Bloomberg News

Schapiro Exits, CFTC-Intrade, HP Autonomy: Compliance

November 27, 2012

U.S. Securities and Exchange Commission Chairman Mary Schapiro, who took the agency’s helm in 2009 as it reeled from public rebukes for failing to rein in Wall Street abuses, is leaving the agency next month.

Schapiro, 57, will be replaced as chairman when she steps down on Dec. 14 by Commissioner Elisse Walter, former senior executive vice president at the Financial Industry Regulatory Authority, President Barack Obama said in a statement.

It was unclear how long Walter might serve as chairman. An administration official said Obama intends to make a new nomination to the commission in the near future. The official, who spoke on condition of anonymity, didn’t specify whether the nomination would be for the chairman position.

Walter’s five-year term as a commissioner expired in June. Under current law, she’s entitled to work through the end of 2013 without being reconfirmed. The president has the right to designate any commissioner as chairman.

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Compliance Action

Intrade Sued by U.S. Commodities Regulator Over Options

The U.S. Commodity Futures Trading Commission sued the operator of the Intrade website, alleging the company offered trading in options banned for U.S. customers in violation of securities laws and a previous agency order.

From September 2007 to June 25, 2012, Intrade continued to offer options betting on future prices of gold, crude oil and changes in U.S. economic data after it had pledged to stop doing so under the 2005 order, the CFTC said in a lawsuit filed yesterday in federal court in Washington.

The CFTC said it’s seeking a permanent injunction to prevent Dublin-based Trade Exchange Network Ltd., which runs the Intrade site, from operating in violation of securities laws including a part of the Dodd-Frank Act intended to crack down on abuses in the sales of derivatives. The CFTC also said it is seeking fines and disgorgement of all monetary benefits received as a result of the violations.

Unless the securities are listed for trading and traded on a CFTC-registered exchange or are legally exempt, it’s illegal to solicit people in the U.S. to buy and sell commodity options, even if they’re called “prediction’ contracts, David Meister, director of the CFTC’s enforcement division, said.

Intrade said all of its U.S. customers would be required to shut down their accounts by Dec. 23 in a statement on its website.

‘‘We are sorry to announce that due to legal and regulatory pressures, Intrade can no longer allow U.S. residents to participate in our real-money prediction markets,” Intrade said.

The case is U.S. Commodity Futures Trading Commission v. Trade Exchange Ltd., 1:12-cv-01902, U.S. District Court, District of Columbia (Washington).

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Ex-SAC Portfolio Manager Martoma Appears in New York Court

Former SAC Capital Advisors LP portfolio manager Mathew Martoma, charged in what prosecutors called the biggest-ever insider trading case, appeared in federal court in New York yesterday.

Martoma, 38, is accused of using illegal tips about a clinical trial of an Alzheimer’s disease drug to help SAC, the hedge-fund company founded by Steven A. Cohen, make $276 million on shares of Elan Corp. (ELN:US) and Wyeth LLC. He was arrested at his Boca Raton, Florida, home Nov. 20 and freed on $5 million bond.

The defense and prosecution yesterday agreed to a modified bail package under which the $5 million bond must be secured by $2 million in cash or property, as well as signatures from three instead of two financially responsible people. Martoma, who surrendered his and his children’s travel documents, is limited to Florida, Massachusetts, New Jersey and parts of New York.

He is charged with conspiracy and two counts of securities fraud, a crime that carries a maximum 20-year prison term. Defense lawyer Charles Stillman has said he expects his client to be exonerated.

Martoma denies wrongdoing, and Cohen hasn’t been sued or charged. A spokesman for the SAC founder, Jonathan Gasthalter, has denied any wrongdoing and said Stamford, Connecticut-based SAC is cooperating with the government.

The criminal case is U.S. v. Martoma, 12-mj-02985; and the civil case is SEC v. CR Intrinsic Investors LLC, 12-08466, U.S. District Court, Southern District of New York (Manhattan).

Zhang Quits Listed Companies Boards After Firm’s SEC Settlement

Billionaire Zhang Zhi Rong quit as chairman of two Hong Kong-listed companies about five weeks after an investment firm he controlled agreed to pay $14 million to resolve U.S. insider- trading claims.

Zhang resigned from the boards of shipbuilder China Rongsheng Heavy Industries Group Holdings Ltd. (1101) and developer Glorious Property Holdings Ltd. (845), according to statements yesterday. He is the largest shareholder in both companies. The decision has nothing to do with the U.S. case, iPR Ogilvy in Hong Kong, which handles Zhang’s public relations, said in an e- mailed reply to Bloomberg News questions.

The billionaire is leaving “to devote more time to his personal endeavors” and there were no disagreements with boards, both companies said.

“We respect his decision to focus on his own personal business,” Doris Chung, a Hong Kong-based spokeswoman for Glorious, said of Zhang’s departure.

Rongsheng said that Zhang himself had suggested leaving. The move showed his “confidence in the management team,” it said in an e-mailed reply to Bloomberg News questions. Zhang didn’t have an executive role.

Compliance Policy

Euro-Area’s Bailout Fund Wins Blessing of Highest EU Court

The euro area’s 500 billion-euro ($648.7 billion) firewall today won approval from the European Union’s highest court. The court rejected a challenge that threatened to derail efforts to keep the currency bloc intact.

Examination of a treaty change in 2011 to allow for the creation of the European Stability Mechanism, or ESM, “disclosed nothing capable of affecting the validity” of the mechanism, the EU Court of Justice in Luxembourg ruled today. The euro area’s 17 members acted in line with EU rules by ratifying the ESM treaty, the court ruled.

Today’s ruling lifted a potential shadow hanging over attempts to save the euro, just hours after ministers struck a deal to ease the terms on emergency aid for Greece.

The EU’s top court worked on the case under a fast-track procedure for almost 4 months, using for the first time in such a case its full force of 27 judges to consider the challenge.

Irish politician Thomas Pringle had argued that the ESM, which was declared operational on Oct. 8, violates the no- bailout provision under EU law and encroaches on the bloc’s role in economic and monetary policy. He challenged a March 2011 decision by EU governments to change a legal provision in a treaty to allow for the ESM’s creation, saying this was done incorrectly.

The ESM replaces the 440 billion-euro European Financial Stability Facility. The two funds will run in parallel until the EFSF is phased out in mid-2013. The ESM in September survived a legal challenge in Germany, handing a victory to Chancellor Angela Merkel, who championed the facility as vital to save the euro area from a fiscal meltdown.

The court’s ruling cannot be appealed. Ireland’s Supreme Court, which sought the EU court’s guidance in July, will have to give a final decision on Pringle’s challenge in line with today’s ruling.

The case is: C-370/12, Thomas Pringle v. Government of Ireland, Ireland and the Attorney General.

In the Courts

HP Investors Sue Over Losses From Alleged Autonomy Fraud

Hewlett-Packard Co. (HPQ:US) was sued by shareholders over its $8.8 billion writedown that the company said was partly related to falsified finances at Autonomy Corp., the British software maker it bought last year.

The complaint, filed yesterday in federal court in San Francisco, appears to be the first investor suit alleging that Hewlett-Packard issued false and misleading statements regarding the acquisition. The company’s former Chief Executive Officer, Leo Apotheker, as well as its current CEO Meg Whitman are named as defendants, along with Chief Financial Officer Catherine Lesjak.

Hewlett-Packard said Nov. 20 that $5 billion of the total charge is due to accounting practices, which were disclosed by a senior executive at Autonomy. Hewlett-Packard said it referred the matter to U.S. and U.K. securities regulators and will also pursue civil litigation.

Hewlett-Packard said in a statement last week that some former members of Autonomy’s management team used accounting misrepresentations to inflate its underlying financial performance before the acquisition. Mike Lynch, who founded Autonomy, defended the company’s accounting practices in an interview last week.

Deloitte LLC said last week that it didn’t find any evidence of improper accounting methods or misrepresentations when it last looked at Autonomy’s finances before Hewlett- Packard bought the software company. Deloitte, which said it wasn’t employed to do due diligence on the deal, last audited Autonomy’s finances for the year ended Dec. 31, 2010.

Michael Thacker, a spokesman for Palo Alto, California- based Hewlett-Packard, declined to comment immediately on the complaint.

The case is Nicolow v. Hewlett-Packard Co., 12-05980, U.S. District Court, Northern District of California (San Francisco).

BofA Wins on Standing of Countrywide Securities Investors

Bank of America Corp. (BAC:US) may limit its exposure to claims by Countrywide Financial mortgage-backed securities investors after a federal judge said she may have erred two years ago by allowing some claims to proceed.

U.S. District Judge Mariana Pfaelzer in Los Angeles, who presides over the consolidated mortgage-backed securities cases against Bank of America’s Countrywide, said in a Nov. 21 order that she is no longer convinced that a California state court case extended the statute of limitation of claims brought in federal court.

Pfaelzer in 2010 had allowed a federal class-action case to proceed for mortgage bonds that were owned by investors who filed the first securities lawsuits against Countrywide in state court in 2007 and 2008. In her decision at the time, the judge had agreed with the investors that the statute of limitations hadn’t run out for those claims based on the earlier suits.

In her new ruling, the judge said that since state lawsuits don’t have to meet the same requirements as class-action lawsuits filed in federal court, the federal rules that would have preserved the plaintiffs’ standing to pursue the claims couldn’t be applied to the state lawsuit.

The case is FDIC v. Countrywide Financial, 12-4354, U.S. District Court, Central District of California (Los Angeles.)

AU Optronics Executive Was Key Part of Price Fixing, U.S. Says

AU Optronics Corp. (2409) executive Steven Leung was a key part of a liquid-crystal display screen price-fixing conspiracy that has yielded a $500 million penalty against the company, prosecutors said as Leung’s retrial began.

Prosecutors told a jury in San Francisco federal court yesterday that Leung, an executive at the Taiwanese company’s desktop-display unit, had pricing authority for computer monitor panels, was responsible for large accounts including Dell Inc. (DELL:US), Apple Inc. (AAPL:US) and Hewlett-Packard Co. and was a key player in meetings held from 2001 to 2006 where prices were fixed.

“The evidence will show that Steven Leung’s company was already engaged in a price-fixing conspiracy and Leung knew about that conspiracy,” Heather Tewksbury, a U.S. Justice Department attorney, said in her opening statement.

A jury in March convicted AU Optronics, its vice chairman and a senior vice president, while deadlocking on the charges against Leung, leading government lawyers to retry his case. He has pleaded not guilty.

Leung’s lawyers claim that the government’s key witness, an AU Optronics employee, has testified that he didn’t know whether executives in Taiwan were meeting with competitors to fix prices.

Leung “had no authority to set prices, no authority to bargain,” Dennis Cashman, Leung’s attorney, told jurors yesterday in his opening statement.

The case is U.S. v. Lin, 3:09-cr-00110, U.S. District Court, Northern District of California (San Francisco).

SEC’s Lawsuit Against Morgan Keegan Begins in Atlanta

The U.S. Securities and Exchange Commission’s suit against Morgan Keegan & Co. over the sale of auction-rate securities began yesterday in federal court in Atlanta. The nonjury trial is scheduled to take two weeks.

The case alleges that Morgan Keegan told clients that the more than $2 billion in securities it sold had “zero risk” as the market was collapsing in late 2007 and 2008. It was initially dismissed by U.S. District Judge William Duffey Jr. in June 2011, but in May, the U.S. Court of Appeals for the Eleventh Circuit reversed, finding he incorrectly concluded brokers’ verbal comments to four customers were immaterial in light of disclosures posted on the firm’s website.

In opening statements, M. Graham Loomis, a lawyer for the SEC, said Morgan Keegan brokers told customers auction-rate securities were “liquid, short-term investments.”

A lawyer for Morgan Keegan, Amelia Rudolph, said in an opening statement that “Morgan Keegan’s failure to predict the future is not securities fraud.”

The suit is Securities and Exchange Commission v. Morgan Keegan & Co., 1:09-cv-01965, U.S. District Court, Northern District of Georgia (Atlanta).

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CME Group, Board of Trade Must Defend Price-Settlement Lawsuit

CME Group Inc. (CME:US), operator of the world’s largest futures market, must defend a lawsuit brought by Chicago Board of Trade brokers and traders challenging a change in how final-trade settlement prices are determined.

Cook County Circuit Judge Lee Preston in Chicago yesterday denied in part a defense request that he throw out the lawsuit filed against CME in June. The suit seeks to prevent a shift from computing agricultural trade prices solely by open outcry from the trading pits to a system relying on an algorithmic blend of open outcry and electronic-trade information.

Announced in May, the change went into effect on June 25, before the more than 20 suing traders and brokers, who claim their membership rights were violated, could obtain a court order to block it.

Preston yesterday said the plaintiffs could proceed on their claims for injunctive relief and for breach of contract against CME and the Board of Trade.

While Preston dismissed the breach of contract claim against CME Group Chairman Terrence Duffy and Chief Executive Officer Phupinder Gill, he said the plaintiffs could pursue breach of fiduciary duty claims against them. The judge rejected a breach of fiduciary duty claim asserted against the company.

Laurie Bischel, a spokeswoman for Chicago-based CME Group, said the company doesn’t comment on pending litigation.

While his clients still seek a court order blocking the new measure, Sang said no hearing date has been set. The parties are due in court on Dec. 4 for a hearing on the next steps in the case.

The case is McKerr v. The Board of Trade of the City of Chicago, 12-ch-23185, Cook County, Illinois, Circuit Court, Chancery Division (Chicago).

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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