Bloomberg News

Rajaratnam Sentence, ICE Access Fee, Natixis: Compliance

October 14, 2011

(Updates with EU swap rules in Compliance Policy; Zynga, EBA and Direct Edge in Compliance Action; Lehman-Nortel in Courts; and Berenzweig, Smith and Stoltmann in Interviews/Speeches.)

Oct. 14 (Bloomberg) -- Raj Rajaratnam, the Galleon Group LLC co-founder whom prosecutors called “the modern face of illegal insider trading,” was sentenced to 11 years in prison, one of the longest terms ever for insider trading, though less than half of the maximum sought by the government.

Rajaratnam, 54, is the central figure in what U.S. investigators called the largest hedge fund insider trader case in U.S. history. The probe, which leveraged the widespread use of FBI wiretaps for the first time in such an inquiry, led to convictions of more than two dozen people. Prosecutors said he made more than $72 million by using illegal tips to trade in stocks of companies including Goldman Sachs Group Inc., Intel Corp., Google Inc., ATI Technologies Inc. and Clearwire Corp.

U.S. District Judge Richard Holwell sentenced Rajaratnam yesterday before a packed courtroom in lower Manhattan, saying his term was enhanced because of his leadership role in the scheme and obstruction of a related Securities and Exchange Commission probe. Holwell also noted that he received more than 200 letters on the fund manager’s behalf, and that Rajaratnam, who declined to speak, suffers from diabetes and needs a kidney transplant.

Holwell denied Rajaratnam’s request to remain free on bail while he appeals his conviction, and told him to report to the medical center at the federal correctional complex in Butner, North Carolina, in 45 days.

The Galleon case helped trigger two other overlapping insider-trading investigations that relied heavily on wiretaps, a tool more commonly used to probe organized crime. A federal jury in Manhattan convicted Rajaratnam on May 11 of all 14 counts of securities fraud and conspiracy against him following a two-month trial.

The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court, Southern District of New York (Manhattan).

For more, click here, click here, and click here.

Compliance Policy

German Banks Said to Prepare for Up to 60% Loss on Greek Debt

German banks are preparing for losses of as much as 60 percent on their Greek government debt holdings as European officials push for more private-investor involvement in a rescue of the debt-stricken country, said three people with knowledge of the matter.

The country’s banks held a conference call this week and participants discussed the potential for losses on Greek bonds of between 50 percent and 60 percent, though no final figure has been set, according to the people, who declined to be identified because the talks are private.

Deutsche Bank AG Chief Executive Officer Josef Ackermann, who led talks in July when Europe’s banks and insurers agreed to a voluntary loss of about 21 percent, said he will go to Brussels next week to discuss the potential for a bigger reduction. Luxembourg’s Jean-Claude Juncker, who heads the group of euro-area finance ministers, said separately that talks are under way with the Washington-based Institute of International Finance, which Ackermann chairs, on the cost to investors of a second bailout package for Greece.

Separately, European banks are “deeply concerned” by plans to bring forward the implementation of the Basel III capital levels to 2012 from 2015, according to lobbyists at the European Banking Federation.

While banks will continue to take the necessary steps to build up more reserves, they are concerned about finding additional funds on the open market in a climate of decreasing profitability, the Brussels-based group said in a statement yesterday.

For more, click here and click here. see EXT4, for more on the euro-area financial crisis.

EU Resumes Talks Oct. 18 on Short-Selling, Sovereign CDS Rules

European Union lawmakers and government officials will continue talks on Oct. 18 aimed at reaching a deal on possible rules for short-selling and sovereign credit-default swaps, the European Parliament’s press service said in an e-mailed statement today.

Compliance Action

ICE Proposes New York Floor-Access Fee as Trading Moves Online

ICE Futures U.S. proposed that individual members pay a fee of $3,000 for the first half of 2012 to use the New York options-trading floor for contracts including sugar and coffee.

ICE noted in a letter dated yesterday to the Commodity Futures Trading Commission that as electronic trading of exchange options contracts continues to increase in both absolute terms and as a share of total options volume, “we anticipate a further decline in the number of brokers and locals on the trading floor.”

ICE is part of Atlanta-based IntercontinentalExchange Inc. Options for sugar, coffee, cocoa, cotton and orange juice change hands in New York via open outcry in a trading pit. Futures pits were shut in early 2008, and those contracts trade only electronically.

The exchange proposed rebates, linked to trading volume, for as much as the full access fee. The cost for the second half of 2012 will be determined at least 60 days before the start of the period, according to the letter.

Natixis, Employees Fined 355,000 Euros by French Watchdog

Natixis SA, BPCE SA’s investment banking unit, and three employees were fined a total of 355,000 euros ($487,300) by France’s financial markets regulator for violations at the now- shuttered Natixis Securities brokerage unit.

Natixis was fined 250,000 euros and the employees were each fined 35,000 euros, the Autorite des Marches Financiers said yesterday in a decision posted on its website.

The fine concerns “isolated and old” actions, said Victoria Eideliman, a spokeswoman for Natixis. “We are studying the decision and reserve the right to appeal.”

U.S. Consumer Bureau Outlines Mortgage Servicer Supervision

The U.S. Consumer Financial Protection Bureau will make mortgage servicing a priority as it begins supervision of the nation’s largest banks, Raj Date, special adviser to the Treasury Secretary for the consumer bureau, said in an e-mailed statement.

The bureau’s supervisory program will focus initially on loans that are in default and homeowners who are struggling to make payments, the bureau said in the statement.

For example, the bureau will examine loan modification procedures to ensure that servicers are providing accurate information about alternatives to foreclosure, and will scrutinize the foreclosure process, the statement said. It will also look carefully at the fees charged to defaulting borrowers, according to the statement.

The consumer agency, which was created by the Dodd-Frank regulatory law of 2010, made the announcement as it also released the first edition of its examination manual, the document that tells bureau employees and the banks how it will conduct its oversight.

On July 21, the new agency officially took over banking supervision for consumer issues. Its authority is limited to those U.S. banks, currently 105, that have more than $10 billion in assets.

Mortgage Probe Short of Results With States Divided After Year

A year after the start of a nationwide investigation of foreclosure practices, state and federal negotiators haven’t settled with banks and face infighting that may leave some states outside any agreement.

A year ago yesterday, all 50 state attorneys general announced they were investigating the foreclosure procedures of banks following reports they were using faulty documents to seize homes and possibly violating state laws.

The effort, since broadened to force banks to provide mortgage relief for homeowners, hasn’t resulted in a deal. States, meanwhile, are fighting among themselves. The biggest, California, walked away from the talks, possibly putting a nationwide agreement out of reach.

The investigation was triggered by the disclosure of so- called robosigning, in which foreclosure documents were processed without proper verification. Banks said they were suspending foreclosure actions across the country to review their procedures.

While the investigation continues, bank shares have declined in value and homeowners have complained of difficulty in obtaining loan modifications.

For more, click here.

Zynga Chooses Nasdaq Over NYSE for Social-Game Company’s IPO

Zynga Inc., the online-game developer founded in 2007 that is planning an initial public offering, filed to list its shares on the Nasdaq Stock Market.

Zynga applied to list its stock under the symbol ZNGA, according to a filing yesterday with the U.S. Securities and Exchange Commission. Zynga said in July it would seek to raise $1 billion in an IPO.

By listing on the Nasdaq, the gaming startup bucks a recent trend of young Internet companies listing on the New York Stock Exchange. The Nasdaq has traditionally had an edge with technology companies.

Earlier this week, Zynga announced a new service, called Project Z, geared toward reducing its dependence on users of Facebook Inc.’s social network.

EU Says EBA Intends to Complete Bank Reassessment by Ecofin

The European Banking Authority intends to complete an assessment of the region’s capital needs in time for a meeting of European Union finance ministers next week, said Jonathan Todd, a spokesman for the European Commission.

“The EBA’s intention is to finalize their reassessment in time for that” meeting, Todd told reporters in Brussels.

SEC Faults Direct Edge For Weak Controls That Caused Losses

Direct Edge Holdings LLC and two electronic exchanges it operates were faulted by U.S. regulators for having weak controls that led to about $2.8 million in trading losses and a systems outage.

In November 2010, an untested change to a computer code caused the EDGA and EDGX exchanges to execute more orders from three members than what they wanted, totaling about $773 million in unwanted trades, the Securities and Exchange Commission said in an administrative order yesterday.

While Direct Edge and the exchanges returned $2.1 million in customer losses, they were faulted for having done so in violation of rules prohibiting exchanges from trading their own capital. The firms, which didn’t pay any fines, agreed to implement new risk-management policies and train employees about securities laws.

In a second instance in April, a mistake from an administrator, who had inappropriate access according to the SEC, shut down connections to an EDGX database. That resulted in stopping orders and forcing the use of the “self-help” rule by other trading centers, bypassing the exchange.

The exchange reimbursed about $668,000 in customer losses resulting from the second instance.

In settling the matter, Direct Edge and the exchanges didn’t admit or deny wrongdoing.

“Several months ago, we developed a comprehensive plan to ensure the fulfillment of our obligations in a sustainable, repeatable and demonstrable way,” Direct Edge said in a statement. “We have vigorously executed this plan, with significant investments made to enhance our technology, personnel and processes.”

Courts

Lehman, Nortel Lose Appeal Over $3.5 Billion Pension Shortfall

The administrators of Lehman Brothers Holdings Inc. and Nortel Networks Corp. lost a bid to overturn a court order forcing them to pay 2.25 billion pounds ($3.5 billion) into underfunded pensions plans.

A London appeals court ruled in favor of the U.K. Pensions Regulator, which is seeking 148 million pounds from Lehman and 2.1 billion pounds from Nortel to meet the shortfall. The case hinged on whether employee pensions take priority over creditors when a company collapses into administration.

“It would be extraordinary if the onset of insolvency were to thwart a process already under way, or even only contemplated, on the part of the Pensions Regulator,” Justice Timothy Lloyd said today.

Lehman Brothers filed the largest bankruptcy in U.S. history in September 2008, and the U.K. unit is being liquidated in London. Nortel and affiliates filed for bankruptcy in the U.S. and Canada in January 2009 while its U.K. operations were placed in administration.

Today’s ruling is likely to be appealed to the U.K. Supreme Court, said Nick Moser, an insolvency lawyer at Taylor Wessing LLP.

Former Citadel Employee Charged With Trade-Secret Theft

Yihao “Ben” Pu, 24, a former Citadel LLC employee, was arrested yesterday and charged with stealing trade secrets from the Chicago-based investment firm, according to a statement by U.S. Attorney Patrick Fitzgerald in Chicago.

Citadel hired Pu last year to help develop proprietary- trading strategies for the $11 billion hedge fund. Citadel officials allegedly discovered Pu copying company data onto a removable storage device, according to the U.S.

Fitzgerald, citing evidence recovered in the investigation, said Pu was “attempting to construct a trading strategy similar to the one used by Citadel.”

Citadel sued Pu in Illinois state court in August.

Pu is being held in federal custody while awaiting a detention hearing scheduled for today, according to prosecutors.

Robert Greenspoon, the attorney representing Pu in the civil suit, yesterday declined to comment on the criminal allegations. Devon Spurgeon, a spokeswoman for Citadel, declined to comment on the case.

The criminal case is U.S. v. Pu, U.S. District Court, Northern District of Illinois (Chicago). The civil case is Citadel LLC v. Pu, 11CH30493, Cook County, Illinois, Circuit Court, Chancery Division (Chicago).

Interviews/Speeches

Volcker Rule May Mostly ‘Go Up in Smoke,’ Levitt Says

The Volcker rule, which would bar banks from trading for their own accounts, is likely to be postponed and weakened amid lobbyists’ resistance, said former Securities and Exchange Commission Chairman Arthur Levitt, who advises Goldman Sachs Group Inc.

Wall Street “will be doing all it can to delay this until they hope there’s a Republican president and a Republican Senate,” Levitt said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “This is going to be a long slog, and much of that rule that you see today is going to go up in smoke.”

Levitt, a Democrat appointed to the SEC by former President Bill Clinton, is also on the board of Bloomberg LP, the parent company of Bloomberg News.

Berenzweig Says Rajaratnam Case to Influence Compliance

Seth Berenzweig, managing partner at Berenzweig Leonard, talked about Galleon Group LLC co-founder Raj Rajaratnam’s 11- year prison sentence, the outlook for more insider-trading investigations by the government and the impact of the case on corporate compliance policies.

Berenzweig spoke with Lisa Murphy on Bloomberg Television’s “Street Smart.”

For the video, click here.

Smith Says Rajaratnam ‘Caught a Break’ With Sentence

Former Assistant U.S. Attorney Jeffrey Smith and Andrew Stoltmann, a Chicago lawyer who represents investors in securities litigation, talked about Raj Rajaratnam’s prison sentence.

The Galleon Group LLC co-founder, whom prosecutors called the modern face of illegal insider trading,’’ was sentenced to 11 years in prison, one of the longest terms ever for insider trading. Smith and Stoltmann talked with Mark Crumpton on Bloomberg Television’s “Bottom Line.”

For the video, click here.

--With assistance from Charles Mead, John Tucker, Patricia Hurtado, Bob Van Voris, David McLaughlin, Marvin G. Perez and David Glovin in New York; Margaret Cronin Fisk in Southfield, Michigan; Andrew Harris in Chicago; Heather Smith in Paris; Jef Feeley and Phil Milford in Wilmington, Delaware; Carter Dougherty, Jesse Hamilton and Joshua Gallu in Washington; Oliver Suess in Munich; Jim Brunsden in Brussels; Kit Chellel in London; Douglas MacMillan in San Francisco; and Nicholas Comfort and Aaron Kirchfeld in Frankfurt. 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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