Bloomberg News

Short-Sale Bans, Forex Slippage, Hedge Police: Compliance

October 04, 2011

(Updates with prescription-drug regulation in Compliance Policy; Waugh, Ackermann and Hester in Interviews/Speeches; and Vorapol in Comings and Goings.)

Oct. 4 (Bloomberg) -- Financial stocks subject to rules restricting short sales in France, Italy, Belgium and Spain have behaved about the same as banks in European countries with no such prohibitions, according to Instinet Inc.

French lenders governed by the regulations trailed the benchmark CAC 40 Index by about 7 percentage points between Aug. 12, when the ban was imposed, and Aug. 29, data compiled by the New York-based brokerage show. Italian financial firms fell about 4 points more than the FTSE MIB Index, the data show. Shares in the U.K. and Netherlands, which didn’t ban bearish bets, underperformed by 5 or 6 percentage points, Instinet said.

The study says prohibiting bearish bets did little to stem volatility or reverse losses after concern about the European debt crisis sent banks in the Stoxx Europe 600 down more than 30 percent from their February highs. France banned short sales in companies such as Societe Generale SA and BNP Paribas SA, and Italy’s rules covered almost 30 companies such as UniCredit SpA.

A report on the short-sale ban from Credit Suisse Group AG said banned financial stocks fell 10.4 percent from Aug. 12 to Sept. 20, while German, Dutch and British constituents of the MSCI Europe Financials Index declined 4.4 percent. The study, published yesterday, says the rules didn’t stop share price declines in affected European stocks. Analysts Mark Buchanan, Jonathan Tse and Drew Vincent, based in London, wrote the report.

For more, click here.

Compliance Policy

FSB Backs Capital-Surcharge Plan for World’s Biggest Banks

The Financial Stability Board backed plans for the world’s largest banks to set aside additional capital and develop measures to wind down their operations in a crisis, the group’s chairman Mario Draghi said yesterday.

Lenders whose collapse could roil global markets will face surcharges as high as 2.5 percentage points, Draghi said after a FSB meeting in Zurich, Switzerland. The group also agreed more must be done to implement banker pay rules and said the international community would miss a 2012 deadline for tougher regulation of over-the-counter derivative markets.

Bank watchdogs have clashed with some lenders over the additional capital requirements, which were released for public comment in July. Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Bank of America Corp. CEO Brian T. Moynihan, are among bankers who have said the proposals would constrain lending and hurt the economy.

The FSB decision to back the capital surcharges mirrors a decision last week by the Basel Committee on Banking Supervision, which had prepared the plans.

For more, click here.

For a video report, click here.

Finland to Amend Securities Markets Law in 2012, Ministry Says

Finland’s parliament will next year debate the overhaul of the country’s securities markets legislation, the Finance Ministry said on its website yesterday.

The government will give two proposals to parliament in 2012, with the second focusing on possible indirect holding of assets, the ministry said.

Express Scripts Must Disclose Markup in Drug Plans, U.S. Says

Pharmacy managers such as Express Scripts Inc. that administer Medicare drug benefits would have to reveal the markup they charge insurers for prescription medicines under a proposed U.S. rule.

The “spread” reflecting the difference between what companies such as St. Louis-based Express Scripts and Medco Health Solutions Inc. pay pharmacies and what they charge health plans hasn’t been reported. Doing so would “promote transparency of financial transactions” in Medicare, the U.S. health program administrators said yesterday in a regulatory filing.

The rule would also require the companies to report the percentage of Medicare prescriptions they fill through their own mail-order pharmacies compared with retail pharmacies, as well as disclosing discounts and rebates. The U.S. won’t publicly disclose the information, according to the filing. Medicare spends about $62 billion a year on its prescription drug benefit.

Pharmaceutical Care Management Association, which represents the companies in Washington, has defended keeping spreads secret as an incentive for its members to negotiate lower prices. A spokesman for the association, Charles Cote, didn’t immediately comment.

Compliance Action

SEC Asked Apple for Information on Nokia Patent Settlement

The U.S. Securities and Exchange Commission asked Apple Inc.’s Chief Financial Officer Peter Oppenheimer for information on the financial terms of a patent litigation settlement with Nokia Oyj.

The SEC requested details of the settlement agreement including any amounts accrued, the periods in which they were recognized and the timeline of negotiations in a June 28 letter to the company released in a regulatory filing yesterday. Apple said “no aspects of the company’s discussions with Nokia were material to the company’s consolidated financial statements” in a July 12 letter to the SEC released in a separate filing yesterday.

Nokia won an almost two-year patent dispute with Apple, in a settlement that awards a one-time payment and royalties to the Finnish handset maker, Nokia said in June. Details of the contract are confidential, Nokia said at the time.

The two mobile-phone makers had been in litigation since October 2009, when Nokia filed a lawsuit accusing Cupertino, California-based Apple of infringing patents.

Mark Durrant, a Nokia spokesman, Steve Dowling an Apple spokesman, and John Nester, a spokesman for the SEC, declined to comment on the SEC request.

FXCM to Pay $14 Million to Resolve CFTC ‘Slippage’ Claims

Forex Capital Markets LLC agreed to pay $14.2 million to settle U.S. regulators’ claims it failed to properly oversee handling of more than 57,000 accounts that used the New York- based firm’s foreign-exchange trading platform.

FXCM, between 2008 and 2010, deprived customers of $8.26 million in “positive price slippage,” advantageous price changes that occurred after the clients placed orders and before the transaction was executed, the Commodity Futures Trading Commission said in an administrative order filed yesterday. The firm agreed to reimburse the damages and to pay a $6 million penalty, the CFTC said.

FXCM had agreed in August to pay restitution to the customers in a settlement with the National Futures Association, which also imposed a $2 million penalty. As part of yesterday’s settlement with the CFTC, the firm agreed to retain a monitor for its trade-execution practices.

“FXCM has previously enhanced its execution system to pass along all price improvements on every order type,” Drew Niv, the firm’s chief executive officer, said in a statement yesterday. “We are happy to have settled all our regulatory matters in the U.S., to have this behind us and to see this come to an end.”


S&P Faces Australia Trial Over Ratings of CDOs Sold to Towns

Standard & Poor’s, the rating company being investigated by U.S. regulators over the nation’s credit downgrade, will face trial in an Australian court to defend allegations it misled investors with ratings of collateralized debt obligations, in the first case of its kind.

Two Australian towns and an insurer sued the U.K. arm of S&P’s owner McGraw-Hill Cos., along with financial services firms including the Royal Bank of Scotland Group Plc, who were involved in the sale of AAA-rated securities that plummeted in value during the global economic crisis in 2008.

Statecover Mutual Ltd., a workers’ compensation insurer of local governments in New South Wales, Bathurst regional council and Corowa Shire Council seek to recoup the losses they incurred from the purchase of securities in 2006.

The Bathurst council paid A$1 million ($963,000) to acquire a so-called Community Income Constant Proportion Debt Obligation Note, or a CPDO, on Dec. 20, 2006, and was advised less than two years later that the note was being unwound and the council would receive a repayment on the note of A$67,043, according to the statement of claim.

The trial in Sydney Federal Court before Justice Jayne Jagot is scheduled for 10 weeks.

The case is: Statecover Mutual Ltd. v. Local Government Financial Services Ltd. NSD1268/2010. Federal Court of Australia (Sydney).

Kerviel Appeal on SocGen Trading Verdict Scheduled for June

Jerome Kerviel’s appeal of a three-year jail sentence and order to repay Societe Generale SA’s 4.9 billion-euro ($6.5 billion) trading loss was scheduled for June 2012.

A Paris appeals court yesterday set the appeal hearings to run from June 4 to June 28. Kerviel didn’t attend yesterday’s session.

While Kerviel said during the trial that his activities were “probably not” part of his mandate, his lawyer Olivier Metzner said yesterday that he is appealing all three guilty counts -- breach of trust, forging documents and computer hacking.

Kerviel, 34, was held solely responsible for the loss in the 2010 verdict. The judges rejected his arguments that his superiors at the bank knew he had trades that exceeded his limits and that it was the bank’s decision to unwind the bets over three days of falling markets in 2008 that caused such a large loss.

A spokeswoman for the bank declined to comment on the appeal yesterday.


Algorithmic Traders Under Scrutiny From SEC Hedge-Fund Police

Algorithmic traders and quant funds are under close scrutiny from a U.S. Securities and Exchange Commission enforcement team responsible for policing hedge funds, the unit’s co-chief said at securities law forum.

The SEC is “very much focused” on possible misconduct by traders who primarily use computer models to execute investment strategies, and more cases in those areas are likely, Bruce Karpati said yesterday during a Practising Law Institute panel discussion in New York. Investigators are zeroing in on firms with “aberrational performance,” he said, without giving details on practices that are under scrutiny.

The February case in which Karpati’s asset-management team accused Axa Rosenberg Group LLC of causing $217 million in customer losses by concealing a coding error was “wake-up a call for all quant managers” to be fully forthcoming about the risks of their strategies, he said at the time. Axa paid $242 million to resolve the claims.

In his remarks yesterday, Karpati said his team is also looking at how hedge funds value illiquid assets and whether some investment managers have used so-called side pockets to hide underperforming assets. Side pockets are accounts used by hedge funds to separate less-liquid investments from others.

The SEC will likely bring more cases against hedge funds that engaged in preferential redemption, where the owners of the firm or selected investors are able to liquidate their investments before other clients, Karpati said.

The agency is using powers granted by the Dodd-Frank Act to bring enforcement actions against unregulated entities and seek expanded sanctions in administrative cases, he said.

Waugh Says Deutsche Bank Has Written Down Greek Bonds

Seth Waugh, chief executive officer of Deutsche Bank AG’s Americas division, talks about financial regulation, his company’s capital levels and the European debt crisis.

He spoke with Adam Johnson on Bloomberg Television’s “Street Smart.”

For the video, click here.

Deutsche Bank’s Ackermann Speaks at CEO Conference

Deutsche Bank AG Chief Executive Officer Josef Ackermann spoke at the Bank of America Merrill Lynch Banking & Insurance CEO Conference 2011 in London. He discussed the “challenging environment” raised by slowdown in China, indebtedness and real estate imbalances in the U.S., and the debt crisis in Europe.

For the audio, click here.

Hester Says Firebreak Proposals at ‘Tough End’ of Expectations

Royal Bank of Scotland Group Plc’s Chief Executive Officer Stephen Hester said proposals to erect firebreaks around the lender’s retail unit will “increase funding costs and capital need.”

Hester spoke at a conference in London today.

Comings and Goings

Wilson Sonsini Hires Former Justice Department Chief of Staff

Wilson Sonsini Goodrich & Rosati, the law firm whose clients include Google Inc., hired Donald L. Vieira, a former chief of staff in the U.S. Justice Department’s national security division.

Vieira, who will be a partner in the Palo Alto, California- based firm’s Washington office, will focus on regulatory and enforcement issues related to foreign investments and data security, according to the statement.

At the Justice Department, Vieira was responsible for day- to-day management of his division, according to the statement.

Thai Cabinet Approves Vorapol as New SEC Chief, Kittiratt Says

Thailand’s Cabinet approved the appointment of Vorapol Socatiyanurak as secretary-general of the Securities and Exchange Commission, Commerce Minister Kittiratt Na-Ranong said.

--With assistance from Joe Schneider in Sydney; Kati Pohjanpalo in Helsinki; Lisa Rapaport, Cullen Wheatley and Nina Mehta in New York; Heather Smith in Paris; Alex Wayne in Washington; Gavin Finch in London; Suttinee Yuvejwattana in Bangkok; and Jim Brunsden in Basel. Editor: Mary Romano.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this report: Michael Hytha at

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