Nasdaq Trading Halt, NSA Data, Repo Curbs: Compliance

Aug. 23 (Bloomberg) -- Computer breakdowns yesterday shook American equity trading for the second time this week, freezing thousands of stocks listed on the Nasdaq Stock Market for three hours and raising fresh concerns about the fragility of exchanges.

The second-biggest American exchange operator, home to 3,200 companies from 37 countries, halted transactions in all of its securities shortly after noon, a decision that caused buying and selling to stop on its platform and dozens of others where the securities trade. Errors in the feed used to disseminate quotes and prices were to blame, Nasdaq said on its website.

Many of the country’s most-traded shares, from Apple Inc. to Intel Corp. and Facebook Inc., ground to a virtual standstill as brokers were unable to execute customer orders. The Nasdaq 100 equity index didn’t update during the outage and volume in stocks listed on the rival New York Stock Exchange also dwindled as liquidity dried up around the country.

Shares covered by the halt began to change hands again at about 3:25 p.m. yesterday in New York. Apple’s price swung between $499 and $504.10 after resuming. The Nasdaq 100 added 1 percent.

The disruption, just two days after options markets were roiled by mistaken trades sent by Goldman Sachs Group Inc., is the latest in a series of computer malfunctions that have raised questions about the reliability of electronic markets.

Though the cause was unclear, the outage is more bad news for Robert Greifeld, the Nasdaq chief executive officer whose reputation suffered in the Facebook initial public offering. Company representatives didn’t respond to e-mails and phone calls asking what triggered the breakdown.

Securities on Nasdaq have a combined market capitalization of more than $5 trillion, based on the value of the 2,446-member Nasdaq Composite Index.

For more, click here.

Compliance Policy

E-Mails to Web Searches in U.S. Collected Illegally, Court Found

Tens of thousands of Americans who sent e-mails from 2008 to 2011 had some of them scooped up by an unintended recipient: the National Security Agency.

The NSA intercepted as many as 56,000 electronic communications a year of Americans who weren’t suspected of having links to terrorism before a secret court found the operation unconstitutional in 2011, according to legal opinions that were declassified Aug. 21.

The finding raises new questions about President Barack Obama’s assurances that the NSA hasn’t been engaged in a “domestic spying program.” The disclosure also added to demands by members Congress for more oversight of the agency. Lawmakers have been preparing legislation that would curb U.S. surveillance operations for consideration when they return from a break next month.

Obama said on Aug. 6 that “there is no spying on Americans” by the government.

Release of the documents “begins to appropriately draw back the curtain on the secret law of government surveillance,” Democratic Senator Patrick Leahy of Vermont, chairman of the Senate Judiciary Committee, said in an Aug. 21 statement. “They also underscore the need for increased oversight and stronger protections for Americans’ privacy.”

The court order on intercepted Internet communications was declassified Aug. 21 by the Office of the Director of National Intelligence after it was described last week in a Washington Post report. That article, based on documents provided by former agency contractor Edward Snowden, focused on a separate audit that found the NSA broke privacy rules thousands of times in a year.

“Mistakes and errors can and will happen,” Director of National Intelligence James Clapper said in a statement. “The government undertakes extraordinary measures to faithfully identify, record and correct its mistakes and to put systems and processes in place that seek to prevent mistakes from occurring in the first place.”

For more, click here.

EU Said to Weigh Curbs on Collateral Asset Reuse in Repos

Banks and brokers may face European Union curbs on the number of times a single asset can be passed on as collateral in repurchase agreements and other secured trades, according to a person familiar with the plans.

The EU is weighing whether it should limit the length of transaction chains in which traders who receive collateral in turn use the same securities to back separate trades, according to the person, who asked not to be named because the proposals aren’t public. It is also planning measures to make the chains easier to monitor by regulators.

Repurchase agreements, or repos, are one of the targets of the possible EU rules, as authorities seek to extend regulations beyond traditional banking activities to cover other sources of risk taking.

The 2008 collapse of Lehman Brothers Holdings Inc. unleashed turmoil in financial markets, fed by uncertainty over who owned cash and other assets used to back derivatives trades with the bank. Litigation over the collateral has continued ever since, including a dispute between Lehman and Intel Corp. over $1 billion in cash the bank provided to the world’s largest chipmaker as part of a swap agreement.

The handing over of collateral is an integral part of repos -- one of the activities under review by global regulators as part of their efforts to regulate shadow banking. Banks use repos to help finance investments in Treasuries, corporate bonds and mortgage-backed securities.

Lenders including UBS AG and HSBC Holdings Plc have warned that plans by global regulators in the Basel Committee on Banking Supervision to set minimum collateral requirements for non-centrally cleared swaps trades will prompt a global liquidity squeeze as banks struggle to locate enough securities to satisfy the standards.

While Basel regulators early this year proposed changes to the draft standards, including some scope for re-using collateral, and a longer phase-in time, lenders have said this doesn’t go far enough to resolve their concerns.

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SEC to Expand Ban on Employees Lobbying Agency After Departure

Hundreds of U.S. Securities and Exchange Commission lawyers and examiners face new obstacles to cashing in on their agency experience under an expanded ethics rule to take effect in January.

The change targets the practice of regulators moving to jobs at law firms and investment banks where they capitalize on their SEC relationships. The ethics rule, which previously affected only the most senior officers, will now be applied to everyone who earns more than $155,440 a year, according to a copy of an agency announcement.

The employees will be banned from contacting old colleagues for one year after leaving the SEC when the policy becomes effective in January. Commissioners and division directors have long faced such limits.

The rule “places us on even footing with our peer regulators and adds an additional layer of protection against even the appearance of impropriety when former employees take on new jobs,” Shira Pavis Minton, the SEC’s top ethics official, wrote in the announcement.

Law firms and investment banks regularly recruit top aides to SEC commissioners, enforcement attorneys and examiners of broker-dealers to help defend against investigations and advise on compliance.

FHFA Should Develop Policies to Govern Settlements, Report Says

The Federal Housing Finance Agency should develop a formal review process for settlements that levy fees on lenders or take away their right to service home loans, according to a report from its watchdog.

The agency, which oversees government-backed mortgage firms Fannie Mae and Freddie Mac, should have more formal policies to govern how it decides what banks must pay for missing foreclosure timelines and other actions, according to a report from the agency’s inspector general, Steve Linick. The FHFA agreed to enact the conclusions.

The report examined the FHFA’s review and approval of the $11.7 billion agreement between Bank of America Corp. and Fannie Mae. The accord was designed to resolve most mortgage disputes between the two entities, and involved the bank paying $3.6 billion in cash, $6.75 billion to buy back residential loans sold to Fannie Mae, and $1.3 billion in fees for taking too long to assist or foreclose on overdue borrowers.

“There are several opportunities for improvement that FHFA might wish to consider,” according to the inspector general’s report. “The most important would be the development of procedures for settlements of compensatory fee claims and significant MSR transactions.”

Compliance Action

U.K. Banks to Pay $2 Billion for Card-Insurance Compensation

Britain’s biggest banks will pay as much as 1.3 billion pounds ($2 billion) to compensate customers wrongly sold insurance to cover credit-card and identity theft.

A group of 13 banks and credit-card issuers, including Barclays Plc, Lloyds Banking Group Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Capital One (Europe) Plc and MBNA Ltd. will fund the redress program, the Financial Conduct Authority said in a statement yesterday. The regulator didn’t disclose the firms’ individual contributions.

Regulators said in November that CPP Group Plc, which provided the insurance for the lenders, overstated the risks and consequences of identity theft and failed to tell buyers of its card-protection product that they were already covered for losses of as much as 100,000 pounds by their banks. The compensation adds to the 15.5 billion pounds Britain’s banks have already set aside for customers who were wrongly sold payment-protection insurance that they didn’t need.

“The involvement of the banks and credit-card issuers reflects the fact that they introduced customers to CPP’s products and so must share responsibility for putting things right,” the FCA said in the statement.

About 7 million customers who bought the insurance since 2005 will be able to claim a refund on the premiums they paid plus 8 percent interest, the London-based FCA said. The money is expected to be paid in early 2014.

“We are determined to put things right for Barclays customers who are eligible for redress payments as swiftly as possible,” Paul Maddox, Barclays’s managing director for customer service, said in a statement.

RBS and Lloyds said in separate statements they will work with CPP to achieve “the best outcome” for customers affected. Officials at HSBC declined to comment.

For more, click here.

Morgan Stanley Fined $1 Million for Unfair Trading in Bonds

Morgan Stanley, owner of the world’s largest brokerage, was fined $1 million for buying and selling bonds for customers at unfair prices.

The Financial Industry Regulatory Authority also ordered the bank to pay $188,000 in restitution to customers, the group said in a statement yesterday. The case involved corporate, agency and municipal bonds, Wall Street’s self-funded regulator said.

“Finra will continue to sanction firms that execute fixed-income transactions for their customers at unfair prices,” Thomas Gira, Finra’s executive vice president of market regulation, said in the statement.

Morgan Stanley was also fined $1 million for similar violations in 2011. James Wiggins, a spokesman for New York-based Morgan Stanley, said in an e-mail that the bank cooperated with Finra’s investigation and that yesterday’s settlement involved fewer than 300 transactions during a period when it made 4 million trades. Finra didn’t allege fraud or intentional misconduct, he said.

JPMorgan Said to Face London Whale Fines as Soon as Next Month

U.K. and U.S. regulators are preparing to impose fines as soon as mid-September on JPMorgan Chase & Co. after an investigation into the bank’s London trading losses last year, a person with direct knowledge of the matter said.

The U.K.’s Financial Conduct Authority and the U.S. Securities and Exchange Commission are in negotiations with the New York-based company to settle their probes, according to the person, who asked not to be identified because the talks aren’t public. In the U.S., the Commodity Futures Trading Commission and the Justice Department are also investigating events surrounding the losses.

JPMorgan, the biggest U.S. bank by assets, lost more than $6.2 billion last year on derivatives bets made by Bruno Iksil, a trader who was dubbed the London Whale because of the size of his positions. The U.S. last week charged Javier Martin-Artajo and Julien Grout, two of Iksil’s former colleagues, with wire fraud and conspiracy charges for allegedly seeking to hide losses. Iksil is cooperating with the U.S. in the case.

Spokesmen for JPMorgan, the SEC and the FCA declined to comment.

JPMorgan is expecting multiple fines from regulators investigating the losses, a person familiar with the matter said last week.

The criminal cases are U.S. v. Grout, 13-MAG-01976, and U.S. v. Martin-Artajo, 13-MAG-01975, U.S. District Court, Southern District of New York (Manhattan). The SEC case is Securities and Exchange Commission v. Martin-Artajo, 13-cv-05677, U.S. District Court, Southern District of New York (Manhattan).


Bo Xilai Disputes Guilt as China Court Microblogs Bribery Trial

Former Chinese Politburo member Bo Xilai denied guilt in his bribery and abuse-of-power trial, sparring with the judge in a hearing that broke with precedent as court officials released live updates on the Internet.

As yesterday’s trial started, Bo rejected charges that he took bribes worth more than 21 million yuan ($3.4 million) and dismissed his wife’s testimony that he kept a safe stocked with cash for her and their son to spend in the U.K. Responding to one witness’s testimony, Bo said he’d just seen “the ugly performance of someone who had sold his soul.”

“I’m not a perfect person, or one with a strong mind, and I’m willing to take responsibility for that,” Bo said, according to remarks posted on the Internet by the Intermediate People’s Court in the city of Jinan. “But I won’t be silent about the basic truth on whether I’m guilty or not.”

Bo’s combativeness signals that he will not submit to the charges against him in a case that roiled China’s once-a-decade leadership transition last year, after the Communist Party expelled him following the death of a British businessman.

The bribery and embezzlement charges against Bo date back to his time as mayor of Dalian in the 1990s. The abuse of power charge is linked to the murder of British businessman Neil Heywood in Chongqing in 2011, when Bo was party secretary there.

Bo’s wife Gu Kailai was convicted of murder and given a suspended death sentence last year over Heywood’s death. His former police chief in Chongqing, Wang Lijun, was sentenced to 15 years on charges related to the cover-up of Heywood’s poisoning at a hotel in the megacity.

Today, when the trial resumed he called his wife “crazy” and said she spoke under duress as a Chinese court aired testimony in which she detailed the dispute that led to the former Politburo member’s ouster and corruption trial.

“Gu has changed, she’s crazy, she always tells lies,” Bo said, according to a transcript released by the court in the eastern city of Jinan. “Under the circumstances, her mental state wasn’t normal. Her handlers put huge pressure on her.”

For more, click here for details on the first day of trial and here for details of today’s second hearing.

Indian Tribes Sue New York Financial Regulator Lawsky

Two American Indian tribes sued New York state’s financial regulatory agency and its head over his crackdown on Internet lending businesses, some of which are tribally owned.

A lawsuit seeking a court order against Benjamin Lawsky, superintendent of the New York Department of Financial Services, was filed Aug. 21 in federal court in Manhattan.

Lawsky ordered 35 online lenders, including at least four tribal companies, to stop offering loans in New York on Aug. 6. He also sent a letter to 117 banks -- including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. -- requesting their help to block improper lending by cutting off the lenders’ access to the electronic payments system they rely on.

The executive director of the Native American Financial Services Association, Barry Brandon, said that only the U.S. Congress can regulate tribes. The association was formed last year to defend services based in tribal communities.

“We wrote a letter to Lawsky with our concern about his actions, requesting a meeting,” Brandon said during an Aug. 21 telephone press conference. “We received no response from him.”

“Payday loans are illegal in New York. We have respect for tribal sovereignty, but these are loans sold illegally to New Yorkers outside of tribal boundaries,” Matt Anderson, a spokesman for the financial services department, said in an e-mail.

Last week, the Online Lenders Alliance wrote to the organization that manages the payments network, the Electronic Payments Association, or Nacha, asking that it tell the banks to allow access to businesses doing legitimate lending. The trade group said it supports the tribes in this legal dispute.

The case is Otoe-Missouria Tribe of Indians v. New York State Department of Financial Services, 13-cv-05930, U.S. District Court, Southern District of New York (Manhattan).

Arizona, Kansas Sue U.S. Over Voter Proof of Citizenship Rule

Arizona and Kansas sued the U.S. Election Assistance Commission, seeking a court order forcing it to amend voter registration forms for those states so that people signing up are required to prove they’re citizens.

The states’ complaint, filed Aug. 21 in federal court in Topeka, Kansas, comes two months after the U.S. Supreme Court threw out Arizona’s law requiring such proof from would-be registrants.

Writing for the majority, Supreme Court Justice Antonin Scalia said then that the state could petition the election commission to amend its form to add the requirement, which he said otherwise runs afoul of federal law.

“As sovereign states, plaintiffs have the constitutional right, power and privilege to establish voting qualifications, including voter registration requirements,” Kansas and Arizona said in their complaint.

Current law requires only that those registering to vote using the standardized federal form swear an oath that they’re American citizens, according to the complaint. The Supreme Court’s ruling doesn’t prevent Arizona from requiring the proof from voters using a state registration form.

Peter Carr, a spokesman for the U.S. Justice Department, declined to comment on the states’ suit.

The case is Kobach v. The United States Election Assistance Commission, 13-cv-04095, U.S. District Court, District of Kansas (Topeka).

Texas Sued by U.S. Over Voter ID Law as Republicans Protest

President Barack Obama’s administration sued Texas to block new voter-identification rules, escalating a confrontation with Republicans in a state where Democrats seek gains from a growing Hispanic population.

The Justice Department suit, filed yesterday in federal court in Corpus Christi, Texas, is the second effort by the administration to upend the state’s voter-identification law and its first since the U.S. Supreme Court struck down a key provision of the Voting Rights Act earlier this year. The government also joined a suit on the state’s redistricting plan.

“The state knew or should have known that Hispanic and African-American Texans disproportionately lack the forms of photo ID required” by the new law, “as opposed to their Anglo counterparts,” the government said in the complaint.

The fight over Texas voting rules comes amid a surge in the state’s Hispanic population, about 38 percent, which in the 2012 election voted 71 percent nationally for Obama, according to exit polls. Texas is the only one of the four majority-minority states that didn’t vote for Obama in 2012.

Texas’s elected officials, led by Governor Rick Perry, a Republican, vowed to fight back against what they perceive as federal intervention in state sovereignty.

“The filing of endless litigation in an effort to obstruct the will of the people of Texas is what we have come to expect from Attorney General Eric Holder and President Obama,” Perry said in an e-mailed statement.

The case is U.S. v. Texas, 13-cv-00263, U.S. District Court, Southern District of Texas (Corpus Christi). The redistricting case is Perez v. Perry, 11-cv-00360, U.S. District Court, Western District of Texas (San Antonio).

For more, click here.

Ex-Texas State Judge Sentenced to Six Years for Corruption

A former Texas state judge who pleaded guilty to corruption charges in federal court was sentenced to six years in prison.

Abel Corral Limas, 57, was also ordered Aug. 21 by U.S. District Judge Andrew Hanen to pay $6.7 million in restitution and forfeit $257,300 he gained from selling favorable court rulings. Limas was a judge from 2000 to 2008 in the 404th judicial district in Texas’s southern-most county, which includes Brownsville and South Padre Island.

“Limas admitted to the court that his conduct was ‘not a mistake it was intentional,’ and he had destroyed the public’s view of the local judiciary,” Kenneth Magidson, U.S. Attorney for the Southern District of Texas, said in a statement after Limas’s sentencing in federal court in Brownsville.

Limas “did all he could to right his wrongs and the government did its best to reciprocate,” Limas’s lawyer, Chip B. Lewis, said in an e-mail.

A total of eight South Texas defendants have pleaded guilty to related violations in the Federal Bureau of Investigation’s four-year public corruption investigation, including a former Texas state representative and a former investigator in the county’s district attorney’s office, according to the statement.

The case is U.S. v. Limas, 1:11-cr-00296, U.S. District Court, Southern District of Texas (Brownsville).

Comings and Goings

Everbright Securities President Xu Resigns After Trading Error

Everbright Securities Co., the brokerage whose erroneous buy orders set off China’s biggest stock swings since 2009, said Xu Haoming resigned as president four days after regulators announced a probe into the company.

Shares in the brokerage were suspended yesterday from trading for the afternoon session in Shanghai and will resume today, the company said in a statement to the city’s stock exchange.

Chairman Yuan Changqing will become acting president as the company seeks to allay investors’ concern and stem an 18 percent drop in its shares this week, after it made 23.4 billion yuan ($3.8 billion) of erroneous buy orders on Aug. 16. The China Securities Regulatory Commission banned Everbright from proprietary trading for three months following the error, which the watchdog called unprecedented.

The company earlier this week suspended Yang Jianbo, who oversees its proprietary trading as head of global markets.

Everbright estimated that it lost 194 million yuan on the trades, based on Aug. 16 closing prices, and said the figure may change.


Krawcheck Says Bank Leverage, Capital Need Discussion

Sallie Krawcheck, former head of Bank of America Corp.’s wealth management division, talks about financial industry regulation.

Speaking with Tom Keene, Sara Eisen, Alix Steel and Julianna Goldman on Bloomberg Television’s “Surveillance,” Krawcheck also discusses the outlook for the next Federal Reserve chairman, the importance of women in management and the economy.

To watch the video, click here.

U.S. Probe of JPMorgan Energy Is Warranted, Admati Says

Anat Admati, a professor at Stanford University and author of “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It,” talks about the U.S. Justice Department’s probe of JPMorgan Chase & Co.’s energy-trading practices.

She speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.” Bloomberg’s Dawn Kopecki also speaks.

To watch the video, click here.

To contact the reporter on this story: Michael Bathon in Wilmington at

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

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