Taxes, Money-Market Rules, Insider Trading: Compliance
Failure by Congress to act on the alternative minimum tax by year’s end will lead to “significant” delays in tax filing and a strain on taxpayers, said Steven Miller, the Internal Revenue Service’s acting commissioner.
The alternative minimum tax, or AMT, is part of the current fiscal negotiations in Congress. Leaving it untouched would immediately affect taxpayers, because its reach would be expanded for returns for tax year 2012.
Without action by Congress, the parallel tax system would affect 32.4 million households in 2013, up from 4 million in 2010, according to the Congressional Research Service. It would increase tax collections by $92 billion, shrinking or erasing many taxpayers’ expected refunds.
“Taxpayers and the IRS need to know what the tax provisions are for 2012, so that you know what you owe and we know how to process your return in January,” Miller said at a tax conference yesterday in Washington.
Also, the IRS’ computer systems have been programmed assuming that Congress will act this year to prevent the AMT’s expansion, leading to a delay in the agency’s ability to accept tax returns if lawmakers do nothing.
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SEC Study Says Money Fund Overhaul Wouldn’t Hurt Debt Issuers
The mutual fund industry’s argument that new money-market fund rules would hurt companies, states and cities that sell short-term debt has been contradicted in a new Securities and Exchange Commission study.
Should new rules shrink money funds, non-financial companies wouldn’t be significantly affected because they don’t lean heavily on the funds, while banks are well suited to find alternative funding, according to the report prepared by SEC staff for three commissioners. The report also said a reduction in demand by money funds wouldn’t necessarily cause a drop in demand for short-term debt.
“Given the supply of very short-term securities is likely to be limited to the same securities in which money funds currently invest, shifts in investor capital are likely to increase demand for these same assets, reducing the net effect on the short-term funding market,” the report said.
The SEC report, made public Dec. 5, undermines the case put forth by fund companies that a planned overhaul of money funds would hurt the U.S. economy by disrupting markets for short-term debt. Fund executives have been fighting efforts by regulators to impose changes the companies believe would destroy the attraction of the products that manage about $2.6 trillion and represent the largest collective buyer of commercial paper in the U.S.
Ianthe Zabel, a Washington-based spokeswoman for the Investment Company Institute, a trade association that has fought the proposed rules, declined to comment.
“These changes would destroy money-market funds, at great cost to investors, state and local governments and the economy,” ICI President Paul Schott Stevens said in written testimony before the Senate Banking Committee on June 21.
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EU to Consider Changes to Merger Rules to Prevent Tax Evasion
The European Commission will seek to review merger rules in 2013 in search of changes that could reduce tax evasion and fraud, according to an action plan released yesterday.
The Brussels-based commission also will urge nations to adopt common anti-abuse standards to prevent companies from using an “artificial arrangement” to avoid taxes. Other recommendations call for new efforts to identify tax havens and to urge other nations to meet EU standards.
“Around one trillion euros ($1.3 trillion) is lost to tax evasion and avoidance every year in the EU,” EU Tax Commissioner Algirdas Semeta said yesterday. The action plan, which will be presented to national finance ministers and the European Parliament, calls for “ways to address legal technicalities and loopholes which some companies exploit to avoid paying their fair share.”
Corporations including Starbucks Corp., (SBUX) Amazon.com Inc. (AMZN) and Google Inc. (GOOG) have come under attack from British lawmakers and protesters for using complex accounting methods to minimize tax liabilities in the U.K. while running large operations in the country.
Starbucks, the world’s biggest coffee-shop operator, has pledged to build public trust in the U.K. after lawmakers criticized the firm for not paying any corporation tax for the past three years. The firm is in talks with the U.K. Treasury over its tax affairs and will release details of the discussions this week, Starbucks said on Dec. 2 in an e-mailed statement.
EU Readies Law to Help Price-Fixing Victims Sue for Damages
European Union regulators may make it easier for cartel victims to sue the perpetrators under proposals to be unveiled in “the coming months,” Competition Commissioner Joaquin Almunia said yesterday.
The proposals will seek to “set up an EU-wide procedure for these compensation actions,” Almunia told a conference in Brussels.
Private damages lawsuits are rare in national courts across Europe. The European Commission, which yesterday levied record cartel fines of 1.47 billion euros ($1.9 billion) on producers of cathode-ray tubes for TVs and computer monitors, has championed such lawsuits as a way to compensate victims of illegal monopolies and cartels.
The damages legislation will also include rules on what documents claimants can obtain from EU regulators to bolster compensation lawsuits against cartel members, Almunia said.
Cartel victims taking legal action in national courts have asked for documents “that should have been protected because otherwise our leniency programs would not work,” Almunia said.
Possible rules on group lawsuits, or collective redress, “will come later,” he said.
SEC Urged to Update Fair Disclosure Rules After Warning Netflix
U.S. regulators, probing comments posted by Netflix Inc. (NFLX) Chief Executive Officer Reed Hastings on Facebook Inc.’s site, are being urged to reconsider disclosure rules created years before the advent of social media.
Netflix said it they may face a Securities and Exchange Commission civil suit after Hastings told Facebook followers in July that Netflix customers watched more than 1 billion hours of videos in June, according to a filing by Netflix yesterday. The company said that it didn’t issue an accompanying press release or make a filing with regulators.
Companies and executives are increasingly relying on sites such as Facebook and Twitter Inc. -- alongside news wires and other more traditional outlets -- to communicate with the public. It’s time for the SEC to update its policies to account for the widening role played by social media in helping companies be more transparent, said Stephen Diamond, associate professor of law at Santa Clara University.
The SEC adopted its fair disclosure regulations, known as Reg FD, in 2000 to inhibit companies from sharing sensitive information in a selective manner.
“The SEC staff believes that I gave you all ‘material’ investor information in my post and that we needed to instead release the June viewing fact ‘publicly,’” through a press release or a regulatory filing, Hastings wrote, addressing his customers, in yesterday’s SEC filing.
Jonathan Friedland, a spokesman for Los Gatos, California- based Netflix, said the company had no additional comment. Florence Harmon, a spokeswoman for the SEC, declined to comment.
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Big Lots Gets Subpoena From U.S. Attorney in CEO Stock Probe
Big Lots Inc. (BIG) said that Chief Executive Officer Steven Fishman is under investigation by the Justice Department over stock trades he made and that it received a grand jury subpoena from the Manhattan U.S. attorney requesting documents relating to the trades.
“We are fully cooperating with the U.S. attorney in connection with the subpoena,” the Columbus, Ohio-based discount retailer said Dec. 5 in a regulatory filing.
Big Lots said the Securities and Exchange Commission is also conducting an inquiry into the matter. While the company hasn’t received a document request from the SEC, it expects one, Charles Haubiel, Big Lots’ chief administrative officer, said in an interview. Manhattan U.S. Attorney Preet Bharara asked for information on Fishman’s trades over the past couple years, he said.
The inquiries come after the company, which has more than 1,400 U.S. stores, announced Dec. 4 that the 61-year-old Fishman, who took over in July 2005, would retire as soon as a replacement is found.
“Unequivocally, his retirement had nothing to do with this,” Haubiel said.
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Diamondback Capital to Shut as Investors Pull $520 Million
Diamondback Capital Management LLC, among the hedge funds raided by the FBI two years ago in the U.S. investigation of insider trading on Wall Street, is liquidating after an exodus of clients.
The fund received requests from investors to withdraw about $520 million, or 26 percent of its assets, for the end of the year, co-founders Richard Schimel and Lawrence Sapanski said yesterday in a client letter. The Stamford, Connecticut-based firm, which has 133 employees, plans to return most of clients’ cash next month.
The redemptions left Diamondback with $1.5 billion in assets, down from $5.8 billion in November 2010, when its offices were searched by the Federal Bureau of Investigation. Three other hedge funds that were also raided at the time, including Level Global Investors LP, have shuttered. Former Diamondback portfolio manager Todd Newman is on trial in Manhattan on charges that he was part of a “criminal club” of friends and co-workers who made trades based on illegal tips.
“It’s difficult for anyone to survive once they’re connected with the insider-trading probe,” said Ronen Schwartzman, founder of Ten Capital Advisors LLC, a New York- based firm that advises clients on investing in hedge funds.
Steve Bruce, a spokesman for Diamondback, declined to comment beyond the letter.
Diamondback, which has 22 investment teams, agreed this year to pay more than $9 million to resolve a Securities and Exchange Commission lawsuit over trades made in 2008 and 2009 by Newman and Jesse Tortora, a former analyst who worked with Newman. Tortora has pleaded guilty to securities fraud and is cooperating with the government.
The office of Manhattan U.S. Attorney Preet Bharara agreed not to prosecute Diamondback for the actions of Newman and Tortora and said the co-founders weren’t aware of their misconduct.
A third Diamondback employee, portfolio manager Anthony Scolaro, pleaded guilty to conspiracy and securities fraud in November 2010. His cooperation with the government’s insider- trading probe led to the raid on Diamondback.
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Stanford’s Antiguan, U.S. Receivers Reach Cooperation Accord
R. Allen Stanford’s Antiguan liquidators have agreed to cooperate with his U.S. receiver and federal prosecutors to jointly control the convicted financier’s remaining assets, the liquidators said.
The receiver and liquidators have been battling for control of Stanford’s assets since his companies were seized by U.S. regulators in February 2009.
The agreement announced Dec. 5 by liquidators Hugh Dickson and Marcus Wide, and independently confirmed by Kevin Sadler, a lawyer for the court-appointed U.S. receiver, clears one of the last obstacles to compensating victims of Stanford’s $7 billion investment fraud scheme.
An estimated 20,000 investors were defrauded of more than $7 billion through a Ponzi scheme Stanford created around bogus certificates of deposit sold by Antigua-based Stanford International Bank Ltd.
Stanford, 63, was convicted in March of leading the fraud and stealing more than $2 billion to finance a lavish personal lifestyle and an array of money-losing private ventures ranging from Caribbean resort developments to cricket tournaments.
He’s serving a 110-year sentence in a federal prison in Florida as he appeals his conviction and sentence.
Ralph Janvey was appointed receiver by a federal judge in Dallas to marshal Stanford’s assets and wind down his companies in the U.S. and abroad, while London-based Wide & Dickson were appointed by an Antiguan court to do the same.
The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas). The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston).
In the Courts
Level Global Co-Founder, SAC Fund Manager Ruled Co-Conspirators
Level Global Investors LP co-founder David Ganek and SAC Capital Advisors LP fund manager Michael Steinberg were ruled to be co-conspirators in an insider-trading scheme involving fund managers Anthony Chiasson and Todd Newman.
U.S. District Judge Richard Sullivan, who is presiding over the criminal trial of Chiasson, who co-founded Level Global with Ganek, and Newman, a former portfolio manager at Diamondback Capital Management LLC, made the rulings yesterday in Manhattan federal court. The decision means prosecutors can present the jury with evidence involving both Ganek and Steinberg, neither of whom has been charged with a crime.
“I’m going to allow the Ganek evidence in,” Sullivan told Greg Morvillo, a lawyer for Chiasson, who had argued it shouldn’t be presented to the jury. He also allowed e-mails involving Steinberg, over objections from Newman’s attorney, Steve Fishbein.
The U.S. says Chiasson and Newman made trades in stocks including Dell Inc. (DELL) and Nvidia Corp. based on illegal tips from company insiders which were provided to the fund managers by analysts who worked for the defendants. They have pleaded not guilty to securities fraud and conspiracy. Six men have pleaded guilty to roles in the scheme.
Ganek started Level Global in 2003 with Chiasson, an analyst he met at SAC Capital.
Steinberg, 40, who was put on leave in September after it emerged he was an unindicted co-conspirator, has worked at SAC Capital for 15 years, the longest tenure of the six people who have been tied to the insider-trading probe while employed at the $14 billion hedge fund.
Jonathan Gasthalter, a spokesman for Stamford, Connecticut- based SAC, declined to comment on yesterday’s ruling.
Ganek’s lawyer, John Carroll, said in a statement that there’s no evidence Ganek knew about any inside information.
Barry Berke, a lawyer for Steinberg, didn’t immediately return a call seeking comment about the judge’s finding.
The case is U.S. v. Newman, 12-00121, U.S. District Court, Southern District of New York (Manhattan).
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Facebook IPO Judge Orders Consolidation of Investor Suits
A judge overseeing investor litigation over Facebook Inc. (FB)’s initial public offering in May ordered three groups of suits consolidated and named lead counsel to represent the plaintiffs.
U.S. District Judge Robert Sweet yesterday ordered consolidation of suits claiming Facebook and its officers and directors violated securities laws, and of those claiming Nasdaq OMX Group Inc. (NDAQ) violated securities laws and mishandled the first day of public trading in Facebook shares.
Sweet named the law firms Bernstein Litowitz Berger & Grossman LLP and Labaton Sucharow LLP as co-lead counsel representing investors in the Facebook securities actions. Entwistle & Cappucci LLP was appointed lead counsel for cases claiming securities violations against Nasdaq. Sweet named Finkelstein Thompson LLP and Lovell Stewart Halebian Jacobson LLP to lead the suits alleging negligence against Nasdaq.
Sweet said he will decide whether to consolidate a separate group of derivative suits by Facebook shareholders on behalf of the company after a hearing on Dec. 12.
Investors sued Facebook, the operator of the world’s largest social network, after its stock dropped in the wake of the IPO.
The investors claim the Menlo Park, California-based company failed to disclose discussions it had with underwriters’ analysts about advertising revenue.
Suits against Nasdaq claim it caused technical and other trading-related errors that created market uncertainty and caused investor losses.
The case is In Re: Facebook Inc. IPO Securities and Derivative Litigation, MDL 2389, U.S. Judicial Panel on Multidistrict Litigation (Washington).
Rajat Gupta Insider Appeal to Be Heard as Early as April 1
Rajat Gupta’s appeal of his conviction for passing inside tips to Galleon Group LLC co-founder Raj Rajaratnam will be heard as soon as April 1, according to the court that’s considering the case.
The U.S. Court of Appeals in Manhattan yesterday said it will expedite Gupta’s appeal, ordering that briefs be filed by March 29 and setting oral arguments for as soon as the first week of April.
In a hearing Dec. 4, a two-judge panel of the appeals court ruled that Gupta, 64, a former Goldman Sachs Group Inc. (GS) director, can remain free on $10 million bond while it considers the case. The decision overruled an order by U.S. District Judge Jed Rakoff that Gupta surrender to begin serving his two-year prison sentence on Jan. 8.
Gupta was convicted by a jury in June of one count of conspiracy and three counts of securities fraud. He was accused of passing illegal information about New York-based Goldman Sachs to Rajaratnam, his friend and business partner.
In yesterday’s order, U.S. Circuit Judges Jose Cabranes and Reena Raggi, who allowed Gupta to remain free pending appeal three days ago, directed that any issues about his release be directed to them.
U.S. Circuit Judge Susan L. Carney, who was also assigned to the panel, removed herself from consideration of the case, according to yesterday’s order, which didn’t provide a reason.
The case is U.S. v. Gupta, 12-4448, U.S. Court of Appeals for the Second Circuit (Manhattan).
Money-Laundering Reporting Requirement Doesn’t Violate Rights
Requiring lawyers to report suspicions that clients may be involved in money laundering doesn’t violate human rights standards, a European court said.
A French lawyer lost his appeal yesterday against the national rule as the European Court of Human Rights found the requirement doesn’t infringe lawyer-client confidentiality.
The requirement was adopted in 2007 to ensure French lawyers comply with European Union anti-money-laundering directives. The rule has safeguards such as requiring the report to be filed to a bar association and restricting the obligation to certain services, including property transactions.
The rule doesn’t “represent a disproportionate interference with lawyers’ professional privilege,” the Strasbourg, France-based court found, according to a statement on the decision.
Toll Officials Settle Investor Lawsuits for $16.2 Million
Toll Brothers Inc. (TOL) officials agreed to a $16.2 million settlement of claims that they misled shareholders about the company’s prospects while selling stock worth about $615 million, according to court filings.
The accord resolves investor claims that executives of the largest U.S. luxury-home builder wrongfully issued bullish forecasts in the face of falling demand in fiscal 2006 and 2007, according to a filing yesterday in Delaware Chancery Court. The investors also alleged company directors, including co-founders Bruce Toll and Robert Toll, sold shares at inflated prices because of the forecasts, according to a 2008 complaint.
Insurers covering Toll Brothers directors will pay $9.8 million of the settlement while the remaining $6.4 million will be paid personally by individual defendants, according to the filing. The money will be returned to Toll Brothers’ coffers rather than paid out to shareholders.
The settlement “confers substantial benefits upon Toll Brothers and its current stockholders,” the investors’ lawyers said in the filing.
Kira Sterling, a spokeswoman for the Horsham, Pennsylvania- based builder, didn’t respond to e-mails seeking comment on the settlement.
The settlement resolves three cases--one in state court in Delaware and two in federal court in Philadelphia--according to the Delaware filing.
Toll Brothers officials said in the filing outlining the settlement that board members weren’t admitting to any wrongdoing as part of the accord.
The defendants agreed to the settlement to “permit the operation of Toll Brothers without further distraction and diversion of its directors and executive personnel” by the litigation, according to the filing.
The Delaware case is Pfeiffer v. Toll, 4140, Delaware Chancery Court (Wilmington).
Conferences and Interviews
Quantitative Models Require More Discipline, SEC’s Kurtas Says
Investment and trading firms must impose more discipline developing quantitative models to avoid mishaps that can harm investors, according to a Securities and Exchange Commission official.
Reliance on mathematical models to make trading decisions requires firms to ensure that automated systems operate as planned and are properly tested, Erozan Kurtas, an assistant director in the quantitative analytics unit within the SEC’s Office of Compliance Inspections and Examinations, said at a conference about high-frequency trading Dec. 5.
The SEC is emphasizing the responsibilities of firms using automated strategies to invest or trade in the wake of events such as Knight Capital Group Inc. (KCG)’s technology mistake that cost the firm more than $450 million in August, and a coding flaw that led to $217 million in client losses at a unit of Axa SA a few years earlier. The Axa case was the first targeting an error in a quantitative investment model, according to the commission.
“If we don’t sort this out, we’re going to have lots of Axas or Knights,” Kurtas said.
The OCIE unit, formed earlier this year, uses quantitative analytics to understand how companies manage risks posed by technology and mathematical models, Kurtas said. OCIE administers the SEC’s national examination program of companies such as investment advisers, brokers and exchanges.
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Denmark’s FSA Tells Banks to Ignore Basel Liquidity Rules
Denmark’s financial regulator is telling banks to ignore global standards set by the Basel Committee on Banking Supervision and give mortgage bonds the top liquidity designation reserved for sovereign assets.
The Financial Supervisory Authority is disregarding Basel’s definition of easy-to-sell assets even as it requires banks to show they comply with liquidity coverage standards envisaged by the regulator. The Copenhagen-based watchdog will expand the pool of reporting banks “in the near future” from Denmark’s five largest lenders to include institutions with working capital that exceeds 12 billion kroner ($2 billion).
“We think, based on objective criteria, that a large part of Danish covered bonds are as liquid as government bonds,” Kristian Vie Madsen, deputy director at the Copenhagen-based agency, said in an interview.
The FSA has backed Denmark’s banks in lobbying the European Commission for equal treatment of mortgage bonds after the Basel Committee proposed limiting the asset class to 40 percent of easy-to-sell holdings. Regulators want lenders to hold more liquid assets to help them withstand market disruptions.
Denmark has fought Basel’s definition of liquid assets as Europe’s debt crisis tests assumptions that sovereign bonds are safer than other securities. The government in Copenhagen, the central bank and commercial lenders have argued that Basel’s liquidity rules would lay the Danish market to waste. Denmark’s public debt is less than a third the size of its $495 billion mortgage market, meaning there aren’t enough sovereign bonds to satisfy banks’ liquidity needs.
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