Bloomberg News

Hedge Fund Secrets, Bank Capital Deadline, Gupta: Compliance

October 27, 2011

(Updates Gupta Special Section; Greek banks in Compliance Policy; and BNP Paribas, Societe Generale in Compliance Action.)

Oct. 27 (Bloomberg) -- The U.S. Securities and Exchange Commission responded to objections from hedge funds and private- equity funds by dialing back demands in its new rule calling for fund advisers to report internal information to regulators.

Revising its proposal from January -- approved in a unanimous vote yesterday -- the agency eased thresholds for defining which large funds will have to report the most information starting next year. It also allows private-equity funds to report less often than initially proposed.

In yesterday’s rule, required by the Dodd-Frank regulatory overhaul, all funds with more than $150 million in assets will be required to report asset and operational information that has not been collected by regulators in the past.

The new rule defines large funds as hedge funds with more than $1.5 billion in assets, private-equity funds with $2 billion in assets, and liquidity funds with $1 billion. Those designated as large funds would have the highest reporting standards.

Under the new definitions, about 230 U.S.-based hedge funds and 155 private-equity fund advisers would be subject to the large-fund disclosure system. Hedge fund advisers will have to file the new Form PF every quarter.

For more, click here.

Compliance Policy

Papandreou Says Greece Will Nationalize Some Greek Bank Shares

Greek Prime Minister George Papandreou said the government will likely buy shares in some Greek banks as a result of a planned writedown of the country’s debt and a European accord to recapitalize lenders.

“Probably some of the bank shares will be nationalized,” Papandreou told reporters today in Brussels after a 10-hour European summit. “After restructuring, we will then take it back out on to the market.”

Papandreou didn’t give any details on the banks that would be targeted in any nationalization program or the size of any potential shareholdings.

European leaders persuaded bondholders today to take 50 percent losses on Greek debt and set a deadline of mid-2012 for banks to have core capital reserves of 9 percent. Lenders are expected first to tap the market to make up any capital shortfall before resorting to public funds from either governments or the euro region’s bailout fund.

Europe’s banks will need to raise 106 billion euros ($148 billion) in fresh capital under the tougher rules being introduced in response to the euro area’s sovereign-debt crisis, with Greek lenders needing to find 30 billion euros of the total, the European Banking Authority said.

For more, click here and click here.

EU to Set June 2012 Target for Banks to Reach 9% Capital

European Union leaders will set a deadline of June 30, 2012, for banks to have core capital reserves of 9 percent after writing down their holdings of sovereign debt, according to a draft statement prepared for an EU summit today.

The reserves must be of the “highest quality,” according to the document obtained by Bloomberg News. Lenders are expected first to tap private sources to make up any capital shortfall and “should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained.” The document doesn’t give an estimate of total capital EU banks must raise to comply with the rule.

Measures for restoring confidence in the EU’s banks are “urgently needed,” the document says. They should include steps to “ensure the medium-term funding of banks, in order to avoid a credit crunch and to safeguard the flow of credit to the real economy.”

European leaders were set to meet in Brussels at 6 p.m. yesterday to hammer out an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain. The summit is part of an attempt to solve the two-year-old sovereign-debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the euro.

Banks’ reserves should be measured after “accounting for market valuation of sovereign debt exposures” as of Sept. 30 2011, the document says.

To help European lenders shoulder sovereign losses, banks may be required to raise about 100 billion euros ($139 billion) in capital by mid-2012, two people briefed on the matter said earlier this week. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece, they said.

For more, click here.

Angola to Force Oil Companies to Use Local Banks, Angop Says

Angola plans to pass a law that will require oil companies, such as Exxon Mobil Corp., BP Plc and Total SA, operating in Africa’s second-biggest oil-producing nation to use local banks to carry out their financial operations, Agencia Angola Press reported.

The paper cited a law proposal submitted to parliament yesterday.

In the past, oil companies benefited from a “special regime” that didn’t require them to use domestic banks to pay sub-contractors for services as lenders couldn’t handle the volume of transactions, the state-owned news agency, based in the capital, Luanda, said, citing the proposal.

The new legislation, once approved, will require all financial transactions from the oil industry to be carried out in Angola, it said. Angola Press did not say when parliament would vote on the law proposal.

House Panel Backs Measure to Reduce SEC Rules for Private Firms

A U.S. House panel approved measures aimed at increasing investment in closely held firms, clearing the way for House floor consideration of four bills to reduce Securities and Exchange Commission regulations.

With bipartisan support, the House Financial Services Committee approved all four of the bills, including a measure to increase the shareholder threshold for privately held firms to 1,000 from 500 before the firm must have an initial public offering.

House Republicans are promoting legislation to help startups and smaller firms raise money amid regulatory hurdles and tighter lending standards following the 2008 credit crisis. Shares of such companies are being traded on secondary markets that have emerged since the Sarbanes-Oxley Act of 2002 and last year’s Dodd-Frank Act increased the cost of going public.

U.S. Trading Curbs Cause Few Disruptions, Credit Suisse Says

The trading pauses used to curb volatility in U.S. equities since June 2010 are working as planned and rarely disrupt trading, according to a study by Credit Suisse Group AG.

Circuit breakers adopted after the May 6, 2010, plunge that erased almost 1,000 points from the Dow Jones Industrial Average were deployed 111 times through last month, Credit Suisse said. Stocks were halted 56 times after news on takeovers, litigation and other events. The rest fell into three categories: trading in illiquid or low-priced stocks; “fat finger” orders that were mistakenly placed at prices far from previous levels or for more shares than intended; and single “bad prints.”

Advisers to the Securities and Exchange Commission and Commodity Futures Trading Commission said in February that the five-minute halts had been “particularly problematic” in cases where a single trade prompted the pause. Credit Suisse found that happened 6.3 percent of the time.

For more, click here.

Compliance Action

NYSE Euronext, Deutsche Boerse to Fight for Tie-Up at EU Hearing

Deutsche Boerse AG and NYSE Euronext will seek to counter European Union criticism that their bid to form the world’s largest exchange may create a derivatives and clearing monopoly, defending the proposed merger at a hearing before regulators in Brussels.

NYSE Euronext Chief Executive Officer Duncan Niederauer and Reto Francioni, CEO of Deutsche Boerse, backed by other company executives will seek to persuade regulators the $6.71 billion deal benefits the region and customers at a two-day antitrust hearing beginning today. EU regulators are studying how Deutsche Boerse’s takeover of NYSE Euronext will affect derivatives trading competition, clearing and index licensing, three people with direct knowledge of the review said Oct. 10.

The European Commission declined to comment because the hearing is private. Heiner Seidel, a spokesman for Deutsche Boerse, declined to comment. NYSE spokesman Robert Rendine declined to comment.

The EU Competition Commission said in August it will conduct an expanded probe and has set a Dec. 22 deadline to give its final opinion.

For more, click here.

BNP, SocGen Speed Up Trading-Book Cuts to Skirt Capital Aid

BNP Paribas SA and Societe Generale SA, France’s largest banks, are accelerating cuts in their 1.1 trillion-euro ($1.5 trillion) trading books to avoid going to shareholders or the government for capital.

The banks, which last month began a program to trim about 300 billion euros in assets by 2013, have focused on cutting dollar-funded businesses such as aircraft lending after Europe’s sovereign debt woes squeezed funding. The lenders’ statements show that their trading operations have not gone unscathed.

Reluctant to lose their top spots in the risky yet lucrative trading and derivatives business, Societe Generale and BNP Paribas hadn’t shrunk the operations as much as rivals such as Deutsche Bank AG and UBS AG. The French banks may have little choice after European Union leaders pushed lenders to boost capital. BNP Paribas and Societe Generale need 5.4 billion euros in new capital, the region’s banking regulator said today.

“It’s a striking sin of pride,” said Francois Chaulet, who manages euros at Montsegur Finance in Paris described it as a “sin of pride,” adding that “French banks risk not having the necessary capitalization.”

French banks need about 8.8 billion euros in fresh capital, according to the European Banking Authority, with 2.1 billion euros for BNP Paribas and 3.3 billion euros for Societe Generale.

BNP Paribas and Societe Generale said they’ll meet the new capital requirements through their own means.

For more, click here.

Special Section: Gupta Case

Ex-Goldman Sachs Director Gupta Charged in Galleon Probe

Former Goldman Sachs Group Inc. director Rajat Gupta was indicted for conspiracy and securities fraud, making him the highest-ranking executive charged in a nationwide crackdown on insider trading centered on Raj Rajaratnam, co-founder of hedge fund Galleon Group LLC.

Gupta, who also sat on the board of Procter & Gamble Co. and led McKinsey & Co., was charged with five counts of securities fraud and one count of conspiracy to commit securities fraud in an indictment unsealed today in Manhattan federal court. The U.S. Securities and Exchange Commission also sued Gupta, 62, yesterday.

Gupta, who surrendered to the FBI in Manhattan at about 8 a.m. yesterday, pleaded not guilty before U.S. District Judge Jed Rakoff. He was ordered released on $10 million bond secured by his Westport, Connecticut, home. His travel is restricted to the continental U.S. and he must surrender his passport. Rakoff set an April 9 trial date.

After his arraignment, Gupta declined to comment on the charges.

For more, click here, and click here.

Gupta Case Built on Circumstantial Evidence May Help Defense

The insider-trading prosecution of Gupta is built on circumstantial evidence that may be less persuasive than the wiretaps that sealed the fate of his friend Rajaratnam.

Unlike the case against the Galleon Group LLC co-founder and hedge fund tycoon, which included his own words in calls with leakers, prosecutors will seek to convict Gupta based on the timing of his phone calls and the Rajaratnam trades that immediately followed, said Peter Henning, a law professor at Wayne State University in Detroit. Wiretaps likely to be used at Gupta’s trial involve Rajaratnam boasting of a source he doesn’t name. The government said that source is Gupta.

Gupta’s indictment cites at least three instances in which he allegedly leaked tips to Rajaratnam. He’s accused of telling Rajaratnam about Berkshire Hathaway Inc.’s $5 million investment in Goldman Sachs in September 2008, about the bank’s unexpected fourth-quarter loss that year, and about P&G’s poor performance in late 2008.

Sam Buell, a law professor at Duke University in Durham, North Carolina, said the indictment suggests that prosecutors will rely on the tools they traditionally employed in insider trading cases before turning to wiretaps in 2008 to catch Rajaratnam and others swapping secret data.

To show that Gupta tipped Rajaratnam about Berkshire’s investment, the indictment says that Gupta telephoned Rajaratnam “approximately 16 seconds” after learning of it during a Goldman Sachs board meeting on Sept. 23, 2008. Rajaratnam bought Goldman Sachs shares minutes later, prosecutors alleged.

The government will also offer evidence of close ties between the two men relating to offshore funds and investments.

“The government’s allegations are totally baseless,” defense attorney Gary Naftalis said in a statement. “Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity.”

In a related lawsuit by the U.S. Securities and Exchange Commission, the agency said Gupta tipped Rajaratnam about Goldman Sachs’s second-quarter profit in 2008. The regulator puts Rajaratnam’s profit from the entire insider scheme at more than $23 million.

The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta, 11-cv-07566, U.S. District Court for the Southern District of New York (Manhattan).

For more, click here.

Berenzweig, Burns Comment on Federal Charges Against Rajat Gupta

Seth Berenzweig, managing partner at Berenzweig Leonard, talked about former Goldman Sachs Group Inc. director Rajat Gupta and the likelihood of government use of phone records in building a case against him.

Douglas Burns, a formal federal prosecutor, also talked about Gupta. He said the defense will likely argue that there was no ‘quid pro quo’ because Gupta was not paid for the information he allegedly passed to Galleon Group LLC’s Raj Rajaratnam.

Gupta was accused by U.S. prosecutors of conspiracy and securities fraud, making him the highest-ranking executive charged in a nationwide crackdown on insider trading centered on Galleon Group co-founder Rajaratnam.

Berenzweig spoke on Bloomberg Television’s “In Business with Margaret Brennan.” Burns spoke with Sara Eisner on Bloomberg Television’s “Inside Track.”

For the Berenzweig video, click here.

For the Burns video, click here.

Comings and Goings

Freddie Mac Replaces Chairman as CEO Haldeman Plans to Step Down

Freddie Mac, the mortgage finance firm seized by the U.S., said Chief Executive Officer Charles E. Haldeman will leave and named board member Christopher S. Lynch to replace John Koskinen as non-executive chairman.

One other director is leaving, according to a statement yesterday from regulators who oversee the McLean, Virginia-based company, bringing total departures announced in recent days to four of 11 board members. The changes portend a larger shakeup at Freddie Mac, according to four people with direct knowledge of the matter at McLean, Virginia-based Freddie Mac.

Haldeman will stay until a new CEO is found, according to the statement.

--With assistance from Jesse Hamilton and Phil Mattingly in Washington; Jonathan Stearns, Jim Brunsden, Aoife White and Aaron Kirchfeld in Brussels; Nandini Sukumar in London; Nina Mehta, Patricia Hurtado, David Glovin, Chris Dolmetsch and James Sterngold in New York; David Voreacos in Newark, New Jersey; David Whitehouse and Fabio Benedetti-Valentini in Paris; and Henrique Almeida in Lisbon. 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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