Bloomberg News

Insider Trading, SEC Budget, Corzine Testifies: Compliance

December 16, 2011

(Updates with House bill on mortgage-backed securities and U.K. bank plans in Compliance Policy; Guillen and ex-IndyMac chief Perry in Courts; and Zachary in Interviews/Speeches.)

Dec. 15 (Bloomberg) -- A Senate panel approved a proposal to place restrictions on insider stock trading by members of Congress, as lawmakers seek to restore eroding public trust in Washington.

The Senate Homeland Security Committee, on a 7-2 vote, yesterday approved a measure that would explicitly ban lawmakers and their aides from using nonpublic information they receive as part of their legislative and oversight duties for personal gain. The legislation also would make clear that existing securities laws prohibiting insider trading apply to Congress.

Enacting such legislation, which Congress has considered before, took on added urgency after the CBS News program “60 Minutes” reported last month that members of Congress bought stock in companies during debates on legislation that might affect the businesses. None of the questioned investments was illegal, the report said.

The Senate measure combines bipartisan proposals. It directs ethics committees in the House and Senate to issue rules on insider trading and requires lawmakers to disclose their stock, commodities futures, bond and other transactions within 30 days.

The bill requires the Government Accountability Office to study the role of so-called political intelligence firms, which use their contacts in Washington to provide financial institutions with market-related information.

In the House, similar legislation is gaining bipartisan support, growing from nine cosponsors before the CBS report to more than 230 backers.

Compliance Policy

House’s Emerson Says Lawmakers Agree on SEC Budget for 2012

The U.S. Securities and Exchange Commission’s 2012 budget has been agreed upon by lawmakers negotiating over the federal spending plan, according to Representative Jo Ann Emerson, the Missouri Republican who leads the House panel responsible for the SEC’s outlay.

Emerson, who spoke in Washington yesterday at a U.S. Chamber of Commerce forum, declined to disclose specifics on the SEC budget, which is to be included in a $1 trillion bill to fund the government for the rest of the fiscal year. House and Senate leaders are trying to finish negotiations on that catchall bill before current federal funding expires Dec. 16.

The agency’s budget is more generous than the spending plan lawmakers have negotiated for the Commodity Futures Trading Commission, Emerson told reporters at the Chamber of Commerce event held to discuss its plan for reforming the SEC.

The CFTC’s 2012 budget was increased by $2.6 million to $205.3 million under an agreement signed into law last month. SEC Chairman Mary Schapiro has asked Congress to approve a $1.4 billion budget for 2012 as it implements new oversight duties under the Dodd-Frank financial-regulation law.

Both Emerson and Representative Scott Garrett, the New Jersey Republican who leads a House subcommittee that oversees SEC operations, said the agency shouldn’t be given more money without demonstrating it can make fundamental changes.

Separately, the U.S. Securities and Exchange Commission should hold off an overhaul of money-market fund rules until it assesses whether earlier changes are working, Republican Commissioner Dan Gallagher said yesterday at the conference.

Considering capital buffers and a floating net-asset value at this point “would be premature or possibly unnecessary,” Gallagher said, citing steps Schapiro has said the agency may take.

“I’m hesitant about any form of so-called capital requirement, whether it takes the form of a buffer or an actual capital requirement similar to those imposed on banks,” said Gallagher, who was installed as an SEC commissioner last month. “The level of capital that would be required to legitimately backstop the funds would effectively end the industry.”

Schapiro said last month that the SEC will soon propose revamping money-market fund rules in pursuit of “structural reform” in the $2.6 trillion industry.

Regulators are aiming to make the funds safer and more stable in response to the 2008 collapse of the Reserve Primary Fund. The SEC could approve rules without backing from Gallagher, one of two Republicans on the five-member commission.

House Panel Votes for Standards on Mortgage-Backed Securities

A U.S. House subcommittee advanced legislation that would require regulators to establish standards for mortgage-backed securities.

The Financial Services Committee’s Capital Markets panel voted 18-15 yesterday for the measure.

The requirement is part of a package of bills from House Republicans aimed at dismantling Fannie Mae and Freddie Mac, the mortgage-finance companies that have operated under U.S. conservatorship since they were seized in September 2008. The government-sponsored enterprises, which own or guarantee almost half of U.S. home loans, have drawn more than $170 billion from a Treasury Department lifeline.

The bills must win approval from the full Financial Services Committee before they can be considered by the House.

FSA Official Said to Meet Bankers on Euro Breakup Contingencies

The head of prudential policy at the U.K. Financial Services Authority will meet today with officials from the British Bankers’ Association in London, two people familiar with the matter said.

Paul Sharma will discuss, as part of the meeting with officials from the lender group, contingency plans for a financial collapse following the breakup of the Euro currency union or a large bank failure, said one of the people, who spoke on condition of anonymity because the meeting isn’t public.

U.K. banks should have contingency plans for “unlikely but not un-severe scenarios,” including the exit of euro-area member states, Andrew Bailey, head of banking supervision at Britain’s banking watchdog, said last month.

Liam Parker, a spokesman at the FSA, declined to immediately comment.

The Wall Street Journal reported the planned meeting earlier today.

Special Section: MF Global

Corzine, Abelow, Berkovitz to Testify Today at CFTC

Jon S. Corzine, former MF Global Holdings, Ltd. chairman and chief executive officer, Bradley Abelow, the firm’s president and chief operating officer, and Dan Berkovitz, U.S. Commodity Futures Trading Commission general counsel, are scheduled to testify at a hearing today of the House Financial Services subcommittee on oversight and investigations.

The panel is the third congressional committee to vote to subpoena Corzine, who has said he had no intent to authorize the misuse of customers’ funds at the company’s broker-dealer unit.

Corzine Knew MF Made Loan From Customer Accounts, Duffy Says

Jon Corzine, the former chief executive officer of MF Global Holdings Ltd., knew that the company made a loan out of segregated customer accounts before it went bankrupt, CME Group Inc. chairman Terrence Duffy told the U.S. Senate.

Duffy, whose company is MF Global’s regulator and principal exchange, faced questions about a shortfall of some $1.2 billion in missing customer funds. CME and Commodity Futures Trading Commission staff had been told a discrepancy existed in the customer funds, which by law are required to be kept separate from company funds.

On Oct. 31, the day MF Global filed for bankruptcy protection, “a CME auditor also participated in a phone call with senior MF Global employees, wherein one employee indicated that Mr. Corzine knew about the loans that it had made for the customer -- from the customer segregated accounts,” Duffy said Dec. 13.

Corzine in earlier testimony said that he couldn’t explain why money was missing from customer accounts, and that he had been surprised to find out that money was missing from customer accounts on the night of Sunday Oct. 30.

For more, click here, and click here.

CFTC Internal Watchdog Prepares for MF Global Oversight Review

The U.S. Commodity Futures Trading Commission’s internal watchdog will review the agency’s oversight of MF Global Holdings Ltd’s brokerage after “immediate concerns” about as much as $1.2 billion in client funds are resolved, said Judith Ringle, attorney-adviser in the inspector general’s office.

The watchdog’s office is waiting for James W. Giddens, the trustee overseeing the liquidation of the bankrupt broker, to determine when the concerns are resolved before beginning the review, Ringle said yesterday in an interview.

Compliance Action

Ex-UBS Trader Says Bank Had No Unauthorized Trading Controls

UBS AG’s wealth-management unit in London had no controls to prevent unauthorized trading in client accounts, according to a lawyer for a former trading desk head challenging a 1.25 million-pound ($1.93 million) fine.

UBS “was to some extent complicit” in Sachin Karpe’s unauthorized trades because “senior managers” were copied on e-mails about some client accounts, Karpe’s lawyer, Michael Blair, said at a court hearing in London this week. An external auditor’s review, commissioned by the bank, determined there were no controls to prevent internal unauthorized transfers or loans between clients of the bank unit, Blair said.

Blair said that Karpe did not circumvent controls because there were no rules in place.

The case is one of three challenges by individual UBS bankers to Financial Services Authority enforcement actions stemming from the unauthorized trades. Zurich-based UBS in 2009 paid an 8 million pound-fine and agreed to reimburse customers $42.4 million.

A UBS spokesman said the bank has “acknowledged that there were weaknesses in certain aspects of Wealth Management U.K.’s control environment.”

For more, click here.

SEC Revokes Registration of China’s Longtop Financial

The U.S. Securities and Exchange Commission revoked the registration of Longtop Financial Technologies, a Chinese maker of financial software, saying the company is in default for failing to respond to an agency order.

The SEC had requested that Longtop give reasons why the registration of its securities shouldn’t be revoked for failing to file required financial reports, according to an SEC filing.

Goldman Sachs Group Inc. and Deutsche Bank AG took Longtop public in 2007.


Kluger Pleads Guilty in Law-Firm Insider Trading Scheme

Matthew Kluger pleaded guilty to stealing corporate merger tips from law firms to fuel a 17-year insider-trading scheme that prosecutors said generated $37 million in illegal profits.

Kluger, 50, admitted to securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and obstruction of justice yesterday in federal court in Newark, New Jersey. He said he stole from four law firms where he worked as an attorney and agreed to forfeit $415,000 in cash. U.S. District Judge Katharine Hayden set sentencing for April 9. Kluger remains free on bail.

Kluger is the third defendant to plead guilty in the case, joining stock trader Garrett Bauer and middleman Kenneth T. Robinson in admitting they used nonpublic data to trade ahead of more than 30 corporate transactions over 17 years. Robinson, who cooperated with prosecutors, pleaded guilty in April. Bauer pleaded guilty on Dec. 8.

The case is U.S. v. Bauer, 11-cr-03536, U.S. District Court, District of New Jersey (Newark).

Accountant Gets 14 Months in Connecticut Hedge-Fund Case

A Venezuelan accountant was sentenced to 14 months in prison for his role in trying to hinder a probe into a Connecticut hedge fund manager accused of conducting a Ponzi scheme.

Juan Carlos Guillen Zerpa, 44, was sentenced yesterday in federal court in Bridgeport, Connecticut, for lying to the U.S. Securities and Exchange Commission, according to Tom Carson, spokesman for U.S. Attorney David Fein in New Haven.

Guillen admitted to aiding Francisco Illarramendi, majority owner of Michael Kenwood Group LLC, a holding company for an investment adviser through which Illarramendi managed several hedge funds. Illarramendi pleaded guilty to fraud and obstruction on March 7. Guillen was managing partner of BDO Guillen Martinez & Asociados, the Venezuelan affiliate of BDO International Ltd., according to the Latin American Herald Tribune.

Carson, the prosecutor’s spokesman, said the investigation into the case is continuing.

The criminal case is U.S. v. Guillen, 11-cr-76, U.S. District Court, District of Connecticut (Bridgeport), and the SEC case is SEC v. Illarramendi, 11-cv-78, U.S. District Court, District of Connecticut (New Haven).

For more, click here.

Ex-IndyMac Chief Perry Must Face FDIC Lawsuit Over Loan Losses

Michael Perry, the ex-IndyMac Bancorp Inc. chief executive officer, must face Federal Deposit Insurance Corp. claims over more than $600 million in losses on mortgage loans that couldn’t be sold.

U.S. District Judge Otis Wright II in Los Angeles denied Perry’s request to dismiss the lawsuit. The judge disagreed with Perry’s argument that the so-called business-judgment rule protects corporate officers as well as directors from lawsuits over their decisions made on behalf of the corporation. In support of his decision, Wright cited California legislative history.

The FDIC sued Perry in July, alleging that he acted negligently when he allowed IndyMac, once the second-largest U.S. independent mortgage lender, to generate and purchase $10 billion in risky loans to be sold in the secondary market in 2007.

IndyMac was seized by regulators in July 2008, and was later sued by the Securities and Exchange Commission.

D. Jean Veta, a lawyer for Perry, didn’t immediately return phone and e-mail messages yesterday seeking comment on the ruling.

The case is FDIC v. Perry, 11-05561, U.S. District Court, Central District of California (Los Angeles).


Cameron Says Looking at Extra Measures Against RBS Directors

U.K. Prime Minister David Cameron said the government is considering what extra measures it can take against directors of Royal Bank of Scotland Group Plc after a Financial Services Authority report this week on the near collapse of the bank following its purchase of ABN Amro Holding NV in 2007.

Cameron made his comment at his weekly question-and-answer session in Parliament in London yesterday.

For the video, click here.

Zachary Discusses Opposition to 500-Shareholder Rule

George Zachary, general partner at Charles River Ventures Inc., talked about his opposition to a rule that requires closely held companies to disclose financial data when they have 500 or more shareholders.

Zachary, who spoke with Emily Chang on Bloomberg Television’s “Bloomberg West,” also discussed Zynga Inc.’s initial public offering.

For the video, click here.

Comings and Goings

Goldman Sachs Recruits French-Speaking Regulator From FSA

Goldman Sachs Group Inc.’s U.K. arm hired a French-speaking markets regulator from Britain’s Financial Services Authority, as rule-setting powers move from London to Paris and Brussels.

The bank hired Martine Doyon, a specialist in European Union market rules and an international strategist for the regulator, to head up its EU government-affairs department, an FSA spokesman said in a telephone interview. She becomes at least the ninth senior official to leave the regulator since the government said in 2010 it would abolish the agency.

--With assistance from Ben Moshinsky in Brussels; Lindsay Fortado and Eddie Buckle in London; Lorraine Woellert, Silla Brush, Jesse Hamilton and Catherine Dodge in Washington; David Voreacos in Newark, New Jersey; Tiffany Kary, Thom Weidlich and Will Daley in New York; and Edvard Pettersson in Los Angeles. 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

The Good Business Issue
blog comments powered by Disqus