The U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”), have found themselves fighting in the same arena this year as the DOJ aggressively tackled two high profile civil cases. The overlap has sparked speculation as to why the DOJ is poaching territory that is usually under the SEC’s purview.
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News has been spreading in the cable industry about a potential merger or buyout of Time Warner Cable (TWC). Speculation surrounding the possible buyout has been fueled by interest from companies like Comcast, Charter Communications, and Cox.
The proposed merger of the bankrupt AMR Corporation (parent company of American Airlines – hereinafter American) with US Airways Group, Inc. (parent company of US Airways – hereinafter US Airways) to create the new American Airlines was announced in February 2013. Despite the European Commission’s (EC) August 5 clearance of the merger with minimal commitments, the Antitrust Division of the U.S. Department of Justice (DOJ), joined by seven states and the District of Columbia, brought suit to permanently enjoin the merger on August 13. United States v. US Airways Group, Inc., 1:13-cv-01236 (D.D.C. Filed Aug. 13, 2013). The content of the DOJ’s complaint (Complaint) demonstrate the DOJ’s modus operandi for litigating a merger.
The past few weeks have seen the airline industry suffer from regulatory issues both in the U.S. and abroad.
In the United States, the proposed merger of American Airlines and U.S. Airways is causing a headache. Officially bankrupt since 2011, American Airlines’ bankruptcy exit plan was approved by a federal judge in late September of this year, such plan being contingent upon its merger with U.S. Airways going ahead successfully.
Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking. Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures.
Another settlement deal surfaced this week—and its numbers are much larger. The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless. According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.” On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour. Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.
All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives. The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products. To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf.
While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country. Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth. He told the Post: “If I was in [Holder’s] position, I would be concerned about my legacy. . . . There’s been a lot of criticism of officials in Justice being much too soft, timid.”
The trial for United States v. Apple Inc. begins on June 3rd, with some saying that the case will “effectively set the rules for internet commerce.” The Government alleges that Apple conspired with five publishing companies to increase prices while simultaneously plotting to increase market share vis-à-vis Amazon. The five publishing companies originally named in the suit have since reached a settlement with the Justice Department in which they will pay a collective $164 million to recompense consumers harmed by the price-fixing scheme. Read the rest of this entry »
Weekly News Update: SEC Warns Mutual Fund Directors and Announces More Charges in Venezuelan Bank Kickback Scheme
Recently, the Securities and Exchange Commission settled charges against eight former directors of Morgan Keegan bond mutual funds for failing to control the portfolio managers they administered, allowing for mortgage assets to be overvalued prior to the 2007 financial crisis. Under federal securities laws, fund directors are responsible for determining the fair value of portfolio securities for which market quotations are not readily available. In addition, fund directors must determine the methodologies to be used to fair value securities and must periodically reevaluate the appropriateness of those methodologies. The SEC order finds that the eight directors failed to make a diligent effort to understand how fair values were being determined. Furthermore, the directors delegated this responsibility to a valuation committee without providing adequate guidance on how fair-valuation determinations should be made, resulting in the funds having overstated value of their securities. While no fines were imposed on the former directors, the SEC order required that the eight men, cease and desist from committing or causing any future violations. “Our settlement sends a clear warning of our commitment to enforce the duty of mutual fund directors and trustees to closely oversee the process of valuing securities held by their funds,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.
In May, the SEC announced charges against four individuals in an alleged “pay-to-play” scheme in which the global markets group from brokerage firm Direct Access Partners (DAP) executed fixed-income trades for customers in foreign sovereign debt. This generated $66 million in revenue from transaction fees related to fraudulent trades they executed for state-owned Venezuelan bank Banco de Desarrollo Económico y Social de Venezuela (Bandes). Recently, the SEC has charged the former head of DAP’s Miami office, Ernesto Lujan, for his integral role in the massive scheme to secure the bond trading business of Bandes. According to the SEC, Lujan and others allegedly deceived DAP’s clearing brokers, executed internal wash trades, positioned another broker-dealer in the trades to conceal their role in the transactions, and engaged in massive roundtrip trades to pad their revenue. In a parallel action, Mr. Lujan was recently arrested for felony charges related to the conspiracy to bribe the Vice President of Finance at Bandes, according to the U.S. Attorney’s Office for the Southern District of New York. The SEC’s amended complaint filed in federal court in Manhattan charges Lujan and the other defendants with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.
Saying it was the world’s largest international money laundering prosecution in history, federal authorities announced charges against the operators of Liberty Reserve, an online currency exchange that prosecutors say enabled more than a million people worldwide to launder about $6 billion.
The investigation of the Costa Rican based company involved law enforcement officials from 17 countries, highlighting the complexity and globalization of illicit financing systems that have gone digital. With Liberty Reserve, any user could open an online account from anywhere in the world, without providing identification, and then trade virtual currency anonymously through an easily accessible online banking infrastructure.
Recently, the Securities and Exchange Commission charged France-based oil and gas company Total S.A. with violating the Foreign Corrupt Practices Act (FCPA) by paying $60 million in bribes to an Iranian government official. The official then exercised his influence to help the company obtain valuable contracts to develop significant oil and gas fields in Iran. The SEC alleges that the company profited more than $150 million through the bribery scheme. Total S.A. attempted to cover their illegal payments by entering into phony consulting agreements with the intermediaries of the Iranian official and concealing the bribes in its records as legitimate business expenses relating to these consulting agreements. Total S.A., whose securities are publicly traded on the New York Stock Exchange, agreed to pay more than $398 million to settle the SEC’s charges and a parallel criminal matter from the U.S. Department of Justice. The SEC’s order requires the oil company to pay $153 million in illegal profits and retain an independent consultant to review and report the company’s compliance with the FCPA. In the parallel criminal proceedings, Total S.A. agreed to pay a $245.2 million penalty as part of a deferred prosecution agreement.
The Securities and Exchange Commission has halted trading in the securities of 61 empty shell companies in the second-largest trading suspension in history. The suspension is part of the SEC’s ongoing “Operation Shell Expel” crackdown against the manipulation of microcap shell companies that the agency sees as ripe for fraud as the companies lay dormant in the over-the-counter market. The SEC is looking to thwart so-called pump and dump schemes which are among the most common types of fraud involving empty shell companies. By suspending the trading in these companies it obligates them to provide updated financial information to prove they are still operational, essentially rendering them useless to scam artists. This latest round of suspensions follows one under the same operation last year, in which 379 companies were suspended by the SEC before they could be manipulated for fraudulent activity to harm investors.
The “Franken Amendment” Receives New Life; Plan Calls for SEC to Promulgate New Rules for Credit Rating Agencies
Senators Al Franken (D-MN) and Roger Wicker (R-MS) have renewed the call for the SEC to regulate how credit-rating agencies generate revenue. Eight of the nine registered credit-rating agencies employ what is known as the “issuer-pays” model in which ratings agencies receive “their principal revenue stream from issuers whose products they rate.” This model has been blamed for inflating the value of financial products, particularly mortgage-backed securities, and thus misleading investors and contributing to the 2007-2009 financial crisis. The senators want to prevent future manipulation by empowering the SEC to better regulate these credit-rating agencies’ revenue generating systems.