Bloomberg News

CFTC Skips Votes, Bitcoin Ponzi, SAC E-Mail: Compliance

July 24, 2013

Enforcement lawyers at the U.S. Commodity Futures Trading Commission have circumvented formal agency votes to begin investigations unilaterally, according to Scott O’Malia, a Republican member of the commission.

The lawyers at the top U.S. derivatives regulator are using a summary process that doesn’t require a vote by the agency’s members who are confirmed by the Senate, O’Malia said in testimony at a House Agriculture Committee hearing yesterday.

The agency’s enforcement process “is a clear abrogation of the commission’s powers and a violation of commission rules relating to investigations,” O’Malia said in prepared remarks.

The CFTC’s enforcement division has begun using new Dodd-Frank Act authorities to oversee swaps and futures markets, while bringing a series of recent enforcement cases to ensure customer funds are adequately protected.

At the Securities and Exchange Commission, attorneys previously required approval to open formal investigations and issue subpoenas. When Mary Schapiro took over the agency’s helm in 2009, she delegated subpoena authority to the enforcement division, saying the approval process unnecessarily slowed investigations.

Bart Chilton, one of three Democratic members of the CFTC, said the enforcement division’s policy is long-standing. Representative Frank D. Lucas, the Oklahoma Republican who leads the agriculture panel, said he was concerned by the CFTC’s enforcement process. “The requirement to vote on key actions should not be disregarded,” Lucas said at the hearing.

Compliance Policy

Congress Must Rein in Banks’ Commodity Business, Rosner Says

The U.S. Congress should rein in banks’ ability to own and trade raw materials or risk another financial collapse, Joshua Rosner of Graham Fisher & Co. said at a Senate subcommittee hearing yesterday.

The Federal Reserve said last week that it’s reviewing a decade-old ruling that lets banks deal in physical assets like metal and oil, potentially putting commodity units of JPMorgan Chase & Co. (JPM:US), Morgan Stanley and Goldman Sachs Group Inc. (GS:US) in jeopardy. A Senate Banking Committee subcommittee yesterday considered whether laws and regulations that have allowed banks to own, store and transport raw materials are hurting competition and endangering the financial system.

The panel is led by U.S. Senator Sherrod Brown, an Ohio Democrat, who is among lawmakers and regulators who say banks can drive up prices when they control both the physical products and the financing. Senator Jeff Merkley, an Oregon Democrat, said the arrangement may allow banks to “put a thumb on the scale” to influence supply and demand, and bet accordingly.

Banks and regulators probably will be called to testify at a second hearing on their role in the commodities industry and the Federal Reserve will need to be “more forthcoming,” said Brown. A new hearing might occur in September, and he wants banks, the Fed and the Commodity Futures Trading Commission to testify, Brown said.

Banks may get an unfair advantage because they can fund themselves from the Fed and insured deposits, according to some of yesterday’s witnesses, and Brown said he’s concerned that lenders may be put at risk when volatile commodity markets move against them or disaster strikes one of their operations.

For more, click here, and see Interviews, below.

European Banks Face Capital Gap as Attention Turns to Leverage

Europe’s biggest banks, which more than doubled their highest-quality capital to $1 trillion since 2007 to meet tougher rules, may have further to go as regulators scrutinize how lenders judge the riskiness of their assets.

Deutsche Bank AG, Barclays Plc (BARC) and Societe Generale SA (GLE) are among European banks that issued stock, sold units or hoarded earnings to bring capital, as a proportion of assets weighted by risk, into line with new global rules. Now some regulators are questioning the weightings, typically set by the banks’ own models, and embracing a broader measure of equity to total assets known as the leverage ratio that ignores risk.

The focus on leverage is the latest effort by financial watchdogs to prevent a repeat of the taxpayer-funded bank rescues of 2008. The Basel Committee on Banking Supervision, which sets global banking standards, is taking a closer look at risk weightings after finding wide variations in a study of 32 lenders, Stefan Ingves, the group’s chairman, said this month.

Regulators say the leverage ratio provides a safeguard against the potential for gaming risk-based rules, which allow banks to assign weightings depending on how they judge the safety of assets on their balance sheets. Government bonds or loans to borrowers with good credit require little or no capital, while riskier assets such as subprime debt command a higher allocation.

Under current Basel leverage proposals, banks would have to hold equity equal to 3 percent of total assets by 2018. While the EU has said the rule needs more study, the U.K. and Switzerland are following a similar path as the U.S., where regulators this month proposed ordering eight of the largest lenders to hold capital equivalent to 5 percent of assets at their parent companies and 6 percent at their banking units.

For more, click here.

Compliance Action

RBS Fined $8.6 Million in U.K. Over Trade Reporting Failures

Royal Bank of Scotland Group Plc, Britain’s biggest government-owned lender, was fined 5.6 million pounds ($8.6 million) for incorrectly reporting wholesale trades for six years.

The bank failed to properly report about 37 percent of the total number of trades, which included over-the-counter derivatives transactions, from 2007 through 2013, the Financial Conduct Authority said in a statement on its website today. RBS broke reporting rules on 44.8 million deals, and completely failed to report another 804,000, the regulator said.

Global regulators have sought to bolster oversight of the swaps market after largely unregulated trades helped fuel the 2008 credit crisis and led to the rescue of American International Group Inc., a U.S.-based insurer that booked large amounts of swaps trades in Europe.

The rule breach was the result of a problem with the bank’s systems and controls, which “were compounded by the takeover of ABN Amro Bank NV in October 2007,” the FCA said.

The Edinburgh-based lender earned a 30 percent discount on its fine for cooperating with the regulator at an early stage in the investigation.

“We regret the failings that were uncovered and have subsequently made significant investments to our systems and controls in this area,” Sarah Small, an RBS spokeswoman, said in an e-mailed statement.

Newcrest Slump Prompts Scrutiny of Broker Calls at 20 Companies

Australia’s securities regulator will attend analyst meetings at about 20 companies next month as part of a clampdown on selective briefings, after questions were raised about broker coverage of Newcrest Mining Ltd. (NCM)

The Australian Securities and Investments Commission will also listen in on some one-on-one calls with analysts, Commissioner Cathie Armour said in an interview in Sydney yesterday. She declined to name the companies, saying they were picked to represent a spread of industries and locations and weren’t necessarily suspected of any wrongdoing.

Newcrest shares fell 12 percent in the two days before the company announced a possible A$6 billion ($5.6 billion) writedown June 7, raising concerns of selective briefing that have been denied by the Melbourne-based gold producer. Australia requires companies to disclose all market-sensitive information to the Australian Stock Exchange, and the Commission announced it would be running spot checks of analyst briefings July 7.

Companies suspected of selective briefing won’t necessarily be targeted for spot checks as ASIC would have investigated them already, and some of the businesses were picked as examples of best disclosure practice, Armour said.

Newcrest named former Australian Securities Exchange Chairman Maurice Newman to head an internal inquiry into the company’s disclosure and investor-relations policies, the producer said on a June 25 conference call.

“We do not think we have done anything wrong,” Chairman Don Mercer told reporters on the call. “If we have, we want to know about it and I can assure you we will hold people accountable from top to bottom.”

Newcrest Chief Executive Officer Greg Robinson said investor relations staff had held meetings before the company’s announcement and insisted that they acted in accordance with regulations.

SAC Says Cohen Has No Recollection of Dell E-Mail Cited by SEC

Steve Cohen doesn’t recall reading an e-mail on Dell Inc. that was cited by the Securities and Exchange Commission as evidence that that the founder of SAC Capital Advisors LP failed to supervise his employees, according to a report given to the firm’s employees July 22.

While Cohen sold his stake in Dell after being forwarded the e-mail, evidence suggests he did so because a portfolio manager started selling the stock, SAC said in a 45-page paper that refutes many of the facts outlined in the SEC’s administrative order filed last week against the 57-year-old billionaire. There’s no evidence Cohen ever read the communication, according to the paper.

The refutation, posted on SAC’s internal website, illustrates Cohen’s efforts to keep his employees calm while fighting the SEC’s allegations -- the government’s first against him personally -- and its efforts to close down his $15 billion hedge fund. Cohen was accused of ignoring red flags in trades conducted by two portfolio managers, Mathew Martoma and Michael Steinberg, who have both been charged with securities fraud. The report stated that at that time, Cohen only opened about 11 percent of his messages. SAC argues that even if Cohen had read the e-mail, the SAC report also says there were no “red flags.”

Martoma, 39, was arrested in November for alleged insider trading in Elan Corp. and Wyeth. Steinberg was arrested in March for trading in Dell and Nvidia Corp. Martoma and Steinberg, 41, have pleaded not guilty.

The SEC said in last week’s order that Cohen received a tip about Dell that was forwarded to him by Steinberg, and that he traded immediately afterward.

For more, click here.

Separately, the SEC’s chief administrative law judge will hold a hearing next month into whether Cohen should be barred from managing other people’s money.

Brenda P. Murray, who has been an administrative judge at the SEC’s Washington headquarters for 25 years, is scheduled to preside over the hearing on Aug. 26 at 9:30 a.m., according to an order filed in the administrative court today.

Jonathan Gasthalter, a spokesman for SAC, said last week that the SEC’s action has “no merit” and that Cohen will fight the claims.

Murray has been an administrative law judge since 1975, first with the Interstate Commerce Commission and then with the Federal Energy Regulatory Commission. She has been at the SEC since 1988, according to the SEC news release announcing her appointment.

For more, click here.

Bitcoin Ponzi Scheme Alleged by SEC in Lawsuit Against Texas Man

The U.S. Securities and Exchange Commission sued a Texas man over claims he operated a Ponzi scheme involving Bitcoin, the virtual currency that has recently attracted investors including Tyler and Cameron Winklevoss.

Trendon T. Shavers raised at least 700,000 Bitcoin starting no later than September 2011 through his firm Bitcoin Savings & Trust and improperly used currency from new investors to cover investor withdrawals, the SEC said in a complaint filed yesterday in federal court in Texas.

Shavers falsely promised investors as much as 7 percent interest weekly on purported trades, including selling the online currency to individuals who wished to buy it “off the radar,” quickly or in large quantities, the SEC said. Shavers also misappropriated investors’ funds for his personal use, according to the complaint.

The SEC said the 700,000 Bitcoin that Shavers raised amounted to more than $4.5 million, based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold. Today, the value of 700,000 Bitcoin exceeds $60 million, the SEC said.

Bitcoin is a virtual currency created four years ago that can be used to buy and sell a broad array of items, both legal and illegal. The Winkelvoss brothers offered 1 million shares in a trust that would track the price of Bitcoins, according to a filing with the SEC.

No attorney was listed by the SEC. A phone call to a number listed to Shavers wasn’t immediately returned.

Courts

Former ArthroCare Official Pleads Guilty to Securities Fraud

John Raffle, 45, a former ArthroCare Corp. senior executive, pleaded guilty for his role in a $400 million scheme to defraud investors in the maker of surgical products.

Raffle, who was a senior vice president of Strategic Business Units at Austin, Texas-based ArthroCare, pleaded guilty in June to one count of conspiracy to commit securities, mail and wire fraud and two counts of making false statements. His plea was unsealed yesterday, the U.S. Justice Department said.

He “admitted that he and other co-conspirators falsely inflated ArthroCare’s sales and revenue through end-of-quarter transactions involving ArthroCare’s distributors,” the department said in a statement. Raffle faces a maximum of five years in prison for each count, the government said.

Three other company officers were indicted last week on charges they falsely inflated revenue. A fourth former executive, David Applegate, pleaded guilty in May to two counts of fraud.

The case is U.S. v. Raffle, 12-cr-00314, U.S. District Court, Western District of Texas (Austin).

Ex-Goldman Executive Tourre May Say He’s Scapegoat in SEC Trial

Fabrice Tourre, the former Goldman Sachs Group Inc. vice president facing civil fraud claims over a mortgage bond debacle that made his client $1 billion, may say when he takes the witness stand today that he’s a scapegoat who was only trying to do his best for the firm.

Tourre, now a 34-year-old graduate student, is scheduled to testify before a jury in Manhattan federal court about his role in structuring and selling a 2007 mortgage-backed investment that lost a group of investors about $1 billion when the mortgage market crashed. It will be his first chance to make good on a promise, made before Congress in April 2010, to fight the U.S. Securities and Exchange Commission’s allegations that he “categorically” denied.

Tourre’s testimony comes near the end of two weeks of evidence against him by the SEC, whose lawyers will try to use Tourre’s own words to show he misled investors about the role of Paulson & Co., the hedge fund run by John Paulson, in helping select the assets behind the investment, which it then bet against.

His best defense may be to emphasize his relative lack of stature at Goldman Sachs at the time of the Abacus deal, said Jacob Frankel, a former SEC lawyer not involved the case.

His lawyer has said that Tourre’s e-mails to his girlfriend in 2007 showed he was uncertain about what he was doing and provided “an easy mark, a scapegoat” for the SEC.

Tourre has kept a low profile since enduring the questions of a U.S. Senate subcommittee in April 2010 alongside other Goldman Sachs executives. He has spent part of the time since then volunteering in Rwanda and working on a doctorate in economics at the University of Chicago.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

SEC Rule on Listing ‘Conflict Minerals’ Upheld by U.S. Court

The U.S. Securities and Exchange Commission rule requiring companies to disclose whether any “conflict minerals” are used in their products was upheld by a federal court in Washington.

U.S. District Judge Robert Wilkins wrote that the disclosure reporting scheme doesn’t transgress the First Amendment and dismissed a challenge to the reporting requirement brought by three business groups.

The rule is part of the 2010 Dodd-Frank Act overhauling securities markets and applies to certain minerals, including gold, tin, tungsten and tantalum, mined in the Democratic Republic of the Congo and neighboring countries. It’s intended to help ensure that use of the minerals doesn’t benefit armed groups responsible for extreme violence in the region.

The National Association of Manufacturers, the Business Roundtable and the U.S. Chamber of Commerce claimed the required publications on their own websites was compelled speech violating the First Amendment. In writing the rule, the agency was arbitrary and capricious, they said.

Wilkins’s ruling follows a July 2 district court decision throwing out another SEC rule, also required by Dodd-Frank, that mandated disclosure of payments by about 1,100 public oil, natural gas and mining companies to foreign governments.

The measure applies to companies with SEC-reporting obligations for whom the minerals are “necessary to the functionality or production” of an item they manufacture, the agency said in an Aug. 22 statement announcing the rule’s adoption.

It applies to Apple Inc. (AAPL:US), Boeing Co. (BA:US) and thousands of other U.S.-listed manufacturers whose products use the metals.

The conflict minerals case is National Association of Manufacturers v. U.S. Securities and Exchange Commission, 12-1422, U.S. Court of Appeals for the District of Columbia Circuit (Washington).

The payments case is American Petroleum Institute v. U.S. Securities and Exchange Commission, 12-cv-01668, U.S. District Court, District of Columbia (Washington).

Interviews

Guynn Says Banking, Commodities Connection Not New

Randall Guynn, head of the financial institutions group at law firm Davis Polk & Wardwell LLP, says the connection between banking and commodities is “not a new development” and has “very ancient roots.”

Guynn testified before a Senate Banking subcommittee in Washington yesterday.

For the video, click here and for more, see Compliance Policy, above.

Robertson Sees ‘Tougher’ Competition Among Hedge Funds

Julian Robertson, founder and chief executive officer of Tiger Management LLC, and Nehal Chopra, founder of Tiger Ratan Capital, talked about the hedge-fund industry and investment strategy.

They spoke with Tom Keene and Scarlet Fu on Bloomberg Television’s “Surveillance.”

For the video, click here.

Douglas Burns, Bloomberg’s Burton Discuss SAC’s Cohen

Douglas Burns, an attorney and former federal prosecutor, and Bloomberg News reporter Katherine Burton discussed the Security and Exchange Commission’s administrative action against Steven Cohen, the owner of SAC Capital Advisors LP. Burns and Burton talked with Bloomberg’s Pimm Fox and Carol Massar on Bloomberg Radio’s “Taking Stock” on July 22nd.

For the audio, click here.

Comings and Goings

Ex-SEC Enforcement Chief Khuzami Joins Kirkland & Ellis Law Firm

Robert Khuzami, the former head of enforcement at the U.S. Securities and Exchange Commission, is joining Kirkland & Ellis LLP.

Mark Filip, a partner in charge of Kirkland’s government enforcement defense and internal investigations, said Khuzami will help immediately in securities enforcement defense, advising boards and companies and counseling financial institutions on securities regulations. He will complement the firm’s general white-collar, internal investigations, and private class-action securities practices, Filip said July 22 in an interview.

Khuzami, 56, will be joined by Kenneth Lench, who served as one of his lieutenants at the SEC and headed a unit that scrutinizes financial instruments such as mortgage-backed securities and collateralized-debt obligations, Filip said.

Khuzami, a former federal prosecutor and top lawyer at Deutsche Bank AG, took over the SEC’s enforcement division in 2009 under Mary Schapiro. He carried out the biggest shakeup in the enforcement unit’s history, eliminating management layers, expanding investigators’ powers and creating five specialized units to police Wall Street.

He held the position for about four years before stepping down and was replaced in February by his deputy, George Canellos.

Under Khuzami, the SEC filed more than 150 cases related to the financial meltdown, including 65 actions against senior corporate officers, the agency said in January.

For more, click here.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

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


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