1.The Dog Ate My Regulation. The Fed is Late Delivering the Volcker Rule.
When the financial reform was being discussed shortly after the credit crisis, former Fed Chairman Paul Volcker suggested that federally insured banks should not be allowed to trade their own proprietary assets. After much debate, the “Volcker Rule“—which does not prohibit but severely limits banks’ ability to trade their own assets—was incorporated into Dodd-Frank. After two years of debate and struggle current Fed Chairman Ben Bernanke had the uncomfortable task of telling the House Financial Services Committee this week that the rule will not be completed by the July deadline set by the Act. Once complete the rules will also have a two-year phase-in period—so the banks will have adequate time to comply. It is true that the rule is controversial. It is true that it is not simple to dictate how banks should be required to dispose of their proprietary assets. But are the rules to be so complex that after two years the Fed has not committed the precept to paper? Complexity invariably leads to litigation. Let us hope that the final Volcker rules, whenever they are completed, will be simple and clear.
2. Don’t Count Your Settlements Before They’re Hatched
In June, Bank of America reached a tentative $8.5 billion settlement with a group of about two dozen large hedge funds claiming losses from mortgage-backed securities issued by Countrywide Financial (the troubled thrift purchased by BofA). Normally that would be the end of this story. To be safe, one of the parties to the proceedings—Bank of New York Mellon, trustee for many of the underlying securitizations—brought what is called an Article 77 proceeding to confirm that as trustee they had authority to enter into the settlement. That’s when the story takes an unexpected turn. Another group of investors sought to have the case moved to federal court under the Class Action Fairness Act. This Act gives federal courts broader jurisdiction over certain class actions over $5 million in which any members of the class are citizens of different states. This second group of investors was concerned that the initial group of hedge funds would receive preferential treatment as a result of the settlement. The Second Circuit Court of Appeals has sent the matter back to state court to respond to Bank of New York Mellon’s request to confirm their actions. To the casual observer this had sounded like a completed settlement back in June (and that may still prove to be the case). However, despite lengthy negotiations, despite headlines announcing the settlement—if the court determines that this matter is best handled as a class action this settlement may still evaporate. The lesson is clear. If all impacted parties don’t sign off on a settlement don’t assume that the matter is complete.
3. Greed is…Apparently Quite Common. Insider Trader Investigation Expands.
In the last two years, prosecutors have charged 66 individuals with insider trading and won 57 convictions or guilty pleas. This week the FBI disclosed that there are currently 240 people under active investigation for improperly sharing material nonpublic information. Authorities also revealed that roughly half of those under investigation are “targets” indicating that charges may be sought against approximately 120 of that number. Barry Goldsmith, former chief litigation counsel for the SEC, noted in the Wall Street Journal that current rings are much broader, involving bankers, analysts, corporate insiders, consultants and traders and that the rings are much larger. He stated that in the 1980s insider-trading cases “generally the number of people in a particular ring, you could count on both hands.” Perhaps the most famous, albeit fictional, insider trader Gordon Gekko (in the form of his portrayer, actor Michael Douglas) has released a public service announcement for the FBI denouncing insider trading and urging people with information about securities fraud to report it to the FBI. It’s a curious and unusual thing when the FBI becomes so public about their on-going investigations. What is clear is that there will be more on-going insider trading cases than we have ever seen before and that greed is getting more attention.
4. Is Someone Going to Jail Over LIBOR?
The setting of interest rates doesn’t usually lead to jail time. However, the Department of Justice has started their investigation into questions of tampering with the setting of the London Interbank Offering Rate (“LIBOR”). This story has been reported widely and there are on-going investigations in money centers around the world. Authorities are asserting that that a number of banks may have been communicating in an effort to influence the setting of the rate that serves as index for approximately $10 trillion worth of securities and derivatives. Until now, at least in the U.S., this has been a civil matter. Now the DoJ is investigating, and that generally means that criminal charges are being considered. To put some perspective on this investigation, a single basis point on $10 trillion is worth a billion dollars.
5. Texas Tech’s Tommy Tuberville Tricked?
Tommy Tuberville is the widely respected head coach for Texas Tech Football and past winner of the Paul Bryant Coach of the year award for his success during his years as coach at Auburn. Tuberville was also co-owner of TS Capital Partners with John David Stroud. That may have been a bad call on the coach’s part. The two are now being sued for fraud in federal court for $1.7 million by seven investors who claim numerous securities violations. The Coach’s partner, Stroud has already been suspended by the Financial Industry Regulatory Authority as of April 2011. The National Futures Authority has taken emergency enforcement action against the firm. It appears that Coach Tuberville had substantial funds invested in the firm and his counsel claims that he has never received any return from the firm. Was Tuberville involved or simply tricked by a duplicitous partner? Either way this may be a sad distraction from an otherwise terrific sports career.
Texas Longhorn fans…please try not to smile.