Bloomberg News

SAC, Publicis-Omnicom, Goldman, JPMorgan: Compliance

July 29, 2013

Insider trading evidence against SAC Capital Advisors LP includes court-authorized wiretaps, a U.S. prosecutor said at the $14 billion hedge fund’s arraignment in federal court in Manhattan.

“The discovery will be voluminous, including a large number of electronic recordings, including electronic messages, instant messages, court-authorized wiretaps and consensual recordings,” Assistant U.S. Attorney Antonia Apps told U.S. District Judge Laura Taylor Swain Friday about the pretrial evidence-gathering process.

Prosecutors didn’t specify whether the wiretaps were directed at SAC founder and owner Steven A. Cohen or any other SAC employee. Cohen wasn’t in court Friday for the hearing that lasted about 15 minutes.

Inside the crowded courtroom, the defense table was lined with six criminal lawyers for SAC. Peter Addison Nussbaum, SAC’s general counsel, entered a not guilty plea on behalf of each of the four SAC business entities.

The U.S. alleges that the four units are culpable for allowing insider trading to become institutionalized as a way of doing business at the Stamford, Connecticut-based hedge fund.

Nussbaum declined to comment after the hearing, as did Martin Klotz, another SAC lawyer from Willkie Farr & Gallagher LLP. Also representing SAC is Theodore “Ted” Wells from Paul Weiss Rifkind Wharton & Garrison LLP.

Under the criminal case, each of the SAC units charged faces a maximum of at least $25 million or twice the profits made or losses avoided on each of the alleged crimes.

SAC last week told investors, employees and counterparties that it will stay open for business as the U.S. presses its case.

The case is U.S. v. SAC Capital Advisors LP, 13-00541, U.S. District Court, Southern District of New York (Manhattan).

Compliance Action

Publicis-Omnicom Merger Seen as Drawing Close Antitrust Scrutiny

Publicis Groupe SA (PUB)’s merger with Omnicom Group Inc. (OMC:US) is seen by antitrust experts as likely to draw intense scrutiny and may even be blocked by U.S. regulators.

The transaction, which culminates years of consolidation in the global advertising market, is likely to spark opposition from corporate customers concerned about the power the merged firm may wield in the advertising market, according to Bert Foer, president of the American Antitrust Institute, which advocates strong enforcement of antitrust laws.

If approved, the merger of Paris-based Publicis and New York-based Omnicom will overtake market leader WPP Plc (WPP) and create an advertising powerhouse with $35 billion in market value and about 41 percent of total spending by the top 10 media agencies in the world, according to data compiled by Advertising Age.

Allen Grunes, an antitrust lawyer with GeyerGorey LLP in Washington, said the transaction may be the one that hits resistance from antitrust regulators after years of consolidation in the industry.

Chief executives of both companies said at a press conference announcing the merger yesterday they didn’t expect to face regulatory hurdles.

It isn’t clear which of the two U.S. antitrust agencies, the Federal Trade Commission or the Justice Department’s antitrust division, is going to review the merger. The agencies usually agree which will review a transaction based on a clearance process that awards the responsibility to the agency with the most expertise.

Gina Talamona, a Justice Department spokeswoman, and Peter Kaplan, a Federal Trade Commission spokesman, declined to comment on the merger.

For more, click here.

Tourre Says ‘I Haven’t Done Anything Wrong’ at Testimony’s End

Fabrice Tourre made one final attempt to convince jurors in Manhattan that he didn’t defraud investors in a 2007 mortgage bond-backed investment that lost them $1 billion when the U.S. housing market crashed.

“I haven’t done anything wrong, as I’m here literally to tell the truth and to clear my name,” Tourre, 34, said Friday as he wrapped up his testimony in the trial of the U.S. Securities and Exchange Commission’s civil fraud case against him.

The SEC claims Tourre, a former vice president at Goldman Sachs Group Inc. (GS:US), hid the involvement of the hedge fund Paulson & Co. in selecting the mortgage bonds underlying the investment, known as Abacus 2007-AC1, and then made a $1 billion bet it would fail. The agency plans to rest its case against Tourre when the trial reconvenes July 29.

Tourre testified he made $1.7 million in salary and bonus in 2007. If found liable for fraud, he faces money penalties and a possible ban from the securities industry.

Tourre told jurors Friday that he learned in April 2010 the SEC was suing him and Goldman Sachs over Abacus from a news headline scrolling on his Bloomberg terminal.

Tourre, a French citizen, said he voluntarily testified before a U.S. Senate subcommittee in 2010. After that he “had to take a step back and think about what to do,” as his career had been “effectively destroyed” by the allegations. Tourre was placed on paid leave by Goldman Sachs for one year, at his base salary of about $750,000. He said he hoped he’d be able to return to the firm.

“I was hoping I could make the SEC understand this transaction,” he said.

Tourre told jurors he did volunteer work in East Africa and is now pursuing a doctorate in economics at the University of Chicago.

Tourre’s lead lawyer, Pamela Chepiga, sought to minimize Tourre’s responsibility for the Abacus transaction by highlighting his relatively junior status and showing that the transaction was reviewed by dozens of people at Goldman Sachs.

Tourre was called as a witness by the SEC and was questioned by both sides. He isn’t expected to testify again when his defense team presents its case this week.

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

GMAC Will Pay Borrowers $230 Million on Faulty Foreclosures

GMAC Mortgage, part of the home lending unit owned by Ally Financial Inc. (ALLY:US), will pay $230 million to compensate borrowers for improper handling of foreclosures, the Federal Reserve said July 26 in a statement.

GMAC Mortgage will pay about 232,000 borrowers to settle claims it improperly seized homes, the Fed said. In a deal similar to those regulators struck with 13 other mortgage servicers this year, the money goes to borrowers who faced foreclosure in 2009 and 2010.

Settlements reached since January with 14 of the largest U.S. mortgage servicers, total more than $3.8 billion and will close the books on mishandled foreclosures after the 2008 credit crisis.

“We’re relieved to be able to distribute these funds directly to borrowers rather than spend the time and money with consultants to complete the file review,” Tammy Hamzehpour, a spokeswoman for Residential Capital -- part of the Ally mortgage unit placed into bankruptcy last year -- said in an e-mailed statement. “That process would not have returned anywhere near as much money, to as many potentially harmed borrowers, as will this settlement.”

The company settled without admitting or denying wrongdoing. The payments will come from the Residential Capital estate, Hamzehpour said.

France Blocks Mercedes Compact Registrations in Coolant Dispute

Daimler AG (DAI), the world’s third-biggest maker of luxury vehicles, is barred from registering its Mercedes-Benz compact models in France because regulators have stopped accepting a coolant fluid used in the vehicles.

The Mercedes A- and B-Class as well as the CLA coupe can’t be registered in the country as they use a refrigerant that no longer meets to European Union environmental regulations, the Ministry of Ecology, Development and Energy said in a statement July 26. Daimler said Friday that it plans legal action against the move, which it called a misreading of EU law.

Daimler has been in talks for about a year with European authorities over a newer refrigerant, R1234yf, that regulators say meets stricter standards on greenhouse gas emissions. The Stuttgart, Germany-based manufacturer has held off from switching to R1234yf, saying the new fluid is susceptible to catching fire in car crashes.

Daimler sold 15,745 compact vehicles in France in the first six months of 2013, accounting for about 2 percent of its global car deliveries in the period, Ulrike Bless, a spokeswoman, said by phone.

The carmaker was in “discussions with all the relevant institutions in order to reach rapid clarification of the situation,” Daimler said in its second-quarter report published July 24.

S&P Wants Government Documents About Other Rating Company Probes

McGraw Hill Financial Inc. (MHFI:US)’s Standard & Poor’s, preparing its defense to the fraud lawsuit by the U.S. Justice Department, will ask the government for information about investigations of other credit raters.

The Justice Department and S&P on July 26 filed a joint report ahead of today’s federal court hearing in Santa Ana, California. The report lays out the kind of evidence each side will seek from the other in preparation for a trial of the government’s claims that S&P lied to investors about its ratings being independent and free of conflicts of interest.

S&P wants the government to provide it with documents about its investigation of S&P and others, about the government’s decision to file the lawsuit, and information the government received about residential mortgage-backed securities and collateralized-debt obligations in investigations of others, including other credit rating providers.

The Justice Department will initially seek evidence related to whether particular S&P-rated residential mortgage-backed securities and CDOs were affected by the alleged fraud and the losses to financial institutions from these particular securities, according to the filing.

The Justice Department seeks as much as $5 billion in civil penalties from New York-based S&P, based on losses federally insured financial institutions incurred from investments in mortgage-backed securities and CDOs that included these securities, which had received investment-grade credit ratings from S&P.

U.S. District Judge David Carter on July 16 denied S&P’s request to throw out the government’s complaint.

Edward Sweeney, a spokesman for S&P, and Thom Mrozek, a spokesman for U.S. Attorney Andre Birotte Jr. in Los Angeles, declined to comment on the filing.

The case is U.S. v. McGraw-Hill Cos., 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).

Compliance Policy

Banks Should Shed Commodities and Focus on Banking, Chilton Says

Banks that own, trade or warehouse commodities should consider going back to being banks, U.S. Commodity Futures Trading Commission member Bart Chilton said July 26 after JPMorgan Chase & Co. (JPM:US) announced it was considering selling its physical commodities business.

“This whole area of banks owning the physical, warehousing and delivery mechanisms of commodities is one that policy makers need to thoughtfully consider, and soon,” Chilton said in an e-mail. “Banks getting back to being banks and making loans to businesses and individuals seems like the best course of action. Perhaps that will happen without any policy changes, although I have definite doubts.”

JP Morgan said it may sell or spin off its physical commodities business three days after a congressional hearing examined whether banks are using their ownership of raw materials to manipulate markets.

The firm plans to continue running the commodities unit “as a going concern and fully support ongoing client activities” while it considers its options, JPMorgan said. One possibility is a strategic partnership, the bank said.

Regulators including the Federal Reserve are under pressure to explain why they allow banks to run trading operations while also owning mines, oil fields, railroads and warehouses. A reversal of those regulatory policies could put commodity units of JPMorgan as well as Goldman Sachs Group Inc. and Morgan Stanley (MS:US) in jeopardy.

U.S. Senator Sherrod Brown, the Ohio Democrat whose subcommittee of the Senate Banking Committee held hearings on the industry this week, has called on the Fed to give clear guidance on what non-bank activities should be allowed “and consider placing limitations on those that expose banks and taxpayers to undue risk.”

In the Courts

Exxon Mobil’s $105 Million MTBE Defeat Upheld by U.S. Court

A U.S. jury’s $104.7 million damage award against Exxon Mobil Corp. (XOM:US) for contaminating New York City wells with the gasoline additive MTBE was upheld by a federal appeals court.

The award for compensatory damages to clean up contaminated wells was proper, the U.S. Court of Appeals in Manhattan said in a ruling July 26, denying Exxon Mobil’s challenge to the 2009 verdict. The Irving, Texas-based company said it plans to appeal the ruling to the U.S. Supreme Court.

“We reject Exxon’s argument that the jury’s verdict conflicts with and is therefore pre-empted by the Clean Air Act Amendments of 1990,” the appeals panel said, adding that the jury properly offset the award by amounts attributed to cleanup of other contaminants.

New York sued Exxon Mobil and other oil companies in 2003, alleging that they knew the gasoline additive methyl tertiary butyl ether, or MTBE, would pollute groundwater. Exxon Mobil argued that state laws are pre-empted by the Clean Air Act, which required oil companies to reformulate gasoline to reduce air pollution from vehicle emissions. Oil companies added MTBE to make it burn more thoroughly.

“MTBE has not been used for seven years, cleanup successfully continues and the myriad of data shows MTBE detections decreasing,” Todd Spitler, a spokesman for Exxon Mobil, said in an e-mail. The company “will be filing an appeal to the United States Supreme Court,” he said.

This case is one of scores around the country by municipalities, states and individuals against oil refiners, distributors and retailers over MTBE. Many, including New York City’s, were consolidated in New York federal court for evidence-gathering.

A state appeals court in Maryland in February reversed two jury awards totaling $1.65 billion against Exxon Mobil over MTBE contamination, ruling that the company hadn’t made fraudulent statements and the property owners who sued hadn’t demonstrated physical harm.

A jury in New Hampshire state court in April ordered Exxon Mobil to pay $236 million in damages for contaminating groundwater with MTBE. The company has appealed that verdict.

The appeal is In re Methyl Tertiary Butyl Ether Products Liability Litigation, 10-4329, U.S. Court of Appeals for the Second Circuit (Manhattan).

For more, click here.

Texas Loses Bid to Stop EPA Takeover of Greenhouse Gas Rules

Texas’s bid to keep control of its own greenhouse gas permitting program was rejected by a divided federal appeals court in a decision that supports a takeover by the U.S. Environmental Protection Agency.

In a 2-1 ruling, the U.S. Court of Appeals in Washington said July 26 that Texas, Wyoming, Peabody Energy Corp. (BTU:US) and industry groups aren’t in a legal position to challenge federal rules governing the revision of state implementation plans, known as SIPs. The ruling follows the court’s holding last year that the EPA’s limits on greenhouse gas emissions are lawful.

The parties cannot show harm because “the permitting requirements are self-executing” under the Clean Air Act, U.S. Circuit Judge Judith Rogers wrote in a majority opinion joined by Judge David Tatel.

Texas sued the agency in 2010 to prevent the EPA from taking control of the state’s regulation of carbon-emissions from stationary sources. States were required to regulate greenhouse gases as pollutants in their permitting programs by January 2011.

Bryan Shaw, chairman of the Texas Commission on Environmental Quality, said in an emailed statement that the “EPA has effectively rewritten the Clean Air Act to impose its new standards, imposed severely restrictive timelines on the states to implement its new requirements, and then twisted the act to immediately impose its agenda on Texas.”

In a dissent, Circuit Judge Brett Kavanaugh argued that under EPA regulations the states should have three years to revise their plans before any federal intervention. He said the regulation also doesn’t impose a construction moratorium during those three years.

The case is State of Texas v. Environmental Protection Agency, 10-1425, U.S. Court of Appeals for the District of Columbia (Washington).

MF Global Reaches Settlement With JPMorgan Unit on Recovery

MF Global Holdings Ltd. reached a settlement giving it a share of JPMorgan Chase & Co.’s recovery on a $60 million claim against the holding company’s brokerage.

Under a prior settlement with the brokerage, MF Global Inc., JPMorgan agreed to hand over $100 million in customer property and in return received the $60 million unsecured claim. As part of a new settlement, JPMorgan will give a percentage of its recovery on the claim to the holding company, according to court papers filed July 24.

Investigations of the bank “concluded that, while there are potential claims against JPMorgan, it is not at all clear” that plaintiffs would prevail in litigation seeking to recover money on the claims, lawyers for MF Global Holdings wrote in the filing in U.S. Bankruptcy Court in Manhattan.

JPMorgan’s settlements with the brokerage have so far resulted in a total of $1 billion being made available to distribute to former customers, according to the filing.

The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The broker liquidation is In re MF Global Inc., 11-bk-02790, same court. The class-action case is 11-cv-7866, U.S. District Court, Southern District of New York (Manhattan).

In the Courts

Morgan Stanley Allowed by Judge to Pursue Skowron Fraud Claim

Morgan Stanley won a judge’s permission to pursue a fraud claim as it seeks to recover damages from Joseph “Chip” Skowron, a former hedge fund manager serving a five-year prison term for insider trading.

Skowron managed Morgan Stanley’s FrontPoint Partners LLC until he was charged in 2011 with using inside information to avoid $30 million in losses. The New York-based bank sued Skowron after he pleaded guilty to conspiring to commit securities fraud and obstruct justice, seeking to recover $33 million it paid U.S. regulators and the $32 million it paid him.

Skowron, 44, asked U.S. District Judge Shira Scheindlin in Manhattan to dismiss three of Morgan Stanley’s claims, including that he defrauded the bank and breached his fiduciary duty. The judge ruled that the bank can seek to prove its fraud claim, while dismissing its fiduciary duty claim. She said Skowron covered up his crimes as the bank and U.S. government investigated.

The judge also granted Skowron’s motion to dismiss Morgan Stanley’s breach of fiduciary duty claim relating to the bank’s payment of $33 million to settle with the U.S. Securities and Exchange Commission. Morgan Stanley had agreed to cover any liabilities incurred by FrontPoint for alleged violations of the law, according to the judge.

Josh Epstein, a lawyer for Skowron, didn’t immediately return a call seeking comment about the ruling.

Kevin Marino, a lawyer for Morgan Stanley, said “We’re very pleased that the court rejected Mr. Skowron’s attempt to escape the consequences of his fraud and look forward to pursuing this case to a successful resolution.”

On July 16, the U.S. Court of Appeals in Manhattan ruled that Morgan Stanley is entitled to $10.2 million in restitution from Skowron. The court upheld a judge’s ruling that Skowron owed the bank 20 percent of his salary from 2007 to 2010, or $6.4 million, and $3.8 million in legal fees.

The District Court case is U.S. v. Skowron, 1:11-cr-00699, U.S. District Court, Southern District of New York (Manhattan). The appeal is U.S. v. Skowron, 12-1284, U.S. Court of Appeals for the Second Circuit (Manhattan). Morgan Stanley’s suit is Morgan Stanley v. Skowron, 12-cv-8016, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Ex-AIG CEO Greenberg Asks Court to Dismiss New York Suit

Former American International Group Inc. (AIG:US) Chief Executive Officer Maurice “Hank” Greenberg said he’s filed another request to dismiss an eight-year-old fraud lawsuit brought by the New York Attorney General’s Office.

The New York Court of Appeals, the state’s highest court, last month ruled that the state can pursue its case against Greenberg over his role in a sham reinsurance transaction and can seek an injunction banning him from the securities industry and from serving as an officer or director of a public company.

Greenberg, 88, argued the suit was fatally flawed after court approval of a $115 million settlement of a class-action suit that resolved claims against him and former AIG Chief Financial Officer Howard Smith. After the settlement was approved, the attorney general’s office said it was withdrawing its claim for damages in the case.

Greenberg, in a filing July 26, urged the state Supreme Court in Manhattan to dismiss the case before trial, according to his attorneys with the firm of Boies, Schiller & Flexner LLP. Greenberg is also asking Justice Charles A. Ramos, who’s been presiding over the lawsuit, to recuse himself, saying the judge has shown he’s biased, the lawyers said.

Eric Schneiderman, who took over the case when he became attorney general, contends that Greenberg and Smith bear responsibility for the transaction with General Reinsurance Corp. in 2000 and 2001 that inflated AIG’s loss reserves by $500 million.

The original case is State of New York v. Greenberg, 401720-2005, New York State Supreme Court, New York County (Manhattan).

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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