Month: February 2013

European Commission: Anti-Money Laundering

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On February 5, the European Commission published two legislative proposals designed to reinforce the European Union’s existing rules on anti-money laundering and fund transfers.  The legislative proposals comprise a directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, which is complemented by a regulation on information accompanying transfers of funds, designed to ensure the “due traceability” of these transfers.  Both proposals take into account the latest recommendations of the Financial Action Task Force.  The aims of the proposed directive include:

  • The provision of a clear mechanism for the identification of beneficial owners of funds.
  • Achieving greater clarity and transparency of the rules on customer due diligence in order to ensure that firms have adequate controls and procedures in place.
  • An expansion of the provisions dealing with politically exposed persons.

The legislative proposals are accompanied by an impact assessment and executive summary of the impact assessment, along with a set of frequently asked questions.

RBS Fined £87.5 Million over LIBOR Rates

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On February 6, the FSA issued a final notice to RBS imposing a fine of £87.5 million for misconduct in submitting rates for the calculation of LIBOR.  RBS’ misconduct included the manipulation of submissions and several failings in respect of risk management systems and controls (including ongoing failings to identify inappropriate LIBOR submissions), as well as RBS’ collusion with other LIBOR panel banks and brokers in setting rates.

The FSA stated that the significant financial penalty of £87.5 million is intended to reflect both the widespread nature of the misconduct, as well as the harm caused to market participants and the integrity of the UK financial system.  In related actions, RBS has agreed to pay $324 million to the US Commodities and Futures Commission and $150 million to the US Department of Justice. 

Legal Uncertainty in Proposed Ring-Fencing Provisions

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On February 5, the Financial Markets Law Committee published a paper highlighting uncertainties identified in relation to the ring-fencing provisions contained in the draft Financial Services (Banking Reform) Bill 2012 – 2013.  Three key areas were identified as being problematic, as follows:

  • Compatibility with EU law: the operation of the depositor preference and group support provisions may conflict with the proposed Recovery and Resolution Directive and certain provisions, as drafted, may also indirectly discriminate against nationals of other member states.
  • Drafting uncertainty: the current definition of “core services” is very unclear and the proposed transitional provisions create uncertainty as to the enforceability of existing arrangements between banks and customers.
  • Scope of the ring-fence: as drafted, the legal, economic and operational independence of the ring-fenced bank is uncertain due to a lack of clarity in the provisions setting out the height and location of the ring fence.

S&P Seeks Declaration That Credit Ratings Are Immune From Liability

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On February 5, two Standard & Poor’s entities filed a declaratory judgment action in the Southern District of South Carolina seeking to bar the South Carolina Attorney General from suing S&P under South Carolina’s Unfair Trade Practices Act in connection with S&P’s ratings of RMBS and CDOs.  S&P filed the action in response to a December 20, 2012 letter from the Attorney General that threatened litigation.  S&P alleges that its credit ratings are predictive and subjective opinions that constitute protected speech under the First Amendment.  It seeks a declaration that South Carolina’s Unfair Trade Practices Act may not constitutionally be applied to S&P’s credit rating activities and an injunction prohibiting the Attorney General from pursuing any lawsuit that is inconsistent with S&P’s First Amendment rights.  Complaint.

DOJ Brings Civil Fraud Action Against S&P

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On February 4, the Department of Justice filed a complaint in the Central District of California against two Standard & Poor’s entities in connection with credit ratings S&P provided for certain RMBS and CDOs.  The government asserts claims under the 1989 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which allows the government to bring civil claims for mail fraud, wire fraud, and “financial institution fraud” for alleged frauds perpetrated against federally insured financial institutions.  The complaint alleges that from September 2004 through October 2007, S&P knowingly issued inflated ratings of non-prime RMBS and CDOs, delayed downgrading those products, and knowingly used faulty ratings methodology.  The government seeks statutory civil penalties totaling over $5 billion.  Complaint.

Assured Wins $90 Million in Damages in RMBS Breach of Contract Trial

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On February 6, Judge Rakoff of the Southern District of New York ruled in favor of monoline insurer Assured Guarantee Municipal Corp. against Flagstar Bank FSB after presiding over a bench trial seeking damages for breach of loan-level representations and warranties.  Flagstar, a loan originator and RMBS sponsor, contracted for Assured to provide bond insurance on two securitizations of home equity loans totaling approximately $900 million.  Flagstar represented to Assured that at the time of origination the loans complied with Flagstar’s underwriting guidelines, but Judge Rakoff concluded in his findings of fact and conclusions of law, based in large part on expert testimony describing the re-underwriting of loan samples, that Flagstar breached certain of its representations.  Judge Rakoff awarded Assured $90 million in damages.  Findings & Conclusions.

Interest Rate Hedging Products: Review of Misselling

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On January 31, the FSA published a report of its findings from pilot reviews conducted by banks into the misselling of interest rate hedging products to small businesses.  The report confirms the FSA’s initial view that there has been significant misselling of such products in the small business market.

The pilot reviews were undertaken in order to consider proposed methods of reviewing such sales, and have led to the FSA identifying the following areas where changes in the review approach are required:

    • Assessment of compliance with regulatory requirements: consideration of compliance with regulatory requirements and, in the event of non-compliance, redress should be undertaken on a specific case-by-case basis.
    • Redress: all non-compliant sales must be considered for redress.
    • Sophistication test: the review should be focused on small businesses that were likely to have misunderstood interest rate hedging products.

The FSA anticipates that banks should have completed their reviews within 6 months, although acknowledges that it may take longer for those with large volumes of cases to review.

Upper Tribunal Upholds FSA Swift Trade Market Abuse Fine

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On January 28, the FSA published a press release regarding the decision of the Upper Tribunal (Tax and Chancery Chamber) to uphold the FSA’s decision to fine Swift Trade Inc £8 million for market abuse, marking the largest fine ever issued against a firm for market manipulation.

The FSA first published its decision notice in August 2011, having identified that Swift Trade had engaged in market abuse prior to its dissolution under Canadian law in December 2010.  In response, Swift Trade referred the matter to the tribunal, and Peter Beck, the President and CEO, made an additional reference on the basis that he had been prejudicially identified in the decision notice.  However, the tribunal concluded that the FSA had provided sufficient proof that Swift Trade had engaged in deliberate, manipulative and deceptive layering activities which together constituted market abuse.  The tribunal also dismissed Mr Beck’s reference.

ESMA Questions and Answers on Short Selling

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On January 30, the European Securities and Markets Association (ESMA) published the second update to its questions and answers on the implementation of the Short Selling Regulation (the SSR).  The Q&A document addressed questions posed by the general public, market participants and competent authorities with the aim of ensuring that competent supervisory authorities adopt common supervisory approaches and practices in the application of the European short selling regulatory regime.  The Q&A document has been updated in respect of ESMA’s guidance on:

    • Question 1 – The scope of the SSR.
    • Question 3 – Calculating the net short position.
    • Question 4 – Duration adjustment for calculating net short positions in sovereign debt.
    • Question 5 – Net short positions when different entities in a group have long or short positions or for fund management activities.
    • Question 7 – Uncovered short sales.

In addition ESMA has added a new question 8 on uncovered sovereign credit default swaps.

Israeli Bank Sues UBS and Goldman Sachs Seeking a Combined $220 Million

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On January 29, Bank Hapoalim B.M., Israel’s largest bank, filed summonses with notice against UBS AG, Goldman Sachs & Co., and their affiliates, in the Supreme Court for the State of New York.  In both actions, Bank Hapoalim alleges that the offering documents for RMBS it purchased contained material misrepresentations and omissions concerning the underwriting standards for the mortgages underlying the securities, the transfer of mortgage loans, the legal validity of the trusts, and the statistical information about the mortgage loans underlying the securities.  Bank Hapoalim asserts causes of action for common-law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and rescission against both UBS and Goldman Sachs, and additional claims for violations of the Securities Act of 1933 against Goldman Sachs.  Bank Hapoalim seeks approximately $116 million in damages from UBS and $106 million in damages from Goldman Sachs, inclusive of punitive damages.  UBS Summons with Notice.  Goldman Sachs Summons with Notice.