Bloomberg News

SEC Trade Halts, Best Buy Departure, Compliance

May 15, 2012

The U.S. Securities and Exchange Commission halted trading in 379 shell companies over concern that fraudsters could hijack stocks to steal investor money.

The trading suspensions, the most by the SEC in a single day, stem from the work of an agency task force that identified clearly dormant microcap stocks in 32 states and at least six countries, the SEC said yesterday in a statement.

Microcap shares have long been used for frauds such as pump-and-dump schemes.

Regulators sharpened their focus on shell companies about two years ago amid complaints that issuers, many from China, were using them to enter U.S. markets through so-called reverse mergers. In a reverse merger, closely held firms buy shells that let them sell shares on exchanges without the scrutiny that would surround a public offering.

Several reverse-merger companies have seen their share prices plummet amid allegations that their financial statements were inaccurate.

Compliance Policy

Bank Bonus Curbs Endorsed by EU Lawmakers in Vote on Basel Rules

Banks may face tougher bonus curbs including a ban on awards stemming from carry-trade profits on cheap European Central Bank loans under proposed changes to a law on Basel capital rules endorsed by European Union lawmakers.

Lenders should also be forbidden from giving staff bonus awards that exceed fixed salaries, in the proposals approved by members of the European Parliament’s economic and monetary affairs committee in Brussels yesterday. The amendments will be part of the EU assembly’s negotiation position in talks with governments on the legislation.

Separately, European Union finance ministers reached a political agreement to boost the amount of core capital and liquid assets that banks must hold, after resolving U.K. concerns that the move may hamper its implementation of even tougher rules.

U.K. Chancellor of the Exchequer George Osborne said he won assurances from other nations that the U.K. wouldn’t be impeded in enacting its separate rules that will force some lenders to hold core capital equivalent to 10 percent of their assets, weighted for risk.

Governments and lawmakers in the 27-nation EU face a January deadline to implement the bank rules, which were agreed on by the Basel Committee on Banking Supervision in the wake of the 2008 collapse of Lehman Brothers Holdings Inc. The measures, known as Basel III, would more than triple the core capital that banks need to hold to 7 percent of their risk-weighted assets. Basel agreements must be implemented into nations’ laws before they can come into effect.

Today’s deal will allow Denmark, which holds the rotating presidency of the EU, to begin negotiations on the draft law with lawmakers in the European Parliament.

Parliament, which approved its negotiation position on the law yesterday, is seeking to expand the scope of the rules to include limits on banker bonuses and a requirement for banks to draw up plans showing how they could be safely wound down if they failed.

Parliament’s additions to the text mean that “there’s still quite a long way ahead to go” before work on the legislation is finished, Osborne said. The U.K. is opposed to some of the changes made by the assembly, he said.

The first round of talks between Denmark and members of the assembly is scheduled for May 23.

For more, click here.

Special Section: JPMorgan

JPMorgan Says Ina Drew to Retire, Replaced by Zames as CIO

JPMorgan Chase & Co. (JPM:US) said Chief Investment Officer Ina Drew will retire after the firm suffered a $2 billion trading loss, marking the downfall of one of the highest-ranking women on Wall Street.

Matt Zames, the 41-year-old co-head of global fixed income in the investment bank, will succeed Drew, New York-based JPMorgan said yesterday in a statement. The entire London staff of the bank’s chief investment office, which employs a few dozen people and where the loss occurred, is at risk of dismissal, a person familiar with the situation said.

Chief Executive Officer Jamie Dimon, 56, announced the loss May 10, assailing his firm’s handling of trading in synthetic credit positions as “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” JPMorgan is examining whether anyone in the unit, which employs a few dozen people in London, sought to hide risks, though there isn’t yet evidence that’s the case, the person said.

Drew, 55, was one of two women on the operating committee at JPMorgan, the biggest and most profitable U.S. bank. Her office oversees about $360 billion, the difference between money from deposits and what the bank lends. Drew was named chief investment officer in 2005, reporting directly to Dimon.

Drew declined to be interviewed for this article

For more, click here.

JPMorgan’s Cavanagh Enlists Rauchenberger to Aid Loss Response

JPMorgan Chase & Co. executive Mike Cavanagh, appointed to oversee the firm’s response to a $2 billion trading loss, enlisted Lou Rauchenberger to help coordinate the project.

Cavanagh, the chief executive officer of the bank’s treasury and securities services group, wrote in a memo to employees yesterday that Rauchenberger will be the “point person” organizing the meetings, structure and follow up.

Rauchenberger works in that division and is on the firm’s executive committee, according to the New York-based bank’s website.

Senate Banking Committee Plans Hearings on Trading Loss

The U.S. Senate Banking Committee will hold hearings over the next few weeks that are expected to include discussions of the $2 billion trading loss by JPMorgan. The hearings will include proposals to overhaul money market funds and address the economic situation in Europe, Committee Chairman Tim Johnson, a Democrat from South Dakota, said in e-mailed statement.

The committee will call witnesses from the U.S. Securities and Exchange Commission, the Commodities Futures Trading Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Consumer Finance Protection Bureau, the Office of the Currency Comptroller, and the Treasury Department on enhanced bank supervision.

For more, click here.

Separately, the disclosure of the trading loss will mean more pressure from regulators and lawmakers on large U.S. banks, BNA said. The increased attention will boost the likelihood of tighter rules to implement new restrictions on proprietary trading. At the same time, it raises the odds for legislation to separate commercial and investment banking.

For more, click here.

JPMorgan Fallout Could Hurt Liquidity, Rosiak Says

Jason Rosiak, head of portfolio management at Pacific Asset Management, talked about the implications of JPMorgan Chase & Co.’s $2 billion trading loss on credit markets.

Rosiak, who talked with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InBusiness,” also discussed investment strategy.

For the video, click here.

Moody’s Said to Delay Bank Downgrades Amid Crisis, JPMorgan

Moody’s Investors Service is delaying ratings downgrades on more than 100 banks as it assesses the effect of JPMorgan Chase & Co.’s trading losses and a greater possibility of a euro breakup, a Moody’s official said.

The Moody’s official declined to be identified as he wasn’t authorized to comment publicly. Moody’s said on April 13 that it would begin downgrading banks, including BNP Paribas SA (BNP), France’s biggest lender, Germany’s Deutsche Bank AG and New York-based JPMorgan and Morgan Stanley (MS:US), by early May.

Yesterday, Moody’s spokeswoman Kirsten Knight said the firm’s schedule for “concluding bank rating reviews” hadn’t changed. “Moody’s expects to conclude the reviews by the end of June,” she said in an e-mailed statement. Moody’s declined to elaborate beyond the statement or comment on when the first downgrade would occur.

For more, click here.

Levitt Says Derivatives ‘Wonderful’ for Risk Balance

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and senior adviser to Goldman Sachs (GS:US), said derivatives are “very positive for our markets and have gotten a black eye” after a $2 billion loss by JPMorgan Chase. Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Dimon Says Regulators Should Look at JPMorgan’s Loss

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., talked about the company’s $2 billion trading loss and financial industry regulation. Dimon said he was “dead wrong” in initially dismissing news reports scrutinizing trades that led to the loss.

He spoke with David Gregory on NBC’s “Meet the Press.”

For the video, click here, and for more, click here.

Compliance Action

Google EU Probe Delayed by ‘New Elements,’ Almunia Says

Google Inc. (GOOG:US)’s antitrust probe by European Union regulators has been delayed by “new elements,” EU Competition Commissioner Joaquin Almunia said yesterday.

Almunia hasn’t received a preliminary report from officials working on the probe because they had to examine the extra information, he told Bloomberg Television in an interview, without elaborating. The EU antitrust chief said he plans to make a decision on the future of the case soon.

Online travel companies Expedia Inc. (EXPE:US) and TripAdvisor Inc. (TRIP:US) were among companies in four sets of allegations over Google’s anti-competitive behavior sent to EU regulators in March and April, Google said in a regulatory filing last month. Google, based in Mountain View, California, is under growing pressure from global regulators probing whether the company is thwarting competition in the market for Web searches.

Google’s “size and success rightly generate scrutiny, which is why we’ve worked hard to explain how our business works, cooperating with the European Commission since this investigation began,” said Al Verney, a Brussels-based spokesman for the company. “Because there’s always room for improvement, we’re happy to discuss any concerns the commission might have.”

Habib Bank Fined $844,000 Over Money-Laundering Control Failures

Habib Bank AG Zurich was fined 525,000 pounds ($844,000) by the U.K. financial watchdog for failing to put in place effective money-laundering controls.

The Financial Services Authority also fined a former bank official 17,500 pounds for failing “to take reasonable care to establish and maintain” systems to prevent money laundering, the agency said in an e-mailed statement. The problems at the bank lasted from 2007 to 2010, the FSA said.

The FSA is leading a crackdown on companies that have insufficient systems and controls to manage risk.

Both Habib Bank and the former official agreed to settle with the FSA at an early stage and qualified for a 30 percent discount. Anjum Iqbal, chief executive officer of the bank in the U.K., couldn’t be immediately reached for comment.

Courts

SEC Sues China Natural Gas Chairman for Secret Loans to Son

The U.S. Securities and Exchange Commission sued a China- based natural gas company over claims its chairman secretly used the firm’s money to make $14 million in loans to benefit his son’s real-estate business.

Qinan Ji, the former chief executive and current chairman of China Natural Gas Inc. (CHNG:US), arranged the two short-term loans, one through a sham borrower, in January 2010, the SEC said in a lawsuit filed yesterday at U.S. District Court in Manhattan. Ji lied about the loans to the company’s board, investors and auditors, as well as during an internal investigation into the matter, the SEC said.

China-based companies listed on U.S. exchanges have faced increased scrutiny over the past two years after regulators became concerned that certain firms may not be providing accurate financial statements to investors.

The SEC is seeking unspecified financial penalties and to bar Ji from acting as an officer or director of a public company, according to the complaint.

Ji, a resident of Shaanxi Province, China, could not be immediately located. A call to a telephone number listed on China Natural Gas’s website wasn’t answered.

For more, see story about shell companies in top section.

Comings and Goings

Best Buy Chairman Steps Down for Not Raising Dunn’s Conduct

Best Buy Co. (BBY:US) founder Richard Schulze will step down as chairman after a probe found he failed to tell the board about allegations that then-Chief Executive Officer Brian Dunn was having an inappropriate relationship with a female employee.

The internal probe found Dunn acted inappropriately, such as sending multiple e-mails and text messages to the woman, lending her money and giving her free tickets to concerts and sporting events, Richfield, Minnesota-based Best Buy said yesterday in a statement. Schulze will be replaced by director Hatim Tyabji after the annual meeting on June 21.

Schulze’s resignation marks a complete change at the top of Best Buy, which has struggled to compete against rivals such as Amazon.com Inc. (AMZN:US) and Apple Inc. (AAPL:US)

Director G. Mike Mikan is serving as Best Buy’s CEO while the board seeks a permanent replacement. The company has said that search may take as long as nine months.

For more, click here.

Senator Presses SEC Over Decision to Put Investigator on Leave

U.S. Senator Charles Grassley is pressing the U.S. Securities and Exchange Commission to explain how the agency decided to place the chief investigator in its inspector general’s office on leave over concerns he posed a threat to other employees.

In three letters sent yesterday, including one to SEC Chairman Mary Schapiro, Grassley, of Iowa, asked for a copy of the “security threat evaluation” that was used to exclude the investigator, David Weber, from the SEC’s offices. Grassley, the senior Republican on the Senate Judiciary Committee, also requested details on any complaints that were filed about Weber.

Weber was suspended last week after some of his co-workers said they were bothered by his suggestion that he and other employees in the watchdog office seek authorization to carry guns as part of their jobs. The concerns were raised after Weber reported allegations about the conduct of former Inspector General H. David Kotz to an outside group for review.

SEC spokesman John Nester declined to comment as did Weber’s attorney, Christopher Mead.

Bafin Wants More Germans at European Regulators, FTD Reports

Germany’s financial regulator Bafin wants to boost the number of Germans serving at European regulatory agencies, Financial Times Deutschland reported, citing an interview with Bafin chief Elke Koenig.

Bafin will try to place more of its own people at the international regulatory authorities including the European Banking Authority and the European Securities and Markets Authority, the newspaper cited Koenig as saying in a preview of an article for today’s edition.

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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  • JPM
    (JPMorgan Chase & Co)
    • $60.94 USD
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  • MS
    (Morgan Stanley)
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