Tax Breaks Targeted, JPMorgan-Madoff, SAC: Compliance

Executive stock options, corporate jets and the tax break enjoyed by hedge-fund managers are among the targets for Democratic lawmakers seeking to negotiate a budget deal by next month.

The Democrats’ list of options, obtained by Bloomberg News, sets the stage for a renewed clash with Republicans, who reject proposals to raise revenue as part of an agreement. Democrats say taxes must be on the table as lawmakers seek an annual budget that would replace some of the $1 trillion in automatic spending cuts now in effect.

While congressional aides say the two sides are finding some areas of compromise on spending cuts, the standoff over revenue might be the main obstacle to reaching a deal by the lawmakers’ self-imposed Dec. 13 deadline.

Democrats have long urged Republicans to agree to scrap at least some of the tax preferences on their list, while Republicans argue that doing so would undermine efforts for a broader tax-code revision.

One proposal to limit the ability of some business owners to avoid payroll taxes by claiming income as business profits would save $12 billion over the next 10 years, according to the Democrats’ estimates. Another option is the carried-interest treatment that allows hedge-fund managers and private-equity advisers to pay a 20 percent tax rate on their income instead of the nation’s top income rate of 39.6 percent. Ending that break would save more than $17 billion over a decade, according to the Democrats.

Limiting corporate deductions for “excessive” executive stock options could save even more -- as much as $50 billion over the same period, the Democrats’ list says.

Ending preferences for corporate jets and subsidies for yachts and vacation homes, combined, would bring in another $19 billion.

Representative Paul Ryan, the lead Republican negotiator and chairman of the House Budget Committee, has opposed including any tax measures as part of a budget agreement. The 29-member panel, which met last week, will reconvene on Nov. 13.

A spokesman for Ryan didn’t respond to a request for comment.

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Compliance Action

Swaps Probe Stalled Over Bank Secrets as EU Readies Libor Fines

The European Union’s antitrust probe into credit derivatives trading by 13 of the world’s biggest banks stalled after the lenders’ lawyers won the right to see confidential information compiled by investigators.

The banks asked to see business secrets about their rivals in EU files to help them fight a formal antitrust complaint sent in July, according to five people familiar with the probe who asked not to be identified because the process isn’t public.

Meeting the requests may add about four months to the investigation, after the EU extended its deadline for responses to the so-called statement of objections, two people said.

The credit-default swaps probe, which includes HSBC Holdings Plc, JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc, is one of two priority EU investigations into financial institutions.

Antoine Colombani, spokesman for Competition Commissioner Joaquin Almunia at the European Commission in Brussels, declined to comment.

The commission was required to grant access to potentially confidential data after lawyers in the CDS probe argued the information was vital given the complexity of the case, the people said. The delays are the second time the investigation has been thrown off track by confidential-data issues.

In the underlying probe, the EU accused the 13 banks as well as Markit and ISDA of working together to prevent Deutsche Boerse AG and the Chicago Mercantile Exchange from entering the credit-derivatives business from 2006 to 2009.

Freddie Mac Profits Push Dividend Return Close to Bailout Funds

Freddie Mac and Fannie Mae will return $39 billion to the U.S Treasury after reporting third-quarter profits, bringing their total payments to within about $2 billion of the cash aid they got after the credit crisis.

The companies, which were sustained by $187.5 billion in taxpayer money after they were placed under federal conservatorship in 2008, will make dividend payments by next month to boost their total returns to $185.2 billion, they said in separate filings Nov. 7.

Under terms of their conservatorship, the government since last year has been taking all of the companies’ quarterly profits beyond a $3 billion net-worth cap. The money counts as a return on the U.S. investment and not as a repayment of the aid.

The company’s aid and amount returned have left taxpayers $9 million ahead, according to a statement. The government has an additional $1 billion liquidation preference in the company.

China Agency Lists 181 Shanghai IPO Applications as of Nov. 7

The China Securities Regulatory Commission said 10 applications were approved of 181 companies that submitted applications for initial public offerings on the Shanghai exchange as of Nov. 7.

Thirty applications were approved so far this year of 311 companies applying for initial public offerings on Shenzhen’s main and medium-small company board’s initial public offerings.

Forty-three applications of 265 companies that submitted applications for initial public offerings on Shenzhen’s Chinext board were approved as of Oct. 31.


SAC Tipper Aggarwal Pleads Guilty to Securities Fraud

Sandeep Aggarwal, a former research analyst with Collins Stewart LLC, admitted passing inside information about a deal involving Yahoo! Inc. and Microsoft Corp. to a former SAC Capital Advisors LP fund manager.

Aggarwal, 40, pleaded guilty to one count each of conspiracy and securities fraud Nov. 8 in federal court in Manhattan. He told U.S. Magistrate Judge Ronald Ellis that he tipped “Richard Lee and others” about the Yahoo-Microsoft venture in 2009.

He told Ellis he was “very sorry” for his actions, which he did to “improve his standing as an analyst” and “increase revenue” for his firm.

Aggarwal faces as much as 25 years in prison when he’s sentenced and may be deported to his native India. He agreed to cooperate with prosecutors in hopes of receiving leniency.

The case is U.S. v. Aggarwal, 13-mj-01877, U.S. District Court, Southern District of New York (Manhattan).

Separately, the U.S. judge overseeing SAC’s guilty plea to securities fraud said she wouldn’t immediately decide whether to accept it because she wanted to review the documents first.

The hedge fund Nov. 8 entered a plea through its general counsel, who appeared in Manhattan federal court before U.S. District Judge Laura Taylor Swain. Insider-trading trials of two SAC fund managers are scheduled over the next three months in the same courthouse -- trials that could still put the hedge fund’s founder, Steven A. Cohen, in jeopardy, should either defendant seek a plea bargain and cooperate with the U.S. in its continuing probe of the firm’s employees.

She set sentencing for March 14.

Cohen didn’t attend the Nov. 8 hearing, at which SAC General Counsel Peter Nussbaum entered the plea to four counts of securities fraud and one count of wire fraud. Swain said she wanted time to review a pre-sentence report and the sentencing submissions from the government and SAC before deciding whether she would accept the plea. She set sentencing for March 14.

Jonathan Gasthalter, a spokesman for SAC, and lawyers for SAC declined to comment after court on the judge’s decision.

SAC has agreed to pay a record $1.8 billion and shutter its investment advisory business as part of an accord announced Nov. 4 to end both a prosecution and a federal money-laundering suit brought by the Justice Department.

Cohen, 57, wasn’t charged in the indictment of the Stamford, Connecticut-based firm. He still faces an administrative action filed by the U.S. Securities and Exchange Commission for his alleged failure to supervise the hedge fund’s activities.

The criminal case is U.S. v. SAC Capital Advisors LP, 13-cr-00541, U.S. District Court, Southern District of New York (Manhattan). The civil case is U.S. v. SAC Capital Advisors LP, 1:13-cv-5182, U.S. District Court, Southern District of New York (Manhattan).

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JPMorgan’s Madoff Banker Backed $200 Million Loan in 2008

A former JPMorgan Chase & Co. banker who managed Bernard Madoff’s account said the con man was on track to receive a $200 million loan less than a month before his arrest if the request hadn’t been dropped.

Daniel Bonventre, one of five ex-Madoff employees on trial accused of aiding the fraud, asked JPMorgan in November 2008 to borrow twice Madoff’s credit limit of $100 million, with U.S. Treasuries as collateral, Mark Doctoroff, who left the bank last year, testified Nov. 7 in federal court in Manhattan.

Doctoroff described Madoff’s securities firm in an e-mail to JPMorgan’s credit department on Nov. 17, 2008 as “doing well financially.”

The five former Madoff employees are accused of helping Madoff hide his fraud from customers, banks and regulators for years and getting rich in the process.

The loan was part of a last-ditch attempt by Madoff to secure cash as his Ponzi scheme was collapsing, and Bonventre’s role in the application process was one of the many examples of his involvement in the fraud, prosecutors have said.

While the loan never went through, Doctoroff said he thought the loan would have been granted and that he didn’t know why the loan process stopped.

He said he never met Madoff.

Bonventre, who oversaw the broker-dealer and proprietary trading operations of Madoff’s company, where real trading took place, pleaded not guilty and has denied involvement in the fraud, saying he was duped like thousands of others.

Bonventre’s lawyer, Andrew Frisch, asked if the loan request and the fraudulent capital figures given by Bonventre could have come from Madoff himself. Doctoroff agreed Madoff could have given the fake figures to Bonventre.

Joseph Evangelisti, a JPMorgan spokesman, declined to comment on the testimony.

The office of U.S. Attorney Preet Bharara in Manhattan is investigating JPMorgan in relation to Madoff. Bharara is weighing a deferred-prosecution agreement or fine to resolve the probe, a person familiar with the matter said last month.

The case is U.S. v. O’Hara, 10-cr-00228, U.S. District Court, Southern District of New York (Manhattan).

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Hedge Fund Founder Says U.K. Fraud Prosecutors Acted Unfairly

Magnus Peterson, the founder of the collapsed hedge fund Weavering Capital (UK) Ltd., is seeking to delay a criminal prosecution against him by arguing that U.K. prosecutors acted unfairly in the case.

A decision by the director of the Serious Fraud Office to reopen a probe into the firm’s collapse after the former director closed the investigation is an “abuse of process” by the agency, Peterson’s lawyer, Peter Lodder, said at a hearing in London Nov. 8. The court will hear his arguments in February.

Peterson will also argue that the SFO’s initial decision to open the probe could be unlawful.

Weavering Capital, which once had about $640 million under management, collapsed in March 2009 after discovering the counterparty for its biggest trading position was controlled by the fund’s manager. Peterson and about 10 employees were ordered by a U.K. court last year to repay a total of $450 million to liquidators of the collapsed hedge fund.

Peterson was charged in December with fraud and other counts related to the collapse. A trial is scheduled for October next year.

BofA Should Pay $863 Million in Fannie Mae Case, U.S. Says

Bank of America Corp. should pay the maximum penalty of $863 million for selling defective loans to Fannie Mae and Freddie Mac, given the egregiousness of the fraud, U.S. prosecutors told a federal judge.

Bank of America’s Countrywide unit was found liable by a jury in Manhattan federal court last month for selling the government-sponsored entities thousands of defective loans in the first mortgage-fraud case brought by the U.S. to go to trial.

U.S. District Judge Jed Rakoff, who presided over the trial, told lawyers last month he would determine the amount of any penalty at a later date. Arguments in the matter are scheduled for Dec. 5.

The filing represents an increase over what the government said the gross losses were last month, when Assistant U.S. Attorney Pierre Armand asked Rakoff to impose a penalty of $848 million. He also offered a more lenient option, telling Rakoff he could fine Countrywide about $131 million, the estimated net losses to the two entities.

The U.S. last year joined the whistle-blower action against Bank of America filed by former Countrywide executive Edward O’Donnell.

The case is U.S. v. Countrywide Financial Corp., 12-cv-01422, U.S. District Court, Southern District of New York (Manhattan).


Bernanke Says Failing Bank Process to Cut Moral Hazard

Federal Reserve Chairman Ben S. Bernanke speaks about the 2008 financial crisis and banking regulations.

Former Bank of Israel Governor Stanley Fischer, Harvard University’s Kenneth Rogoff and former U.S. Treasury Secretary Lawrence Summers also spoke on the panel in Washington.

For the video, click here.

Fed’s Dudley Says Banker Pay Rules Could Help Curb Risk

Federal Reserve Bank of New York President William C. Dudley spoke in New York about the regulation of too-big-to-fail firms and the compensation of banker executives.

For the video, click here.

Bharara Says Budget Constraints May Derail Future Prosecutions

Manhattan U.S. Attorney Preet Bharara said a federal hiring freeze is threatening his office’s ability to carry out its job of prosecuting financial and other crimes.

Bharara made the remarks Nov. 8 at a Practising Law Institute event in New York, where he spoke on a panel.

“We’re OK now but at some point that will cease to be true,” he said.

Other governmental departments and offices have faced financial constraints as a result of federal budget cuts known as sequestration. Bharara said he’s not able to replace prosecutors who leave through normal attrition.

Also, in contrast to the SEC’s policy to seek admissions from defendants only in a subset of cases, Bharara said there is “a very strong presumption” that if his office pursues a civil case, it will require admissions of wrongdoing. Companies will often be willing to pay “huge sums” of money to settle a matter yet are ready to go to trial over an admission, he said.

“It’s not just the financial component, but the story needs to be told,” Bharara said. “We’re a little tired of recidivism.”

Bharara said prosecutors are looking more into holding institutions accountable for employees’ misconduct, both criminally and civilly.

Comings and Goings

SEC Names Gaunt Head of Muni Securities and Public Pensions Unit

The U.S. Securities and Exchange Commission appointed LeeAnn Ghazil Gaunt to be chief of the agency’s Enforcement Division’s Municipal Securities and Public Pensions Unit.

Gaunt oversaw the commission’s first “pay-to-play” enforcement action for in-kind political campaign contributions. The action occurred in September 2012, when the agency charged Goldman Sachs with violations related to contributions to the state treasurer of Massachusetts, the agency said in a statement.

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