Bloomberg News

Amazon-Overstock, Squawk Box Case, SAC Accord: Compliance

April 01, 2013

Amazon.com Inc. (AMZN:US), the world’s biggest online retailer, and discount Internet seller Overstock.com Inc. (OSTK:US) lost a challenge to New York’s Internet sales tax law as the state’s highest court rejected their arguments that it was unconstitutional.

Amazon, based in Seattle, and Overstock, based in Salt Lake City, sued the state’s Department of Taxation and Finance separately in 2008, seeking to overturn a law requiring retailers to pay taxes if they solicit business in New York through a link to a website.

The companies argued that the law violated the Commerce Clause of the U.S. Constitution by subjecting online retailers without a physical presence in the state to sales and compensating use taxes. It violated the Due Process Clause by “creating an irrational, irrebuttable presumption of solicitation of business within the state,” they said.

Justice Eileen Bransten dismissed the suits in January 2009. An appeals court in Manhattan affirmed her rulings in 2010, and the state Court of Appeals agreed on March 28, saying the companies “established an in-state sales force” through agreements with affiliates who received commissions for posting links on their websites directing users to Amazon.com or Overstock.com.

“If a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden,” Chief Judge Jonathan Lippman wrote in a majority decision.

The decision affirms New York’s approach to “ensure fair tax administration for both brick-and-mortar and Internet-based businesses,” the state’s commissioner of taxation and finance, Thomas H. Mattox, said in a statement.

The ruling conflicts with U.S. Supreme Court precedents and with decisions by other state courts, Amazon spokesman Ty Rogers said in an e-mail.

“Given the confusion reflected by this decision, we believe the best way to effectively fix this problem is through passage of the Marketplace Fairness Act by Congress, which Amazon strongly supports,” Rogers said.

Overstock will probably appeal to the U.S. Supreme Court as Colorado and Illinois state courts have found similar laws violated the Constitution, said Jonathan Johnson, the company’s acting chief executive officer. Eight states other than New York have passed similar laws, “the chief effect of which has been to put many Internet advertisers out of business,” Johnson said in a statement.

“We’re disappointed in the ruling but are confident that the New York law is unconstitutional,” Johnson said in a telephone interview. “We will very likely file to have it heard by the U.S. Supreme Court since there are other states that on almost the same law have ruled the opposite way.”

The cases are Amazon.com LLC v. Department of Taxation, 601247/2008, and Overstock.com v. New York State, 107581/2008, New York State Supreme Court, New York County (Manhattan).

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Compliance Action

All 6 Charged in Squawk-Box Case Made Deals, Prosecutors Say

Six men charged in a scheme to tip off traders to communications on internal brokerage “squawk boxes” reached deferred-prosecution agreements, the government said.

Assistant U.S. Attorney James McMahon announced the deals March 28 in Brooklyn, New York, federal court, marking the end of a seven-year-long effort by the Justice Department to prosecute “front-running,” or trading ahead of market-moving orders.

In the case, former brokers at Merrill Lynch & Co., Citigroup Inc. (C:US), Lehman Brothers Holdings Inc. and Smith Barney were accused of conspiring with employees at day-trading firm A.B. Watley Group Inc. (ABWG:US) to use order information transmitted on “squawk boxes” for front-running.

The deals were reached after a Manhattan federal appeals court reversed the men’s convictions in August, finding that prosecutors had withheld critical evidence.

“The government has entered into deferred prosecution agreements with each of the six defendants,” McMahon said March 28 to U.S. District Judge John Gleeson. Under the deals, the men face waiting periods ranging from six months to five years when the charges against them could be revived if they engage in other crimes.

The charges would eventually be dropped if defendants meet the conditions of their agreements, attorneys said. Some defendants face other conditions under separate deals reached earlier with the U.S. Securities and Exchange Commission.

The men were first tried in 2007 on securities fraud, conspiracy and other charges. A jury acquitted them of 20 separate securities fraud charges, remained hung on a conspiracy charge and convicted one of the defendants, former Merrill broker Timothy O’Connell of witness tampering and making a false statement, according to the appeals court’s ruling.

In a second trial in 2009, a jury found the men guilty of conspiracy to commit honest services and property fraud, according to the ruling.

The appeals court said that prosecutors failed to disclose until after the trial 30 deposition transcripts taken by the SEC, some of which would have supported the defense of ex- Merrill Lynch and Smith Barney broker Kenneth Mahaffy Jr. and others. Turning over the materials was required under the U.S. Supreme Court’s ruling in Brady v. Maryland, the appeals court found.

“The government should have dismissed the case,” Andrew J. Frisch, a lawyer for Mahaffy, said after the brief hearing.

The case is U.S. v. Mahaffy, 1:05-cr-00613, U.S. District Court, Eastern District of New York (Brooklyn).

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SAC Capital Siege by U.S. Seen Slowing With Steinberg Evidence

SAC Capital Advisors LP may seem under siege by federal prosecutors, with the steady drumbeat of indictments over the past few years and the invariable 6 a.m. knock at the door as one employee after another meets agents of the Federal Bureau of Investigation’s New York office.

With the insider trading indictment last week of SAC fund manager Michael Steinberg, a 16-year veteran of the firm, prosecutors have reached the inner circle of founder Steven A. Cohen. After the arrest last year of SAC portfolio manager Mathew Martoma, and the tying of seven other current or former SAC traders or analysts to illegal trades, prosecutors are seen by some as looking to cut deals in pursuit of the $15 billion hedge fund itself -- and Cohen.

But looks can be deceiving. While Martoma’s case involves direct communication with Cohen over health stocks, Steinberg’s technology stock case is more indirect, and the judge presiding over it said the indictment doesn’t show much new evidence of malfeasance at the hedge fund. Following the $616 million U.S. Securities and Exchange Commission settlement with SAC last month, it may very well be that the government won’t seek to go much higher up SAC’s ladder.

Still, the SEC has said that its investigation is continuing, and the Justice Department has made no announcement that its five-years of scrutinizing hedge funds led by SAC was winding down.

Cohen, 56, hasn’t been charged or sued by the government. Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, and Ellen Davis, a spokeswoman for Bharara, declined to comment.

Steinberg, who turns 41 this week, was taken into custody March 29 at his Manhattan home when FBI agents appeared at his door at 6 a.m. The most senior SAC official to be charged, he was indicted by a federal grand jury March 28 on five counts of conspiracy and securities fraud. Part of SAC’s Sigma Capital Management unit, he has been with SAC since 1997.

Steinberg traded on insider tips obtained from convicted SAC technology analyst Jon Horvath, according to his indictment.

One of 15 SAC portfolio managers handling technology, media and telecommunications stocks before he was placed on leave last year, a person familiar with the matter said, Steinberg faces as long as 20 years in prison if convicted.

Steinberg pleaded not guilty during a half-hour court hearing March 29.

Barry Berke, Steinberg’s lawyer, rejected the charges and said his client traded “based on detailed analysis as well as information that he understood had been properly obtained.”

The case is U.S. v. Steinberg, 12-00121, U.S. District Court, Southern District of New York (Manhattan).

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Separately, SAC will have to wait to learn if its $602 million insider trading settlement with the SEC can go forward, after a Manhattan judge raised questions over a provision that allows the hedge fund to avoid admitting it did anything wrong.

SAC and the agency asked U.S. District Judge Victor Marrero on March 28 to approve the agreement, which is the SEC’s biggest insider-trading settlement. It would resolve SEC claims that SAC and its CR Intrinsic Investors LLC unit profited from illegal tips about an Alzheimer’s drug received by a former portfolio manager, Mathew Martoma.

At the hearing, Marrero expressed concern about the SEC’s use of the “neither admit nor deny” provision, which was questioned by a different judge who rejected an SEC settlement with Citigroup Inc. in 2011. Marrero said he may condition approval of the SAC deal on a ruling in the Citigroup case by the U.S. Court of Appeals in New York. Marrero also asked what would happen if Martoma, who has pleaded not guilty to related criminal charges, is convicted.

Charles Riely, a lawyer for the SEC, argued that the Citigroup appeal doesn’t concern the question whether a judge may approve a settlement with such a provision. He said the judge is free to approve the deal without regard to the Citigroup appeal.

“We do not see the no-admit, no-deny language as an unsettled question,” Riely said.

“The ground is shaking, let’s admit that,” said Marrero. “This court is in the same position that Judge Rakoff was some months ago.”

In the Citigroup case, U.S. District Judge Jed Rakoff in Manhattan criticized the SEC’s policy of allowing settlements that permit defendants to neither admit nor deny the agency’s allegations, ruling that Citigroup’s $285 million SEC settlement couldn’t go forward because the deal wasn’t in the public interest. The appeals court heard arguments in the case in February.

Marrero questioned why SAC, the Stamford, Connecticut-based hedge fund run by billionaire Steven A. Cohen, is willing to pay more than $600 million to settle, rather than $1 million in legal costs to defend itself, “if it truly did nothing wrong.” He said he isn’t questioning the amount of the settlement.

SAC settled “because we have a business to run and we don’t want to have this case hanging over our heads for years,” Martin Klotz, a lawyer representing the firm, told Marrero. “And we want to put this behind us.”

Jonathan Gasthalter, an SAC spokesman who works for Sard Verbinnen & Co., declined to comment on the hearing.

The SEC case is Securities and Exchange Commission v. CR Intrinsic Investors LLC, 12-cv-08466, and the criminal case is U.S. v. Martoma, 12-cr-02985, U.S. District Court, Southern District of New York (Manhattan).

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FSA to Press Banks, Others on Assisting SMEs, Nikkei Says

Japan’s Financial Services Agency plans audits of private financial institutions to gauge support for struggling small and medium-size enterprises, Nikkei reported, without citing anyone.

The audits, which are to include credit unions and banks, are planned for May and June.

Compliance Policy

Sifma Urges End to Some Data Systems as Audit Trail Approaches

U.S. regulators implementing a sweeping project to monitor securities trading should discard overlapping systems designed to capture similar data, according to a paper published by the Securities Industry and Financial Markets Association.

The Securities and Exchange Commission should end its Electronic Blue Sheets system to collect trading information from brokers and its Large Trader Reporting system, approved in 2011 as a way to compile data on the 300 biggest market participants, Sifma said in a paper published on its website March 28. The Financial Industry Regulatory Authority, which oversees almost 4,300 brokers, should also end its Order Audit Trail System, in place since the late 1990s, Sifma said.

The planned consolidated audit trail, one of former SEC Chairman Mary Schapiro’s main projects, will track all securities orders and trades in the U.S. from start to completion and give the agency and other regulators a system to monitor markets, pursue abusive behavior and reconstruct crashes. The exchanges and Finra said in November they would submit the plan in December 2013, eight months later than initially expected.

The amount of money it will take to comply with overlapping reporting requirements “not only complicates the task of sound regulation, but also serves as a tax on the industry that can increase costs to the investing public, reduce shareholder value and reduce the competitiveness of U.S. markets,” Sifma wrote in the report, which it co-wrote with International Business Machines Corp., a consultant engaged for the study.

The trade group said it supports the construction of a consolidated audit trail.

In the Courts

BofA, Societe Generale Appeal MBIA Win in Restructuring Case

Bank of America Corp. (BAC:US) and Societe Generale SA (GLE) appealed a judge’s decision upholding regulatory approval of bond insurer MBIA Inc. (MBI:US)’s 2009 restructuring, which they say harmed them as policyholders.

New York state Justice Barbara Kapnick was wrong when she dismissed a lawsuit by the banks seeking to reverse approval by the state insurance regulator, they said in papers filed March 28.

The trial court erred in not annulling the approval because it “was arbitrary and capricious and an abuse of discretion,” they said.

In 2009, New York Insurance Department Superintendent Eric Dinallo approved the split, allowing MBIA to move the company’s guarantees on state and municipal bonds out of subsidiary MBIA Insurance Corp., which guaranteed some of Wall Street’s most toxic mortgage debt.

The banks said during a month of oral arguments last year that the approval was based on inaccurate and incomplete information provided by Armonk, New York-based MBIA. They say the split exposed them to losses as holders of financial- guaranty policies by siphoning more than $5 billion in assets from MBIA Insurance.

In a March 4 decision, Kapnick dismissed the banks’ lawsuit, which was brought under New York law allowing court challenges to state agency decisions.

Spokesmen for MBIA and the New York Department of Financial Services, which combines the functions of the state’s banking and insurance regulators, didn’t immediately respond to e-mails seeking comment on the appeal.

The case is ABN Amro Bank NV v. Dinallo, 601846-2009, New York State Supreme Court, New York County (Manhattan).

Gardner Denver Sued by Investor Over $3.7 Billion KKR Deal

Gardner Denver Inc. (GDI:US) was sued by an investor claiming KKR & Co. (KKR:US)’s planned $3.7 billion buyout undervalues the industrial- equipment maker.

Gardner Denver directors breached their fiduciary duties by accepting an insufficient offer that furthers the interests of a majority stakeholder, investor Daniel White said in a complaint filed March 27 in Delaware Chancery Court. White blamed the proposed deal on pressure from ValueAct Holdings LP, the company’s third-largest investor. ValueAct isn’t named as a defendant in the case.

The sales process “was being run in an unnecessarily hurried fashion which deprived the board of the opportunity to make a fully informed decision and ultimately favored KKR’s offer,” White said in his complaint.

KKR, the New York-based private-equity firm, announced March 8 that it would pay $76 a share for Wayne, Pennsylvania- based Gardner Denver after raising its offer from $75 a share. The deal, expected to close in the third quarter, is valued at $3.9 billion including the assumption of Gardner Denver’s debt.

Vikram Kini, a Gardner Denver spokesman, didn’t immediately respond to a call seeking comment on the complaint.

The case is White v. Larsen, CA8439, Delaware Chancery Court (Wilmington).

Speeches and Interviews

Cordray Says Consumer Complaint Data Can Aid Financial Companies

Financial services companies should use the Consumer Financial Protection Bureau’s complaint database to head off potential lawsuits instead of objecting to its public release, the director of the agency said March 28.

“If they want to do so, they can use this information to improve their customer service and their general practices,” Richard Cordray said in a speech in Des Moines, Iowa. “Data can help them detect regulatory risks and address problems before they are faced with potential enforcement action or private litigation.”

The agency held a hearing in Des Moines March 28 on its consumer complaint system, which has been criticized by the industry for tarnishing respectable brands by publicizing data on complaints that may not be valid.

The bureau was created by the 2010 Dodd-Frank law to protect consumers from abusive financial practices. It supervises major banks such as JPMorgan Chase & Co. (JPM:US) and US Bancorp (USB:US), and non-bank firms like payday lenders, credit bureaus and debt collectors.

Last week, the CFPB expanded the body of published data on consumer complaints from about 19,000 entries to more than 90,000 on mortgages, student loans, checking accounts and other consumer products. It had previously only published data on credit card complaints.

Cordray rejected the industry’s criticism of the data’s impact on their reputations.

Comings and Goings

FSA Chairman Turner to Join Soros Think Tank, Telegraph Says

Adair Turner, the Financial Services Authority chairman, will join the board of the New York-based Institute for New Economic Thinking, founded by billionaire investor George Soros, the Sunday Telegraph reported.

Turner is stepping down from his FSA role as the agency splits into two, the newspaper reported.

An unnamed FSA spokesman confirmed Turner’s appointment, according to the paper.

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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  • AMZN
    (Amazon.com Inc)
    • $323.63 USD
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  • OSTK
    (Overstock.com Inc)
    • $17.5 USD
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    • 3.54%
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