Bloomberg News

Carlyle Suit Ban, Greek Rescue, Pipeline Bill: Compliance

February 07, 2012

(Updates Carlyle suit-ban in top section and adds EU-U.K. banking supervision in Compliance Policy and EU bank ‘sovereign buffers’ in Compliance Action.)

Feb. 6 (Bloomberg) -- Carlyle Group LP abandoned a plan to ban shareholders from filing class-action lawsuits after U.S. regulators threatened to block a stock sale the private-equity firm is seeking to complete as soon as April.

The Washington-based firm amended the documents for its initial public offering on Jan. 10 to include a provision that would have required future stockholders to resolve any claim against Carlyle through arbitration rather than in court. The move provoked controversy among lawmakers and shareholder rights advocates, who urged the U.S. Securities and Exchange Commission not to approve the arbitration clause.

The SEC subsequently told Carlyle that it wouldn’t sign off on the IPO as long as the provision was included, according to a statement the agency issued Feb. 3. In addition, the proposal was likely to draw opposition from public pensions and agencies, which provided about 40 percent of the capital commitments to Carlyle’s funds as of Sept. 30 and would also have been potential customers for the IPO.

Last week three Democratic senators wrote a letter to SEC Chairman Mary Schapiro, urging her not to clear the IPO unless Carlyle dropped the arbitration clause.

The Feb. 3 letter was signed by Senators Al Franken of Minnesota, Robert Menendez of New Jersey and Richard Blumenthal of Connecticut, who wrote that Carlyle’s provision “would unlawfully deprive investors of their ability to vindicate their statutory rights.” The senators expressed concern that the Carlyle public offering filing could set a precedent for future IPOs and diminish shareholder rights.

Christopher Ullman, a spokesman for Carlyle, declined to comment on the letter. The American Association for Justice, the primary trade group for trial lawyers, urged its members to contact public pension funds and ask them to weigh in with Carlyle and the SEC, according to Michelle Widmann, a spokeswoman for the Washington-based association. The Council of Institutional Investors, an association of pension funds, endowments and foundations that oversee more than $3 trillion in assets, had also placed the Carlyle proposal on its policy committee agenda for review, according to Jeff Mahoney, the organization’s general counsel.

Carlyle’s initiative followed a series of U.S. Supreme Court rulings that said arbitration was the preferred method of resolving disputes between corporations and their customers and employees. That concept could have been extended to U.S. securities markets had Carlyle succeeded in going public with a mandatory-arbitration clause.

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Compliance Policy

ECB Said to Consider Ways to Use Bond Holdings in Greek Rescue

The European Central Bank is considering using its bond holdings to bolster Greece’s next rescue program and support efforts to contain the sovereign debt crisis, three euro-region officials said.

Under one plan, the ECB could sell its Greek bonds to the European Financial Stability Facility at the price it paid for them rather than accept a loss along with private creditors, two of the people said. The EFSF is against that proposal because it may stretch its capacity, the officials said. Another plan is for euro-area central banks to give up profits or take losses on Greek bonds in their investment portfolios. Several options are under informal consideration and none have gained traction so far, two of the officials said. Spokesmen for the ECB and the EFSF declined to comment.

The central bank’s discussions have taken place as Greece, its private creditors and international authorities struggle to assemble a new aid package big enough to contain the crisis. The European Union is under pressure to reach a deal with Greece and its creditors soon because of a 14.5 billion-euro ($19 billion) Greek bond payment due March 20.

In October, the EU, Greece and private creditors agreed to a deal that includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and 130 billion euros in official loans. That deal, which also involves the International Monetary Fund, requires Greece’s debt burden to fall to 120 percent of gross domestic product by 2020.

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EU Style of Bank Supervision May Clash With U.K., FSA CEO Says

The U.K.’s changing system of banking supervision may be at odds with the European Union’s style of financial oversight, said Hector Sants, the British Financial Services Authority chief executive officer.

The FSA plans to implement a so-called twin peaks structure by April 2, Sants said in a speech today in London, splitting rule-making and enforcement duties into two separate divisions within the regulator. The agency will be “more intrusive” while seeking to limit “unnecessary questioning,” Sants said.

Sants said he believes there’s a “necessity of having customized risk assessments” for individual firms.

The FSA will be disbanded next year as part of the U.K. government’s plans to hand responsibility for banking supervision to the Bank of England. Oversight of trading and consumer rules will be taken over by the Financial Conduct Authority.

Compliance Action

Two Agencies to Lose Roles Under Keystone XL Bill, Officials Say

A Republican-backed bill giving the Federal Energy Regulatory Commission power to approve TransCanada Corp.’s Keystone XL pipeline would remove two federal agencies from oversight, officials of the Interior Department and U.S. Army Corps of Engineers said.

The Interior Department is responsible for monitoring construction and maintenance of pipelines on U.S. land, and the legislation makes FERC the “sole federal agency responsible for the project,” Mike Pool, deputy director of Interior’s Bureau of Land Management, said Feb. 3 at a House subcommittee hearing in Washington. The Corps would lose its permitting authority for the pipeline, an official said.

Republicans are pressing to start work on the $7 billion pipeline from Canada to U.S. Gulf coast refineries, which was delayed by President Barack Obama in November to consider an alternate route.

The bill strips the Corps of Engineers of its role in reviewing and approving pipelines, Margaret Gaffney-Smith, chief of the Corps’ regulatory program, said at the hearing. It also poses jurisdictional and legal issues, officials from the State Department and FERC told the House subcommittee Jan. 25. FERC doesn’t have the authority to site oil pipelines.

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Espirito Santo Says Does Not Plan to Use Recapitalization Funds

Banco Espirito Santo SA, Portugal’s biggest bank by market value, does not plan to use the state’s recapitalization funds, Chief Executive Officer Ricardo Salgado said in Lisbon Feb. 3.

Espirito Santo ended 2011 with a core tier 1 ratio of 9.2 percent and a tier 1 ratio of 9.4 percent, the lender said in a statement Feb. 3 on its full-year earnings.

The Salgado also reaffirmed at the press conference that the bank has no exposure to Greek sovereign debt.

California’s Solo Mortgage Probe Complicated by 2008 Deal

California Attorney General Kamala Harris objects to giving banks broad releases of liability for predatory lending. At the same time, she may be locked into her predecessor’s 2008 settlement with the largest lender in the state during the mortgage boom that does exactly that.

Facing a deadline today to join a proposed multistate agreement over foreclosure practices said to be worth as much as $25 billion if California joins, Harris has said she won’t sign onto a deal blocking her from investigating whether the five largest U.S. mortgage servicers misled homeowners about the terms of their loans, among other issues.

One of the five lenders involved in the talks, Bank of America Corp., reached an agreement in 2008 with Harris’s predecessor, Jerry Brown, who is now governor, that bars its Countrywide Financial unit’s mortgage holders from pursuing claims of the type that Harris wants to investigate.

Harris, 47, whose state is the most populous and leads the nation in foreclosure filings for housing units, has described as “inadequate” the proposed settlement state and federal officials have been negotiating for more than a year.

The foreclosure probe, which had involved attorneys general from all 50 states, began in October 2010 following disclosures that banks were using faulty documents to seize homes.

Harris, through spokesman Shum Preston, declined to comment on the Countrywide settlement or the multistate negotiations.

Gil Duran , a spokesman for Brown, had no immediate comment.

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EU May Consider Relaxing Demands on Banks for Sovereign Buffer

European bank supervisors may discuss easing rules for lenders to hold capital against sovereign debt this week amid more than 30 meetings this month that will track banks’ progress in complying with updated requirements, two people with knowledge of the discussions said.

Regulators will meet this week at the European Banking Authority in London to review the capital rules issued in December. National supervisors will likely discuss the sovereign buffer, according to one of the people, a senior EU official, who declined to be identified because the talks are private.

The EBA told banks to raise 114.7 billion euros ($150.5 billion) in fresh capital by the end of June as part of measures introduced to respond to the euro area’s fiscal woes. The EBA required banks to keep a core Tier 1 capital ratio of 9 percent and hold additional reserves against the debt of weaker euro- area countries according to the market price of the bonds, known as the sovereign buffer.

Banks submitted their plans to raise capital in January.

Supervisory colleges, groups of national regulators that oversee Europe’s largest cross-border banks, will hold 31 meetings this month to decide whether the banks’ proposals comply with the EBA guidelines, one of the people said. Banks aren’t allowed to reduce lending to hit the capital ratios, the EBA said in December.

Courts

Ex-Credit Suisse CDO Chief Surprised by Charges, Lawyer Says

Kareem Serageldin, the ex-global head of Credit Suisse Group AG’s CDO business charged in a bonus-boosting fraud tied to a $5.35 billion trading book, was surprised by the U.S. indictment since he has been cooperating with investigators for four years, his lawyer said.

Serageldin, 38, a U.S. citizen who lives in England, was charged in Manhattan federal court for masterminding a scheme to fake collateralized debt obligation data to meet targets and protect end-of-year bonuses. Two of his former subordinates, David Higgs, 42, and Salmaan Siddiqui, 36, pleaded guilty Feb. 1 in New York to manipulating prices at Serageldin’s direction. The men were also sued by the U.S. Securities and Exchange Commission.

Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case, urged Serageldin after the indictment was unsealed to come to the U.S. to face the charges. Serageldin’s lawyer said his client was blindsided by Bharara’s prosecution because he has been fully cooperating with U.K. and U.S. investigators, including Bharara.

James McGuire, a lawyer for Serageldin in New York, said Feb. 2 in a phone interview his client is “studying his options.” Serageldin denied any wrongdoing.

Higgs and Siddiqui both implicated their former boss, saying Serageldin told them to overstate the value of mortgage- backed assets in a Credit Suisse trading book after the collapse of the U.S. housing market. Both men, who have plea agreements with the government, face sentences of as long as five years in prison on one count of conspiracy, the U.S. said.

The cases are U.S. v. Higgs, 12-cr-00088, and U.S. v. Siddiqui, 12-cr-00089, U.S. District Court, Southern District of New York (Manhattan). The SEC case is U.S. Securities and Exchange Commission v. Serageldin, 12-cv-00796, U.S. District Court, Southern District of New York (Manhattan).

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Interviews/Speeches

Cohen Says ‘Laser-Like Focus’ on Europe Is Cause for Optimism

Increased awareness of the seriousness of Europe’s debt problems is cause for optimism, said H. Rodgin Cohen, a partner at Sullivan & Cromwell LLP.

“I am actually more positive, more optimistic because of the laser-like focus by the entire European community and the world at large on the necessity of solving Greece and solving Europe,” Cohen, senior chairman at the New York-based law firm, said Feb. 3 in an interview on Bloomberg TV.

While there is still “a lot that could go wrong” in Europe, there is more awareness about the seriousness of the issues, he said. The U.S. and other countries shouldn’t be too intrusive in the process, he said.

Cohen worked with U.S. governmental agencies on behalf of financial and trade associations following the U.S. financial crisis. He said the Volcker rule, which would ban proprietary trading under new financial industry regulations, should be implemented in a way that ensures liquidity in financial markets.

Comings and Goings

SEC Said to Appoint GAO’s Franzel to Auditor Watchdog Panel

Jeanette M. Franzel, a managing director at the Government Accountability Office, has been chosen to fill a vacancy on the Washington-based panel that oversees public-company auditors, the U.S. Securities and Exchange Commission said in a statement.

The Securities and Exchange Commission will appoint Franzel to replace former acting chairman Daniel Goelzer, whose term on the Public Company Accounting Oversight Board expired late last year, said the people, who declined to be identified because the decision isn’t public. The five-member board is weighing several major changes to core auditing rules, and the new member’s vote could tip the balance.

The nonprofit panel created under the Sarbanes-Oxley Act of 2002 began to pursue several policy changes that have drawn criticism from the accounting industry, including forced rotation of auditors.

Embraer Nominates Brazil Treasury’s Augustin as Board Member

Embraer SA said it nominated Brazil’s Treasury Secretary Arno Augustin as a member of its board, according to a regulatory filing.

Augustin’s nomination to the company’s board will be voted on in a meeting of shareholders scheduled for March 6.

--With assistance from Miles Weiss, Jesse Hamilton and Cristina Alesci, Jesse Hamilton and Brian Wingfield in Washington; Patricia Hurtado, Will Robinson and Deirdre Bolton in New York; Joao Lima in Lisbon; Joel Rosenblatt in San Francisco; Jana Randow in Brussels; Jeff Black and Rebecca Christie in Frankfurt; Ben Moshinsky in London; and Helder Marinho in Sao Paulo. 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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