Ex-Madoff Workers, U.K. Branches, JPMorgan: Compliance

Oct. 18 (Bloomberg) -- Former employees of Bernard L. Madoff who are on trial on charges they aided the convicted con man’s $17 billion Ponzi scheme were unaware of the fraud and were duped into helping him keep it going, lawyers told a jury.

Daniel Bonventre, 66, the operations chief who signed checks for Madoff’s securities firm and worked with its general ledger, was fooled by Madoff’s “depraved and pathological lies,” and never knew about the fraud, Andrew Frisch, his lawyer, said yesterday in his opening statement in federal court in New York.

In his guilty plea in 2009, Madoff said the market-making and proprietary trading side of his firm was “legitimate” while admitting he ran the scheme from the advisory business, Bernard L. Madoff Investment Securities LLC.

Annette Bongiorno, a 40-year Madoff employee who helped run the investment advisory business, “never understood that she was involved in a fraud,” her lawyer Roland Riopelle told the jury yesterday in his opening statement.

The lawyers were the first among the defense to present opening statements in the trial of the five ex-employees.

Assistant U.S. Attorney Matthew Schwartz Oct. 16 told jurors that the defendants created millions of false, misleading records, and became rich in the process. The three men and two women on trial knew Madoff’s securities firm didn’t conduct real trades and used money from earlier investors to pay off new ones, the U.S. alleges.

U.S. District Judge Laura Taylor Swain has said the trial she’s overseeing may last five months.

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Compliance Policy

Bailey Says U.K. Regulator Wants Limits on Foreign Bank Branches

Branches of foreign banks opening in the U.K. won’t be able to take retail deposits unless they convince the regulator they can be easily wound down in a crisis, said Andrew Bailey, the U.K.’s top banking supervisor.

Branches from banks based outside the European Union “should stick to straightforward wholesale banking, of the type that supports world trade and capital flows,” Bailey, the chief executive officer of the Prudential Regulation Authority, told an audience of banking executives in London yesterday. “Resolution will be a key deciding factor in the PRA’s judgments.”

The U.K. government said this week that branches of Chinese banks would be approved for business in London. Chancellor of the Exchequer George Osborne said the PRA will start talks with Chinese banks later this year.

Bailey, deputy governor for prudential regulation at the Bank of England, said it is a “general policy, not a China policy, and it is consistent with promoting the benefits of an open world economy.”

Regulators around the world have encouraged banks to open subsidiaries rather than branches since the financial crisis because they have to comply with tougher capital and liquidity rules. Branches are supervised by the regulator of the home country of their parent bank.

Large U.K. Companies Get Up to 10 Years to Switch Auditor

U.K. antitrust regulators gave companies more time to seek new bids for accounting work, saying that large corporations must retender audits every 10 years.

The requirement will apply to companies in the FTSE 350 Index starting in the last quarter of 2014, the U.K. Competition Commission said in a statement. The regulator also plans to forbid clauses limiting a company’s choice of auditor to the top four accounting firms.

The Competition Commission repeatedly backed away from stricter measures during a two-year inquiry focused on KPMG LLP, Deloitte LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP. In February, the U.K. regulator said it was considering forcing companies to change auditors, before proposing guidelines to rebid work every five years in July. The European Union is also working on new audit rules.

Under the Competition Commission’s new rules, companies would be required to spell out when they next intend to hold a tender process if five or more years have elapsed since the last one.

European lawmakers voted in April on measures that would have banks, insurers and listed companies change accountants every 14 years, with an option for national authorities to extend this to 25 years. Michel Barnier, the EU’s financial services chief, had proposed legislation that would have mandated audit rotation every six years.

The legislation must be adopted by the full parliament, and approved by governments, before it can take effect.

SEC to Issue Crowdfunding Rule Easing Investor Verification

Small businesses raising money by selling shares over the Internet wouldn’t have to verify that their backers comply with individual investment limits under a U.S. regulatory proposal set for a vote as soon as next week.

The plan, targeted for an Oct. 23 vote by the Securities and Exchange Commission, would allow such companies to use so-called equity crowdfunding without having to check that a person’s investment is a greater share of their income or net worth than allowed by law, according to two people with direct knowledge of the matter who asked not to be named because the proposal hasn’t been made public.

The crowdfunding rule, authorized as part of the 2012 Jumpstart Our Business Startups Act, is intended to benefit small businesses and startups too small to attract funding from banks or venture capitalists. It may also boost business for Internet funding portals such as Kickstarter Inc., IndieGoGo Inc. and CircleUp Network Inc. that are used by startups to raise money.

Crowdfunding was a popular provision in the JOBS Act, with advocates saying it would unlock capital for small businesses and entrepreneurs. In implementing the law, the SEC has been trying to balance the need to protect ordinary investors from potential fraud with Congress’s goal of reducing regulations for small businesses.

Although the law imposes limits on investors based on the person’s income or net worth, the people said the SEC’s proposal won’t require companies or brokers to verify compliance with the limit, something Internet funders have argued is impractical.

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Compliance Action

Japan Ruling Party to Ask Mizuho’s Sato to Explain Crime Loans

Japan’s ruling party plans to ask Mizuho Financial Group Inc. President Yasuhiro Sato to appear before its finance committee to explain the bank’s lending to crime groups.

Isshu Sugawara, chairman of the Liberal Democratic Party’s finance committee, said he wants Sato to speak to the panel after Mizuho submits a business improvement plan to the Financial Services Agency due Oct. 28. The panel has begun to examine whether the FSA’s supervision of Mizuho was adequate, Sugawara told reporters in Tokyo today.

The financial regulator ordered Mizuho to improve compliance on Sept. 27 for neglecting to break off loans made to members of crime groups through its Orient Corp. consumer credit affiliate. Mizuho had been aware of the loans for more than two years, the FSA said.

U.K. Banks May Face 100 Billion-Pound Capital Gap, Exane Says

U.K. lenders may face a 100 billion-pound ($161 billion) capital shortage under a proposal by the country’s Prudential Regulation Authority, which could force banks to postpone dividends and depress their returns, according to Exane BNP Paribas analysts.

Lenders would need to hold a fully loaded equity Tier 1 ratio of 13 percent over time should the regulator adopt its proposal in full, the analysts, led by Jonathan Pierce, wrote in a note to clients yesterday. Banks will probably be given time to build up the buffer, prompting a review of their liabilities, the analysts said.

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, is the only U.K. bank likely to reach the target by 2015, Exane said. While the PRA is unlikely to force other banks to scale back their assets quickly or sell more stock to investors, dividend payments are at risk, the analysts wrote.

CRU Steel Price Audit Finds ‘No Major Gaps’ Amid Global Scrutiny

CRU, the publisher of business information on the metals, mining and fertilizer industries, completed a third-party audit of its U.S. Midwest steel prices.

The indexes, which include hot- and cold-rolled coil, hot-dipped galvanized coil and plate price are the most widely used in the world, London-based CRU said in an e-mailed statement.

The audit, by a “Big Four” firm, included an electronic survey and site visits and found “no major gaps,” according to CRU’s statement.

“At a time when some price reporting agencies have been under attack and some are still under investigation, it is crucial that companies like CRU continue to invest in both excellent processes and third-party assessments of our work,” Chief Operating Officer Fraser Murdoch said, according to closely held CRU.


Morgan Stanley Must Face Group Lawsuit by Singapore Investors

A group of Singapore investors who lost money on $154.7 million in credit-linked notes were allowed by a U.S. judge to pursue their lawsuit against Morgan Stanley as a group.

U.S. District Judge Jesse Furman in Manhattan said yesterday the 18 plaintiffs may represent a class of all investors who bought any of seven series of Pinnacle Notes issued in 2006 and 2007. The investors, including the Singapore Government Staff Credit Cooperative Society Ltd., sued in 2010, claiming the notes were a “bait and switch” scheme designed to benefit Morgan Stanley at the expense of customers.

Mark Lake, a Morgan Stanley spokesman, declined to comment on the ruling. The firm has denied all wrongdoing in connection with the Pinnacle notes.

The case is Dandong v. Pinnacle Performance Ltd., 10-cv-08086, U.S. District Court, Southern District of New York (Manhattan).


Banker Bonus Link With Sales Disappearing, FCA’s Wheatley Says

The biggest banks in the U.K. are moving away from a culture of linking sales to bonuses after a series of scandals where products were improperly sold to consumers, the head of the markets regulator said.

Martin Wheatley, chief executive officer of the Financial Conduct Authority, made the remarks yesterday at a speech in London. He described the proposal as “one of the most significant steps forward for the U.K. banking industry since 2008.”

The FCA has been scrutinizing how bankers are rewarded after lenders were forced to pay billions of pounds to compensate customers who were sold payment-protection insurance they didn’t need. U.K. banks have set aside about 15.5 billion pounds ($25 billion) for PPI claims.

Allianz CEO Says New Regulation to Create Room for Acquisitions

Michael Diekmann, chief executive officer of Allianz SE said tougher financial regulation will create takeover opportunities for Europe’s biggest insurer.

“If Solvency II and Basel III mean more capital, then it’s hard for mutuals to get that,” Diekmann, 58, said in an interview this week at Bloomberg headquarters in New York, referring to mutuals’ customer-owned structure, which makes it more difficult for them to raise funds. That’s why they may need to find a buyer should they require a larger capital buffer under Solvency II, the new risk-based rules for the industry scheduled to be implemented in 2016, he said.

“We have a situation in most countries where you have listed companies and mutual companies and there is a little bit of an unequal playing field,” Diekmann said. “That gets resolved through regulation.”

Allianz, based in Munich, acquired Turkish insurer Yapi Kredi Sigorta AS in March for 684 million euros ($932 million), displacing France’s Axa SA as Turkey’s largest insurer.

Solvency II, intended to harmonize the way insurers in Europe allocate capital against the risks they take, was originally scheduled to come into force in 2012. It has been delayed several times over and may now be implemented on Jan. 1, 2016 with a transitional period.

Comings and Goings/Labor

Abe Delays Labor-Rules Reform Amid Resistance, Nikkei Says

Japan’s government has put off key labor market deregulation, the Nikkei newspaper reported today, as Prime Minister Shinzo Abe faces resistance to his reforms to revive the world’s third-biggest economy.

Fixed-term employment contracts may be extended to 10 years from the previous five within special economic zones under proposed new regulations, the Nikkei said. While the government proposes considering extending the length of employment contracts for highly skilled, highly paid workers, details will be worked out in a bill to be submitted to parliament next year, a document released today by the Cabinet Office showed.

Any freeing up of labor rules would give companies more flexibility as Abe implements the “third arrow” of his so-called Abenomics policies to shake up industry and lay a foundation for sustained growth. Relaxing employment rules in certain areas or for some companies would be “unacceptable,” the head of the Japanese Trade Union Confederation Nobuaki Koga said yesterday after a meeting with politicians and business leaders.

Investors will lose confidence in Japan’s economic revival unless Abe adds substance to his growth strategy and relies less on stimulus measures, Hideo Hayakawa, who previously served as executive director at the Bank of Japan, said in an interview in Tokyo this week.

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Dimon Said to Have Given Up Role at Bank Unit on OCC Request

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon stepped down as chairman of the bank’s main operating subsidiary in July because of a recommendation by the Office of the Comptroller of the Currency, according to two people with knowledge of the matter.

The agency asked for the change as part of an effort to improve corporate governance at the company, said one of the people, who asked not to be identified because discussions were confidential. The move wasn’t punitive, that person said. Robert Garsson, an OCC spokesman, declined to comment on the talks.

Dimon stepped down as chairman of the subsidiary July 1, a person with direct knowledge of the move said on Oct. 3. When asked about the situation during a conference call with reporters last week, the CEO referred to talks with government supervisors without specifying whether any request was made.

“We are in constant dialogue with our regulators regarding how to strengthen our governance and controls,” he said on the Oct. 11 call to discuss the bank’s earnings. “We thought this board change we made was consistent with our regulators’ views and governance for a banking subsidiary.”

The move didn’t affect Dimon’s titles as chairman and CEO of the parent company.

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To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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