Bloomberg News

SAC, Goldman, JPMorgan, GMAC, Daimler, Exxon Mobil: 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

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.

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).

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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. 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).

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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