Bloomberg News

Cigarettes, Money Market Funds, Basel Rule: Compliance

August 27, 2012

Tobacco companies defeated a U.S. law forcing cigarette packaging and advertisements to display images such as diseased lungs, persuading a federal appeals court that the requirements violate their free speech rights.

In a 2-1 decision, the U.S. Court of Appeals in Washington on Aug. 24 ruled that Food and Drug Administration regulations mandating visual-image warnings of smoking’s health risks, along with the telephone number 1-800-QUIT-NOW, are “unabashed attempts to evoke emotion” and “browbeat consumers” to stop buying the companies’ products.

“These inflammatory images and the provocatively named hotline cannot rationally be viewed as pure attempts to convey information to consumers,” U.S. Circuit Judge Janice Rogers Brown wrote in her majority opinion.

Commonwealth Brands Inc., Liggett Group LLC and Santa Fe Natural Tobacco Co. sued the FDA last year, claiming the mandates for cigarette packages, cartons and advertising, passed as part of the Family Smoking Prevention and Control Act, violated the First Amendment.

The companies said in court papers that complying with the requirements would cost them a total of about $20 million. The mandate, scheduled to go into effect next month, was put on hold by a lower-court judge while the appeals court considered its legality.

The government argued in court papers that nine images selected by the agency to be placed on packages and advertisements are true depictions required by Congress in the law to show the negative health consequences of smoking.

The graphics were supposed to cover the top half of the front and back of cigarette packages and 20 percent of print advertisements. The FDA estimated the visual warnings would help lower the smoking rate by about 0.212 percentage points, according to the lower court judge who also ruled against the FDA.

Jennifer Haliski, an FDA spokeswoman, said the agency doesn’t comment “on possible, pending or ongoing litigation.”

The Campaign for Tobacco-Free Kids, an anti-smoking group, urged the government to appeal the ruling, noting that a federal appeals court Cincinnati upheld the packaging requirements in March.

“The split decisions make it likely the U.S. Supreme Court will settle the issue,” the group said in an e-mailed statement.

In a dissent, U.S. Circuit Judge Judith Rogers said Brown’s opinion applied the wrong level of First Amendment scrutiny and disregarded the tobacco companies’ history of deceptive advertising.

Noel Francisco, a lawyer for R.J. Reynolds, a unit of Reynolds American Inc. (RAI:US), argued that “the purpose of the warnings is not to inform, but to scare consumers into adopting the government’s course of action.” He said during the February hearing that the government was using “threats and fear” to motivate people to stop using a lawful product.

The case is R.J. Reynolds Tobacco Co. v. U.S. Food and Drug Administration, 11-5332, U.S. Court of Appeals for the District of Columbia (Washington).

Compliance Policy

Money Funds Test Geithner, Bernanke as Schapiro Defeated

Money-market mutual funds, an alternative to bank accounts for individuals and companies, will test the resolve of the U.S. Federal Reserve and Treasury Department to prevent another financial crisis after the $2.6 trillion industry successfully lobbied against more regulation by the Securities and Exchange Commission.

Fed Governor Daniel Tarullo has said the central bank could tighten rules on banks’ borrowing from money-market funds, and Boston Fed President Eric Rosengren has said officials have the option to force banks to back their money funds with capital. The Fed and the Treasury could also work through the Financial Stability Oversight Council, a new regulatory panel formed under the Dodd-Frank Act, to seize oversight of money funds from the SEC and grant that power to the Fed.

“There’s real unanimity in the bank regulatory arena about the need to do something about money-market funds,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an interview. “What the Fed can do, and I think will try to, is put the funds back in a much more limited corner, by isolating them from integration with the banking sector.”

SEC Chairman Mary Schapiro last week abandoned a four-year effort to adopt tougher rules for money funds as three fellow commissioners said they wouldn’t support her proposal. The announcement marks a victory for the fund industry, which had lobbied against the plan.

Former SEC Chairman Arthur Levitt called the decision by three commissioners to block Schapiro’s proposal a “national disgrace” and said the Obama administration should pursue the issue through the Financial Stability Oversight Council, or FSOC, the panel Congress charged under Dodd-Frank with monitoring the country’s financial threats.

“This is an important time for the President to weigh in” and for the Fed and Treasury to make “changes in how the system works,” Levitt said in an interview on Bloomberg Television.

For more, click here.

EU Lawmakers to Resume Basel Bank Rule Talks on Sept. 5

European Union lawmakers and government officials will resume talks on Sept. 5 over how to apply Basel bank capital rules amid calls from lenders to delay implementing the measures, said Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee.

Cyprus, which holds the rotating presidency of the EU, and members of the EU assembly are seeking a deal on the draft law ahead of an international deadline of January 2013.

Banks have urged a delay in applying the rules, saying the ongoing talks mean that they will have insufficient time to adapt their systems and internal procedures.

“We’re obviously going to have to have discussion about it,” Bowles said in an interview. “I’m not unsympathetic, I recognize the practicalities.”

Negotiators will begin a series of meetings on the legislation on Sept. 5, Bowles said.

The Basel Committee on Banking Supervision, which brings together regulators from 27 nations including the U.S., U.K. and China, agreed in 2010 that the measures should be phased starting Jan. 1, 2013, with full implementation from 2019.

Compliance Action

Deutsche Bank Unit Sued by FHFA Over Mortgage Securities

A Deutsche Bank AG (DB:US) unit was sued by the Federal Housing Finance Agency, which seeks the repurchase of loans backing mortgage securities.

DB Structured Products Inc. breached promises about loans that were pooled and securitized and failed to repurchase them as required, the FHFA said in a filing Aug. 24 in New York State Supreme Court in Manhattan.

The FHFA oversees mortgage-finance companies Fannie Mae and Freddie Mac. The agency didn’t disclose in its court filing the size of the investment at issue in the case. The securities were issued by ACE Securities Corp. Home Equity Loan Trust, Series 2006-FM1.

Deutsche Bank will fight the lawsuit, Renee Calabro, a spokeswoman for the Frankfurt-based bank, said.

“Deutsche Bank has acted appropriately in response to legitimate repurchase demands,” Calabro said in an e-mailed statement. “These suits are based on brazen factual assumptions and unsupported legal theories.”

The case is Federal Housing Finance Agency v. DB Structured Products Inc., 652978-2012, New York State Supreme Court (Manhattan).

Scan Health Settles U.S. Medi-Cal Probe for $324 Million

A California health-care group will pay about $324 million to settle state claims that it received excess payments from Medicare and Medi-Cal, the state’s medical program for the poor.

The settlement with SCAN, a Los Angeles-based health maintenance organization comprising SCAN Health Plan, Senior Care Action Network and Scan Group, is the largest Medi-Cal recovery in the state’s history, California Attorney General Kamala Harris said Aug. 23 in an e-mailed statement. SCAN provides health care in Southern California to the elderly and disabled.

The settlement resolves California’s claims that SCAN failed to provide required financial information to the California Department of Health Care Services, preventing the agency from revising payment rates for the group.

“We played no role in how the state set rates for the population at issue, and we were previously unaware of the mistake the state made,” SCAN Chief Executive Officer Chris Wing said in an e-mailed statement. “Once we learned that the state made errors, we decided to refund all the money mistakenly paid.”

Because of the overpayments, Californians lost millions of dollars “that should have been going toward the health care of our most vulnerable citizens,” Harris said in her statement. The U.S. Justice Department also announced the settlement.

The U.S. will receive $3.82 million for the Medicare portion of the settlement, according to the statement. For the Medi-Cal portion, $319.9 million will be split between the federal government and California, with the U.S. receiving $129.4 million and the state $190.5 million, Harris said.

The case is U.S. v. Scan Health Plan, 09-05013, U.S. District Court, Southern District of California (Los Angeles).

In the Courts

Omnicare Agrees to Settle False Claims Case Over Kickback

Omnicare Inc. (OCR:US), a supplier of drugs to nursing homes, agreed to settle a lawsuit claiming it paid a kickback in buying a pharmacy company, and that it submitted false claims for reimbursement to government health insurers.

Lawyers told a federal judge in Chicago Aug. 23 that they reached a “settlement in principle” to resolve a 2007 lawsuit by whistle-blower Maureen Nehls, a court docket entry shows. The terms, if final, weren’t entered into the docket. U.S. District Judge John J. Tharp Jr. set a hearing for Sept. 25.

Nehls claims Omnicare’s $25 million purchase of Total Pharmacy Services LLC in 2004 included a kickback to one of its owners, Philip Esformes, and his father, Morris. That payment helped Omnicare win contracts with nursing homes owned or controlled by Morris Esformes and gave the company thousands of elderly and disabled customers, according to the complaint.

“Omnicare capitalized on the illegal kickback arrangement at the heart of Total Pharmacy’s operations,” Nehls attorney Matthew Organ said in a March 21 filing. “As Total Pharmacy held no assets, aside from a small inventory, virtually all of the $25 million that Omnicare ultimately paid to purchase Total Pharmacy amounted to a kickback” for long-term contracts.

Omnicare, based in Covington, Kentucky, has denied wrongdoing in court papers. Ed Loyd, an Omnicare spokesman, declined to comment in an e-mail.

David Chizewer, an attorney for Nehls, also declined to comment on the settlement. He said that Nehls, who once worked at Total Pharmacy, is now pursuing a nursing degree.

The settlement doesn’t include the Esformes, Philip’s lawyer, Michael Pasano of Miami, said. The father and son have rejected Nehls’ offers to resolve the case, he said.

“Philip Esformes understands that Omnicare made a business judgment to reach a settlement in this case,” Pasano said in an e-mail. “That settlement in no way speaks to Mr. Esformes’ position, and Mr. Esformes continues to emphatically emphasize he has done nothing wrong and is in no way liable in this matter.”

Last year, U.S. District Judge Amy St. Eve, who had overseen the case, denied Philip Esformes’ request to dismiss Nehls’s fifth amended complaint. He filed an answer denying wrongdoing.

“Omnicare’s purchase of Total Pharmacy Services LLC was the result of an arm’s-length negotiation,” his lawyers said in that April 2011 filing. “Omnicare paid the reasonable market value for Total Pharmacy Services LLP and therefore, no kickback was paid and no violation of federal and state anti-kickback laws can be alleged in connection with the purchase.”

In a separate filing, Morris Esformes also substantially denied the allegations against him.

One of his attorneys, Harvey Tettlebaum of Husch Blackwell LLP, declined to comment on the Omnicare settlement, saying he’d not seen the settlement documents.

Tettlebaum said his client “continues to insist that he’s done nothing wrong,” and that a motion seeking judgment in favor of the elder Esformes would soon be filed with the court.

The case is United States of America v. Omnicare Inc., 07- cv-5777, U.S. District Court, Northern District of Illinois (Chicago).

For more, click here.

Comings and Goings

SEC Deputy Inspector General Leaves Office Amid Investigation

Noelle Maloney, who was second in command of the U.S. Securities and Exchange Commission’s troubled internal watchdog office, has left the agency.

Maloney served as the SEC’s deputy inspector general since 2008, a period in which the office produced landmark investigations including probes of the agency’s failure to catch the Bernard Madoff and R. Allen Stanford frauds. Her last day at the agency was Aug. 17, SEC spokesman Kevin Callahan said on Aug. 24.

The office has been in turmoil since March after an employee complained to the SEC that possible conflicts of interest involving former inspector general H. David Kotz could have tainted the integrity of certain reports the agency produced. David Williams, the U.S. Postal Service’s inspector general, is conducting an investigation into the allegations.

Following the January departure of Kotz, who has denied any wrongdoing, Maloney served as interim inspector general until the agency named Jon Rymer, inspector general for the Federal Deposit Insurance Corp., to temporarily take over the office.

Attempts to find contact information for Maloney weren’t successful.

Interviews

Feds May Play Future Role in Student Loans, Chopra Says

Federal agencies intervened in the student-loan market during the financial crisis and could play a future role, said the Consumer Financial Protection Bureau’s student-loan ombudsman.

“Regulators and agencies and the Fed may have a role to play to ensure that the market is working well and is liquid and that risk really reflects a price appropriately,” Rohit Chopra said in an interview for Bloomberg Radio’s “Bloomberg EDU with Jane Williams” program.

“Certain low-risk borrowers probably don’t need to be paying such high rates and paying those high rates is leading them to delay a lot of economic milestones, which have really large consequences and ripple effects for the entire economy, including the housing market,” Chopra said.

Outstanding student-loan debt is about $1 trillion. About 15 percent comes from private loans made by banks and other lenders, and the rest is federally backed, according to the agency.

The Federal Reserve Board of Governors exercised its authority to establish the Term Asset-Backed Securities Loan Facility, which facilitated the issuance of a wide range of such securities, including those backed by student loans.

“During the financial crisis, we had seen the Fed try and ensure that capital markets were functioning and used certain authorities to make sure that asset-backed securities, whose underlying assets were private student loans, were able to be made,” Chopra said in the interview. “It seems that there are some places where the market is not working. You have a lot of responsible borrowers paying very high interest for several years now, but they’re unable to refinance that debt.”

For more, click here.

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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