JPMorgan Talks, BofA Race Bias, Libor Suit: Compliance

Sept. 25 (Bloomberg) -- JPMorgan Chase & Co. resumed settlement talks with the U.S. as the government was preparing to sue the bank in California alleging it misrepresented the quality of mortgage-backed securities sold from 2005 to 2007, according to a person familiar with the matter.

The government informed JPMorgan it was ready to file a complaint yesterday in Sacramento, the person said. Shortly after, talks between the bank and Justice Department officials over a possible settlement restarted, said the person, who asked not to be identified because the matter isn’t public.

JPMorgan wanted to negotiate an accord resolving mortgage-bond investigations being conducted by federal and state authorities, including probes by the U.S. attorneys in Sacramento, Philadelphia and Washington, according to another person briefed on the effort.

The bank also tried to settle a $6 billion claim by the Federal Housing Finance Agency and an investigation by New York Attorney General Eric Schneiderman, who sued the company in October over mortgage bonds packaged by Bear Stearns Cos., which JPMorgan acquired in 2008, according to the person, who asked not to be identified because the talks are private.

The FHFA sued the bank and 17 other lenders two years ago over faulty mortgage bonds.

Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on settlement negotiations. Adora Andy Jenkins, a spokeswoman for the U.S. Justice Department, and Peter Garuccio, a spokesman for FHFA, also declined to comment.

Compliance Policy

Bank Leverage Holes Drive Scandinavia to Set Agenda EU Won’t

Scandinavia is once again showing it won’t wait for the European Union when it comes to banking regulation as the AAA rated region moves to curb financial industry leverage.

After beating the EU in setting rules for too-big-to-fail banks, Sweden and Denmark are now exploring the option of imposing a leverage ratio years before most of the rest of Europe does so, and with tougher limits on gearing than recommended by the Basel Committee on Banking Supervision.

Eagerness to regulate in areas neglected by the EU is growing among Europe’s richest nations, where record-low interest rates are distorting asset prices. A leverage ratio --a measure of capital to assets before they’ve been weighted for risk -- will help national regulators catch banks understating loss probabilities, said Jesper Rangvid, the head of Denmark’s government-appointed crisis commission. His report, released last week, showed excessive leverage at Danske Bank A/S almost destabilized the entire Danish economy in 2008.

Stefan Ingves, governor of the Riksbank and chairman of the Basel committee, said this month regulators in his native Sweden should target a leverage ratio before European standards are set. While the Swedish FSA this year required banks to raise risk weights on mortgage assets to 15 percent, the level should go as high as 35 percent, Per Jansson, a deputy governor at the Riksbank, said yesterday.

Europe has hesitated to follow Basel’s recommendation that banks hold at least 3 percent equity relative to total assets on concern more rules risk curbing lending and hampering economic growth. The EU will instead require banks to publish their individual leverage ratios from 2015 and decide by 2018 whether region-wide standards need to be set.

Compliance Action

BofA Told to Pay $2.2 Million in Race Bias Case Spanning Decades

Bank of America Corp. was ordered to pay $2.2 million to black job applicants who were unfairly rejected for teller and clerical positions in a case spanning almost two decades, according to the U.S. Department of Labor.

An administrative judge told the bank to pay $964,000 to more than 1,000 applicants from 1993 and $1.22 million to 113 people who were rejected from 2002 to 2005, the regulator said yesterday in a statement. The lender also was ordered to make job offers to 10 people. The firm settled separate claims of racial and gender bias at its Merrill Lynch unit in the past month.

The Labor Department complaint stems from a routine review of hiring practices at an office in the firm’s hometown of Charlotte, North Carolina, according to the statement. After talks broke down, the government filed an administrative complaint in 1997, asserting the federally insured bank was subject to laws covering U.S. contractors, the agency said. The firm challenged that authority, according to the statement.

Bank of America, the second-largest U.S. lender by assets, said it’s examining the recommended decision and order.

“Diversity and inclusion are part of our culture and core company values,” said Christopher Feeney, a company spokesman. “We actively promote an environment where all employees have the opportunity to succeed.”

SEC Says California Man Ran Real Estate Investment Fraud

The U.S. Securities and Exchange Commission accused a California man of defrauding almost 500 investors through a purported private-equity real estate firm.

Larry Polhill sold investors unregistered notes promising to yield annual returns of 5 percent to 17 percent when the collateral backing the investments was often non-existent or otherwise impaired, the SEC said in a statement yesterday. The investors are now owed about $160 million by Polhill’s bankrupt firm, according to the agency.

In settling the claims, Polhill agreed to be barred from acting as an officer or director of a public company. The settlement is subject to approval by the U.S. District Court for the Central District of California, which will decide any monetary sanctions at a later date.

“Mr. Polhill has neither admitted nor denied any of the allegations in the SEC’s complaint, which have not been adjudicated by any court,” his attorney, Michael Quinn of K&L Gates LLP, said in an e-mailed statement. “Mr. Polhill is pleased to have this matter behind him.”

According to the SEC, Polhill, 61, used his company, San Bernardino, California-based American Pacific Financial Corp., to buy and sell real estate and distressed assets, offering clients the chance to invest through the unregistered notes. The properties underlying the investments were sometimes sold without notice to the investors, the agency said.

When APFC eventually filed for bankruptcy, it named the investors as unsecured creditors.


JPMorgan Chase Said to Be Sued Over Libor With 12 Other Banks

JPMorgan Chase & Co., Barclays Plc, Credit Suisse Group AG and 10 other international lenders were sued by a U.S. credit union regulator alleging they illegally manipulated benchmark Libor interest rates.

The National Credit Union Administration, an Alexandria, Virginia-based regulator, said it sued the banks Sept. 23 at a U.S. court in Kansas. The filing couldn’t immediately be confirmed in court records.

Their alleged manipulation “resulted in a loss of income from investments and other assets held by five failed corporate credit unions: U.S. Central, WesCorp, Members United, Southwest and Constitution,” according to an NCUA statement.

The banks are accused of giving false information in response to a daily survey by the British Bankers’ Association, which asks lenders how much it would cost to borrow money from each other for various intervals in 10 different currencies.

Libor, the London interbank offered rate, is a key metric to set interest rates for trillions of dollars in financial instruments.

The misinformation allowed them to “benefit their investments that were tied to Libor, to reduce their borrowing costs, to deceive the marketplace as to the true state of their creditworthiness, and to deprive investors of the interest rate payments to which they were entitled,” according to the NCUA.

Kerrie Ann Cohen, a New York-based spokeswoman for Barclays, declined to comment on the allegations.

Brian Marchiony, a spokesman for New York-based JPMorgan, and Drew Benson, a spokesman for Credit Suisse, also declined to comment.

The case is National Credit Union Administration Board v. Credit Suisse Group AG, U.S. District Court, District of Kansas.

Ex-SAC Manager Martoma Has Assets Frozen in Insider Case

A judge in Manhattan yesterday froze the Florida home and other assets of former SAC Capital Advisors LP manager Mathew Martoma, who is charged in a $276 million insider trading case.

The U.S. claims the assets, including Martoma’s $1.9 million Boca Raton home and more than $4 million in accounts held by Martoma and his wife, were derived from the alleged crime. The government is seeking forfeiture if Martoma is convicted.

Prosecutors and lawyers representing Martoma agreed to the order, which bars him from transferring the property while the case against him goes forward.

The U.S. claims Martoma used inside information from two doctors who were involved in the clinical trial of the Alzheimer’s disease drug bapineuzumab, or “bapi,” to trade in shares of Elan Corp. and Wyeth on behalf of SAC, the hedge fund company founded by Steven A. Cohen. The government has called it the biggest criminal insider-trading case against an individual in history.

Martoma was paid a $9.3 million bonus tied to the illegal trades, prosecutors claim. SAC, based in Stamford, Connecticut, was indicted in July, partly because of Martoma’s alleged illegal trading.

Martoma has pleaded not guilty. His case was postponed two months so his defense lawyer can work on another trial. The lawyer, Richard Strassberg, represents Bank of America Corp.’s Countrywide unit in a lawsuit by the U.S. claiming mortgage fraud.

The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).

Bank of New York Mellon Wins Case Over Interest Deductions

Bank of New York Mellon Corp. is entitled to deduct interest on a loan linked to a transaction with a British bank that generated disallowed tax credits, a U.S. Tax Court judge ruled.

The loan “served a purpose beyond the creation of the tax benefits,” Judge Diane Kroupa wrote in an opinion released Sept. 23.

Kroupa’s decision grew out of her ruling earlier this year that BNY Mellon couldn’t claim $199 million of tax credits and related expense deductions for 2001 and 2002 from a series of transactions with London-based Barclays Plc because they had no economic substance.

BNY Mellon didn’t challenge Kroupa’s ruling on the tax credits and instead argued that since she ruled that the loan proceeds could be used by the bank for business purposes, interest on them is deductible. Kroupa agreed with that analysis. The ruling didn’t indicate the amount of interest at stake.

Kevin Heine, a spokesman for BNY Mellon, declined to comment on the ruling.

The case is Bank of New York Mellon Corp. v. IRS, 09-26683, U.S. Tax Court (Washington).


Schneiderman Seeks New Rules for High-Speed Traders

New York Attorney General Eric Schneiderman talked about the impact of emerging technologies on U.S. financial markets and the need to update regulation to maintain oversight.

He spoke to Bloomberg News editor-in-chief Matt Winkler at the Bloomberg Link Markets 50 Summit in New York.

For the video, click here.

EU’s Rehn Says Euro-Area Financial-Market Stress Has Decreased

Stress on euro-area financial markets “has decreased from the peaks seen in the last two years,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said.

“Liquidity in most market segments has improved, volatility has receded and risk premia have fallen,” Rehn said in a response to an EU lawmaker’s question posted on the European Parliament website.

SEC’s White Says Jury ‘Still Out’ on High-Speed Trading

U.S. Securities and Exchange Commission Chairman Mary Jo White talked about market regulations, banking rules and high-frequency trading.

In a wide-ranging discussion, White talked about acknowledgments of wrongdoing in SEC settlements, as well as rule-making topics such as crowd-funding, which she described as a “very high priority,” adding that she hopes to get those rules done this year.

White also vowed the agency would eventually adopt a June 5 proposal to add new restrictions to money-market mutual funds.

She spoke with Peter Cook at the Bloomberg Link Markets 50 Summit in New York.

For the video, click here.

U.S. Bank Agency Invites Foreign Regulators to Review Its Work

The regulator of U.S. national banks is inviting overseas counterparts to find flaws in its practices that may have caused the agency to miss early signs of the coming financial crisis more than five years ago.

Comptroller of the Currency Thomas Curry said he has asked regulators from Australia, Singapore and Canada to review his agency’s bank supervision methods even as the OCC conducts its own performance evaluation.

Curry made the comments in remarks prepared for delivery at an American Banker regulatory conference this week in Arlington, Virginia.

The OCC was among regulators criticized by lawmakers for missing early evidence that the financial system was under threat before the crisis, as well as for overlooking initial signs of money-laundering violations at HSBC Holdings Plc and trades at JPMorgan Chase & Co.

“We’ll be looking at everything from agency culture to our approach to risk identification,” Curry said in his remarks, “and we’ll be looking for gaps in the system that might have led us to miss problems in the past.”

Australia, Singapore and Canada were selected as countries that weathered the 2008 global credit crisis well, Curry said. They will conduct “an independent peer review of the process we use for the supervision of large banks and thrifts” -- an evaluation he said could be “frankly painful” for those at the OCC, Curry said.

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

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

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