Debt Rule, Bitcoin Clarity, Analyst Probe: Compliance

Lenders are poised to win concessions from central bank chiefs and global regulators over a debt limit they criticized as a blunt instrument that would penalize low-risk activities and curtail lending.

A revised leverage-ratio plan is set to be laxer than a draft published last year by the Basel Committee on Banking Supervision, said a person familiar with the scope of a Jan. 12 meeting of the group’s oversight body at which the measure will be discussed.

Leverage ratios are designed to curb banks’ reliance on debt by setting a minimum standard for how much capital they must hold as a percentage of all assets on their books. A quarter of large global lenders would have failed to meet the draft version of the leverage limit had it been in force at the end of 2012, according to data published by the committee in September.

Some supervisors have called for greater use of leverage ratios instead of standard Basel capital requirements, which are measured as a ratio of banks’ equity against risk-weighted assets, because banks are inconsistent in the way they calculate these standards.

The draft leverage rule published last year would have required banks to hold capital equivalent to at least 3 percent of their assets, without any possibility to take into account the riskiness of their investments.

The Basel committee declined to comment on the leverage ratio talks.

The leverage measure is the main item on the agenda for the Jan. 12 meeting, according to people familiar with the talks who asked not to be identified because the discussions are private.

Under the published Basel timetable, banks will be expected to publicly disclose how well they measure up to the standard from 2015, with the rule to become a binding minimum standard in 2018.

Compliance Policy

Bitcoin Tax Rules Needed for Clarity, Taxpayer Advocate Says

The U.S. Internal Revenue Service should give taxpayers clear rules on how it will handle transactions involving Bitcoin and other digital currencies, Nina Olson, the National Taxpayer Advocate, said Jan. 10.

Spending Bitcoins to purchase goods may trigger capital gains and losses or ordinary income and losses, which have different tax rates, Olson said in her annual report to Congress.

“It is the government’s responsibility to inform the public about the rules they are required to follow,” she wrote. “The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”

Olson, who runs an independent office within the IRS, listed digital currency as one of the 25 most serious issues encountered by taxpayers.

Atop Olson’s list was the absence of a clear set of taxpayer rights and the decline in IRS service and enforcement stemming from budget cuts, issues on which she has repeatedly urged change.

Introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, Bitcoin is the most prominent of a group of virtual currencies -- money that exists mainly as a string of code -- that have no central issuing authority.

Compliance Action

Ex-Trader Faces Charges in Biggest U.K. Insider-Trades Probe

Julian Rifat, a former trader at Moore Capital Management LLC, will be charged as soon as this month in the U.K.’s biggest insider-trading case, according to two people with knowledge of the case.

Rifat, who was arrested almost four years ago, will be charged by the Financial Conduct Authority no later than early next month, said one of the people, who asked not to be identified because the matter isn’t public. His lawyer was told by the regulator Jan. 9 that he will be charged soon, the other person said. A hearing for Rifat at a London criminal court scheduled for Jan. 10 was canceled.

The U.K. authority stepped up its efforts to prosecute insider trading in the wake of the financial crisis. Rifat will be the ninth person to be charged in the case, known as Operation Tabernula. He was an execution trader in the London office of Moore Capital, a New York-based firm that oversees about $12 billion.

Rifat was taken into custody in 2010 and has been under investigation since. His lawyer didn’t immediately respond to a request for comment.

Eight other men have been charged in the probe.

At a private hearing in November over Rifat’s assets, a judge told the FCA to decide whether it was going to charge Rifat by Jan. 10, according to one of the people.


Ex-SAC Trader Says He Feared Losing Job Over Drug Trial News

Mathew Martoma’s former SAC Capital Advisors LP trader testified he came to work on July 29, 2008, thinking he and his boss might lose their jobs because of losses he thought had occurred in their portfolio.

The former trader, Timothy Jandovitz, who was the first witness called by prosecutors in Martoma’s insider-trading trial on Jan. 11, told jurors he believed that bad news about a clinical drug trial had caused losses in the fund managed by Martoma “north of $100 million,” and he feared for the security of his job as well as Martoma’s.

What Jandovitz didn’t know was that SAC had liquidated a $700 million position in shares of Wyeth and Elan Corp. the week before the announcement, according to prosecutors. SAC gained $276 million from trades based on the illegal tips about tests of the Alzheimer’s disease treatment, said prosecutors, who have called it the most lucrative insider-trading scheme in history.

Jandovitz said Martoma later told him that SAC founder and owner Steve Cohen had directed Martoma not to tell him about the decision to sell the stock.

Prosecutors claim Martoma used inside information from two doctors supervising the drug trial to allow SAC to sell its position before the bad news was announced publicly. If convicted of securities fraud, he faces as long as 20 years in prison.

Jandovitz’s testimony came after lawyers for both sides gave their opening statements.

Assistant U.S. Attorney Arlo Devlin-Brown told jurors that Martoma “corrupted” a doctor overseeing the trial in order to get inside information and trade on the illegal tips.

Martoma “sought out an illegal edge,” Devlin-Brown said. “Ultimately, this case is not about scientific testing and it’s not about trading. The case is about cheating.”

Richard Strassberg, an attorney for Martoma, told jurors his client is “an innocent man. Mathew Martoma did not commit these charges.”

“There were many, many independent reasons to sell Elan and Wyeth stock in July 2008,” Strassberg said about SAC Capital’s decision to liquidate its holdings in the two stocks. “Inside information was not one of them.”

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

Infinium Capital Accused of Fraud in Ex-Workers’ Lawsuit

Infinium Capital Management LLC, a Chicago-based high-frequency trading firm, was sued by former employees who claim they were tricked into swapping loans to a company affiliate for equity, causing them to lose $4 million.

The defendants, including six of the company’s executives, failed to disclose to the employees Infinium’s true financial condition, including executive redemption obligations that wiped out the 31 workers’ investments, according to a complaint filed in federal court in Chicago on Jan. 7.

On its website, Infinium says it trades and makes markets electronically, on exchange floors and over the counter, 23 1/2 hours a day, six days a week.

Tabb said Infinium was a top-25 high-frequency firm.

Firm President Mark Palchak, who isn’t a defendant in the case, didn’t immediately reply to a telephone message seeking comment on the former workers’ allegations. There was no reply to an e-mailed request for comment sent to Infinium’s general mailbox.

The workers accuse the businesses and the individual defendants of securities fraud, breach of fiduciary duty and common law fraud. They seek return of their lost money, plus interest and punitive damages.

Earnings by high-frequency outfits from stock trading fell to about $1 billion in 2012 from about $5 billion in 2009, according to data from Rosenblatt Securities Inc.

The case is Bojan v. Infinium Capital Holdings LLC, 14-cv-00098, U.S. District Court, Northern District of Illinois (Chicago).


Schneiderman Says BlackRock Cooperative in Probe

New York Attorney General Eric Schneiderman talked about the state’s investigation of BlackRock Inc.’s analyst survey program.

Schneiderman, who spoke with Stephanie Ruhle and Adam Johnson on Bloomberg Television’s “In the Loop,” also discussed recent probes of JPMorgan Chase & Co. Robert Wolf, chief executive officer of 32 Advisors LLC, also spoke.

For the video, click here.

Separately, in a Jan. 10 interview with on Bloomberg Television’s “In the Loop with Betty Liu,” Schneiderman said the probe that led to his settlement with BlackRock over analyst surveys is now looking at brokerage firms and individuals who provided nonpublic information that could have been used to trade.

For more, click here.

Comings and Goings

German Pick at ECB Means Power Over Banks as Rate Sway Slips

In sending Sabine Lautenschlaeger to the board of the European Central Bank, Germany could be gaining power over the region’s lenders at the expense of its monetary-policy clout.

Lautenschlaeger, the only candidate to succeed Joerg Asmussen after he quit the ECB for the German government, will testify today before European Parliament lawmakers already keen to raise the number of women on the board from zero to one. A fast-tracked procedure could see her shift across Frankfurt to the ECB from her current job as vice president and head of supervision at the Bundesbank by the end of the month.

That would change the tone of Germany’s voice at the ECB, as the 49-year-old’s profile is that of an experienced scrutinizer of bank balance sheets, not an economics heavyweight. It means the nation, which has been overridden more than once on interest rates and measures to quell the debt crisis, could instead push its agenda for redesigning Europe’s financial system to prevent a repeat of the turmoil since 2007.

As Europe builds a banking union, Germany has fought for nations to retain more control than foreseen in plans presented by the European Commission and backed by the ECB. Finance ministers reached a deal last month on a blueprint to create a single system for handling crisis-hit lenders by acceding to German demands.

Lautenschlaeger, who declined to comment, has backed the German position as a pragmatic way forward. The European Parliament and Greece, which holds the rotating presidency of the European Union, started negotiations on the final version of the rules this month, amid warnings from the assembly that the approach agreed on by national governments is too cumbersome to work.

Lautenschlaeger has almost two decades of experience overseeing German banks. Her first job, after completing legal training and a stint as an intern in Chicago, was at the Federal Banking Supervisory Office, the predecessor of Bafin, in 1995.

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