(Updates with Bank of America, AT&T and Florida Supreme Court ruling in Compliance Policy, Mexican insider trading in Compliance Action, and Knights of Columbus and Lorillard lawsuits in Courts.)
Aug. 17 (Bloomberg) -- German Chancellor Angela Merkel and French President Nicolas Sarkozy said they’ll press for closer euro-area economic integration with tougher deficit rules and stricter supervision to stamp out the debt crisis.
“It’s very obvious that in order for this to work we need a stronger convergence in finance and economic policy within the euro zone and Germany and France are at the vanguard of that effort,” Merkel said at a joint briefing in Paris after a two- hour meeting at Sarkozy’s Elysee Palace.
Merkel and Sarkozy rejected euro bonds and expanding the 440 billion-euro ($633 billion) rescue fund. They plan to resubmit a financial-transaction tax, which was rejected in 2010. They proposed debt limits be written into national law and a “euro council” to be headed by European Union President Herman van Rompuy established as part of a planned “economic government” for Europe.
Introducing euro bonds now would put the “most stable countries of the euro zone in grave danger,” Sarkozy said.
“Euro bonds -- we can imagine having them one day,” he said. “But it will be at the end of a process of integration, not the beginning.” Right now, “in their current state, European institutions,” are not ready for this.
“It’s hugely disappointing and what they say is not going to work,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “They think they have all the time in the world and they don’t.” He urged an expanded European Financial Stability Facility or a euro bond.
“People always seem to have the feeling that there is one method that we’ll spring us out of the crisis and in this context there seems to be that the last resource we have is euro bonds,” Merkel said. “I don’t think Europe has come to its last resource and I don’t think we can solve the problem with a single big bang.” Rather, “we need to work steadily and step by step to win back confidence. I don’t think that euro bonds will help us now with this.”
Fannie and Freddie Would Survive in New Form Under Obama Plan
The Obama Administration is working on a proposal to maintain a large government role in mortgage finance, effectively preserving most of the functions of Fannie Mae and Freddie Mac, according to a person with direct knowledge of the effort.
The primary goal is to encourage reliable sources of residential lending by continuing an 80-year-old practice of government guarantees on most home loans. At the same time, the administration wants to reduce government’s dominance in the system by imposing limits on Fannie Mae, Freddie Mac or their successors.
In February, U.S. Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan presented Congress with three options for weaning the almost $11 trillion mortgage market from its dependence on government.
There is no timeline for delivering the new proposal, which is based on one of the options in the February report, according to the person, who did not want to be identified because the work is in an early stage.
The administration also is exploring steps it can take in the interim without legislation to shrink the companies’ role in the market, the person said.
White House spokesman Matt Vogel said President Barack Obama has made no decision to move forward with a particular plan.
“We remain committed to winding down Fannie and Freddie, though such significant measures would need to be done gradually and with care,” Vogel said. “We believe that it is essential to bring private capital back to the center of a reformed housing system.”
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Payback May Backfire as U.S. Presses BofA for Mortgage Refunds
Efforts by U.S. regulators and government-controlled firms to recoup billions of dollars from Bank of America Corp. for faulty mortgages may backfire, hurting the same taxpayers they’re meant to protect.
After committing more than $30 billion to satisfy claims, Bank of America faces a new $10 billion lawsuit from American International Group Inc. alleging “massive fraud.” Fannie Mae and Freddie Mac stepped up efforts to extract refunds beyond the $5.1 billion already expected. The bank is also the biggest target of a 50-state foreclosure probe seeking $20 billion from the five largest home lenders and an $8.5 billion mortgage-bond accord that includes the Federal Reserve Bank of New York.
Regulators behind these companies and agencies are walking a thin line between success and renewed crisis, according to Neil Barofsky, former special inspector general for the Troubled Asset Relief Program. While each is pushing for its own interests, their collective demands could leave the nation’s biggest lender needing another taxpayer rescue, Barofsky said.
“There is an inherent conflict,” said Barofsky, who’s now a senior fellow at New York University School of Law. “As a policy matter, is it really a good idea to permit a government- controlled entity to potentially provoke a global meltdown by laying claims against Bank of America?”
New York-based AIG, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac are each almost 80 percent owned by U.S. taxpayers after 2008 rescues conducted at the depths of the financial crisis. The two mortgage firms have already received more than $170 billion in taxpayer funds, while AIG at its height received $182 billion.
“BofA is getting hit from all fronts,” said Mark Williams, a former Federal Reserve bank examiner who is now an executive-in-residence at Boston University’s School of Management. “Its too-big-to-fail size and wobbly financial condition has put it in the middle of a potential regulatory tug-of-war.”
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News Corp. Made Aware of Hacking in 2007, Ex-Reporter Says
News Corp.’s editors at the News of the World Sunday tabloid discussed phone hacking in daily meetings, a former reporter said, increasing pressure on executives to explain when they became aware of the practice.
Phone hacking was “widely discussed in the daily editorial conference” until “explicit reference to it was banned by the editor,” former royal reporter Clive Goodman said in a March 2007 letter to top News Corp. executives that was published by U.K. lawmakers yesterday. News Corp. deputy Chief Operating Officer James Murdoch will probably be recalled to Parliament to answer more questions about the allegations at the now-defunct tabloid.
Murdoch told lawmakers last month that he hadn’t realized until late 2010 that phone hacking was widespread at the News of the World. That’s been contradicted by Tom Crone and Colin Myler, two former executives of the tabloid, who said they informed him in 2008 about an e-mail that suggested more reporters had been involved.
Crone and Myler, its one-time editor, are likely to be recalled in September to answer further questions, John Whittingdale, who chairs the Culture, Media and Sport committee, said yesterday, adding that James Murdoch would appear after Crone and Myler. The committee won’t recall James’ father Rupert Murdoch, the chief executive officer of News Corp.
“What is plain is we are receiving accounts that are completely different and contradict each other at various points in a number of areas,” Whittingdale said.
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China Banks Rise as Capital Rule Less Strict Than Expected
Industrial and Commercial Bank of China Ltd. led Chinese banks higher in Hong Kong trading after the financial regulator issued draft capital rules that analysts said were less strict than investors anticipated.
The draft rule on capital requirements, published Aug. 15 by the China Banking Regulatory Commission in response to the Basel Committee on Banking Supervision’s new global standards, helps lift regulatory concerns for the industry, according to UOB Kayhian Investment Co. The proposed changes lower risk weightings for personal and small-business loans and first-home mortgages, which would boost banks’ capital levels when adopted.
Chinese commercial banks need to maintain at least 10.5 percent of capital, including an 8 percent minimum requirement and a 2.5 percent conservation buffer, by the end of 2016, according to a draft, published on the regulator’s website for public feedback. Systemically important lenders are subject to an additional 1 percent buffer and need to meet the requirements three years earlier.
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U.S. Audit Watchdog Weighs Term Limits for Long-Term Auditors
The U.S. regulator for auditors is formally considering whether to limit how long a company can work with accounting firms that oversee financial disclosures.
The Public Company Accounting Oversight Board voted yesterday to open a public comment period on the idea of establishing term limits for auditors. Proponents said term limits may eliminate inappropriate company influence on long- term auditors.
“The long association of the largest audit firms with their major audit clients is an issue that must be addressed in order to fulfill the mission of the PCAOB,” said Chairman James R. Doty before the vote. Mandatory rotation of auditors should be considered because of “the very size, complexity and systemic risk” found in the present issuer population, Doty said.
The board will accept public comments on the proposal for 120 days.
The PCAOB, a nonprofit corporation authorized by the Securities and Exchange Commission as a watchdog for auditors of U.S.-listed firms, will review public comments before another meeting in March.
Florida Governor’s Orders Exceeded Authority, Court Rules
Florida Governor Rick Scott overstepped his authority by suspending state-agency rulemaking and requiring agencies to seek permission to issue new regulations from an accountability office he created, the state’s highest court decided.
The Florida Supreme Court said yesterday that the Republican governor violated the separation of powers and overstepped his constitutional authority.
The court, ruling 5-2, said that Scott’s executive orders “infringe upon the very process of rulemaking and encroach upon the legislature’s delegation of its rulemaking power.” The majority rejected Scott’s argument that the Florida constitution gave him the power to suspend rulemaking.
“Governor Scott has a law degree, he has practiced law and this ruling just doesn’t make sense,” Lane Wright, Scott’s spokesman, said in a phone interview.
The case is Whiley v. Scott, SC11-592, Florida Supreme Court, Tallahassee.
AT&T Acquisition of T-Mobile May Mean More Industry Regulation
AT&T Inc.’s pursuit of U.S. government approval for its proposed $39 billion purchase of T-Mobile USA Inc. may lead to more regulation for the telecommunications industry.
If the Federal Communications Commission and the Justice Department sign off on the transaction, they could require AT&T and Verizon Wireless to keep prices from rising, said Carl Howe, an analyst at Yankee Group, a Boston-based research firm.
Regulators also might create a new mobile service provider by combining smaller competitors or requiring the combined AT&T- T-Mobile to sell part of its customer base to a mobile virtual network operator such as TracFone Wireless Inc. or Tru, according to a Yankee Group report.
“Once you have a monopoly, you have pricing power, you need rules,” Howe, the report’s co-author, said in an interview. Without more regulation, “your choice is lawlessness.”
“More regulation would be unwarranted, unwise and unproductive,” and the industry would remain competitive after the merger, AT&T spokesman Michael Balmoris said in an e-mail.
With the acquisition, AT&T would displace Verizon Wireless, which is owned by Verizon Communications Inc. and Vodafone Group Plc, as the No. 1 U.S. wireless carrier. Together, AT&T and Verizon control 80 percent of profits in the market, according to the FCC’s annual wireless report published June 27.
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Solar Millennium Is Facing Insider-Trading Investigation
Solar Millennium AG, the German developer of parabolic trough solar-power plants, is facing an insider-trading probe by financial regulator Bafin.
Bafin opened a formal investigation, Dominika Kula, a spokeswoman for the regulator, said in an interview yesterday. The probe covers transactions done before a Dec. 15, 2009, release in which the company announced it would hire Utz Claassen as chief executive officer, she said.
Solar Millennium currently has no knowledge of any wrongful insider trading and expects the allegation will turn out to be unfounded, a spokeswoman for the company supervisory board said in an e-mailed statement.
Solar Millennium founder and supervisory board member Hannes Kuhn, who is suspected to have bought 150,000 shares before the Claassen appointment became public, may be a target, Sueddeutsche Zeitung said. The newspaper reported the probe yesterday without saying where it got the information.
The supervisory board spokeswoman who couldn’t be cited by name, due to company policy, said the shares were purchased before Claassen became CEO because he requested stock as part of his salary.
Claassen left the Erlangen, Germany-based company less than three months after becoming CEO and is now involved in litigation with the solar company over a 9 million-euro ($13 million) payment.
U.K. FSA Fines Ex-Morrison Chairman $344,000 Over Disclosure
The U.K. market regulator fined the former chairman of grocery store chain WM Morrison Supermarkets Plc 210,000 pounds ($344,000) for failing to report reductions in his shareholding and voting rights in the company.
After his retirement Ken Morrison “failed to notify” the company between 2009 and 2010 when his voting rights fell below 6 percent, 5 percent, 4 percent and 3 percent, the U.K. Financial Services Authority said in a statement. This prevented the company, the U.K.’s fourth-largest supermarket chain, from updating the market, meaning investors were “misled.”
“Investors are entitled to know when major and influential shareholders significantly reduce their interest in a listed company,” said Tracey McDermott, the FSA’s acting director of enforcement and financial crime. “Failure to comply with the rules risks damaging investor confidence in the financial markets.”
The size of the penalty shows that the FSA is positioning itself as a “zero-tolerant regulator of the U.K. financial markets,” said Simon Morris, financial services lawyer at CMS Cameron McKenna.
Morrison’s infraction was “an inadvertent oversight which caused not a penny loss to anybody,” he said.
Aggregates Companies May Stifle Competition, Regulator Says
The U.K. market for aggregates, cement and ready-mix concrete used in construction may be distorted and requires a full investigation by the Competition Commission, Britain’s antitrust regulator said.
The provisional decision follows a probe started last year over concerns the biggest companies were barring smaller competitors from the market and driving up prices, the U.K. Office of Fair Trading said on its website yesterday. The five largest companies account for more than 90 percent of cement sales in Britain, the OFT said.
“We are concerned that competition is not working well in these markets,” the OFT said. The “problems are rooted in underlying features of the market that could only be addressed by the kinds of remedies available to the Competition Commission.” The regulator said it would consult with affected companies until Sept. 30 before making a final decision.
The European Commission opened a probe into several cement makers in December over possible competition breaches.
Mexico Fines UBS Equities Trader, Bank of Nova Scotia, HSBC
Mexico’s National Banking and Securities Commission fined Hans Klingbeil, an equities trader at UBS AG, 1.5 million pesos ($123,000) for using inside information to make stock recommendations to his clients.
The commission also fined Bank of Nova Scotia’s local unit 10 million pesos for nine violations, including failure to give clients proper information to make trading decisions, according to rulings posted on the agency’s website and dated Aug. 8.
The fines were the first issued by the commission since September, according to the website. The commission also fined Grupo Financiero Banorte SAB 48,670 pesos for failing to refuse a client’s request that violated securities laws and fined HSBC Holdings Plc 19,468 pesos for failing to notify the agency about changes in its board of directors. UBS wasn’t fined in Klingbeil’s case.
Carlos Lopez-Moctezuma, a spokesman for the commission, said that all the fines have been paid and no appeals are pending for any of them.
The commission is also investigating six other potential cases of insider trading at separate public companies.
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India Probing Foreign Exchange Violations by Bharti Airtel
India’s Enforcement Directorate is probing “suspected contraventions” of foreign-exchange rules by Bharti Airtel Ltd., the country’s largest mobile-phone service operator, according to a government official.
Separately, the Securities and Exchange Board of India, the market regulator, received complaints that Bharti’s founders raised their stake to 67.15 percent as of September 2008, from 60.91 percent in June 2007 without announcing an open offer for shares, Junior Finance Minister Namo Narain Meena said yesterday in a written reply to lawmakers in parliament.
India’s Central Board of Direct Taxes has also received a complaint regarding “improper accounting” of license fees and spectrum charges by the company, Meena said.
Bharti said in an e-mailed statement it will provide requested information and assist with queries.
“Bharti Airtel adheres to the highest standards of corporate governance and always complies with all the rules and regulations laid down by various agencies and the licensor,” according to the statement.
Apple Can’t Enforce Samsung Sales Ban Beyond German Borders
Apple Inc. won’t be able to fully enforce a sales ban against Samsung Electronics Co. over the Galaxy Tab 10.1 tablet device after a German court limited its own ruling to within national borders.
The iPad maker can’t enforce the Aug. 9 injunction outside of Germany against the Samsung parent company which is based in Korea, the Dusseldorf Regional Court decided yesterday. The ruling is still fully enforceable against Samsung’s German arm and the ban on sales in Germany remains unaltered for both units, court spokesman Peter Schuetz said in an interview.
Apple, which won the German injunction a week ago, contends Samsung’s Galaxy phones and tablet computer “slavishly copy” the iPhone and iPad. Apple, based in Cupertino, California, is also seeking a court order to block sales in the U.S. until a trial can be held on patent-infringement claims there.
Samsung welcomes the German court’s decision and is “fully committed” to providing mobile devices to the market without disruption, the company said in an e-mailed statement.
The decision is temporary, as is the Aug. 9 injunction. The court has scheduled a hearing for Aug. 25 in the case, after which it may change either ruling.
The German case against Samsung is LG Dusseldorf, 14c O 194/11.
Agility Pleads Not Guilty to Government Contract Fraud
Agility, the Kuwaiti storage and logistics provider, pleaded not guilty to charges it defrauded the U.S. government on a multibillion-dollar contract to feed troops overseas.
Agility, also known as Public Warehousing Co., denied accusations that it filed false invoices or conspired to pay premium prices to inflate its profit, yesterday in federal court in Atlanta. Prosecutors said Agility encouraged business partners to inflate costs through practices such as putting hamburgers in unnecessarily expensive packaging.
The estimated cost of the U.S. contract with Agility at the time it was signed was $4.66 billion, according to the November 2009 indictment. The final bill came to $8.6 billion, the government said. Agility bought food and transported it to U.S. soldiers in Kuwait and Iraq, prosecutors said.
Agility officials had no immediate comment on the plea after the hearing. Lawyers for both sides declined to comment.
The case is U.S. v. Public Warehousing Co., 09-cr-490, U.S. District Court, Northern District of Georgia (Atlanta).
K&L Gates Former Partner Apologized to Firm for Gambling Habit
A former partner at K&L Gates LLP admitted to taking money from client accounts to cover his gambling habit and apologized, according to a lawyer representing the U.S. law firm.
Victor Dawes, who is representing K&L Gates in its lawsuit against Navin Kumar Aggarwal, said the defendant wrote in a letter to the firm that he had taken money from the escrow accounts of clients to pay his gambling debts.
“What we have is an admission about a systematic scheme that had taken place over a number of years,” Dawes said yesterday at a hearing in Hong Kong’s Court of First Instance.
Aggarwal sought to have about HK$3.7 million ($475,000) released from his account yesterday, to pay for his legal fees. The law firm applied to freeze the accounts after police charged the 44-year-old corporate lawyer with three counts of theft and three counts of forgery on June 24.
Aggarwal, in custody at Hong Kong’s Lai Chi Kok Reception Centre, is scheduled to appear in court on Aug. 22 to face allegations that he stole HK$16.6 million from the accounts of RIM China Co. held with K&L Gates and transferred the funds to Wynn International Marketing Ltd. last year.
Dawes said Aggarwal wrote in the letter to the firm that he was “sorry” and that “the money was used to cover my gambling losses accumulated over the years.”
BNY Sued by Knights of Columbus for Mortgage Trustee Role
Bank of New York Mellon Corp., targeted by New York for allegedly violating state law while representing mortgage-bond investors, was accused by Knights of Columbus of damaging its investment in mortgage securities.
Knights of Columbus, a charitable organization that invested in mortgage-backed securities, seeks to recover losses and demands punitive damages from the bank, according to an amended complaint filed yesterday in New York state court in Manhattan.
Bank of New York, which serves as trustee for trusts holding loans underlying mortgage securities, mismanaged the trust assets, Knights of Columbus said in a statement. It accused the bank in the complaint of gross negligence and recklessness and said the bank’s actions caused a “substantial” loss.
Kevin Heine, a spokesman for Bank of New York, said the complaint “is without merit.”
The case is Knights of Columbus v. Bank of New York Mellon, 651442-2011, New York State Supreme Court (Manhattan).
Lorillard Sues FDA in Bid to Stop New Cigarette Warning Labels
Lorillard Inc., the maker of Newport cigarettes, said it joined with three other tobacco companies in a legal bid to stop the agency from putting new warnings on cigarette packs.
Lorillard, R.J. Reynolds Tobacco Co., Commonwealth Brands Inc. and Liggett Group LLC filed a lawsuit yesterday in U.S. District Court in Washington, Greensboro, North Carolina-based Lorillard said in a statement. The filing couldn’t be immediately confirmed with the court.
Lorillard seeks a preliminary injunction to halt the effective date of the FDA regulation, which requires cigarette packs, cartons and advertising to display new graphic warning labels by Sept. 22, 2012, the company said. The warnings will be accompanied by pictures of rotting teeth or damaged lungs to deter smokers.
“The regulations violate the First Amendment,” Floyd Abrams, a lawyer representing Lorillard, said in the statement. “The notion that the government can require those who manufacture a lawful product to emblazon half of its package with pictures and words admittedly drafted to persuade the public not to purchase that product cannot withstand constitutional scrutiny.”
--With assistance from Jesse Hamilton, Lorraine Woellert, Sara Forden and Jeff Bliss in Washington; Chris Dolmetsch, David McLaughlin and Jody Shenn in New York; Karen Gullo and Dakin Campbell in San Francisco; David Beasley and Laurence Viele Davidson in Atlanta; Erik Larson, Amy Thomson, Tariq Panja and Jonathan Browning in London; Mark Deen in Paris; Karin Matussek and Patrick Donahue in Berlin; Jim Brunsden in Brussels; Debra Mao in Hong Kong; Carlos Manuel Rodriguez and Crayton Harrison in Mexico City; and Ketaki Gokhale in Mumbai. Editor: Glenn Holdcraft
To contact the reporter on this story: Michael Bathon in Wilmington, Delaware, at email@example.com.
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