Bloomberg News

Lehman-Rebuke, Rules Study, Greek Rescue Agency: Compliance

June 06, 2011

(Updates with Goldman Sachs and European Ombudsman in Compliance Action, JPMorgan in Courts and Cable in Interviews/Speeches.)

June 6 (Bloomberg) -- U.S. Securities and Exchange Commission investigators may issue a public rebuke of Lehman Brothers Holdings Inc. and its former executives instead of suing them for actions that led to the firm’s 2008 failure, three people with direct knowledge of the matter said.

SEC enforcement lawyers, who have struggled for more than two years to find definitive evidence that the company and its leaders violated securities laws, are concerned that a legal attack on Lehman’s accounting practices would likely fail, the people said, speaking on condition of anonymity because the deliberations aren’t public.

Instead, the enforcement staff may recommend that the agency take the rare step of publishing a so-called report of investigation, also known as a 21(a) report. The commission would have to vote on whether to issue a report and it’s still possible that the SEC may decide to bring legal claims in court, the people said. The 21(a) reports, which lay out allegations of misconduct without imposing penalties, have only been issued six times in the past decade, according to the SEC’s website.

Kimberly Macleod, a spokesman for Lehman, declined to comment. Patricia Hynes, an attorney at Allen & Overy LLP for Lehman’s ex-chief executive officer Richard Fuld, and Robert Cleary, a lawyer at Proskauer Rose LLP for former finance chief Erin Callan, didn’t respond to e-mails. Florence Harmon, an SEC spokesman, declined to comment.

For more, click here.

For a video report, click here.

Compliance Policy

Rules Study Backed by Republicans ‘Deeply Flawed,’ Sunstein Says

A U.S. Small Business Administration study estimating regulations cost $1.75 trillion is “deeply flawed,” the Obama administration’s rules chief said, as Republicans said new rules are hurting job growth.

The study by Nicole V. Crain and W. Mark Crain of Lafayette College in Easton, Pennsylvania, has “become a bit of an urban legend,” Cass Sunstein, director of the White House Office of Information and Regulatory Affairs, testified June 3 to a congressional hearing.

Sunstein said the Office of Management and Budget reached a different conclusion, finding that rules such as environmental or worker safety protections often have a net benefit for the economy.

Republican lawmakers said a rush of regulations from the Obama administration is to blame for a weak U.S. job market, and cited the study’s finding to support their complaint. Unemployment unexpectedly rose to 9.1 percent in May from 9 percent in April, the Labor Department reported June 3.

The administration said May 26 that 30 U.S. agencies are seeking to repeal or modify regulations in an effort to reduce reporting requirements and save businesses and individuals billions of dollars in compliance costs.

Republicans have said that has so far failed to slow the compliance process.

For more, click here.

Greece to Get Next Aid Payment as Officials Plan New Bailout

European Union and International Monetary Fund officials agreed to pay the next installment to Greece under last year’s 110 billion-euro ($161 billion) bailout, paving the way for an upgraded aid package that includes a “voluntary” role for investors.

Greek Prime Minister George Papandreou agreed to set up an agency to manage an accelerated asset-sale effort and will make “significant” cuts in public-sector employment, according to a statement released June 3 in Athens.

The agreements capped a week when Greece’s fiscal crisis worsened enough for Moody’s Investors Service to raise the probability of a default to 50 percent. Bonds gained June 3 on the prospect of a new aid plan, with the yield on the country’s two-year notes falling 146 basis points to 23.1 percent.

Consumer Bureau to ‘Nudge’ Americans Toward Rational Decisions

When the U.S. Consumer Financial Protection Bureau officially begins work next month, it will set in motion what will become the largest field test to date of a set of ideas known as behavioral economics.

The Harvard University law professor in charge of setting up the bureau, Elizabeth Warren, used tenets of behavioral economics to propose creating the agency.

The consumer bureau will write and enforce rules for a broad array of credit products, including mortgages, credit cards and payday loans. Lenders are likely to have to alter their products, marketing and business models to comply.

As a result, business groups are beginning to study behavioral economics. The field emerged in the last two decades in reaction to the prevailing assumption that consumers are fundamentally rational, making decisions that maximize their economic interests. Behavioral economics, influenced by psychology, asserts that consumers are often irrational or unable to make the optimal decisions. Some behaviorists say patterns of irrational decision-making can be observed empirically, and policies designed to help consumers make more economically rational choices.

Critics contend that whatever the value of behavioral insights in economics, it may be unwise to apply its lessons to law, policy and regulation. Concerns have been raised by Republicans about government paternalism and laws that intervene too much in financial decisions.

For more, click here.

Compliance Action

Goldman Sachs Criminal Probe May Use Powerful New York Law

The criminal investigation of Goldman Sachs Group Inc. by the Manhattan District Attorney’s Office has at its disposal a 90-year-old New York law that makes it easier for state prosecutors to bring charges than their federal counterparts.

District Attorney Cyrus Vance Jr. subpoenaed Goldman Sachs, the fifth-biggest U.S. bank by assets, for records on its activities leading into the credit crisis, two people familiar with the matter said. Vance may bring charges under the state’s Martin Act, which lawyers call a potent tool for New York prosecutors probing investment frauds, Ponzi schemes and other white-collar crime.

To prove securities fraud in federal court, U.S. prosecutors must show that a defendant intended to defraud victims and that the investors relied on misstatements or omissions. Under the Martin Act, New York prosecutors aren’t required to prove intent, said Michael Perino, a law professor at St. John’s University in New York.

Vance’s subpoena of New York-based Goldman Sachs related to the U.S. Senate’s Permanent Subcommittee on Investigations report on Wall Street’s role in the collapse of the financial markets, said the people, who spoke on condition of anonymity because the inquiry isn’t public. Goldman Sachs has stated that the testimony given by its executives before the committee was “truthful and accurate.”

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European Ombudsman Closes Probe into Bank Watchdog

The European Ombudsman closed a transparency probe into the Committee of European Banking Supervisors after its successor, the European Banking Authority, published a list of participants at a meeting on bonuses.

A Swedish trade union representative made the complaint after he was denied a participant list following the meeting last year.

The ombudsman investigates complaints into European Union institutions. The EBA took over from CEBS at the start of this year.

America Movil Faces New Competition Rules, De Swaan Says

America Movil SAB, controlled by billionaire Carlos Slim, will face new rules as soon as this month that could force it to cut prices as Mexico’s dominant phone carrier, the head of the country’s regulator said.

The Federal Telecommunications Commission plans around June 15 to apply restrictions to America Movil’s fixed-line unit in the market for leasing lines to rivals, Mony de Swaan, the agency’s president, said in an interview at the Bloomberg News Mexico City bureau June 2. Next will be regulations for its mobile-phone unit, which could affect consumer prices, he said.

The new rules will be based on 2009 and 2010 findings by Mexico’s antitrust agency that the company is dominant in different market segments, allowing de Swaan’s agency to single out the carrier with specific regulations. America Movil is challenging those antitrust rulings.

America Movil, based in Mexico City, had no immediate comment on the agency’s plans, said an official who can’t be named under company policy.

America Movil has 70 percent of Mexico’s wireless subscribers. Its fixed-line unit, Telefonos de Mexico SAB, known as Telmex, has 80 percent of the country’s land lines and about 70 percent of its Internet connections.

De Swaan is pushing for actions he says will level the playing field between America Movil and its rivals.

For more, click here.

Cohen’s SAC Said to Receive $250 Million in Deposits in 2011

Investors have put $250 million into the main hedge fund of Steve Cohen’s SAC Capital Management LLC this year, even as prosecutors investigate accounts tied to two former portfolio managers who pleaded guilty to insider trading, according to two people with knowledge of the matter.

The fund, which returned 9 percent this year through May, has attracted a net $1.5 billion since mid-2010. The new commitments don’t include money put in by Cohen and employees of the $14 billion firm, said the people, who asked not to be identified because the information is private.

Jonathan Gasthalter, a spokesman for the Stamford, Connecticut-based firm, declined to comment on the deposits.

SAC has come under scrutiny in an insider-trading probe that has ensnared hedge funds, corporate executives and so- called expert networking firms. At other funds, government scrutiny has lead to large redemptions or closures.

For more, click here.

Courts

JPMorgan Seeks Dismissal of $6.4 Billion Madoff Trustee Suit

JPMorgan Chase & Co. sought to dismiss a $6.4 billion lawsuit by the trustee liquidating Bernard Madoff’s firm, saying he doesn’t have the right to sue the bank on behalf of the con man’s investors.

Trustee Irving Picard sued JPMorgan in U.S. Bankruptcy court in Manhattan in December, alleging it ignored signs of fraud as billions of dollars flowed from Madoff’s account at the bank to investors. JPMorgan was Madoff’s primary banker. The lawsuit seeks $1 billion in fees and transfers, and $5.4 billion in damages, alleging that JPMorgan defrauded federal regulators and violated banking law.

JPMorgan, the second-biggest U.S. bank, asked in a filing June 3 that a U.S. District Court judge dismiss the suit. The trustee’s “complaint never alleges facts showing that anyone at JPMorgan knew that Madoff was a crook,” the bank said in the filing.

Picard was hired to liquidate Madoff’s firm and doesn’t have the legal right to sue on behalf of investors in the $17 billion Ponzi scheme, New York-based JPMorgan said.

Amanda Remus, a Picard spokeswoman, didn’t immediately return a call to her office after regular business hours.

The bank’s case is one of at least three that has been moved from bankruptcy court to district court, in a challenge to Picard’s authority.

The appeal is Picard v. JPMorgan Chase & Co., 1:11-cv- 00913, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

Shanghai’s Fang Says Foreign Stocks Board ‘Very Close’

Fang Xinghai, director general of Shanghai’s financial services office, talked about China’s plan to start a board for the listing of overseas companies.

Shanghai Stock Exchange officials are seeking to lure multinational companies as part of a drive to build the city into a global financial center by 2020. Fang, who also discussed the yuan, spoke with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”

For the video, click here.

Tarullo Says Fed Should Oppose Mergers That Increase Risk

Federal Reserve Governor Daniel Tarullo said regulators should use capital surcharges to discourage mergers by large banks that would increase risk without yielding significant public benefits.

Tarullo signaled that the Fed aims to use tougher capital standards correlated to the size of a firm to curb risks posed by “systemically important financial institutions,” or “SIFIs.” The new rules would mesh with international standards now under discussion, he said June 3 in a speech in Washington.

“There is little evidence that the size, complexity, and reach of some of today’s SIFIs are necessary in order to realize achievable economies of scale,” said Tarullo, the Fed governor responsible for supervision and regulation. “The regulatory structure for SIFIs should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant.”

The world’s largest banks face one of the biggest revisions of capital, liquidity and risk management requirements by regulators responding to public opposition to government bailouts. The Dodd-Frank Act in the U.S. mandates that the Fed establish heightened standards for banks with assets over $50 billion. In addition, global regulators are hammering out accords in Basel, Switzerland, that would more than double the minimum common equity requirement for banks.

The Fed is developing a metric for banks with more than $50 billion in assets that gradually increases capital requirements according to measures of systemic importance including size, Tarullo said.

For more, click here.

Adviser Fees Drive Takeovers Like Cadbury, Says U.K.’s Cable

U.K. Business Secretary Vince Cable attacked a corporate culture that he said leads to takeovers driven by the desire of advisers to earn fees rather than by real prospects of increasing company value.

Cable made the remarks at a conference of the GMB union in Brighton on England’s south coast.

Last year’s takeover of Cadbury Plc by Kraft Foods Inc. is an example of the kind of deal that makes Cable believe there should be a change, Cable said.

The Takeover Panel started a review of Britain’s takeover code after the buyout provoked criticism from politicians, who said the outcome of the hostile bid was overly influenced by short-term investors seeking profit.

“We are seeing too many company takeovers which reduce or destroy value and are driven by the fat fees earned by the lawyers and banks who facilitate them,” Cable said. “I have made it clear -- post Cadbury -- that there have to be changes and I am pleased that the Takeover Panel has come up with modest but useful changes to reduce unnecessary takeovers.”

One of the rule changes would require potential buyers to make a firm offer within four weeks of announcing an approach, in order to curb so-called virtual offers. The changes being proposed are intended to protect shareholders of companies that are targets of takeover bids.

For more, click here.

Comings and Goings

Volcker Named to Panel Advising FDIC on Too-Big-to-Fail

Former Federal Reserve Chairman Paul Volcker and former Citigroup Inc. co-chairman John Reed have been named to a Federal Deposit Insurance Corp. panel that will help the agency map strategy for unwinding too-big-to-fail financial firms when they collapse.

Volcker, who advised President Barack Obama during negotiations over what became the Dodd-Frank Act, was named to the FDIC’s 18-member Advisory Committee on Systemic Resolutions along with Reed and current executives including BlackRock Inc. fixed-income chief Peter Fisher.

The advisory committee will build on the FDIC’s internal work aimed at creating an orderly resolution regime that will eliminate the need for taxpayer bailouts to prop up firms whose collapse could imperil the economy, according to a person with direct knowledge of the FDIC’s planning.

Dodd-Frank, the regulatory overhaul enacted last year, gave the FDIC expanded power for resolving systemically important financial firms in the event of a failure.

--With assistance from Meera Louis, Joshua Gallu, Craig Torres, Joshua Zumbrun and Carter Dougherty in Washington; Crayton Harrison in Mexico City; Jonathan Stearns in Luxembourg; Maria Petrakis in Athens; Linda Sandler, Katherine Burton and Kelly Bit in New York; Ben Moshinsky in London; Edvard Pettersson in Los Angeles; Robert Hutton in Brighton, England; and David Voreacos in Newark, New Jersey. Editor: Glenn Holdcraft.

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

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


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