HSBC, Oppenheimer, US Airways-AMR, EU Banks: ComplianceEllen Rosen
HSBC Holdings Plc, Europe’s largest lender, said possible damages from a lawsuit filed by a U.S. regulator over improperly sold mortgage-backed securities could cost the bank as much as $1.6 billion.
The Federal Housing Finance Agency “alleges that the defendants caused hundreds of millions of dollars in damages to Fannie Mae and Freddie Mac,” the London-based bank said yesterday in its first-half earnings report. “Based upon the information currently available, it is possible that these damages could be as high as $1.6 billion.”
The FHFA filed a suit in September 2011 over residential mortgage-backed securities sponsored by HSBC. The FHFA sued 17 other banks that year, seeking to recover losses on $196 billion in mortgage-backed bonds sold to Fannie Mae and Freddie Mac, which have operated under U.S. conservatorship since they were seized amid subprime losses in 2008.
Citigroup Inc. reached a settlement with the FHFA in May on a lawsuit over $3.5 billion in bonds the bank sold to Fannie Mae and Freddie Mac. UBS AG said last month it’s close to an agreement.
Oppenheimer Fined by Finra Over Anti-Money Laundering Rules
Oppenheimer Holdings Inc. will pay $1.4 million to settle a brokerage industry regulator’s claims that it had an inadequate anti-money laundering program and failed to detect and report suspicious penny stock transactions.
The company’s brokerage unit failed to identify as “red flags” sales of more than 1 billion shares of 20 low-priced, highly speculative unregistered securities from August 2008 to September 2010, the Financial Industry Regulatory Authority said in a statement yesterday. The firm also failed to conduct adequate due diligence on a correspondent account of a broker in the Bahamas, Finra said.
“Broker-dealers are required by federal securities laws and Finra rules to monitor customers’ accounts so that those accounts are not used for illegal activities, such as money laundering and penny-stock schemes that can cause considerable harm to investors,” Brad Bennett, enforcement chief for Washington-based Finra, said in a statement.
Oppenheimer said in an e-mailed statement that it has significantly tightened its policies relating to the sales of low-priced shares and enhanced its review of clients’ sales with respect to anti-money laundering oversight. The firm agreed to settle without admitting or denying wrongdoing, Finra said.
Bafin Reviews German Banks’ Role in ISDAfix Rigging Allegations
German financial regulator Bafin is reviewing allegations the country’s banks may have participated in manipulating a benchmark for interest-rate derivatives.
Bafin is in contact with the German lenders taking part in the ISDAfix benchmark, Ben Fischer, a spokesman for the regulator, said in an interview today. Bafin started looking into the issue several months ago, said Fischer, who declined to identify the companies involved.
According to the International Swaps and Derivatives Association’s website, Deutsche Bank AG, Commerzbank AG and UniCredit SpA’s HypoVereinsbank unit are contributors to ISDAfix euro rates.
The Commodity Futures Trading Commission is probing Wall Street banks over the issue, people familiar with the matter said in April. Last week, Bloomberg News reported that U.S. investigators uncovered evidence that banks reaped millions of dollars in trading profits at the expense of companies and pension funds by manipulating the benchmark, according to a person with knowledge of the matter.
Deutsche Bank spokesman Christian Streckert and Commerzbank spokesman Nils Happich declined to comment. HypoVereinsbank’s press office didn’t immediately return a call seeking comment.
Sueddeutsche Zeitung reported Bafin’s involvement earlier today.
The International Swaps and Derivatives Association created ISDAfix in 1998 along with the predecessors of Thomson Reuters Corp. and ICAP Plc.
The benchmark is used to value derivatives trades known as swaptions, which are options on rate swaps.
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Tourre Case Buoys SEC’s Credentials as Congress Weighs Funding
The U.S. Securities and Exchange Commission’s courtroom victory over ex-Goldman Sachs Group Inc. employee Fabrice Tourre is helping the agency turn the page on years of criticism that it isn’t holding Wall Street to account.
The win adds weight to pledges by SEC Chairman Mary Jo White to reinvigorate the regulator, seeking more onerous settlements in some cases and, if necessary, taking them to trial. It also could bolster support for a 27 percent budget increase for the agency that Congress is considering.
The SEC has struggled to repair its image after a decade of debacles that began with accounting fraud at Enron Corp., analyst and mutual-fund scandals unearthed by New York’s attorney general, and Bernard Madoff’s multibillion-dollar ponzi scheme, which the SEC missed despite repeated warnings.
While the trial could be a bellwether for a more aggressive SEC, the agency is still struggling to build a stronger bench of litigators to strengthen its hand in settlement negotiations. White, who became the regulator’s chairman in April, told lawmakers last week that she’s seeking additional resources to hire trial attorneys.
“The SEC needed at least one scalp from the financial crisis, or they were going to face a lot of heat from Congress,” said Adam Pritchard, a University of Michigan law professor who previously worked as a lawyer for the regulator.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).
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US Airways-AMR Wins EU Nod to Create World’s Largest Airline
AMR Corp.’s American Airlines and US Airways Group Inc. won European Union approval for their merger creating the world’s largest carrier after they allayed concerns they would monopolize the London-Philadelphia route.
The duo agreed to give up the right to a daily round trip between London’s Heathrow, the EU’s busiest hub, and the U.S. city, the European Commission said in an e-mailed statement.
“In light of these comprehensive commitments, the commission concluded that the transaction would not raise competition concerns,” according to the statement.
The two carriers agreed to merge in February, and will keep American’s name and Fort Worth, Texas, headquarters, while US Airways Chief Executive Officer Doug Parker will run the company. American Chief Executive Officer Tom Horton will serve as chairman of the merged airline for a limited time.
The merger still must be approved by the court overseeing AMR’s bankruptcy and U.S. antitrust regulators. US Airways shareholders and creditors in AMR’s bankruptcy earlier endorsed the merger.
FERC Seeks $28.8 Million From BP for 2008 Natural Gas Trades
Federal energy regulators proposed a $28 million civil penalty against BP Plc for allegedly manipulating natural gas prices in Houston five years ago. BP said it will challenge the proposed penalty.
The Federal Energy Regulatory Commission yesterday ordered BP to show why it should not be assessed the penalty, along with disgorging $800,000 plus interest, according to a document on the agency website. The FERC gave BP 30 days to respond to accusations it manipulated the next-day, fixed-price gas market at the Houston Ship Channel from mid-September through Nov. 30, 2008.
“These allegations are without merit,” Geoff Morrell, a BP vice president and head of U.S. communications, said in an e-mailed statement. “BP is disappointed that the FERC has brought this action and we will vigorously defend against these allegations.”
Congress in 2005 gave the energy regulator additional powers to police energy markets, following the collapse of trader Enron Corp. The agency has expanded its enforcement offifce to about 200 people whose tasks include policing markets for manipulation.
Since January 2011, the FERC has disclosed more than a dozen investigations of alleged market gaming, including probes of traders for Barclays Plc of London, JPMorgan Chase & Co. of New York and Frankfurt-based Deutsche Bank AG.
BP disclosed the probe in a filing with regulators in 2011 and said it didn’t engage in market manipulation.
EU Banks’ Calculations of Asset Risk Inconsistent, EBA Says
The European Union’s top banking regulator said it found inconsistencies in the way lenders calculate how much capital to hold on their balance sheets against potential losses, adding to the clamor from global supervisors to increase transparency.
Banks may face requirements to publish more information on what’s in their portfolios, how they calculate the risk of a borrower defaulting and how much they could lose as a result, the European Banking Authority said in a report yesterday. The EBA, set up in 2011 to harmonize banking rules across the 28-member bloc, surveyed 35 banks from 13 EU countries for the review.
“This is an important step in a series of exercises the EBA is conducting with the aim of ensuring consistency in the calculation of risk-weighted assets across the EU,” Andrea Enria, chairman of the EBA, said in a statement.
Concerns about banks’ ability to reduce their capital requirements by changing how they measure the risk of losses on their assets have prompted investigations by regulators and calls from some supervisors for more reliance on simpler, non-risk-sensitive capital rules, known as leverage ratios.
The EBA found that the definition of default varied between banks. Two-thirds of the lenders classified a defaulting borrower as one who fails to repay a loan 90 days after it is due, whereas the rest use different calculations.
The regulator said it may use its powers to harmonize the definition of default across the EU bloc to provide “additional clarity.”
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In the Courts
SAC Manager Steinberg Asks to Question Witnesses in SEC Case
SAC Capital Advisors LP portfolio manager Michael Steinberg, who faces a criminal insider-trading trial in November, wants to question witnesses in a related civil lawsuit by the U.S. Securities and Exchange Commission.
Steinberg is defending both a criminal case brought by the U.S. Attorney in New York and a civil lawsuit by the SEC. In a court filing yesterday in the SEC case, Steinberg asked a judge for permission to question witnesses and review documents. Gaining access to witnesses and evidence in the SEC’s case may help Steinberg defend himself against criminal charges.
“The U.S. Attorney’s Office and the SEC chose to simultaneously charge Mr. Steinberg with serious criminal and civil violations of the federal securities law,” his lawyer, Barry Berke, said in a filing yesterday in the SEC’s lawsuit.
Steinberg, a long-serving SAC portfolio manager, is accused of trading in shares of Dell Inc. and Nvidia Corp. based on illegal inside tips. He denies wrongdoing.
Prosecutors previously asked U.S. District Judge Harold Baer in Manhattan, who is presiding over the SEC suit, to halt proceedings in that case until after the criminal trial is concluded.
The criminal case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).
John Hancock Loses Lawsuit Over $560 Million in U.S. Taxes
John Hancock Life Insurance Co.’s bid for deductions on a series of leveraged lease transactions was denied by the U.S. Tax Court in a decision addressing a $560 million tax dispute.
Judge Harry Haines accepted arguments by the U.S. Internal Revenue Service and denied claims for depreciation, rental and interest expense and transaction costs.
“John Hancock did not acquire the benefits and burdens of ownership” Haines wrote of one of the disputed transactions.
The ruling yesterday is the latest court victory for the IRS in challenges to lease-in-lease-out and sale-in-lease-out transactions, commonly called LILO and SILO, which the tax agency has determined are vehicles for improper tax avoidance.
“There have probably been six or seven of them and they’ve ultimately won all of them,” said Mark Allison, a tax attorney with Caplin & Drysdale Chartered in Washington.
In 2008, the IRS gave companies a chance to terminate LILO and SILO transactions in exchange for keeping 20 percent of the savings and getting reductions in some penalties.
In LILO and SILO transactions, a bank or other company purchases large assets, such as railroads or utilities, and leases them back to governments or other operating entities.
The companies purportedly buying the assets claim tax deductions such as depreciation on the equipment.
The IRS has argued the arrangements are shams designed to produce tax benefits on assets the companies never actually owned.
John Hancock, the U.S. unit of Toronto-based Manulife Financial Corp., is considering an appeal of the decision, Roy Anderson, a spokesman for the company, said in an e-mailed statement.
The case is John Hancock Life Insurance Co. v. U.S. Internal Revenue Service, 70830-10, U.S. Tax Court (Washington).
Deutsche Bank Sued by Royal Park Investments Over Securities
Deutsche Bank AG, continental Europe’s biggest bank, was sued by Royal Park Investments SA/NV in New York state court over $535 million worth of residential mortgage-backed securities.
The suit accuses Frankfurt-based Deutsche Bank of failing to disclose that it was betting that similar investments would default at “significant rates” while using “false and misleading” offering documents that Royal Park relied upon in purchasing the securities, according to a court filing.
Royal Park Investments was set up in May 2009 by Belgian bank Fortis, the Belgian government and French bank BNP Paribas SA as a special purpose vehicle to manage a pool of distressed debt securities. Credit Suisse Group AG and Texas-based Lone Star Funds agreed to pay 6.7 billion euros ($8.7 billion) for Royal Park’s assets in April.
Royal Park has filed similar suits against other banks in the same court over residential mortgage-backed securities, including Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc.
Renee Calabaro, a spokeswoman for Deutsche Bank in New York, declined to comment on the suit.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed and the crisis swept up lenders and investment banks as the market for the securities evaporated.
The case is Royal Park Investments SA/NV v. Deutsche Bank AG, 652732/2013, New York State Supreme Court, New York County (Manhattan).
Speeches and Interviews
Fed Should Reverse Commodity Policy, CFTC’s Chilton Says
The Federal Reserve should reverse a decade-old ruling that lets banks trade physical commodities, Commodity Futures Trading Commission member Bart Chilton said.
“I don’t want a bank owning an electric service, or cotton, corn or feedlots,” Chilton, a Democrat, said in remarks prepared for a conference of U.S. cotton growers in Lake Tahoe, California. “I don’t want banks owning warehouses, whether they have aluminum, gold, silver or anything else in them.” The Fed “can and should reverse” the policy, he said.
Banks including Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley, all based in New York, have been permitted to expand into commodities markets under a 2003 Fed decision and subsequent ones. The central bank said last month that it’s reviewing the policy amid Senate scrutiny of whether such involvement allows Wall Street firms to control prices.
JPMorgan, the biggest U.S. bank by assets, said days after a congressional hearing on the matter last month that it’s weighing whether to sell or spin off holdings in physical commodities. The 10 largest Wall Street firms reaped about $6 billion in revenue from commodities in 2012, including dealings in physical materials as well as related financial products, analytics company Coalition Ltd. said in a Feb. 15 report.
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