounts after Liechtenstein amended its law last year to allow such transfers.

“LLB-Vaduz knew that certain U.S. taxpayers were maintaining undeclared accounts at LLB-Vaduz in order to evade their U.S. tax obligations,” the bank said in a non-prosecution agreement released July 30 by the Justice Department. “LLB-Vaduz knew of the high probability that other U.S. taxpayers who held undeclared accounts” did so “for the same unlawful purpose.”

The U.S. chose not to prosecute, citing the bank’s “extraordinary” cooperation. The admissions and handover of account data make LLB-Vaduz the third bank, after Switzerland’s UBS AG and Wegelin & Co., to acknowledge wrongdoing in a five-year U.S. crackdown on offshore tax evasion.

UBS, Switzerland’s largest bank, avoided prosecution by paying $780 million in 2009, admitting it aided U.S. tax evasion and handing over data on 4,500 accounts. Last year, the U.S. indicted Wegelin, the oldest Swiss private bank. Wegelin pleaded guilty in January, handing over $74 million.

“The bank is very pleased that the inquiry concerning LLB-Vaduz has now been resolved under the terms negotiated,” said Benjamin Brafman, a lawyer in New York who represents LLB-Vaduz.

The case is U.S. v. $15.9 Million in U.S. Currency, 13-CV-5296, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Compliance Policy

Wall Street Firms Back Removing Legal Protections for Exchanges

The government should strip U.S. stock exchanges of the legal status that protects them from most lawsuits, a trade group for brokers said.

In a letter to the Securities and Exchange Commission, the Securities Industry and Financial Markets Association said the self-regulatory model of organizations such as the New York Stock Exchange and Nasdaq Stock Market is outdated. Though the SEC fined Nasdaq for mishandling Facebook Inc.’s initial public offering last year, the legal protections shielded the market operator from liabilities.

The letter is the latest salvo in the fight between brokers and exchanges, who in recent years have become competitors for stock transaction volume. The proliferation of trading venues such as dark pools at broker-dealers and the decline of the public exchanges’ market share has created tensions on Wall Street.

Self-regulatory status for exchanges means that “one group of businesses is empowered to oversee and regulate the business and activities of its competitors,” Theodore R. Lazo, associate general counsel at Sifma, wrote in the letter to the SEC. “Conflicts of interest in this model abound and only worsen as they are left unresolved.”

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SEC’s Money-Fund Rule Boosted by Economic Study, Paredes Says

A revised proposal to limit the systemic risk posed by money-market mutual funds shows how economic analysis can improve financial regulation, Securities and Exchange Commission member Troy A. Paredes said yesterday.

The SEC measure released in June reflects the progress the agency has made in studying the costs and benefits of new rules, Paredes said at an event sponsored by the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.

“That proposal laid out in pretty crisp terms, ‘this is what we are trying to achieve subject to the following constraint,’” said Paredes, who is scheduled to step down as a commissioner this month. “When you read that document, you understand the starting point and the subsequent analysis which adds to the transparency of government.”

Paredes, a law professor who joined the SEC in 2008, has pushed the agency to analyze how rules affect competition and capital formation. Federal courts have invalidated SEC rules for inadequate economic analysis, including last month when a U.S. district judge tossed out a rule mandating disclosure of payments by oil and gas companies to foreign governments.

The money-market mutual fund proposal, which was backed by Paredes and fellow Republican Commissioner Daniel M. Gallagher, would impose a floating-share price on the riskiest funds that cater to institutional investors and buy corporate debt. The five-member commission coalesced around a money-funds measure after an effort in 2012 splintered the agency under former Chairman Mary Schapiro.

CFPB Questioned by Republicans Over Ex-Employees’ Mortgage Plans

U.S. House Republicans are asking the Consumer Financial Protection Bureau for documents related to work on its qualified mortgage rule amid claims that former employees are seeking to profit from measures they helped write.

Representatives Darrell Issa of California and Jeb Hensarling of Texas made the request in a letter to CFPB Director Richard Cordray, they said in a statement yesterday.

“Simply put, it appears that former CFPB employees are now offering financial products in a market sector created by the very rules they were in a position to influence,” they said in the letter. “This conduct raises serious questions about the integrity of the CFPB’s rulemaking process.”

“In crafting our mortgage rules the bureau engaged in a transparent process, with extensive public input and outreach to stakeholders,” Moira Vahey, a CFPB spokeswoman, said in an e-mail. “As a result, our new rules create important new consumer protections and help establish a foundation for recovery in the mortgage market.”

In the Courts

Tenet, Health Management Accused of Paying Clinic Kickbacks

Tenet Healthcare Corp., the third-biggest publicly traded U.S. hospital chain, and Health Management Associates Inc. were accused in a lawsuit of paying kickbacks to a Georgia clinic in exchange for referrals.

The hospital chains were sued under the Federal False Claims Act in a whistle-blower case brought by Ralph Williams, a former chief financial officer of Health Management Associates, on behalf of the U.S. and Georgia. The lawsuit, filed in federal court in Athens, Georgia, was ordered unsealed July 31.

The clinic recruited pregnant, undocumented Hispanic women who would be eligible for Medicaid benefits when they gave birth and referred them to Health Management and Tenet hospitals in exchange for kickbacks, according to the complaint.

The Tenet hospitals said in an e-mailed statement that the agreements were appropriate and provided substantial benefit to women in underserved Hispanic communities.

“The services provided under these agreements included translation, determination of Medicaid eligibility, and other services designed to improve the delivery of obstetric care and increase the likelihood of a safe birth and a healthy baby,” according to the statement.

“The company denies the allegations contained in the complaint, which the federal government declined to intervene in, and intends to vigorously defend itself,” Naples, Florida-based Health Management said in an e-mailed statement.

The case is U.S. v. Health Management Associates Inc., 09-00130, U.S. District Court, Middle District of Georgia (Athens.)

Judge OKs Citigroup CDO Deal as Finra Panel Rules Against Bank

Citigroup Inc. won court approval to pay $590 million to resolve a lawsuit by shareholders alleging the third-largest U.S. bank hid risks tied to toxic assets.

Separately, the bank lost an arbitration with a papal adviser before a Financial Industry Regulatory Authority arbitration panel.

U.S. District Judge Sidney Stein in Manhattan yesterday also awarded the plaintiffs’ lead lawyers fees of $70.8 million, or 12 percent of the fund, as well as $2.8 million in expenses.

“This is a sizable award that rewards counsel for years of excellent work,” Stein said in his ruling.

Stein last August gave preliminary approval to the settlement of a 2007 suit filed by investors in collateralized debt obligations, which are pools of assets such as mortgage bonds packaged into new securities. The investors accused New York-based Citigroup of repackaging unmarketable financial instruments and selling them to itself to hide its exposure to the securities.

The judge said that the bank’s public statements “painted a misleading portrait of Citigroup as relatively safe from the market’s concerns about potential losses resulting from falling CDO values.”

The class-action, or group, suit was brought on behalf of investors who bought Citigroup common stock from Feb. 26, 2007, through April 18, 2008. The shares fell more than 50 percent in the period, according to data compiled by Bloomberg.

“We are pleased to put this matter behind us,” Shannon Bell, a Citigroup spokeswoman, said in an e-mail.

Ira Press, a lawyer for Kirby McInerney LLP, the firm serving as lead counsel for the plaintiffs, didn’t immediately return a voice-mail message seeking comment on Stein’s ruling.

Separately, a Finra arbitration panel ordered Citigroup to pay a papal adviser over an investment in the Royal Bank of Scotland Group Plc.

John Leopoldo Fiorilla, a legal adviser to the Holy See, the Vatican’s central administration, was awarded $10.8 million plus interest by an arbitration panel over his Citigroup broker’s handling of an investment in RBS.

Fiorilla asked Citigroup to hedge his RBS holding of about $16 million before the credit crisis and then saw it dwindle to less than $1 million as the New York-based lender failed to protect him, according to Kevin Conway, his lawyer. A Finra arbitration panel found the firm liable for Fiorilla’s losses, according to a July 30 ruling that doesn’t describe the allegations in detail.

Danielle Romero-Apsilos, a spokeswoman for Citigroup, said the ruling wasn’t justified.

“We are disappointed with the award, which was not supported by the facts,” she said in an e-mail. She declined to comment on Conway’s description of events.

The Finra panel also ordered Edward Mulcahy, a former Citigroup employee, to pay $250,000. Mulcahy, a branch manager, was accused of failing to supervise a financial adviser and “overconcentrated positions” in a customer’s account, according to his Finra records.

Jeffrey L. Friedman, an attorney who represented Mulcahy and the bank, referred to the company’s statement when asked to comment on the ruling. He didn’t immediately respond to a message on Conway’s description of the case.

The CDO case is In re Citigroup Inc. Securities Litigation, 07-cv-9901, U.S. District Court, Southern District of New York (Manhattan). For more on the Finra arbitration, click here.

Dodd-Frank Stands as Judge Throws Out Suit by States, Texas Bank

A lawsuit by 11 states and a Texas bank challenging the Dodd-Frank law’s financial regulation overhaul was dismissed by a federal judge.

U.S. District Judge Ellen Segal Huvelle in Washington ruled that the states and the State National Bank of Big Spring, Texas, didn’t have legal standing to bring their claims.

The plaintiffs “did not come close” to showing they would suffer financial injury a result of the overhaul, Huvelle wrote in yesterday’s decision.

The lawsuit was filed in June 2012 by the bank and the Competitive Enterprise Institute, a group that advocates for limited government, alleging that the law establishing the Consumer Financial Protection Bureau violates the U.S. Constitution because Congress doesn’t appropriate its budget, the president has limited ability to remove its director and the courts face restrictions in reviewing its actions.

In September, states including South Carolina and Michigan joined the suit challenging the 2010 Dodd-Frank Act that overhauled financial regulation.

The states, in an amended complaint, argued they were only challenging the portion of the Dodd-Frank law that empowers the Treasury Secretary to order a liquidation of a financial company whose collapse may threaten the stability of the banking system.

Dodd-Frank was enacted to curb the kinds of transactions that led to the 2008 financial crisis. It imposed new rules on derivatives, limits the ability of banks to trade on their own account and new rules for mortgages.

Gregory F. Jacob, a lawyer representing the plaintiffs, didn’t immediately respond to phone and e-mail messages yesterday after regular business hours seeking comment on the ruling.

The case is State National Bank of Big Spring v. Geithner, 12-cv-01032, U.S. District Court, District of Columbia (Washington).

Porsche Wins Ruling in Bid to Torpedo Pendragon U.K. Suit

Porsche SE won a ruling in its bid to block a U.K. court from hearing a $195 million suit filed over the 2008 use of options in the failed bid to take over Volkswagen AG.

The Stuttgart Regional Court said it can continue to hear a case Porsche filed against Cayman Islands investment fund Pendragon (Master) Fund Ltd. because the suit was filed 10 days before the fund filed its own action in London. The ruling can be appealed, Bernhard Schabel, a spokesman for the tribunal, said by telephone yesterday.

The decision is a win in Porsche’s battle against lawsuits that are seeking more than 5.4 billion euros ($7.1 billion) combined. A London court in March stayed Pendragon’s U.K. action, saying it will wait until the German courts have determined which case was filed first. A suit in the U.K. would allow plaintiffs to ask for more disclosure than in Germany. The information could subsequently be used against Porsche in the German courts.

By filing a so-called torpedo suit in Stuttgart, Porsche, the holding company that sold the Porsche car brand to VW last year, invoked European Union rules saying the venue where a party files an action first prevails, and bars another country’s court from assuming jurisdiction over the same issue.

Lara Melrose, a lawyer representing Pendragon in the U.K., declined to immediately comment on yesterday’s ruling.

Porsche welcomes the ruling and believes the claims are unfounded, Albrecht Bamler, a spokesman for the company, said in an e-mailed statement.

The case is LG Stuttgart, 18 O 220/12.


Obama to Nominate John Koskinen as U.S. IRS Commissioner

President Barack Obama said yesterday he will nominate John Koskinen, former chairman of Freddie Mac, as the next Internal Revenue Service commissioner.

Koskinen will be tasked with revamping the U.S. tax agency, which has come under intense criticism for giving extra scrutiny to small-government advocacy groups as they applied for tax-exempt status.

Koskinen, 74, is a former deputy director of the Office of Management and Budget under President Bill Clinton and led the government’s efforts to prepare for converting computer systems for the year 2000.

He was city administrator of Washington and took over as non-executive chairman of Freddie Mac, the U.S.-owned mortgage financier, after the credit crisis, from 2008 to 2011.

SEC Nominees Kara Stein, Michael Piwowar Approved by U.S. Senate

Former U.S. Senate aides Michael Piwowar and Kara M. Stein won confirmation to become members of the Securities and Exchange Commission.

Senators backed the nominations of Piwowar and Stein yesterday by unanimous consent in the final hours before the chamber adjourned for its summer recess. President Obama nominated the two on May 23 and they were approved by the Senate Banking Committee on July 18.

Stein, 49, and Piwowar, 45, join the SEC as it adapts to a new agenda under SEC 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.

Stein replaces Elisse B. Walter as a Democratic commissioner and Piwowar succeeds Republican Troy A. Paredes on the five-member commission. Stein served as a top aide to Senator Jack Reed, a Rhode Island Democrat, and Piwowar was the Banking Committee’s chief Republican economist.

O’Rielly Named to FCC in Choice That Could Help Confirm Chairman

President Obama named Michael O’Rielly, a congressional aide, to a Republican seat on the Federal Communications Commission, setting up a potential Senate vote to approve a new Democratic chairman at the regulatory agency.

O’Rielly, who advises Senator John Cornyn, a Texas Republican, would fill one of two vacant FCC seats, according to a White House announcement released by e-mail. The other seat is for Obama’s choice for FCC chairman, former cable and wireless lobbyist Tom Wheeler, who was named May 1 to succeed Julius Genachowski.

Senators usually pair a Democratic and Republican FCC nominee before voting to approve them, Senator John Thune, a South Dakota Republican, said July 30 as the Commerce Committee cleared Wheeler.

Resignations have left the five-member commission with one Republican and two Democrats, including Acting Chairwoman Mignon Clyburn, since May.

Ellen Rosen in New York at

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