HSBC Holdings Plc (HSBA), Europe’s biggest bank, said its Mexican unit paid a $27.5 million fine to the nation’s regulators for non-compliance with money-laundering systems and controls.
The infringements relate to the late reporting of 1,729 unusual transactions and the failure to report 39 others, the London-based bank said in a statement yesterday.
HSBC Mexico is “aware of the importance of strengthening compliance and risk management controls for the overall financial system,” it said in the statement. “It has already taken actions and invested resources to address the past failures for which it has been fined.”
HSBC executives have been grilled by U.S. lawmakers this month over claims that bank affiliates gave terrorists, drug cartels and criminals a portal into the U.S. financial system by failing to guard against money laundering.
The fine is the largest levied by Mexico’s banking regulator, Guillermo Babatz, president of the National Banking and Securities Commission, or CNBV, said in an interview broadcast in Mexico by Radio Red. Other banks operating in Mexico are being fined for similar reasons, though for lesser amounts, he said, without providing details.
HSBC has taken steps including closing accounts where there is “insufficient information” about a customer or if they are considered “high risk,” the bank said. The unit stopped the purchase, sale and deposit of U.S. dollars in cash at branches on Jan. 1, 2009.
The bank paid the fine this morning for “grave” administrative failures that have since been corrected, HSBC Mexico’s chief Luis Pena Kegel said in an interview on Radio Red. The fine hasn’t affected HSBC Mexico’s finances, he added.
“The bank today is very different from the bank that was subject to fines,” Pena Kegel said.
Visa Europe May Get Antitrust Complaint on Credit Cards, EU Says
Visa Europe Ltd. may receive an antitrust complaint from European Union regulators over credit card fees, the EU’s competition commissioner said.
“We are preparing a supplementary statement of objections,” Joaquin Almunia told reporters yesterday.
Visa Europe reduced similar fees for debit cards last year to settle a 2009 EU complaint. Almunia said earlier this month that he hoped the operator of the largest payment-card network in the 27-nation EU would reduce cross-border fees for credit cards and deferred-debit transactions to the same level as MasterCard Inc. (MA:US) He said in May that total costs retailers face to handle payments haven’t decreased since 2006.
“Visa Europe is committed to continuing dialogue to reach a commercially acceptable agreement for setting credit and deferred debit interchange,” said Amanda Kamin, a spokeswoman for the company in London. “We believe this can be done amicably and relatively speedily.”
Visa Inc. (V:US), MasterCard and some of the biggest U.S. banks this month agreed to a U.S. settlement of at least $6.05 billion in a price-fixing case brought by retailers over credit-card swipe fees.
Visa Europe split from Visa Inc. before the U.S. card company’s initial public offering in early 2008.
Retailers have long complained about the cost they are charged to accept card payments. Unlike for checks, banks charge interchange fees to process debit- and credit-card payments. Card operators set the amounts, own the payment networks and pass the money to the lenders. The retailer’s bank pays the fees to the customer’s card issuer.
Google Could Face More Antitrust Probes, EU’s Almunia Says
Google Inc. (GOOG:US) may face further antitrust probes by the European Union, the bloc’s competition chief said, even as the owner of the world’s biggest search engine works to resolve an existing investigation.
EU Competition Commissioner Joaquin Almunia said the current investigation doesn’t cover areas such as applications for mobile phones. Regulators will review the “solutions that Google will present to us and hopefully we will reach a settlement” for the existing investigation, he said.
While “we have not opened any other investigation, I don’t exclude in future” that further probes will be started, Almunia told reporters in Brussels yesterday.
Almunia asked Google in May to make an offer to settle concerns that it promotes its own specialist search services, copies rivals’ travel and restaurant reviews, and that its agreements with websites and software developers stifle competition in the advertising industry.
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. The U.S. Federal Trade Commission and antitrust agencies in Argentina and South Korea are also scrutinizing the company.
Google continues “to work cooperatively” with the commission, said Al Verney, a spokesman for the company in Brussels.
Broadband Research’s Kinnucan Pleads Guilty in Tip Case
Broadband Research LLC founder John Kinnucan, who once publicly refused to cooperate with an FBI probe of insider trading, admitted to passing material nonpublic information to hedge-fund clients.
Kinnucan, who was indicted in February, pleaded guilty yesterday in Manhattan federal court to one count of conspiracy and two counts of securities fraud. He told U.S. District Judge Deborah Batts that he gave tips to hedge fund clients of his expert-networking firm, including two in New York.
Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara accused Kinnucan, 55, of passing tips about SanDisk Corp (SNDK:US), F5 Networks Inc. (FFIV:US) and OmniVision Technologies Inc. (OVTI:US) The U.S. alleged that Kinnucan “befriended” employees of technology companies to obtain inside information from them.
He paid his sources in a variety of ways, prosecutors said, including buying them meals at high-end restaurants and shipping them expensive food, as well as giving them confidential information about other technology companies.
Assistant U.S. Attorney Katherine Goldstein yesterday told the judge that the government had evidence proving Kinnucan shared tips he had obtained from employees at public companies “through monetary and non-monetary benefits.”
Jennifer Brown, a public defender representing Kinnucan, said after court that her client was remorseful for all of his actions.
Kinnucan also agreed to pay a fine of up to $5 million and forfeit up to $164,000.
The case is U.S. v. Kinnucan, 12-cv-163, U.S District Court, Southern District of New York (Manhattan).
Diamondback’s Scolaro Aided FBI in Insider Probe, U.S. Says
Anthony Scolaro, a former portfolio manager for Diamondback Capital Management LLC, provided “substantial assistance” to a federal probe of insider trading at hedge funds, according to U.S. prosecutors.
Scolaro, who pleaded guilty in November 2010 to conspiracy and securities fraud, made at least 43 recorded calls with various individuals that were monitored by the Federal Bureau of Investigation, assistant U.S. attorneys Reed Brodsky and Antonia Apps said in a letter to the court filed yesterday in Manhattan.
He also helped develop “leads and other valuable information” in connection with a search executed at Diamondback, as well as the government’s crackdown on so-called expert-networking consultants, according to the letter.
“Scolaro’s cooperation provided the government with valuable information about the hedge fund industry and the use of matchmaking firms. Scolaro’s cooperation led directly to several investigations,” Brodsky and Apps said.
Scolaro is scheduled to be sentenced on July 30 by U.S. District Judge William Pauley in New York. He admitted to participating in an insider-trading scheme with Franz Tudor, a former Galleon Group LLC fund manager in a conspiracy that began in October 2007 and ended in 2008.
In late November 2010, FBI agents from New York and Boston executed search warrants at the offices of Level Global Investors LP as well as Diamondback, firms founded by alumni of SAC Capital Advisors LP. Agents that day also searched the offices of Loch Capital Management in Boston.
The case is U.S. v. Scolaro, 11-cr-429, U.S. District Court, Southern District of New York (Manhattan).
Fidelity Joins BlackRock in Weighing Libor Action Against Banks
BlackRock Inc., Fidelity Investments and Vanguard Group Inc., firms that collectively manage more than $7 trillion, are gauging how their clients have been hurt by Libor manipulation and whether to take legal action as at least a dozen banks are being investigated for rate-rigging.
The money managers can take cues from Charles Schwab Corp. and the city of Baltimore, which in lawsuits predating the record fine levied on London-based Barclays Plc (BARC) last month, sued lenders for artificially suppressing Libor, or the London interbank offered rate. Schwab alleged last year that returns on money funds and short-term debt strategies were depressed by the banks’ actions, while Baltimore’s lawsuit against Barclays and other banks stems from lower returns on interest-rate swaps.
Libor-related litigation “has the potential to be the biggest single set of cases coming out of the financial crisis because Libor is built into so many transactions and Libor is so central to so many contracts,” said John Coates, a professor of law and economics at Harvard Law School in Cambridge, Massachusetts. “It’s like saying reports about the inflation rate were wrong.”
Global regulators are reviewing the rate-setting mechanism and contemplating criminal charges against bank traders who manipulated Libor, a benchmark interest rate for about $500 trillion in financial products. While Libor affects a broad range of investments from money funds to leveraged buyout financing, firms seeking to sue may struggle to quantify losses and pinpoint which banks are responsible for them, according to interviews with more than half-a-dozen industry executives, lawyers and former regulators.
BlackRock, which oversees $3.56 trillion; Fidelity, which manages $1.6 trillion; and Vanguard, with $2.1 trillion, said they’re examining the damage to their funds.
“On behalf of our clients and shareholders, we have been following developments in the Libor market and the related litigation activity for some time,” Vincent Loporchio, a spokesman for Boston-based Fidelity, said in an e-mailed statement. “We have noted recent news with interest and continue to evaluate our options.”
BlackRock, the world’s largest asset manager, said litigation surrounding Libor is complex and that “it will be some time before greater clarity emerges,” according to Bobbie Collins, a spokeswoman for the New York-based company.
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Ex-UBS Client Sentenced to 4-Month-Term for Swiss Accounts
Luis Quintero, a former UBS AG (UBS:US) client from Miami Beach, Florida, was sentenced to four months in federal prison for failing to disclose $4 million in Swiss bank accounts, the Miami U.S. Attorney’s Office said.
Quintero, a 64-year-old wholesale perfume importer, pleaded guilty in April and agreed to pay a $2 million fine for failing to file a Report of Foreign Bank and Financial Accounts for the calendar year 2006, according to court records.
Born in Cuba, Quintero immigrated to the U.S. when he was 10 years old. He owned Genesis International Marketing Corp., which sold designer perfumes and cosmetics, primarily in airport and duty free shops in the Caribbean and Latin America, according to court records. He was sentenced July 24 in Miami federal court, according to an e-mailed statement.
U.S. prosecutors have charged about 50 Americans with tax crimes since 2009, when UBS avoided prosecution by paying $780 million, admitting it helped thousands of U.S. citizens evade taxes and turning over the names of 250 clients to U.S. authorities. Zurich-based UBS later revealed another 4,450 accounts.
Quintero’s attorney, Ian Comisky, declined to immediately comment.
The case is U.S. v. Quintero, 12-cr-20192, U.S. District Court, Southern District of Florida (Miami).
European Funds Face Tougher Rules for Securities Lending
Europe’s top markets regulator proposed tougher rules for managers of funds for retail investors, tightening guidelines on securities lending and moving profits from such loans directly to investors.
Fund managers lending securities to other funds, typically for the purpose of short selling, should ensure they can recall the securities and cancel the arrangement at any time, the European Securities and Markets Authority said yesterday. The profits of the transaction should go directly to investors because they bear the risk, the ESMA said.
European regulators are trying to make investors aware of the lending process and remove the incentive for funds to lend more assets by requiring them to pass on the profits from the practice to customers. Investors risk losing their assets if the counterparty borrowing them is declared bankrupt, as happened with Lehman Brothers Holdings Inc. in 2008.
“These comprehensive guidelines are aimed at strengthening investor protection and harmonizing regulatory practices across this important European Union fund sector,” Steven Maijoor, chairman of Paris-based ESMA, said in a e-mailed statement yesterday.
European funds lend about 30 percent more of their securities than do counterparts in North America, according to CACEIS Investor Services, a custodian and trading unit of Credit Agricole SA. (ACA)
Peter de Proft, director general of the European Fund and Asset Management Association, declined to comment on ESMA’s proposals before consulting with his members. The European Federation of Investors didn’t return a call seeking comment.
ESMA, set up in 2011 to harmonize market rules across the 27-nation EU, is overhauling regulations governing fund managers. The agency last month proposed that bonuses for senior hedge-fund managers should be deferred to align their personal interests with the amount of risk their firm takes.
Bank-Rate Rigging Faces Tougher EU Rules, Antitrust Scrutiny
The European Union pledged tougher supervision of interbank lending rates and said it may expand antitrust probes as part of a response to the global scandal triggered by the manipulation of Libor.
Michel Barnier, the EU’s financial services chief, said he’s aiming to present proposals by year end for overhauling governance of Libor, Euribor and other market indices. EU Competition Commissioner Joaquin Almunia also said that he may expand probes into bank-rate rigging.
“The international investigations under way into the manipulation of Libor have revealed yet another example of scandalous behavior by the banks,” Barnier told reporters in Brussels. The commission is also examining whether interbank lending rates should be set using real transaction data rather than estimates, he said.
Confidence in Libor, the benchmark interest rate for more than $500 trillion of securities, has been shaken by Barclays Plc’s admission that it submitted false rates. Robert Diamond, who resigned as London-based Barclays’s chief executive officer after the bank was fined 290 million pounds ($450 million), told British lawmakers this month that other banks also lowballed Libor submissions.
The Barclays fine has provoked renewed calls for tougher oversight of the financial system and pushed regulatory probes of interbank lending rates to the top of the political agenda.
Libor, the London interbank offered rate, is determined by a daily poll carried out on behalf of the British Bankers’ Association that asks banks to estimate how much it would cost to borrow from each other for different periods and in different currencies. Similarly, Euribor, the euro equivalent, is overseen by the European Banking Federation in Brussels.
The EU last year opened formal investigations into possible rigging of these two rates and Tibor, their Tokyo equivalent.
These probes are continuing, Joaquin Almunia, the EU’s antitrust chief, said in Brussels yesterday.
The commission yesterday proposed a draft law that would make rigging of market benchmarks punishable with jail terms and other criminal sanctions. Any attempted manipulation could be punished with fines and other administrative penalties.
These plans need approval by lawmakers in the European Parliament and national governments before they can take effect.
Viviane Reding, the EU’s justice policy commissioner, told reporters at the same briefing that the Bank England had failed to act on warnings that Libor may have been manipulated.
Banks to Face Basel Capital Rules for Derivatives Trades
Banks will be forced to put more capital behind derivatives trades in a push by global regulators to bolster market stability and reinforce clearinghouses.
The Basel Committee on Banking Supervision said an amount equal to 2 percent of a bank’s trades through clearinghouses should be added to the risk-weighted assets used to determine the lender’s total capital requirements.
The interim rules are “one of the final pieces” in overhauling bank capital requirements in the wake of the 2008 financial crisis, the Basel group said in a statement on its website yesterday. “Further work in this area is planned for 2013,” it said. The group also published provisional rules on standing funds that are tapped when a bank can’t complete a trade.
Global regulators have sought tougher rules for derivatives since the 2008 collapse of Lehman Brothers Holdings Inc. and the government rescue of American International Group Inc. (AIG:US), two of the largest traders in credit-default swaps. The plans include pushing more transactions through clearinghouses in a bid to cut complexity and risk.
Regulators have in turn called for tougher safeguards for these platforms because of the increased threat that their collapse could damage the global financial system.
The 2 percent rule will apply to trades with clearinghouses that meet international standards, the Basel group said. Transactions that take place with less well regulated clearers would face tougher rules, linked to the platform’s credit rating. The measures will take effect in January 2013.
Testimony and Reports
Geithner Tells Republican Critics U.K. Had to Repair Libor
U.S. Treasury Secretary Timothy F. Geithner yesterday rebutted Republican critics, telling lawmakers that U.K. regulators bore responsibility for addressing possible manipulation of the London interbank offered rate after he told them of his concerns when he was president of the Federal Reserve Bank of New York in 2008.
“We brought those concerns to their attention and we felt, and I still believe this, that it was really going to be on them to take responsibility for fixing this,” Geithner told the House Financial Services Committee yesterday.
Confidence in Libor, a benchmark for financial products worldwide, has been shaken by Barclays Plc’s acknowledgment that it submitted false rates.
Fed Chairman Ben S. Bernanke defended the Fed’s response to Congress last week, saying the central bank cooperated with other regulators and suggested a fix. Documents released by the New York Fed showed that Geithner sent an e-mail in June 2008 to Bank of England Governor Mervyn King recommending changes to how Libor is calculated.
Representative Randy Neugebauer, a Republican from Texas who requested documents from the New York Fed on the Libor probe, said Geithner’s recommendations to the British were not enough.
“If they were having structural problems, I thought your e-mail was appropriate, but what was being disclosed here was fraud, this rate was being manipulated,” Neugebauer said. Geithner defended his actions by saying he raised concerns on Libor to the British authorities and U.S. regulators, including the Securities and Exchange Commission and the Commodity Futures Trading Commission.
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Peregrine Has U.S. Futures Regulators on Defense in Congress
U.S. futures regulators, scrutinized for missing warning signs before the collapse of Peregrine Financial Group Inc., defended their oversight to congressional lawmakers yesterday and called for new rules.
The Commodity Futures Trading Commission, the nation’s derivatives overseer, identified lapses in financial controls in at least three reviews of Peregrine since 2000, Gary Gensler, the agency’s chairman, told a House Agriculture Committee hearing yesterday. Gensler called for new reviews of self- regulatory organizations, including the National Futures Association, the company’s primary overseer.
“The question remains: Who is minding the store?” Representative Frank D. Lucas, an Oklahoma Republican and chairman of the panel, said at the hearing. “New regulations mean nothing when regulators are not enforcing the existing rules on the books. What we need is regulators doing their job.”
About $220 million in segregated client money is unaccounted for at Cedar Falls, Iowa-based Peregrine, which does business as PFG Best. Founder and Chief Executive Officer Russell Wasendorf Sr. was ordered held in custody July 13 following a suicide attempt and a signed confession that he had defrauded customers for 20 years.
Gensler said the futures-regulatory system “clearly failed” to protect Peregrine customers. “I think that we have to take a close look at all that CFTC did to oversee the NFA and also the markets such as Peregrine,” Gensler said.
The CFTC relies primarily on NFA and other self-regulatory organizations as front-line monitors of futures market participants. In turn, the CFTC oversees NFA and conducts periodic reviews to ensure the self-regulator is properly overseeing the industry. The agency also performs limited-scope reviews of futures brokers. Two such reviews of Peregrine conducted by the agency in 2007 and 2008 didn’t detect fraudulent activity.
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Securities Lawsuits Decreased in First Half of 2012, Study Finds
Federal securities class actions decreased in the first half of 2012 compared with last year largely because of a decline in Chinese reverse mergers and the lowest number of mergers and acquisitions since the third quarter of 2009, according to a study.
According to the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, 88 federal securities class-action, or group lawsuits were filed in the first six months of this year, a reduction of 6 percent from both the first half and second half of 2011.
Stanford Law School and Cornerstone reported five securities class actions filed over the reverse-mergers in the first half of the year, a 79 percent decline compared with the same period last year, and seven such filings related to mergers and acquisitions in the past six months, a 67 percent decline from the same period in 2011.
The decline in filings stemming from Chinese reverse mergers isn’t a surprise because “that sector of the market has already been badly hit by concerns over the integrity of Chinese private-company financial statements and these deals have been disappearing from the market,” Joseph Grundfest, a professor at Stanford Law School, said in an e-mailed statement.
Fewer lawsuits over mergers and acquisitions are directly related to a low deal count, Grundfest said.
While class actions over such Chinese deals dropped, filings against foreign issuers as a percentage of all lawsuits were greater than every year since 1997, with the exception of last year, according to the study.
Future filings may result from allegations of Libor rigging, according to Grundfest.
Regulators in the U.S. and Europe are probing more than a dozen banks worldwide over allegations they manipulated Libor, a benchmark for financial products valued at $360 trillion worldwide.
In the Courts
DZ Bank Sues UBS Over $160.4 Million in Mortgage Securities
UBS AG (UBSN) was sued in New York by DZ Bank AG, Germany’s largest cooperative lender, which claimed fraud over $160.4 million in residential mortgage-backed securities.
DZ Bank, based in Frankfurt, sued yesterday in state Supreme Court in Manhattan seeking damages for claims including fraud, fraudulent inducement and negligent misrepresentation.
Christiaan Brakman, a New York-based spokesman for Zurich- based UBS, declined to comment on the lawsuit.
DZ Bank has also sued Barclays Plc, JPMorgan Chase & Co. (JPM:US) and HSBC Holdings Plc in the same court this year over residential mortgage-backed securities.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s.
The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
The case is Deutsche Zentral Genossenschaftsbank AG v. UBS AG, 652575/2012, New York State Supreme Court, New York County (Manhattan).
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