TARP Fraud Trial, Credit Suisse, Discover: Compliance

Ex-Jefferies & Co. trader Jesse Litvak’s former customers told a jury during his fraud trial in Connecticut that lies and misrepresentations are a common part of the give-and-take of bond trading.

Litvak, 39, is on trial in New Haven federal court accused of defrauding investors of $2 million by lying on trades of mortgage-backed securities. He’s the only person charged with fraud in connection with an initiative to distribute more than $20 billion from the Troubled Asset Relief Program, which the U.S. government created during the 2008 credit crisis to help bail out banks.

While the securities rebounded after the financial crisis, markets remained illiquid. TARP used bailout funds to spur investment in mortgage-backed securities issued before 2009 that remained on the books of financial institutions.

Litvak’s alleged victims include private investment funds and six funds established by the Treasury Department in 2009 as part of its response to the financial crisis, prosecutors have said.

The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).

Compliance Action

Bitcoin Holders Resigned to Losses as Japan Probes Mt. Gox

Japanese authorities began investigating Mt. Gox, the Tokyo-based Bitcoin exchange that shut down this week, amid calls for regulation of the digital currency as customers face losses.

The Financial Services Agency, Finance Ministry and police are examining the closing of Mt. Gox, Chief Cabinet Secretary Yoshihide Suga said today. Officials from the FSA, the ministry and the Bank of Japan said they didn’t have responsibility for overseeing Bitcoin. Mt. Gox has been subpoenaed by U.S. prosecutors, the Wall Street Journal reported.

The news triggered renewed calls for more security and consumer protection from U.S. officials. Democratic Party of Japan lawmaker Tsutomu Okubo called on his government to rectify the lack of regulation.

Bank of Japan board member Koji Ishida said he expects the government to make a proper decision on Bitcoin rules, including whether to embark on regulation, after the digital currency faced problems including extreme price volatility, he told reporters today.

The Tokyo Metropolitan Police Department is in talks with Mt. Gox customers after it received inquiries from them.

Discover Faces CFPB Investigation Over Student-Lending Practices

Discover Financial Services said the U.S. Consumer Financial Protection Bureau is probing the company’s student loan-servicing practices.

The CFPB, through a civil investigative demand, is seeking documents and information, Riverwoods, Illinois-based Discover said yesterday in its annual regulatory filing with the Securities and Exchange Commission. The lender could face penalties and customer restitution and be forced to change business practices if the CFPB or the Federal Deposit Insurance Corp. bring an enforcement action, according to the filing.


Credit Suisse Said to Face SEC Probe Over Accounting Moves

U.S. regulators are investigating whether Credit Suisse Group AG improperly shifted money in its private banking unit to obscure a drop in asset growth amid a U.S. probe of tax evasion at Swiss banks, a person familiar with the matter said.

The Securities and Exchange Commission began investigating the conduct last year, said the person, who asked not to be identified because the matter isn’t public. The bank is also conducting an internal investigation, according to a Senate report released yesterday.

The Senate Permanent Subcommittee on Investigations will convene a hearing today on Capitol Hill regarding tax evasion.

Credit Suisse touted the amount of “net new assets,” or net cash inflows, to its private banking business as a key gauge of the lender’s ability to generate earnings, the Senate Permanent Subcommittee on Investigations said in the report.

The committee’s suggestion that “multiple management and accounting officials at Credit Suisse did not follow the bank’s policies regarding net new assets recognition is not accurate,” according to the written testimony of Chief Executive Officer Brady Dougan to be delivered at the committee hearing today. Top management weren’t aware of the fostering of tax evasion by bankers based in Switzerland, it said.

Calvin Mitchell, a spokesman for Credit Suisse, declined to comment on the investigation. Deborah Primiano, a spokeswoman for KPMG LLP, the bank’s auditor, declined to comment immediately.

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Fidelity Urges SEC Not to Adopt Wider Ticks as Small-Cap Fix

Fidelity Investments said the U.S. Securities and Exchange Commission shouldn’t reverse its decimal pricing policy or engage in test programs to widen tick size for small companies.

Wider tick sizes “will increase trading costs for retail investors without improving smaller company access to the public capital markets or the liquidity of their securities,” Fidelity wrote on Feb. 21 in a comment letter to the SEC.

Fidelity noted that while the JOBS Act asks the SEC to study the impact of decimalization on smaller companies, it doesn’t require the agency to change the tick size for such securities.

Legislation in Congress would require securities regulators to test widening the minimum price increment of smaller stocks. Along with Fidelity, Pershing Square Capital, Travelers Cos., D.E. Shaw and TD Ameritrade oppose the proposal.

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