Nasdaq, Libor, Rajaratnam, ‘Pay for Delay’: Compliance

By Michael Bathon


Regulators cleared Nasdaq OMX Group Inc.’s (NDAQ) plan to pay $62 million to compensate brokers for its mishandling of Facebook Inc. (FB)’s public debut, dealing a defeat to Wall Street firms that say they lost many times that amount.

reputational compliance

The Securities and Exchange Commission approved Nasdaq’s request to change its rules and expand the compensation pool for member firms in the May 18 initial public offering. The funds will go to traders who lost money after a design flaw in the exchange’s computers delayed Facebook’s open and left them confused about how many shares they owned.

Nasdaq’s proposal was opposed by Citigroup Inc. and UBS AG, which said in letters urging the SEC to reject it that losses within their market-making units exceeded $62 million. Nasdaq, balancing its role as an organization with legal immunity for technology breakdowns with its obligations to members, said the pool covers “objective, discernible” losses suffered by brokers.

While agreeing the proposal won’t pay all purported losses, the SEC said it provides “significantly more compensation for eligible claims, outside of litigation, than would otherwise be available,” according to its order. Under existing rules, Nasdaq’s liability for losses related to computer malfunctions is $3 million, and may have been as low as $500,000 in the Facebook case, the SEC said in its order.

The pricing of the first public transaction on May 18, a trade known as the IPO cross, took a half-hour longer than Nasdaq planned because of technical malfunctions. In May, Nasdaq OMX Chief Executive Officer Robert Greifeld acknowledged “poor design” in software put the opening auction into a loop that delayed its completion.

Nasdaq’s handling of the Facebook IPO may still end up in court. In approving the rule change needed to accommodate the payouts, the SEC said the question of whether Nasdaq is entitled to regulatory immunity in its handling of the offering is outside the scope of the decision. Nasdaq has made releasing it from legal liability a condition for receiving compensation.

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Compliance Policy

Libor Oversight to Be Handed to New U.K. Finance Regulator

Regulatory oversight of Libor rates will be handed to the U.K. Financial Conduct Authority on April 1, under rules meant to restore credibility to the tainted benchmark.

The measures will ensure that whatever group eventually takes responsibility for setting the London interbank offered rate must corroborate submissions and monitor suspicious conduct, the Financial Services Authority said in a statement yesterday. The administrators of the rate and banks that participate will have to appoint a person approved by the regulator to oversee compliance.

Libor, used to set rates for more than $300 trillion of securities, is being overhauled after three lenders were fined for attempting to manipulate the benchmark and more than a dozen other lenders are still being investigated.

“These new rules today should help restore that faith and bring integrity back to Libor,” said Martin Wheatley, the chief executive officer-designate of the FCA, which will replace the FSA on April 1.

Wheatley carried out a review at the request of Chancellor of the Exchequer George Osborne. Barclays Plc (BARC), UBS AG and Royal Bank of Scotland Group Plc have been fined more than $2.5 billion by U.S. and U.K. regulators for manipulating the rate.

The U.K. government said in October that it planned to implement Wheatley’s recommendations “in full,” and to make it a criminal offense for those who misreport it and give regulators the power to oversee the setting of the rate.

Under the new rules, banks must also develop clear conflict of interest policies, the regulator said.

Dijsselbloem Says Euro Troubled Lenders Must Fend for Themselves

Dutch Finance Minister Jeroen Dijsselbloem, who committed taxpayer funds to take over SNS Reaal NV (SR) last month, said troubled lenders in the euro area must now fend for themselves as part of future euro rescues.

Dijsselbloem, who leads the group of 17 euro finance ministers, said imposing losses on depositors and bondholders must be part of the bailout toolkit after such measures were taken to avoid default in Cyprus.

If ailing banks can’t raise funds, “then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders,” Dijsselbloem said.

Dijsselbloem issued a statement after his comments roiled markets already bracing for the potential of capital flight. The Eurogroup decided the 10 billion-euro ($12.9 billion) bailout for Cyprus will require levies of as much as 40 percent on bank deposits above 100,000 euros.

“Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday,” he said in the later statement. “Programs are tailor-made to the situation of the country concerned and no models or templates are used.”

The Cyprus approach contrasts with the Feb. 1 rescue of Dutch lender SNS, which will cost taxpayers 3.7 billion euros and subordinated bondholders their investments.

The Dutch minister’s emphasis on national solutions come as he and his counterparts build a European banking union that provides for central oversight and the potential for recapitalization of banks by bailout funds to break the vicious circle of financial-sector and sovereign debt.

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Bank Regulators Chase 12% Swedish Capital Floor

Swedish bank capital requirements, among the world’s strictest, may now be setting the minimum standard for regulators across the Nordic region.

Norway proposed raising reserve requirements last week to match levels in neighboring Sweden, as regulators show signs of converging in a race to the top.

Capital rules won’t work unless they’re the same across borders, said Christian Clausen, president of the European Banking Federation and chief executive officer at Stockholm- based Nordea Bank AB. (NDA) As banks with the highest regulatory buffers enjoy lower funding costs, the head of the industry’s biggest association in Europe has argued that the benefits of converging up may outweigh the costs of setting aside extra reserves.

Investors have rewarded banks with bigger buffers against losses. It costs about 25 basis points less to insure against losses on senior notes issued by Nordea than it does for equivalent securities sold by Deutsche Bank AG, using five-year credit default swaps. Handelsbanken default-swaps trade about 40 basis points lower.

Norway, which is trying to avert a housing bubble after property prices and private debt soared to records, will target core capital requirements of 10 percent by July next year, up from the current 9 percent, the Oslo-based Finance Ministry said on March 22. For systemically important banks, the target will rise to 11 percent in 2015 and 12 percent in 2016. A proposed counter-cyclical buffer of as much as 2.5 percent could also be added, the ministry said.

Norway has also proposed raising risk weights on mortgage loans to as high as 35 percent, exceeding the 15 percent level proposed by Swedish regulators.

In neighboring Sweden, regulators have told their banks to target minimum capital buffers equivalent to 12 percent of their risk-weighted assets by 2015. Lenders must meet a 10 percent minimum requirement this year.

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Dark Pools Hamper Market Efficiency, Should Be Avoided, ASX Says

Dark pools reduce efficiency by dividing markets and should be avoided unless there’s a good reason, such as block trades, to use them, said ASX Ltd. (ASX) Chief Executive Officer Elmer Funke Kupper.

New rules to be enforced in May will require trades done in dark pools, broker-operated private venues that don’t display orders publicly, to achieve a better price than public venues. A study by the Australian Securities and Investments Commission released this month proposed that where price formation deteriorates due to dark-pool trading, there should be a trigger to implement a minimum-size threshold for orders.

ASX’s main Australian exchange handled 67 percent of trades of shares listed on the S&P/ASX 200 Index (AS51) in February while its dark pool, Centre Point, handled 3.7 percent, according to Fidessa Group Plc.

In the U.S., a Rosenblatt Securities Inc. report tracking 19 venues showed dark pools accounted for a record 14.3 percent of U.S. equity volume in January.

U.K. FSA to Gamble on Low Capital for New Banks in Last Proposal

The U.K.’s Financial Services Authority plans to cut in half both the time it takes startup banks to get approval and the amount of capital they must hold, in a proposal due today.

The Prudential Regulation Authority, which takes over bank supervision from the FSA next week, will let new lenders operate with a capital ratio as low as 4.5 percent, the minimum allowed under global standards, in an effort to revive banking competition.

The measures, the last from the FSA, will also include a plan to cut the time new banks have to wait for approval from one year to as little as six months, a person familiar with the plans said.

Britain’s four biggest banks — Barclays Plc, Lloyds Banking Group Plc, HSBC Holdings Plc and Royal Bank of Scotland Group Plc — account for almost three-quarters of the market for checking accounts, according to the Office of Fair Trading, and new entrants, such as Metro Bank Plc, have struggled to make inroads into the mortgage market. Chancellor of the Exchequer George Osborne has pledged the government would make it quicker and easier for new players to get approval.

The FSA will be disbanded on April 1 and be replaced by the PRA and the Financial Conduct Authority, which will oversee markets and prosecute financial crime. The FCA also has a mandate to improve competition in the banking industry.

The measures — known as Basel III and scheduled to be fully implemented globally by 2019 — will set the minimum core capital for banks at 4.5 percent of their assets, weighted for risk. So-called systemically important banks must maintain capital ratios of between 8.5 percent and 10 percent under the Basel rules.

Compliance Action

Rengan Rajaratnam Pleads Not Guilty to Insider Charges

Rengan Rajaratnam, the younger brother of imprisoned hedge- fund founder Raj Rajaratnam, pleaded not guilty to charges that he took part in an insider-trading scheme tied to his brother’s fund, Galleon Group LLC.

Rajaratnam, 42, was indicted last week by a federal grand jury for allegedly conspiring with his brother to trade on material nonpublic information about Clearwire Corp. (CLWR) and Advanced Micro Devices Inc. (AMD) He entered his plea yesterday before U.S. District Judge Naomi Reice Buchwald in Manhattan federal court.

Rajaratnam was taken into custody by agents of the Federal Bureau of Investigation the morning of March 24 at 6:30 when he arrived at New York’s John F. Kennedy International Airport on a flight from Brazil. His lawyer Vinoo Varghese said Rajaratnam first learned about the indictment from a story on the Wall Street Journal’s website.

“We contacted the government and told them Mr. Rengan Rajaratnam would voluntarily return to the U.S.,” Varghese told the judge. “He has clearly gone above and beyond to prove his desire to face these charges,” even offering to pay for the plane tickets for the FBI agents to return with him, Varghese said at yesterday’s hearing.

Prosecutors agreed to release Rajaratnam on $1 million bond, citing his voluntary return to the U.S. The bond will be secured by $500,000 in cash and property.

Prosecutors alleged that Rengan Rajaratnam, while working as a fund manager at Galleon, made almost $1.2 million from trades that occurred in 2008 based on tips provided by his brother and his Rolodex of insiders. He was implicated during his brother’s trial, where wiretapped conversations between the two men were played in court.

A parallel insider-trading lawsuit filed by the U.S. Securities and Exchange Commission against Rengan Rajaratnam described a conspiracy that allegedly began in 2006 and lasted until 2008.

Rajaratnam reaped more than $3 million in illicit gains for Galleon and his proprietary account, the SEC alleged. The SEC said its investigation is continuing. The case was assigned to U.S. District Judge John Koeltl.

The criminal case is U.S. v. Rajaratnam, 13-cr-00211, U.S. District Court, Southern District of New York (Manhattan); the civil case is SEC v. Rajaratnam, 13-cv-01894, Southern District of New York (Manhattan).

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New York Seeks Approval to Finish $410 Million Merkin Settlement

New York Attorney General Eric Schneiderman asked a federal judge for permission to complete a $410 million settlement with J. Ezra Merkin, using his law enforcement powers to compensate the former Bernard Madoff investor’s victims.

Madoff brokerage liquidator Irving Picard, who seeks to collect $500 million from Merkin for different investors, is trying to block the deal. Schneiderman has argued that Picard has no claim to the settlement money and lacks power as a bankruptcy trustee to stop the state from enforcing the people’s legal rights.

U.S. District Judge Jed Rakoff began a hearing in Manhattan federal court yesterday by asking the parties to address the state’s argument that Picard had waited too long to try to block its suit. David Ellenhorn, a lawyer from Schneiderman’s office, told Rakoff that investors refrained from bringing their own claims against Merkin in reliance on the attorney general’s suit.

Investors in Merkin’s hedge funds lost more than $1.2 billion in the Madoff fraud, New York has said. Madoff, arrested in 2008, is serving 150 years in prison for the largest Ponzi scheme in U.S. history, which effaced an estimated $17 billion of investors’ principal.

The combatants portray their deadlocked fight as a clash between state law, governing a top law enforcer, and bankruptcy law, regulating trustees in fraud cases. Rakoff took over the case from a bankruptcy judge to decide if Schneiderman can complete the deal with Merkin.

Picard has said that only he can sue investors who allegedly participated in Madoff’s fraud, compensating brokerage customers whose claims he has authorized. New York sued Merkin to pay investors in his hedge funds who wouldn’t get paid by Picard because they weren’t Madoff customers. Schneiderman is trying to complete the settlement of that suit.

The case is Picard v. Schneiderman, 12-cv-06733, U.S. District Court, Southern District of New York (Manhattan).

AstraZeneca Settles Crestor U.S. Patent Case With Actavis

AstraZeneca Plc (AZN), the U.K.’s second-biggest drugmaker, agreed to settle a lawsuit against generic manufacturer Actavis Inc. (ACT) that alleged violation of the patent on the company’s best- selling Crestor cholesterol treatment.

The agreement allows Actavis and partner Egis Nyrt. to begin selling a copy of Crestor on May 2, 2016, London-based AstraZeneca said in a statement yesterday. Actavis will pay AstraZeneca a fee of 39 percent of net sales until the end of pediatric exclusivity on July 8, 2016. Crestor had sales of $6.25 billion last year.

AstraZeneca won an appeals-court ruling in December that blocked generic versions of the drug in the U.S. until July 2016. Shionogi & Co. is also part of the settlement agreement, the complete terms of which were not disclosed.

The generic product still must be approved by the U.S. Food and Drug Administration, and Actavis, which changed its name from Watson in November, has made no decision regarding its release, the company said in a statement.

Ex-Calpers CEO Buenrostro Will Plead Not Guilty, Lawyer Says

Federico Buenrostro, former chief executive officer of California Public Employees’ Retirement System, will plead not guilty to charges he conspired to trick the pension fund into paying millions of dollars to a placement agent, his lawyer said.

Buenrostro, 64, faces conspiracy and other charges for allegedly helping to create false documents so Alfred Villalobos could garner $14 million in fees for arranging a $3 billion Calpers investment into funds managed by Apollo Global Management LLC. (APO) Villalobos was also charged.

William Portanova, Buenrostro’s attorney, said in an interview yesterday his client will plead not guilty and defend himself against the charges in federal court in San Francisco. Buenrostro appeared at a hearing yesterday about the terms of his bail. He is free on a $500,000 unsecured bond. U.S. Magistrate Judge Nathanael Cousins upheld the amount and released Buenrostro from electronic monitoring.

His next scheduled court appearance is May 8.

The case is U.S. v. Villalobos, 13-cr-00169, U.S. District Court, Northern District of California (San Francisco).

Boeing Moves Closer to Battery Fix Approval With 787 Flight

Boeing Co. (BA) planned a flight yesterday of the 787 Dreamliner to test a proposed fix for lithium-ion battery systems that overheated on two separate aircraft earlier this year and led to the plane’s grounding in January.

Boeing said the “functional check flight” would last two hours to validate all systems on the plane, including changes to the batteries, which feature an enclosure that prevents fire and modifications to the charger. The flight will be followed by one certification demonstration flight “in the coming days” that will show the new battery systems function properly, Boeing said in an e-mailed statement.

Yesterday’s flight was made with a Boeing-owned airplane built for LOT Polish Airlines SA and took off and landed at Paine Field in Everett, Washington, the Chicago-based company said. The functional check flight is a step toward winning Federal Aviation Administration approval to get the 787 back in operation.

Anheuser-Busch Discloses India Foreign Corruption Probe by SEC

Anheuser-Busch InBev NV (ABI)’s India joint venture is being investigated by the U.S. Securities and Exchange Commission for possible violations of the Foreign Corrupt Practices Act.

“We have been informed by the SEC that it is conducting an investigation into our affiliates in India, including our non- consolidated Indian joint venture, InBev Indian International Private Ltd., and whether certain relationships of agents and employees were compliant with the FCPA,” the company said in a regulatory filing yesterday. “We are investigating the conduct in question and cooperating with the SEC.”

The investigation is at an early stage and no claims have been asserted by regulators, Marianne Amssoms, an AB InBev spokeswoman, said yesterday in an e-mail. AB InBev’s market share in India is about 2 percent, with operations run by an Indian subsidiary, Crown Beers India, and a joint venture with RKJ Group for local production, in which AB InBev holds a minority stake.

“We have an extensive compliance program which includes robust policies, training, and an employee hot line,” Amssoms also wrote.

Supreme Court News

Drugmaker ‘Pay for Delay’ Accords Questioned by High Court

U.S. Supreme Court justices suggested they will open drugmakers to suits over so-called pay-for-delay agreements, hinting at a ruling that would rewrite the rules governing the release of generic medicines.

Hearing arguments yesterday in Washington, the justices voiced skepticism about the accords, which the Federal Trade Commission says cost buyers as much as $3.5 billion a year. The antitrust agency says brand-name drug companies are paying generic rivals to forestall low-priced versions of popular treatments.

The accords benefit the companies “to the detriment of consumers,” Justice Elena Kagan said.

The FTC says 40 more pay-for-delay accords were struck in fiscal 2012 alone. Bayer AG, Merck & Co. (MRK) and Bristol-Myers Squibb Co. (BMY) units already have faced lawsuits. Companies say the accords are legitimate patent settlements.

Several justices suggested they weren’t comfortable with the FTC’s proposed test to determine whether the accords are anticompetitive. The antitrust agency says courts should start with the presumption that a payment from a brand-name drugmaker to a generic rival is illegal. Justice Stephen Breyer called that test “rigid.”

Justice Anthony Kennedy suggested that brand-name drugmakers at least shouldn’t be allowed to pay generic companies more than the generic companies could expect to get by winning patent litigation.

The FTC and its allies don’t have an issue with settlements that merely set the date for generic entry. A payment is different, they say. If a brand-name drugmaker with $100 million in annual sales can pay a generic rival $20 million to wait an extra year, both companies come out ahead — at the expense of purchasers, the FTC argues.

The case, which the court will resolve by June, is Federal Trade Commission v. Watson Pharmaceuticals, 12-416.

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Affirmative Action Review Expanded by U.S. Supreme Court

The U.S. Supreme Court expanded its scrutiny of affirmative action in higher education, agreeing to review a Michigan law that would bar public universities from considering race or gender as an admissions factor.

The high court already is considering whether the University of Texas is violating the constitutional guarantee of equal protection with its affirmative action program.

The justices now will review a federal appeals court’s conclusion that a voter-approved amendment to Michigan’s constitution impermissibly limits the political rights of racial minorities. The initiative was a response to a 2003 Supreme Court decision that allowed race-based admissions in a case involving the University of Michigan Law School.

At stake are policies that have been a fixture on U.S. campuses since the 1960s. All but a handful of the nation’s selective colleges and professional schools consider race as they seek to ensure a diverse student body.

The decision to take up the Michigan case at this stage marks an unusual move for the court, which typically defers action on appeals that raise similar questions, as a ruling is expected in the Texas case next three months.

One possibility is that the court might hold off ruling in the Texas case and consider the two cases together in the next term.

The Michigan law was immediately challenged in court by a civil rights advocacy group, known as the Coalition to Defend Affirmative Action, Integration and Immigrant Rights and Fight for Equality by Any Means Necessary.

The group argued in court papers that the Cincinnati-based 6th U.S. Circuit Court of Appeals correctly concluded that racial minorities had been put at a disadvantage compared with other groups. The 6th Circuit struck down the measure on an 8-7 vote.

The case is Schuette v. Coalition to Defend, 12-682, U.S. Supreme Court (Washington).

Tax-Shelter Penalty Gets U.S. High Court Review in McCombs Case

The U.S. Supreme Court will use a case involving billionaire Billy Joe “Red” McCombs to decide whether the federal government can impose hundreds of millions of dollars in penalties for the use of abusive tax shelters.

The justices yesterday said they will hear an Obama administration appeal of a ruling favoring McCombs, the co- founder of Clear Channel Communications Inc. (CCMO) and former owner of the Minnesota Vikings and San Antonio Spurs.

The case will test one aspect of the Internal Revenue Service’s effort to recoup billions of dollars from high-income taxpayers who set up shelters in the 1990s and 2000s.

At issue is the scope of a provision that lets the IRS impose a 40 percent penalty on people who understate their capital-gains tax liability by inflating their “basis” — that is, the cost of acquiring property that is later sold.

A federal appeals court said the penalty provision doesn’t apply when the Internal Revenue Service treats the entire transaction as a sham, as it did in the case of McCombs and his business partner, Gary Woods.

The two men used a tax-avoidance strategy known as COBRA in an effort to limit taxes in 1999, when McCombs was expecting high income because of the expansion of the National Football League. Under COBRA, taxpayers used paper losses to offset real gains — and reduce their tax liability.

The government said McCombs and Woods, acting on advice from the accounting firm Ernst & Young LLP, were able to claim $45 million in losses from transactions that actually cost them only $1.37 million.

The Supreme Court will take up the case during the nine- month term that starts in October.

The case is U.S. v. Woods, 12-562, U.S. Supreme Court (Washington).


Bernanke Doesn’t See ‘Beggar-Thy-Neighbor’ Policies

Federal Reserve Chairman Ben S. Bernanke speaks about central bank monetary policies and global exchange rates.

Bank of England Governor Mervyn King, UBS AG Chairman Axel Weber, former U.S. Treasury Secretary Lawrence Summers and International Monetary Fund Chief Economist Olivier Blanchard also speak at the London School of Economics.

This article was written by  Michael Bathon   and originally published on bloomberg


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