Bloomberg News

Bid Rigging, MF Global, Insider Trading, Cordray: Compliance

December 12, 2011

(Adds UBS to Citigroup item in Compliance Action and EU accord in Compliance Policy.)

Dec. 9 (Bloomberg) -- Wells Fargo & Co. agreed to pay $148 million to settle criminal charges and civil claims aimed at Wachovia Bank, which it acquired in 2008.

The deal will resolve investigations by federal agencies, including the U.S. Securities and Exchange Commission and the Justice Department, as well as attorneys general in 26 states, into charges that Wachovia conspired to overcharge state and local governments on investments.

The case is the latest in a more than five-year investigation into how Wall Street banks conspired with local- government advisers to reap excessive fees on investments sold to public agencies by rigging competitive auctions and carving up the market among themselves. JPMorgan Chase & Co., UBS AG and Bank of America Corp. previously settled similar cases.

“Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business,” Robert Khuzami, the director of the SEC’s Division of Enforcement, said in a statement.

The settlement by Wells Fargo will bring to $673 million the amount that banks have paid to settle the case, some of which is being returned to localities that were overcharged in the scheme.

Wells Fargo, based in San Francisco, said the conduct was by former employees of Wachovia before its acquisition. About $59 million from the settlement will go to state attorneys general, the bank said.

“Wells Fargo is pleased to have fully resolved this investigation of Wachovia Bank,” the bank said in a statement.

The SEC said Wachovia was involved in rigging at least 58 transactions over an eight-year span involving the proceeds of more than $9 billion of municipal bonds. Wachovia steered new business to brokers who participated in the conspiracy, the SEC said. Wells Fargo neither admitted nor denied the SEC allegations.

For more, click here.

Compliance Action

Corzine Tells Congress He Didn’t ‘Intend’ to Break Rules

Jon S. Corzine told U.S. lawmakers he never intended to break any rules as head of MF Global Holdings Ltd. and doesn’t know what happened to an estimated $1.2 billion in missing client funds.

“I’m not in a position, given the number of transactions, to know anything specifically about the movement of any specific funds,” Corzine said yesterday at a House Agriculture Committee hearing in Washington. “I certainly would never intend to direct or have segregated funds moved.”

Under subpoena and under oath, the former Democratic senator and New Jersey governor testified on Capitol Hill for 2 1/2 hours, repeatedly apologizing to investors, customers and employees of the failed New York brokerage.

“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine said. “I apologize, both personally and on behalf of the company, to our customers, our employees and our investors. I truly know that they are bearing the brunt” of the collapse.

Corzine said he didn’t knowingly authorize any movement of funds out of client accounts, and that any such transfers could have been a misunderstanding or misinterpretation of his intent.

He said that on the evening of Oct. 30, the night before MF Global filed what has become the eighth-largest U.S. bankruptcy, he was informed of the shortfall in client accounts and told employees, “We’ve got to fix this” and “We’ve got to find the money.” He speculated that someone “could misinterpret” such remarks.

Corzine didn’t once decline to answer a question or invoke his Fifth Amendment right to remain silent.

James W. Giddens, the trustee overseeing the liquidation of the firm, has estimated that $1.2 billion in client money is missing. The Commodity Futures Trading Commission, Securities and Exchange Commission and Justice Department are investigating.

James Kobak, a lawyer for Giddens, testified at the hearings yesterday that the trustee will pursue all “legally available” assets, including those from individuals who may have liability for breaking the rules requiring protection of commodity customers’ accounts. He also said customers now have no assurance of a 100 percent return of their assets because of the money that is missing.

Also testifying at yesterday’s hearings was Jill Sommers, a commissioner at the CFTC, who said that regulators are still working to trace all the transactions and that some client funds may be recovered.

“If there is any customer money that has been transferred out of the accounts, that is part of what we are working together to find, and that money will be clawed back to be distributed back to customers,” Sommers, the commissioner overseeing the agency’s investigation of MF Global, told the committee.

For more, click here and here.

UBS, Citigroup May Be Penalized in Japan on Tibor Probe

UBS AG and Citigroup Inc. may be penalized in Japan for attempting to influence the Tokyo interbank offered rate, the country’s securities watchdog said.

The Securities and Exchange Surveillance Commission recommended that Japan’s Financial Services Agency punish the local brokerage units of UBS and Citigroup, the watchdog said in a statement in Tokyo today. Employees of the local operations repeatedly asked bankers to change the rates they submit for setting Tibor to gain an advantage, it said.

Citigroup, the third-biggest U.S. lender by assets, is part of a global probe by regulators into whether some of the world’s largest banks manipulated the interest rates at which they borrowed from each other. In Japan, apart from the Tibor inquiry, New York-based Citigroup is facing potential penalties for compliance violations at its local banking unit.

Both Zurich-based UBS and Citigroup lacked internal controls to deal with the employees’ actions, the commission said today. It didn’t elaborate on the kinds of penalties sought.

There is no evidence that the Tibor rate was manipulated following the actions, an SESC official said at a news conference today, speaking on condition of anonymity in accordance with the organization’s policy.

Citigroup’s Japanese brokerage unit, Citigroup Global Markets Japan Inc., “has started working diligently to address the issues raised,” the company said in an e-mailed statement.

Eiko Noda, a Tokyo-based spokeswoman for UBS, wasn’t immediately available to comment.

The U.S. Justice Department and the Securities and Exchange Commission may be investigating whether banks colluded to artificially reduce the London interbank offered rate, or Libor, a person with knowledge of the inquiry said in March. The probe came to light after UBS, Switzerland’s biggest bank, said it received subpoenas from U.S. and Japanese regulators.

For more, click here.

Garrett Bauer Pleads Guilty to Trading on Stolen Merger Tips

Garrett Bauer, a New York stock trader, pleaded guilty to his role in an insider-trading scheme that the U.S. says generated $37 million in illegal profits by relying on corporate merger tips stolen from four law firms.

Bauer, 44, joined middleman Kenneth T. Robinson and attorney Matthew H. Kluger in using nonpublic data to trade ahead of more than 30 corporate transactions over 17 years, he admitted in federal court in Newark, New Jersey. Robinson, who cooperated with prosecutors, pleaded guilty in April.

In charging the men in April, prosecutors said the scheme involved companies such as Sun Microsystems Inc., 3Com Corp. and Acxiom Corp. They said Bauer made more than $30 million on the scheme, while Robinson earned more than $875,000 and Kluger more than $500,000.

Bauer pleaded guilty to securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and obstruction of justice. He faces as long as 20 years in prison on the fraud and obstruction counts when he’s sentenced March 13. He forfeited cash and property worth more than $23 million.

Bauer, who is free on $4 million bail, regrets his actions and has been giving lectures to students and traders about insider trading, said, Michael Bachner, his attorney.

Bauer forfeited about $20 million in bank accounts and trading accounts, as well as a $6.65 million condominium on the Upper East Side of Manhattan and an $875,000 home in Boca Raton, Florida. Assistant U.S. Attorney Matthew Beck said the properties had liens on them.

Kluger is in plea negotiations with the U.S. Attorney’s Office in Newark, according to a Sept. 30 court filing.

Robinson, a mortgage broker who secretly recorded Bauer and Kluger for the Federal Bureau of Investigation, is cooperating with federal investigators, U.S. Attorney Paul Fishman said after his plea hearing.

The cases are U.S. v. Bauer, 11-mj-03536, and U.S. v. Robinson, 11-cr-00223, U.S. District Court, District of New Jersey (Newark).

For more, click here.

‘Oddball’ Hedge-Fund Friend Chose Stocks, Sidhu Tells Court

Rupinder Sidhu, who is accused of insider trading, said he had no idea stock tips from his “eccentric” friend at hedge fund AKO Capital LLP were based on confidential information.

Prosecutors allege AKO trader Anjam Ahmad told Sidhu when the fund was about to place large buy or sell orders so Sidhu could benefit from the effect on the shares. The pair split profits of about 500,000 pounds ($783,500) from spread bets on companies including Julius Baer Group Ltd., Swatch Group AG and Michael Page International Plc between June and August 2009, the U.K. Financial Services Authority said in a London trial.

“I didn’t know about any AKO orders,” Sidhu testified yesterday. “I was basing my trades on Ahmad’s decisions and his rationale.”

Sidhu denies 23 counts of insider trading and one money- laundering charge for which he’s on trial. The 40-year-old management consultant from Osterley, West London, admitted contacting Ahmad using unregistered mobile phones and instant- messaging accounts under false names to discuss trades. In one MSN Messenger conversation, they made a coded reference to a potential purchase as a “party.”

For more, click here.

France Telecom Loses EU Court Appeal Over $1.37 Billion Aid

France Telecom SA, France’s largest phone company, lost an appeal at the European Union’s highest court against an EU order that forced it to pay about 1.02 billion euros ($1.37 billion) in back taxes to the French government.

The EU regulator’s “decision finding that that aid existed and ordering its recovery is valid,” the EU Court of Justice in Luxembourg said in a ruling yesterday. It upheld a lower EU court’s ruling in 2009 “that the special tax regime to which France Telecom was subject constituted state aid.”

The European Commission, which checks whether government aid distorts competition, had probed France’s support for the phone company when it was close to bankruptcy in 2002. It decided that France Telecom received improper tax benefits from 1994 through 2004. A lower EU court in 2009 sided with the regulator.

The Brussels-based commission won a separate case at the EU high court in 2007 over France’s failure to recoup the tax breaks. The court in that case rejected France’s arguments that the commission should have given a more precise figure when it ruled in 2004 that France Telecom must pay back as much as 1.1 billion euros, plus interest.

“We take note of the decision, which has no financial consequences for the group because the full amount was paid to the French state at the beginning of 2010,” Sebastien Audra, a Paris-based spokesman for France Telecom, said by phone yesterday.

The commission’s probe focused on the French state’s role in supporting France Telecom at the end of 2002. When the commission started investigating whether the promise of loans to France Telecom constituted state aid, it also opened a probe into whether the company benefited from unfair tax breaks.

The tax system dates back to a French law from 1990 when the company, which was formerly part of a government department, was set up.

The case is: C-81/10 P, France Telecom v. European Commission.

Compliance Policy

Euro Leaders’ Reach Fiscal Union Accord, Next Step to ECB

European leaders reached a preliminary accord to solve the debt crisis after all-night talks in Brussels.

Nineteen months since euro leaders forged their first plan to contain the debt turmoil, the fifth comprehensive effort added 200 billion euros ($267 billion) to the warchest and tightened rules to curb future debts. They sped the start of a 500 billion-euro rescue fund to next year and diluted a demand that bondholders shoulder losses in rescues.

“By beginning a fiscal union we’ve taken good steps forward,” German Chancellor Angela Merkel told reporters. “We are very pleased with the result.”

The blueprint for a closer fiscal union to save their single currency left the onus on central bankers to address investor concerns that Italy and Spain would succumb to the two- year-old financial crisis.

While European Central Bank President Mario Draghi hailed the accord struck at all-night talks in Brussels, investors urged him to expand his crisis-fighting arsenal to ensure debt- addled nations can pay their bills. Italian and Spanish bonds fell even as the ECB was said to be buying them in the market.

“The leaders have now defined the end point they want to reach in terms of fiscal governance, but it’s a long way to go there,” Thomas Mayer, London-based chief economist at Deutsche Bank AG, told Bloomberg Television. “We’ll probably see more near-term tension and that will probably then trigger a more hands-on intervention by the ECB.”

Draghi praised a “very good outcome” a day after he damped expectations that a deal would prompt the ECB to step up its bond-buying after so far spending $207 billion.

His concern is doing so would muddy the divide between monetary and fiscal policies, while lessening pressure on governments to strengthen budgets. The ECB is instead focused on reviving bank lending and yesterday cut interest rates, offered banks unlimited cash for three years and loosened collateral rules for loans.

EU leaders resume talks later today.

For more on Europe’s debt crisis, see EXT4.

EU Banks Must Raise $153 Billion of Extra Capital, EBA Says

European Union banks must raise 114.7 billion euros ($152.8 billion) in fresh capital as part of measures introduced to respond to the euro area’s sovereign-debt crisis.

German banks need to raise an additional 13.1 billion euros, Italian banks 15.4 billion euros, and Spanish lenders 26.2 billion euros in core tier 1 capital, the European Banking Authority in London said. The capital shortfalls include 15.3 billion euros for Spain’s Banco Santander SA and 7.97 billion euros for Italy’s UniCredit SpA.

European leaders are demanding the region’s banks bolster capital to withstand writedowns after they agreed to take losses on Greek bonds. The EBA estimated two months ago that the region’s financial institutions needed 106 billion euros to increase their core Tier 1 capital to a target of 9 percent of risk-weighted assets by mid-2012, after marking their sovereign bonds to match market prices.

For more, click here.

U.S. Stance on Climate Deal Draws Barbs From EU to Barbados

President Barack Obama’s position that dangerous global warming can be avoided without deeper cuts in fossil-fuel emissions before 2020 has prompted a backlash in countries from Norway to Barbados.

There are “multiple pathways” to prevent temperatures from rising 2 degrees Celsius (3.6 degrees Fahrenheit) without countries strengthening pledges to reduce greenhouse gases by 2020, Jonathan Pershing, the U.S. climate envoy, said at United Nations climate talks last week.

“It’s a very risky assumption, too risky,” Norway’s top climate change envoy, Henrik Harboe, said in an interview. “We know we are far below the recommendations of science.”

The question of when the world acts to contain global warming is at the heart of the talks in Durban, South Africa, where delegates from more than 190 nations are working on how to take the next steps in curbing emissions after the limits outlined in the Kyoto Protocol expire next year.

Pressure on the Obama administration to ease its position on a new climate deal before 2020 was underscored earlier yesterday when a U.S. student disrupted a high-level plenary session in Durban as Stern was starting to speak.

“The Obama administration is feeling the heat,” Lou Leonard, director of WWF’s climate change program, based in Washington, said in an interview from Durban.

U.S. Special Envoy on Climate Change Todd Stern later rejected suggestions that the nation’s position means it wants to postpone action on climate change, noting his support for measures agreed in the past two years that require more countries to pledge emissions cuts.

“There is a misconception about the U.S. wanting to delay action on climate change,” he told reporters in Durban. “It’s completely off base to suggest that the U.S. is proposing we delay action until 2020.”

For more, click here.

Congress

U.S. Senate Republicans Block Cordray for Consumer Bureau

Republicans in the U.S. Senate yesterday blocked the nomination of Richard Cordray as the first director of the Consumer Financial Protection Bureau. The vote, on a motion to end debate, was 53-45, with 60 votes required to move the nomination ahead.

In a televised statement after the vote, President Barack Obama insisted his administration would continue its efforts to get Cordray, a former Ohio attorney general, into the job.

Asked whether he was contemplating a recess appointment, Obama told reporters he “won’t take any options off the table.”

So far, Republicans have prevented Obama from making recess appointments by holding short sessions, just a few minutes each, during vacation periods. A recess appointment allows a president to put people temporarily in posts that normally would require Senate confirmation by naming them when Congress has formally adjourned.

After the vote, the Senate’s third-ranking Democrat called on Obama to use “all possible means” to get Cordray, now the bureau’s top enforcement official, into the director post.

“He should do everything within his power to get Cordray on board,” Senator Charles Schumer of New York told reporters.

Senate Democrats and the White House had pressed for the vote, even though it was clear that Republicans had enough votes to block the motion to end debate.

For more, click here.

--With assistance from Martin Z. Braun, Donal Griffin, Tiffany Kary and Linda Sandler in New York; David Voreacos in Newark, New Jersey; Silla Brush, Kim Chipman, Carter Dougherty, William Selway and Lorraine Woellert in Washington; Kit Chellel, Alex Morales and Ben Moshinsky in London; Simon Kennedy in Paris; Stephanie Bodoni in Luxembourg; Jim Brunsden and James G. Neuger in Brussels; and Takahiko Hyuga in Tokyo. Editor: Andrew Dunn

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.


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