Bloomberg News

Pay for Delay, Dodd-Frank, Broker Bonuses: Compliance

December 10, 2012

The U.S. Supreme Court agreed to take up a multibillion-dollar fight between the drug industry and federal antitrust enforcers, a case that may determine how quickly low-price generic medicines reach the market.

The justices on Dec. 7 said they will use a case involving Abbott Laboratories (ABT:US) to scrutinize the “pay for delay” agreements that the Federal Trade Commission says cost drug buyers $3.5 billion each year. Under those accords, brand-name drugmakers pay other companies to hold off selling generic versions. The pharmaceutical industry says the agreements are legitimate settlements of patent disputes.

Companies have struck more than 100 such deals since 2005. Medicines made by Bayer AG (BAYN), Merck & Co. (MRK:US), Bristol-Myers Squibb Co. (BMY:US), Watson Pharmaceuticals Inc. (WPI:US) and Teva Pharmaceutical Industries Ltd. (TEVA) have all been the focus of court cases as the FTC under Chairman Jon Leibowitz seeks to crack down on the practice.

Three of the four federal appeals courts to rule on the issue have said the settlements, also known as reverse payments, are generally permissible. Drug companies and antitrust enforcers alike urged the Supreme Court to set a nationwide standard. The court will rule by June.

The FTC, backed by the Justice Department, is appealing a ruling that rejected its suit against Solvay Pharmaceuticals Inc., now owned by Abbott Labs, and three generic-drug makers over Androgel, a treatment for low testosterone in men.

The case is Federal Trade Commission v. Watson Pharmaceuticals, 12-416.

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Compliance Policy

U.S., U.K. Issue Plan for Dealing With Failing Large Banks

U.S. and U.K. regulators unveiled a plan for dealing with failing global systemically important banks that will allow them to fire senior executives as well as force losses on shareholders to protect taxpayers.

“A resolution strategy for a failed or failing globally active, systemically important, financial institution should assign losses to shareholders and unsecured creditors, and hold management responsible,” according to a paper jointly released by the U.S. Federal Deposit Insurance Corp. and the Bank of England in London today.

Global regulators are working on ways to handle the failure of large international banks to avoid another crisis like the one inflamed by Lehman Brothers Holdings Inc.’s bankruptcy in 2008 that led to taxpayer bailouts. BOE Deputy Governor Paul Tucker said the joint paper is a “significant step” toward solving the issue.

The U.S. has been developing its strategy under the Dodd- Frank legislation passed in 2010, while the U.K. has focused its efforts under the Banking Act of 2009, according to the paper. They each focus on dealing with the top of a financial group -- the holding or parent company -- to minimize disruptions to sound subsidiaries.

The U.K. and U.S. plans -- aimed at ensuring continuity of banks’ “critical services” and reducing risks to financial stability -- are based in part on recommendations published by the Financial Stability Board, while U.K. policies are also linked to European Union proposals presented in June.

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Dodd-Frank Swap Rules Delayed as U.S. CFTC Eases Transition

The U.S. Commodity Futures Trading Commission may delay some Dodd-Frank Act overseas swaps rules for about six months, part of a wave of last-minute exemptions and postponements to ease transition to new regulations.

The derivatives regulator may put off compliance for overseas-based operations of banks including JPMorgan Chase & Co. (JPM:US) and Goldman Sachs Group Inc. (GS:US) for some risk-management rules that begin to take effect at the end of the month, according to two people who asked not to be identified because the delay hasn’t been made public. The agency has already released more than 40 no-action letters postponing other Dodd-Frank rules, and officials have signaled that more are coming.

“We have and will continue to grant requests for phased compliance,” CFTC chairman Gary Gensler said in a telephone interview Dec. 6. The delays are designed to “smooth the transition” to new oversight rules, he said.

Dodd-Frank derivatives rules, originally intended to be in place in July 2011, have been delayed as the government seeks feedback on how to bring swaps under its oversight. The regulations will for the first time lead Wall Street’s largest banks to register as swap dealers with the CFTC at the end of the year and will require them to use clearinghouses to settle interest-rate and credit-default trades by mid-March.

The CFTC’s rulemaking process will face scrutiny this week from U.S. House lawmakers. A House Financial Services subcommittee hearing on derivatives has been scheduled for Dec. 12, and the House Agriculture Committee has planned a hearing for Dec. 13 on the international scope of the CFTC’s rules.

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SEC Removes Obstacle for Active ETFs by Lifting Derivatives Ban

The U.S. Securities and Exchange Commission cleared one obstacle for exchange-traded funds that try to beat benchmarks by lifting a ban on the funds’ use of derivatives.

Proposed funds will have to meet requirements on managing risk and disclosure, Norm Champ, director of the division of investment management, said Dec. 6 in a speech at a New York conference for investment advisers. The agency still won’t approve new ETFs that use derivatives to amplify returns or provide the inverse performance of an index.

Active ETFs seek to combine the skill of a manager selecting investments with the trading flexibility, lower fees and tax advantages of ETFs, which typically track an index. An ETF version (BOND:US) of Bill Gross’s Pimco Total Return Bond Fund, the world’s largest mutual fund, has grown to $3.8 billion since its introduction in February, making it one of the 15 biggest bond ETFs in the U.S.

“It is a step forward,” said Christine Hudacko, a spokeswoman for BlackRock Inc. (BLK:US), the largest ETF provider.

BlackRock, based in New York, and Atlanta-based Invesco Ltd. (IVZ:US) are among companies with pending requests to introduce actively managed ETFs.

ETFs hold baskets of securities, commodities or other assets while trading throughout the day like individual stocks. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.

The SEC froze approval for new ETFs that make significant use of derivatives in March 2010, seven months after warning that some products could confuse individual investors. Champ said the SEC will continue to review the use of derivatives by funds.

“Given the complexity and significance of the issues relating to funds’ use of derivatives, both for the fund industry and for the protection of investors, we are taking a deliberate approach in our continuing review,” he said.

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Brokers Must Disclose Bonuses to Clients in Finra Proposal

Brokers who switch firms would be compelled to tell customers about any recruiting bonuses and other incentives received under rules proposed by industry regulators to protect clients from conflicts of interest.

The Financial Industry Regulatory Authority’s 20-member board of governors voted Dec. 6 to put the proposal out for comment, according to a memo from Chairman Richard Ketchum posted on the group’s website. Conflicts may arise if the new firm’s payments encourage brokers to push products to clients that aren’t needed or suitable.

The self-regulatory trade group is reviewing conflicts at 14 of the largest U.S. brokerages, focusing on compensation and recruiting, Finra said in July. Finra didn’t name the firms whose compensation plans are under review. The new rules won’t persuade many clients to drop their advisers, said David Sobel, chairman of the National Association of Independent Broker/Dealers.

Michelle Ong, a Finra spokeswoman, declined to comment on the board’s action.

Public disclosure may make brokers seek higher bonuses since they’ll know what their rivals got, Sobel said. “That’s going to be bad for small firms that can’t compete with that kind of bonus money,” he said.

Brokerages typically recruit financial advisers with “forgivable” loans -- a kind of bonus that must be repaid if a broker leaves the firm before a specified number of years.

In practice, the rule would apply only to larger brokerages that can afford to pay new employees up-front bonuses, said a person with knowledge of Finra’s plan, who asked for anonymity because the voting wasn’t public.

U.S. Consumer Bureau Signs Data Deal With Justice Department

The U.S. Consumer Financial Protection Bureau and the Department of Justice will share information to streamline enforcement of fair-lending laws, the two agencies announced.

“The Department of Justice welcomes the new tools and resources the CFPB can bring to the fight against lending discrimination,” Thomas E. Perez, assistant attorney general for the department’s civil rights division, said in an e-mailed statement last week.

Both the consumer bureau, which was created by the Dodd- Frank law of 2010, and the department have authority to fight discrimination in lending under the Equal Credit Opportunity Act. The act bars discrimination in lending on the basis of race, religion, national origin and other protected categories.

Under the accord, the two agencies will share information and take steps to keep it confidential, according to the statement. They will also notify each other of enforcement work to avoid unnecessary duplication, according to the statement.

Compliance Action

HSBC, Standard Chartered Said to Resolve U.S. Probes Next Week

HSBC Holdings Plc (HSBA) and Standard Chartered Plc (STAN) may settle U.S. charges involving money-laundering violations and dollar- clearing transactions on behalf of Iranian clients as soon as this week, two people familiar with the negotiations said.

The agencies involved in the settlements include the U.S. Treasury’s Office of Foreign Assets Control, the Federal Reserve, the Justice Department and the New York District Attorney’s office, according to the people, who asked not to be identified because negotiations are still under way.

HSBC announced last month that it had added an $800 million provision to an existing $700 million reserve to cover the costs of a potential settlement, and warned investors that the final payment could “significantly” exceed the $1.5 billion total.

A Senate committee said in July that failures in London- based HSBC’s money-laundering controls allowed terrorists and drug cartels access to the U.S. financial system.

Standard Chartered has said it expects to pay about $330 million to settle claims by federal regulators that its money- clearing operations violated rules related to U.S. sanctions against Iran. The London-based bank agreed in August to pay $340 million to resolve charges brought by New York’s banking regulator that it hid the identity of Iranian customers involved in dollar-clearing transactions.

“As we’ve disclosed, we are cooperating with authorities in ongoing investigations,” Robert Sherman, a spokesman for HSBC in New York, said Dec. 7. “The nature of any discussions is confidential.”

JPMorgan Said to Ask Staff to Help Fund U.K. Tax Settlement

JPMorgan Chase & Co. asked more than 2,000 current and former employees to contribute to a settlement with the U.K.’s tax authority over their use of an offshore trust for bonus payments, according to a person briefed on the situation.

The Financial Times reported Dec. 8 that employees who participated in the trust were asked to help fund a payment of at least a few hundred million pounds if they want to settle with Her Majesty’s Revenue and Customs, the U.K. tax authority. The bank and workers may pay about 500 million pounds ($802 million) total.

Corporations including Starbucks Corp. (SBUX:US), Amazon.com Inc. and Google Inc. have come under attack from British lawmakers and protesters for using complex accounting methods to minimize tax liabilities in the U.K.

The case involving JPMorgan focuses on a Jersey-based trust established 20 years ago, according to the FT. Such entities, typically holding bonus payments that can’t be repatriated without triggering tax payments, are being closed after they were targeted in legislation last year, the FT said.

“Our employee trust has always been transparent to HMRC, and its independent trustee has consistently paid taxes in accordance with U.K. tax law,” JPMorgan said in an e-mailed statement.

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SAC Capital Gets Added Scrutiny as U.S. Probes InterMune Trading

SAC Capital Advisors LP, the $14 billion hedge fund run by Steven A. Cohen, is under mounting scrutiny as the U.S. investigates its trading in InterMune Inc. (ITMN:US) and Weight Watchers International Inc. (WTW:US), according to a person with knowledge of the matter.

The U.S. Securities and Exchange Commission and the Federal Bureau of Investigation are looking into the trades, said the person, who asked not to be identified because the matter wasn’t public.

News of the probe comes after SAC Capital told clients on Nov. 28 that it had received a so-called Wells notice from the SEC related to Mathew Martoma, a former portfolio manager who was criminally charged on Nov. 20 for insider trading in two other stocks. The Wells notice, a warning that the SEC is prepared to sue, cited fraud and control-person liability related to the unit that employed Martoma, a person familiar with the matter said at the time.

Jonathan Gasthalter, a spokesman for Stamford, Connecticut- based SAC Capital, said that the firm wasn’t aware of any investigation involving trades of Weight Watchers or InterMune. He declined to comment on whether the Wells notice, which the company received Nov. 28, cited the two companies.

The SEC sends a Wells notice to a company or an individual after its staff has determined that sufficient wrongdoing has occurred to warrant civil claims being filed. The notice gives the recipient a chance to try to dissuade the SEC from taking action. In some cases, the SEC has decided to refrain from filing a complaint after sending a Wells notice.

Jerika Richardson, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, and John Nester, a spokesman for the U.S. Securities and Exchange Commission, declined to comment on the case. Jim Margolin, a spokesman for the FBI’s New York office, declined to comment on the probes.

Cohen hasn’t been charged with a crime in the Martoma case and hasn’t been sued by the SEC. The agency filed its suit against Martoma and CR Intrinsic Investors LLC, the SAC Capital unit where he worked. Martoma’s lawyer, Charles Stillman, has said he expects his client to be vindicated.

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In the Courts

BofA, U.S. Bancorp Must Face Claims in Mortgage Trustee Case

Bank of America Corp. (BAC:US) and U.S. Bancorp (USB:US) must face some claims in a lawsuit brought by a pension fund that claims they failed in their responsibilities to protect mortgage-bond investors.

U.S. District Judge Katherine Forrest in Manhattan ruled Dec. 7 that the Policemen’s Annuity and Benefit Fund of the City of Chicago can pursue some of its claims. She dismissed other claims against the banks.

The pension fund sued the banks over their role as trustees for pools of mortgage loans bundled into securities and sold to investors, claiming they caused investors to incur millions of dollars in losses.

The banks disregarded their job of ensuring there were no missing or defective documents for the mortgages, and that defective loans were removed from the mortgage pools, the pension fund said in its complaint.

Forrest said the fund could pursue claims on behalf of investors in five of the 41 trusts that were at issue in the complaint.

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on the ruling. Teri Charest of U.S. Bancorp, based in Minneapolis, didn’t have an immediate comment on it.

The case is Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank of America NA, 12-02865, U.S. District Court, Southern District of New York (Manhattan).

Goldman Sachs in Mediation With CIFG to Settle Mortgage Suit

Goldman Sachs Group Inc. and CIFG Assurance North America Inc. retained a mediator as the two companies seek to settle a lawsuit in New York state court in Manhattan, according to a filing.

The insurer sued Goldman Sachs in New York State Supreme Court in August 2011, accusing the New York-based investment bank of making misrepresentations in connection with the securitization of a portfolio of 6,204 mortgage loans.

The two sides have participated in one mediation session and have scheduled another for Dec. 19, according to a document filed in court Dec. 6.

Justice O. Peter Sherwood in May granted Goldman Sachs’s motion to dismiss three counts in the lawsuit, including one for fraudulent inducement, while refusing to throw out three claims for breach of contract. He also granted a motion by Buffalo, New York-based M&T Bank Corp. to remove it as a defendant

CIFG and Goldman Sachs appealed Sherwood’s decision, and the judge in July ordered the two sides to engage in mediation, according to court filings.

CIFG filed another lawsuit against Goldman Sachs in the same court this week, accusing the bank of fraudulently inducing the insurer to provide a policy on a credit default swap.

Michael DuVally, a spokesman for Goldman Sachs, declined to comment on the Dec. 6 filing or the CIFG suit filed last week. Attorneys for CIFG didn’t immediately return voice-mail messages and e-mails seeking comment.

CIFG, based in New York, has taken similar actions in the same court during the past three years, including a $277 million suit against GreenPoint Mortgage Funding Inc. filed in October and a $150 million suit against Bank of America Corp. (BAC:US) filed last month.

The case is CIFG Assurance North America Inc. v. Goldman, Sachs & Co., 652286/2011, New York Supreme Court, New York County (Manhattan).

IBM China Bribe Deal With SEC Awaits Court Nod Two Years Later

International Business Machines Corp. (IBM:US) said in March 2011 it had settled with U.S. regulators over allegations it bribed Chinese and South Korean officials to win at least $54 million in government contracts.

The deal still hasn’t been approved by a federal judge in Washington. Of 33 foreign bribery settlements with companies reached by the SEC since 2010, only one other failed to win judicial sign-off in less than three months.

The cause of the delay isn’t publicly evident. U.S. District Judge Richard Leon, in a set of unusual moves, has held off-the-record hearings and phone conferences with the parties. Even a request for more time to respond to comments Leon made during a nonpublic hearing on Nov. 15 wasn’t placed on the record. Only the order granting the request appears on the court docket.

Neither the SEC nor the company will discuss the matter.

“That’s certainly a long time,” Stephen Crimmins, a former SEC official now at K&L Gates LLP in Washington, said in an interview. “It’s possible Judge Leon is weighing the underlying factual record to see if the proposed settlement is in the public’s interest.”

The first hint of what’s causing the holdup may come Dec. 10 when the parties are required to submit papers responding to what Leon said in the Nov. 15 hearing, according to the court’s docket.

Leon declined to comment through Jenna Gatski, a court spokeswoman.

IBM’s lawyer, Evan Chesler of Cravath, Swaine & Moore LLP in New York, and a company spokesman, Doug Shelton, didn’t respond to e-mail and telephone messages seeking comment on the settlement. John Nester, an SEC spokesman, had no immediate comment.

Since January 2010, the SEC has filed 33 proposed civil enforcement settlements in federal courts against companies citing FCPA violations, according to the commission’s website. Of those, all but five were approved within 30 days.

The case is SEC v. International Business Machines Corp., 11-cv-00563, U.S. District Court, District of Columbia (Washington).

Ex-IndyMac Executives Found Liable by Jury Over Negligent Loans

Three former IndyMac Bancorp Inc. executives must pay $169 million in damages to federal regulators for making negligent loans to homebuilders as the real estate market was deteriorating, a jury decided.

The federal court jury in Los Angeles issued the verdict against Scott Van Dellen, the former chief executive officer of IndyMac’s Homebuilder Division; Richard Koon, the unit’s former chief lending officer; and Kenneth Shellem, the former chief credit officer. Jurors on Dec. 8 found them liable for negligence and breach of fiduciary duty.

The jury awarded the damages to the Federal Deposit Insurance Corp., which brought the lawsuit in 2010.

The FDIC, which took over the failed subprime mortgage lender in 2008, alleged the men caused $500 million in losses at the homebuilders unit by continuing to push for growth in loan production without regard for credit quality and despite being aware a downturn in the real estate market was imminent.

“Mr. Shellem and Mr. Koon used the utmost care in making loan decisions, and there is no doubt that all of the loans at issue would have been repaid except for the housing crash,” Kirby Behre, a lawyer for Shellem and Koon, said in an e-mailed statement after the verdict.

Robert Corbin, a lawyer for Van Dellen, didn’t immediately return a call to his office seeking comment on the verdict.

The verdict was reported earlier by the Los Angeles Daily Journal.

The case is FDIC v. Van Dellen, 10-04915, U.S. District Court, Central District of California (Los Angeles).

Meetings

Fed Board to Hold Open Meeting on Review of Foreign Bank Rules

The Federal Reserve Board said it will have an open board meeting where governors and staff will discuss in public new rules for capital and liquidity for foreign bank holding companies and foreign non-bank companies supervised by the central bank.

The meeting will be held December 14 at 3 p.m. in Washington, the central bank said in a notice published on its website.

The Fed said a staff memo on implementing sections 165 and 166 of the Dodd-Frank Act will be made available to the public.

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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