Bloomberg News

Peregrine, Audits, Libor, Martin Marietta: Compliance

July 12, 2012

Peregrine Financial Group Inc. futures customers won’t have their losses covered by the Securities Investor Protection Corp. even if they were defrauded, the fund’s chief said.

The U.S. Securities Investor Protection Act provisions make customers of a futures commission merchant like Peregrine ineligible for payment, SIPC Chief Executive Officer Stephen P. Harbeck said yesterday in a telephone interview.

Harbeck said his organization, an industry fund that covers losses from brokerage firm failures, has been told Peregrine’s futures business is in a company separate from the registered broker-dealer that’s covered by SIPC. Peregrine’s securities broker traded on a so-called fully disclosed basis where the accounts are held by a unit of Sterne Agee Group Inc., Harbeck said.

While securities customers can look to Sterne Agee, futures customers aren’t covered, he said. A representative of Sterne Agee declined to comment.

“SIPC has not been informed that it is appropriate to take action at this time,” Harbeck said.

If the information Harbeck said SIPC was given is borne out, the collapse of Peregrine won’t unfold like MF Global Inc. and Bernard L. Madoff Investment Securities Inc., where SIPC named trustees and paid the costs of the liquidation.

Peregrine filed for Chapter 7 bankruptcy liquidation in Chicago Tuesday after being sued by the U.S. Commodity Futures Trading Commission, which accused the firm and its founder, Russell R. Wasendorf Sr., of misappropriating at least $200 million.

Separately, a Republican commissioner of the U.S. Commodity Futures Trading Commission, yesterday said the agency must take immediate steps to safeguard customer funds.

The futures regulator should call an emergency meeting of its technology advisory committee to weigh an industry-funded system to verify customer funds daily, Scott O’Malia said in a Bloomberg Television interview.

For more on the interview, click here.

Peregrine’s bankruptcy case is Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The CFTC case is U.S. Commodity Futures Trading Commission v. Peregrine Financial Group Inc., 12- cv-5383, U.S. District Court, Northern District of Illinois (Chicago).

Compliance Policy

SEC Adopts Consolidated Audit Trail to Boost Trade Oversight

The U.S. Securities and Exchange Commission adopted a rule yesterday that would build a single system to monitor and analyze trading activity across U.S. equity and options markets.

In a 3-2 vote, the SEC’s members agreed to require securities exchanges and the Financial Industry Regulatory Authority to create a so-called consolidated audit trail that will enable the reconstruction of market crises and analyze trading on 13 equity exchanges, 10 options markets and more than 200 broker-dealers that execute stock trades away from public venues. The effort is part of the agency’s response to the May 6, 2010, stock rout that temporarily erased $862 billion in U.S. equity value.

“A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide us with an unprecedented ability to effectively oversee the markets we regulate,” said SEC Chairman Mary Schapiro.

The SEC has already implemented circuit breakers to halt trading when a company’s shares move 10 percent in five minutes. Still, Schapiro has pressed for tools that would allow faster and broader oversight of trading activity. After the 2010 market disruption, it took a 20-person SEC team three months to collect and process quote and trade data that arrived in different formats from exchanges and brokers.

Schapiro, a political independent appointed by President Barack Obama, had to rely on the support of Republican Commissioners Troy Paredes and Daniel Gallagher to adopt the rule. The two Democrats on the SEC, Elisse Walter and Luis Aguilar, opposed the measure, saying it doesn’t go far enough.

For more, click here.

Compliance Action

Barclays, U.S. Say Libor Probe Has ‘No Effect’ on 2010 Case

Barclays Plc (BARC) and the U.S. Justice Department said the bank’s settlement of allegations involving its manipulation of the London interbank offered rate has “no effect” on a 2010 deferred-prosecution agreement.

Barclays’s conduct related to its submissions of benchmark interest rates occurred from about 2005 through 2009 -- before the bank signed the agreement, lawyers for Barclays and the U.S. said yesterday in a filing in federal court in Washington.

“Because the conduct preceded the term of the DPA, which began on August 16, 2010, it does not affect whether Barclays is in compliance with the DPA,” according to the joint filing.

On June 27, Barclays was fined 290 million pounds ($449 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates. Part of that fine went to the Justice Department, which agreed not to prosecute the bank for what it called “illegal conduct.”

U.S. District Judge Emmet Sullivan on June 28 ordered the parties to explain how the Libor settlement affected the 2010 agreement, which involves a $298 million settlement with the U.S. over illegal dealings with such nations as Sudan and Iran.

Alisa Finelli, a Justice Department spokeswoman, and Mark Lane, a spokesman for London-based Barclays, declined to comment.

Barclays, Britain’s second-biggest bank by assets, must comply until Aug. 16 with the terms of the deferred-prosecution agreement, which the judge approved on Aug. 18, 2010. Such agreements allow a company to avoid a criminal conviction as long as the terms of the deal are met.

The case is U.S. v. Barclays Bank Plc, 10-cr-00218, U.S. District Court, District of Columbia (Washington).

Swiss Bank Regulator Assists Foreign Authorities in Libor Probe

Switzerland’s financial regulator has provided assistance after receiving several requests for help from foreign authorities probing the rigging of the London interbank offered rate.

We have “given assistance already,” said Tobias Lux, a spokesman for the Bern, Switzerland-based Financial Market Supervisory Authority, without providing further details. “We are in contact with foreign authorities and are talking to Credit Suisse and UBS.”

UBS AG (UBSN) and Credit Suisse Group AG (CSGN), Switzerland’s biggest banks, are among at least 12 banks being investigated for Libor- setting practices by regulators worldwide. Both of the Zurich- based lenders have said they are cooperating with the investigations.

In the Courts

Delaware Court Explains Martin Marietta-Vulcan Ruling

The Delaware Supreme Court expanded on a May 31 ruling from the bench, concluding in a written opinion that a lower court properly found Martin Marietta Materials Inc. couldn’t proceed with a hostile takeover of rock-crushing rival Vulcan Materials Co. (VMC:US)

“It is undisputed that the confidentiality agreements in this case were true confidentiality agreements,” violated by Martin Marietta, the justices said in a 42-page explanatory opinion released Tuesday.

The agreements “did not categorically preclude Martin from making a hostile takeover bid for Vulcan,” the justices wrote. “What they did was preclude Martin from using and disclosing Vulcan’s confidential, nonpublic information.”

After amicable merger talks broke off, Raleigh, North Carolina-based Martin Marietta in December offered to exchange half a share for each share of Birmingham, Alabama-based Vulcan in a $4.7 billion deal that would have created the world’s largest producer of sand, gravel and crushed stone.

The companies sued each other over the hostile bid, and in an opinion May 4 after a non-jury trial, Delaware Chancery Court Judge Leo Strine Jr. decided that Martin Marietta didn’t comply with confidentiality provisions and said it couldn’t pursue Vulcan for four months.

Martin Marietta appealed and the Delaware Supreme Court agreed with Strine after a May 31 hearing.

Jamie Tully, a Vulcan spokesman, in an e-mailed comment reiterated a company statement from May, lauding the decision and the “court’s careful consideration” and saying management is “committed to enhancing long-term value” for shareholders.

Andrea Calise, Martin Marietta spokeswoman, didn’t immediately return phone and e-mail messages seeking comment on the opinion.

The case is Martin Marietta Materials Inc. (MLM:US) v. Vulcan Materials Co., CA7102, Delaware Chancery Court (Wilmington).

Bayer to Pay $15 Million to Settle Aspirin Marketing Suit

A Bayer AG (BAYN) unit will pay $15 million to settle a lawsuit claiming it illegally marketed aspirin mixed with supplements.

The settlement between the unit, Bayer Healthcare LLC, and U.S. consumers received preliminary approval yesterday from a federal judge in Brooklyn, New York.

“Clearly, this was a hard-fought case,” Judge Brian M. Cogan said at a hearing. “The settlement negotiations were extensive. Significant compromises were made by both sides.”

Bayer Healthcare was sued by consumers in 2008 over its Bayer Women’s Low Dose Aspirin + Calcium and Bayer Aspirin with Heart Advantage, containing the supplement phytosterols.

The U.S. Food and Drug Administration warned the company the same year that it considered the aspirin mixtures “unapproved new drugs” and that they were being sold unlawfully. Over-the-counter drugs don’t typically require FDA approval as long as they conform to pre-approved formulas, according to the agency’s website.

The settlement would include all U.S. consumers who purchased the drugs within predetermined timeframes. The deal requires final approval by the court.

Anne Coiley, a spokeswoman for Leverkusen, Germany-based Bayer, didn’t have an immediate comment on the settlement.

The case is Goldberg v. Bayer Healthcare LLC, 1:08- cv-04623, U.S. District Court, Eastern District of New York (Brooklyn).

AU Optronics, LG Display, Toshiba Settle LCD Price-Fixing Case

AU Optronics Corp. (2409), LG Display Co. (066570) and Toshiba Corp. (6502) agreed to pay $543.5 million to resolve allegations they conspired to fix prices of flat-screen panels used in TVs and computer monitors.

Money from the settlement will be available to consumers in 24 states who overpaid for electronics because of the alleged price-fixing, said San Francisco attorney Joseph Alioto, co-lead counsel representing screen purchasers suing the companies.

The manufacturers will also pay $27.5 million in civil penalties to eight states, bringing the total to $571 million, he said without specifying how much each will pay. The companies confirmed a settlement agreement was reached.

A court filing seeking approval of the settlement will be filed today in federal court in San Francisco, he said.

Toshiba will pay $21 million if the settlement is approved by the court, Keisuke Oomori, a spokesman for the Tokyo-based company, said by phone today.

“Toshiba denies any wrongdoing on its part in the LCD business, and we entered settlement to avoid further expense and the distraction of protracted litigation,” Oomori said.

AU Optronics has already made sufficient provisions for the settlement and expects no material impact on its operations or finances, the Hsinchu, Taiwan-based company said in an exchange filing today. Claire Ohm, a spokeswoman for Seoul-based LG Display (034220), confirmed that a settlement had been reached and declined further comment in an e-mail.

Combined with an earlier settlement with other panel makers for $538.5 million, approved yesterday by a federal judge, the cash settlement of more than $1 billion sets a record for recovery in a class action, or group, lawsuit over price-fixing, Alioto said.

The companies are alleged to have fixed prices for the screens, driving up prices from 1999 to 2006, according to the class-action lawsuit filed in 2007.

The case is In RE TFT-LCD Antitrust Litigation, 07-01827, U.S. District Court, Northern District of California (San Francisco).

Bank of America Securities Fraud Suit Narrowed by U.S. Judge

Bank of America Corp (BAC:US). won a federal court ruling dismissing claims against former Chief Executive Officer Ken Lewis and others in a securities fraud lawsuit over the bank’s use of an electronic mortgage registry.

U.S. District Judge William Pauley in Manhattan yesterday granted a motion to dismiss claims against bank executives including Lewis and board members. The judge ruled that some securities fraud claims could be refiled and said that other claims alleging violations of securities law are dismissed with prejudice.

Pennsylvania Public School Employees’ Retirement System alleged in a lawsuit the bank purposefully concealed its reliance on Mortgage Electronic Registration Systems Inc., or MERS, and its exposure to billions of dollars of loan repurchase claims arising from the sale of mortgage-backed securities.

The pension plan claimed it suffered substantial damage as a result of purchasing securities after Bank of America concealed this material information to facilitate the repayment of funds it borrowed from the U.S. government in connection with the Troubled Asset Relief Program.

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on Pauley’s ruling.

The case is Pennsylvania Public School Employees’ Retirement System v. Bank of America Corp. (BAC:US) 11-cv-733, U.S. District Court, Southern District of New York (Manhattan).

Kinnucan’s Wife Tells SEC Case Judge She Has Negative Net Worth

The wife of John Kinnucan, the Broadband Research LLC founder accused of insider-trading, is asking a federal judge to suspend a case filed by the U.S. Securities and Exchange Commission, saying she has a negative net worth.

Catherine Kinnucan, the wife of the jailed analyst, said in a letter to U.S. District Judge Alison Nathan in New York, who is presiding over the SEC case, that she has “zero” income and that there is “nothing for the SEC to recoup.”

John Kinnucan, who pleaded not guilty to the criminal charges, was indicted Feb. 21, accused of passing inside tips to hedge fund clients about SanDisk Corp. (SNDK:US), OmniVision Technologies Inc. (OVTI:US) and other companies. He “befriended” employees of public technology companies, obtained nonpublic information from them and passed it to his fund manager clients, prosecutors in the office of Manhattan U.S. Attorney Preet Bharara allege.

“John assured me he was exercising due diligence with respect to operating his business in full compliance with all applicable laws and regulations,” Catherine Kinnucan said in an April 24, 2012, letter to Nathan made public yesterday.

John Kinnucan remains in custody in the federal jail in Brooklyn, New York, unable to raise $5 million bond.

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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Companies Mentioned

  • VMC
    (Vulcan Materials Co)
    • $65.16 USD
    • 0.66
    • 1.01%
  • MLM
    (Martin Marietta Materials Inc)
    • $129.12 USD
    • -0.18
    • -0.14%
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