JPMorgan-to Pay CFPB, Barclays, Fed ‘Hedging’: Compliance

JPMorgan Chase & Co., the biggest U.S. bank by assets, is paying $389 million in penalties and restitution to settle regulators’ claims that it unfairly charged customers for credit-monitoring products.

The New York-based bank will pay $60 million to the Office of the Comptroller of the Currency and $20 million to the Consumer Financial Protection Bureau in penalties for improperly billing customers for the “add-on products,” the agencies said in a statement Sept. 20. JPMorgan has already paid $309 million in refunds to more than 2.1 million customers, CFPB Director Richard Cordray said in a statement.

An investigation started by the OCC revealed that JPMorgan enrolled customers in credit-monitoring programs that were sold as add-ons to credit cards from October 2005 through June 2012, the consumer bureau said. The bank began charging customers for the programs before obtaining the necessary written authorization, the regulators said.

The consumer bureau, created by the Dodd-Frank Act of 2010, is conducting an industrywide inquiry into various aspects of the add-on market.

Bill Wallace, the bank’s head of operations for consumer and community banking, said in an e-mailed statement that the company’s Chase Bank unit had stopped new enrollments in the products in mid-2012.

“Any mistakes like these are regrettable and we are committed to ensuring our partners and vendors hold themselves to the same high standards that our customers expect of us,” Wallace said in the statement.

The bank still faces a CFPB investigation, disclosed last month in a regulatory filing, over credit card debt sales.

Compliance Policy

U.S. Startups Freed to Solicit Funds Fight SEC Over Disclosures

Startup companies that celebrated the passage of a U.S. law allowing them to solicit investors more openly say regulators may undercut that move by requiring detailed disclosures of their fundraising.

An 80-year-old ban on advertising private investments ends today, allowing businesses to make public pitches to certain investors. At the same time, the Securities and Exchange Commission is weighing whether to require companies to file advance disclosures of those efforts. Failing to file could trigger a one-year disqualification from selling shares.

Startups say the SEC’s proposal was written with more established companies in mind. The cycle of fundraising at younger companies can be less predictable, relying on chance introductions and pitches at meetings of investors known as demo days.

It remains to be seen how the new rules mesh with the 2012 Jumpstart Our Business Startups law, or JOBS Act, intended to deregulate how emerging companies raise money. The law jettisoned advertising restrictions intended to help ensure small investors aren’t lured into out-sized risks.

For the first time, companies raising money outside of a public offering will be able to advertise that they’re seeking funding. The pool of eligible investors will remain restricted to only those considered sophisticated enough to evaluate the risk, or wealthy enough to absorb a loss.

Private offers are the biggest source of funding for small companies. The U.S. market for such securities was $903 billion last year, according to an SEC analysis published in July. The median amount raised was just $1.5 million.

The SEC voted in July to lift the advertising ban. At the same time, it proposed new rules intended to mitigate the risk of fraud created by allowing riskier ventures to solicit investors more directly.

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EU Says It’s in Talks With CFTC Ahead of Swaps Rule Deadline

The European Commission said it’s in talks with U.S. swaps regulators to keep EU-based trading platforms from facing overlapping requirements and unnecessary costs as a result of rules set to take effect next month.

Officials are seeking a deal with the U.S. Commodity Futures Trading Commission ahead of an Oct. 2 deadline for companies offering swaps trading facilities to register with U.S. regulators. Michel Barnier, the European Union’s financial services chief, said earlier this month that EU firms need “meaningful temporary relief” from the requirements while the 28-nation bloc completes work on its own standards.

Chantal Hughes, a spokeswoman for Barnier, said in an e-mail that EU officials are in a dialogue with the CFTC “to seek a possible solution.”

U.S. and EU regulators reached a deal in July that resolved some clashes over whether the U.S. could impose its swaps rules on trades booked in Europe. Barnier and Gary Gensler, the CFTC’s chairman, said that while the accord was a step toward bringing derivatives trading under an integrated framework of global regulation, further work would be needed.

The EU is “pushing hard” for a system of mutual recognition in which the EU and U.S. trust each other’s rules, Martin Wheatley chief executive officer of the U.K. Financial Conduct Authority, said in a speech yesterday.

Compliance Action

Barclays Cybercrime Suspects Arrested Over $2.1 Million Theft

London police arrested eight men in connection to a 1.3 million pound ($2.1 million) computer-aided robbery from a Barclays Plc branch in the capital.

The money was taken from the Swiss Cottage branch via the bank’s computer system in April, the Metropolitan Police said in a statement Sept. 20. Barclays has recovered a “significant amount” of the stolen funds, police said.

The men, who are between 24 and 47, were arrested Sept. 19 and 20 and are in custody in a London police station. Searches were carried out at addresses across London where cash, jewelry, drugs and credit cards have been found.

The Sept. 20 arrests marked the second time in a week that London police announced arrests over suspected bank hacking. The Met said on Sept. 13 it detained twelve men over an attempt to hack into Banco Santander SA computers, preventing a theft potentially worth millions of pounds.

Banks face cyber-security threats from increasingly sophisticated hackers trying to steal customer identities or access funds. In the Barclays case, police said a man posing as an information technology engineer had installed a device in the local branch that allowed the group to remotely transfer money to accounts.

“Barclays has no higher priority than the protection and security of our customers against the actions of would-be fraudsters,” Alex Grant, a managing director for fraud prevention at the bank, said in a statement. “We can confirm that no customers suffered financial loss as a result of this action.”

Co-Op Deal With Regulator Cited as Bailout Obstacle by Creditors

The parent of Co-operative Bank Plc, which is seeking capital after losses, may avoid being forced to rescue the lender thanks to an accord it struck with regulators last year, according to bondholders.

Co-Op Group Chief Executive Officer Euan Sutherland said in a letter to an unidentified bondholder, which was seen by Bloomberg News, that the Financial Services Authority agreed not to classify the firm as a “mixed financial holding company.” That would mean Co-Op can’t be forced to inject capital into the lender, Mark Taber, the organizer of a group of bondholders, said in a separate letter dated Sept. 19 to the Prudential Regulation Authority, or PRA, which along with the Bank of England replaced the FSA as the banking industry’s regulators this year.

Co-Op Bank must raise 1.5 billion pounds ($2.4 billion) to plug a capital hole after losses incurred following its acquisition of Britannia Building Society in 2009. The FSA granted the waiver to the parent before the completion of a planned purchase to acquire 632 branches owned by Lloyds Banking Group Plc last year, Sutherland wrote in the letter.

Liam Parker, a spokesman for the PRA, declined to immediately comment on the contents of the page-long letter dated Sept. 18.

“The FSA granted a three-year waiver from CGL being considered a mixed financial holding company and put the matter beyond doubt,” Sutherland wrote in the letter. “That waiver remains in force.”

Telfer to Pay $194,000 Costs in Settlement With Canada’s OSC

Goldcorp Inc. Chairman Ian Telfer agreed to pay C$200,000 ($194,000) in costs and will be banned from arranging for people to buy shares in companies he promotes for one year in a settlement over allegations that he violated Canadian securities laws.

Telfer admitted his conduct fell below standards expected from his position in capital markets, Cullen Price, a lawyer representing Ontario Securities Commission staff, said at a hearing Sept. 20 in Toronto. Telfer was reprimanded by the OSC as part of the settlement and will make the payment to cover the cost of the investigation, Price said.

The settlement is reasonable and appropriate, said Telfer’s lawyer Kevin Richard.

The sanctions don’t include a prohibition on acting as a director and officer of a public company, which was among the potential penalties Telfer faced.


BB&T’s Bid to Recoup $688 Million in Taxes Angers U.S. Judge

BB&T Corp. lost a bid to recover at least $688 million in taxes and penalties as a federal judge ruled a series of transactions with Barclays Plc, aimed at generating tax credits, lacked economic substance.

U.S. Court of Federal Claims Judge Thomas Wheeler in Washington Sept. 20 slammed BB&T, Barclays and other participants in the transactions, including the KPMG consulting firm and the Sidley Austin LLP law firm, for conduct he said was “nothing short of reprehensible.” BB&T “engaged in an economically meaningless tax shelter” Wheeler said.

The firms followed a path “rife with its conflicts of interest, questionable pro forma legal and accounting opinions, and a taxpayer with a seemingly insatiable appetite for tax avoidance,” Wheeler wrote, upholding the Internal Revenue Service’s rejection of transactions from August 2002 through April 5, 2007.

BB&T said it expects to book a $250 million charge this quarter because of the ruling, at least the second charge the bank has taken in connection with the case.

“We are surprised and very disappointed with the court’s ruling and continue to firmly believe that this was a legitimate financing transaction,” Chief Executive Officer Kelly S. King said in a statement. “We will continue to review the decision and evaluate our legal options.”

BB&T was seeking to recover payments made after the IRS objected to the bank’s use of foreign tax credits and other deductions.

The case is Salem Financial Inc. v. U.S., 10-00192, U.S. Court of Federal Claims (Washington).

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Unitech Can Claim Deutsche Bank Libor Dishonesty, Judge Rules

Unitech Ltd., an Indian property firm, won permission from a London judge to argue that Deutsche Bank AG dishonestly fixed interest rates in a U.K. trial over a derivative contract.

While Unitech can’t use rigging allegations to annul the disputed interest-rate swap, it can file a counter-claim for damages caused by the German lender’s alleged attempts to influence the London interbank offered rate, Judge Nigel Teare said Sept. 20.

Both the swap dispute and any claim linked to Libor must be decided at a trial, he said in a written ruling.

U.K. judges have taken differing approaches on lawsuits related to Libor-fixing allegations, which led to criminal and regulatory probes across the globe and fines totaling about $2.5 billion for investment banks that tried to manipulate the interest-rate benchmark for profit.

Unitech lost its first attempt in February to add Libor allegations to its U.K. lawsuit. Another judge allowed a suit to proceed against Barclays Plc for fraud related to the benchmark and swaps. Both decisions were appealed and will be decided in a joint appeal-court hearing scheduled for October.

“This is a long-standing case of a loan that was made and never paid back,” said Kathryn Hanes, a London spokeswoman for Deutsche Bank. Unitech’s “unfounded allegations about Libor are an attempt to delay payment and divert attention from its remaining unpaid debt on a swap agreement tied to the loan.”

Unitech’s lawyer, Richard Gwynne, didn’t immediately respond to an e-mail seeking comment.

Swipe-Fee Rules to Remain in Place During Appeal, Judge Says

The U.S. Federal Reserve’s rules for debit-card transaction fees and processing will remain in place while the central bank appeals a decision throwing out the regulations, a judge said.

Both the Fed and retailers had asked the federal judge in Washington to keep the current rules in place pending the appeal.

The Fed is seeking to reverse Leon’s ruling that it wrongly set the cap on debit-card transaction fees, known as swipe fees, at about 21 cents for each transaction, and neglected to bolster competition among payment networks.

The decision by U.S. District Judge Richard Leon’s, unless overturned on appeal, will force regulators to revisit rules that bankers said would cost them 45 percent of their swipe-fee revenue. Lenders collected about $16 billion annually from those fees before the Fed’s regulation and responded by cutting back on perks such as rewards programs and free checking to soften the blow to their profits.

The case is NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia (Washington).


Buffett Calls Federal Reserve History’s Greatest Hedge Fund

Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.

“The Fed is the greatest hedge fund in history,” Buffett told students Sept. 19 at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said. “And that wasn’t the case a few years back.”

The central bank has been buying $85 billion of bonds a month to help the U.S. recover as it emerges from the deepest slump since the Great Depression. Chairman Ben S. Bernanke and other Fed policy makers unexpectedly opted last week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy.

The Fed “is under no pressure, none whatsoever to have to deleverage,” Buffett said. “So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.”

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