Bloomberg News

SEC Exemptions, ASR Fund, ASIC Governance: Compliance

July 01, 2011

(Updates with U.K. bribery law in Compliance Policy, ASIC crackdown and AIG oversight in Compliance Action, Longoria in Courts and Quelch and Geithner in Interviews/Speeches.)

July 1 (Bloomberg) -- The U.S. Securities and Exchange Commission needs to improve oversight of firms exempt from certain regulations, the agency’s watchdog said, citing “numerous” cases in which companies violated conditions of the waivers.

SEC staff have “no formalized process” to track whether firms are complying with the conditions of their exemptions, Inspector General H. David Kotz said in a report posted yesterday on the SEC’s website. That may pose “substantial” risks “because exemptive orders and no-action letters allow industry participants to conduct activities that, without the relief, could violate the securities laws and regulations,” Kotz said.

The SEC can issue exemptive orders and so-called no-action letters to allow transactions that may not have been contemplated when the securities laws were written. Those transactions may otherwise violate rules, so the exemptions are often conditional on the firm’s compliance with certain standards, Kotz said. A no-action letter states that the staff will not pursue an enforcement action in response to the proposed activity.

The SEC divisions that grant exemptions and set conditions do not coordinate adequately with examiners that monitor the firms, Kotz said. He recommended that the agency establish processes and databases to increase coordination to better ensure compliance with conditions. In a June 29 letter to division managers, Kotz asked for a corrective action plan within the next 45 days.

Compliance Policy

Basel Seeks to Curb Banks’ Risk From Rogue Traders, Fraud

Banks should bolster their defenses against losses caused by rogue traders, client fraud and other so-called operational risks, global regulators said.

The Basel Committee on Banking Supervision endorsed updated principles on how banks should protect themselves from risks not directly linked to lending or market movements, the group said yesterday on its website.

The measures add to beefed up capital and liquidity rules to toughen regulation of banks following the worst financial crisis since the Great Depression. Rogue traders can also wreak havoc on individual institutions, said Nicolas Veron, a senior fellow at economics research group Bruegel. While such operational risk generally does not cause systemic crisis, it can have a “major impact on individual institutions when things go wrong,” Vernon said.

Current changes build on rules from 2004 that require lenders to hold reserves against risks including natural disasters, computer hacking, systems failures, theft, fraud and unauthorized trading.

“Supervisors expect banks to continuously improve their approaches to operational risk management,” the Basel group said in a statement. The committee “desires to promote and enhance the effectiveness of operational risk management throughout the banking system,” it said.

New Law Gives U.K. Power to Root Out Bribery Anywhere

Bloomberg’s Olivia Sterns reports from London on new anti- bribery legislation which gives the U.K.’s Serious Fraud Office the power to prosecute companies that have any business connection with the U.K., regardless of where they’re incorporated.

The Bribery Act takes effect today.

For the video, click here.

Compliance Action

OCC Orders Banks to Review Compliance With Foreclosure Accord

The Office of the Comptroller of the Currency ordered U.S. national banks to review their foreclosure practices to ensure they are following rules set out in an April settlement with the largest mortgage servicers.

Banks engaged in loan servicing must check whether they are complying with foreclosure laws, conducting home seizures in a safe and sound manner and promoting appropriate treatment of borrowers, the OCC said yesterday in a statement on its directive.

The OCC, Office of Thrift Supervision, Federal Reserve and Federal Deposit Insurance Corp. reached an accord with the 14 largest banks in April, requiring them to improve foreclosure, loan-modification and refinancing procedures.

The April sanctions were the first to arise from state and federal probes of servicer lapses in handling foreclosures stemming from the 2008 financial crisis. State attorneys general and the U.S. Justice Department are negotiating with banks to reach a global settlement that will include fines.

JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Citigroup Inc., Ally Financial Inc., Aurora Bank FSB, EverBank Financial Corp., HSBC Holdings Plc, OneWest, MetLife Inc., PNC Financial Services Group Inc., Sovereign Bank, SunTrust Banks Inc. and US Bancorp were part of the April settlement.

The settlement, which covered almost 70 percent of all mortgages, didn’t affect smaller lenders or non-bank servicers.

ASR Sets Up $1.6 Billion Property Fund to Sell Dutch Assets

ASR Nederland NV, the insurer acquired in 2008 by the Dutch state to help bail out Fortis Bank NV, plans to sell most of its 1.1 billion euros ($1.6 billion) of stores and shopping centers by setting up a fund.

The Utrecht-based insurer, the third-largest in the Netherlands, transferred 210 properties to its new ASR Dutch Prime Retail Fund and hired CB Richard Ellis Group Inc. to find investors in the fund, according to a statement yesterday. ASR plans to keep 20 percent of the fund.

ASR has owned real estate assets directly for more than 100 years and the sales mark the start of a plan to invest outside the Netherlands and to place its money in property indirectly.

ASR plans to follow with more specialist funds to reduce other Dutch real estate holdings, Dick Gort, chief executive officer of ASR REIM, the company’s property asset-management unit, said in a telephone interview.

The company shift in strategy coincides with changes in capital requirements for European insurers as the Dutch government prepares ASR for sale. The Solvency II proposals require insurers to set aside more money in case of a collapse in the value of properties they own directly. This makes investing in funds, publicly traded real estate companies and real estate loans more attractive.

OFI Asset Management Broke Fund-Management Rules, Agency Says

OFI Asset Management, a Paris-based fund management company, was accused by France’s financial regulator of violating market rules by using one of its funds to prop up another.

OFI should be fined 600,000 euros ($871,000), a representative of the Autorite des Marches Financiers said at an enforcement hearing yesterday in Paris.

OFI sent an alert to clients in one of its short-term investment funds in May 2008 saying the fund’s investments were doing badly. Less than 10 days later, the firm invested assets from another longer-term fund in the underperforming one, the AMF said. That sacrificed investors in the second fund to save the others, and meant clients weren’t equally informed, according to the regulator.

OFI managing director Gerard Bourret said “the only alternative” was to close the fund. The company, which later liquidated the short-term fund, believed when investing the one fund in the other that the financial crisis was ending and the failing fund would rebound, he said.

Shanghai Vehicle Violated China Loan Rules, 21st Says

A Shanghai municipal government financing vehicle violated borrowing rules by using working capital loans for the construction of long-term projects, 21st Century Business Herald reported yesterday.

Shanghai Rainbow Investment Corp., which built the city’s Hongqiao transport hub, had borrowed more than 10 billion yuan ($1.5 billion) from banks, the Guangzhou-based newspaper said, citing an unidentified banker. China bars companies from using debt intended to fund day-to-day operations to finance projects and equity investments under rules issued in 2010.

China’s first audit of local government debt, ordered by Premier Wen Jiabao, found liabilities of 10.7 trillion yuan at the end of last year with 79 percent being bank loans, the National Audit Office said this week. As much as 30 percent of the financing vehicles’ loans may sour and become the biggest contributor to lenders’ bad debts, Standard & Poor’s has said.

The China Banking Regulatory Commission’s local branch is arranging two syndicated loans from banks to replace the Shanghai vehicle’s debt, the newspaper said.

Chen Qiwei, a spokesman for the Shanghai government, said June 29 the municipality’s financing vehicles are operating normally and their status is “very healthy.” The local branch of the banking regulator yesterday reiterated Chen’s statement.

Shanghai Rainbow Chairman Lin Guixiang wasn’t immediately available to comment yesterday.

For more, click here.

Insider Trading Crackdown Vowed by Australian Market Regulator

The new head of Australia’s financial markets watchdog intends to “crack down” on unfair disclosures that cause sudden changes in stock prices, and require company directors, auditors and bankers to ensure fair and open markets.

Greg Medcraft, 52, who became chairman of the Australian Securities and Investments Commission in May, said the agency has told investment bankers and stockbrokers they need to strengthen their codes of conduct on sharing confidential information.

Fund managers say that the nation’s financial regulators haven’t stopped practices that give some investors an advantage over others with market moving information. ASIC says it identified 200 cases of unusual share-price moves in the 10 months to May 31, 42 of which were referred for further investigation; of those, 24 involved possible insider trading.

More than 48,000 trades have triggered the regulator’s surveillance filters since Aug. 1, 2010, ASIC said. New investigative powers -- including phone tapping -- mean ASIC is better equipped to uncover insider trading, Medcraft said in an interview in Sydney.

Medcraft is also demanding that stockbrokers, bankers and financial advisors improve self-regulation. The government has credited the regulator, which imposed a short-selling ban as markets tumbled after the collapse of Lehman Brothers Holdings Inc. in September 2008, with helping to stabilize Australia’s financial system.

For more, click here.

AIG Oversight Extended Five Years After Spitzer Accord

American International Group Inc., the insurer seeking an exit from U.S. ownership, was told by regulators to extend the period of oversight imposed as part of a $1.64 billion fraud settlement in 2006.

Therese Pritchard’s term as independent consultant overseeing AIG has been extended through the end of the year, she said in an interview late in the day on June 29. Her duties were set to expire yesterday, according to the insurer’s regulatory filings.

Chief Executive Officer Robert Benmosche, 67, is working to distance AIG from legal disputes under previous leaders and restore confidence in the company as he seeks private capital to replace government bailout funds. The New York-based insurer disclosed a weakness in accounting for credit-default swaps in 2008 and said in February that a shortfall in reserves led to a charge of about $4 billion.

Pritchard’s term was extended to document how AIG implements so-called best-practice recommendations, according to a person familiar with the matter.

Florence Harmon, a spokeswoman for the U.S. Securities and Exchange Commission, declined to comment. Joseph Norton, a spokesman for AIG, didn’t immediately respond to a message seeking comment.

AIG agreed to hire the consultant, acceptable to the SEC, for a three-year term as part of a 2006 fraud settlement with regulators.

For more, click here.

Courts

Ex-Taylor Bean Chairman Gets 30 Years for $3 Billion Fraud

Lee Farkas, the ex-chairman of Taylor, Bean & Whitaker Mortgage Corp., was sentenced to 30 years in prison for leading a $3 billion fraud involving fake mortgage assets.

Farkas was also ordered by U.S. District Judge Leonie Brinkema in Alexandria, Virginia, to forfeit more than $38 million.

A federal jury convicted Farkas, 58, in April of 14 counts of conspiracy and bank, wire and securities fraud after a two- week trial. Prosecutors said Farkas orchestrated one of the largest and longest-running bank frauds in the U.S., which duped some of the country’s largest financial institutions, targeted the federal bank bailout program and contributed to the failures of Taylor Bean and Montgomery, Alabama-based Colonial Bank.

Six conspirators to the fraud scheme who pleaded guilty have been sentenced by Brinkema to prison terms ranging from three months to eight years.

The case is U.S. v. Farkas, 10-cr-00200, U.S. District Court, Eastern District of Virginia (Alexandria).

Ex-PM Manager’s Insider-Trading Sentence Cut to 18 Months

A former PM Group Plc manager convicted of trading on inside information and laundering the profits had his sentence cut by an appeals court to 18 months.

Neil Rollins’s sentence was reduced by nine months after a hearing June 29 at the U.K. Court of Appeal, the Financial Services Authority, which prosecuted the case, said in a statement on its website yesterday. Rollins was convicted in November of five counts of insider trading and four counts of money laundering and ordered to pay 197,000 pounds ($315,000).

At the time of Rollins’s conviction, it was the longest insider-trading sentence from a case brought by the U.K. finance regulator. Prosecutors alleged Rollins sold shares of PM Group, a U.K. maker of scales used in waste management, where he was a senior executive, before the company announced that orders had fallen.

Rollins denied wrongdoing and testified that he wasn’t influenced by the confidential data in deciding to sell shares. His lawyer, Rob Rode, wasn’t immediately available to comment.

Ex-AMD Employee Pleads Guilty to Insider-Trading Scheme

Mark Anthony Longoria, a former employee of Advanced Micro Devices Inc. charged in a U.S. probe of insider trading by fund managers and expert networking consultants, pleaded guilty to a four-year fraud scheme.

Longoria, 45, of San Antonio, yesterday admitted that while also working as a paid consultant to Primary Global Research LLC, an expert networking firm, he committed four crimes: two counts of conspiracy, a count of securities fraud and making false statements to prosecutors and FBI agents.

He faces as long as 50 years in prison, said U.S. District Judge Jed Rakoff in Manhattan. Longoria is cooperating with prosecutors, Rakoff said, and he could face a lesser term if he provides “substantial assistance” to the government.

Longoria admitted in court that he passed tips about AMD’s gross margins and revenue to hedge fund managers in 2009. He also said that he provided inside information about Western Digital Corp., a hard-drive maker based in Irvine, California.

Yesterday in court, Longoria identified people and hedge funds which he said were recipients of his tips.

Michael Silverman, a spokesman for AMD, said in a statement that the company was a victim of the insider trading scheme.

Longoria was one of four people arrested in December in a federal probe of insider trading of hedge funds that was conducted by prosecutors in the office of U.S. Attorney Preet Bharara in Manhattan and the FBI’s New York Office.

The case is U.S. vs. Shimoon, 11-cr-00032, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

ASIC Says Company Directors Must Know Basic Accounting

Australian Securities & Investment Commission Chairman Greg Medcraft spoke about Australian corporate governance and accounting standards.

The ASIC won a case this week in which a judge found Centro Properties Group directors were liable for failing to disclose all of the company’s debt in its 2007 annual report. Medcraft spoke with Bloomberg’s Shani Raja in Sydney June 29.

Quelch Says U.S. Needs ‘More Robust’ Listing Standards

John Quelch, dean of the China Europe International Business School, talked about auditing standards and listing requirements in the U.S.

Quelch also discussed allegations made by short-seller Carson Block’s Muddy Waters LLC about accounting irregularities at Sino-Forest Corp. and Spreadtrum Communications Inc. He spoke in Hong Kong with Susan Li on Bloomberg Television’s “First Up.”

For the video, click here.

Geithner Says He Will Keep Job for ‘Foreseeable Future’

U.S. Treasury Secretary Tim Geithner talked with former President Bill Clinton about a Bloomberg News report that he has signaled that he’s considering leaving the administration after President Barack Obama reaches an agreement with Congress to raise the federal debt limit.

Geithner said that he will keep his job “for the foreseeable future.” Geithner also discussed negotiations between lawmakers to raise the debt ceiling, bank regulation and the U.S. housing market. They spoke at the Clinton Global Initiative America conference in Chicago.

For the video, click here.

--With assistance from Tom Schoenberg in Washington, Lindsay Fortado and Simon Packard in London; Jun Luo in Shanghai; Lorraine Woellert and Joshua Gallu in Washington; Heather Smith in Paris; Noah Buhayar and Patricia Hurtado in New York; Shani Raja in Sydney; and Jim Brunsden in Brussels. Editor: Stephen Farr.

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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