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by Bill Singer
 
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Written: May 22, 2015

One, and only one, Securities and Exchange Commissioner got it right. To her ever-lasting credit and to the shame of her colleagues, Commissioner Kara Stein stood up for public investors and what's left of integrity in the financial services community. Please see my commentary at
The shame and disgrace to which the regulation of the financial markets has fallen:

Investment Company Act Notices and Orders

Other Commission Orders, Notices, and Information

I commend Commissioner Stein's majestic jeremiad to your consideration:


Commissioner Kara M. Stein

May 21, 2015

I dissent from the Commission’s Orders, issued on May 20, 2015, that granted the following waivers from an array of disqualifications required by federal securities regulations:[1]  

1) UBS AG, Barclays Plc, Citigroup Inc., JPMorgan Chase & Co. (“JPMC”), and the Royal Bank of Scotland Group Plc (“RBSG”), waivers from the provisions under Commission rules that automatically make them ineligible for well-known seasoned issuer (“WKSI”) status;[2]

2) UBS AG, Barclays, and JPMC waivers from automatic disqualification provisions related to the safe harbor for forward-looking statements under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934; and

3) UBS AG and three Barclays entities[3] waivers from the automatic Bad Actor disqualification provided under Rule 506.[4]

The disqualifications were triggered for generally the same behavior: a criminal conspiracy to manipulate exchange rates in the foreign currency exchange spot market (“FX Spot Market”), a global market for buying and selling currencies.  Traders at these firms “entered into and engaged in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for,” the euro-dollar foreign currency exchange (“FX”).[5]  To carry out their scheme, the conspirators communicated and coordinated trading almost daily in an exclusive online chat room that the traders referred to as “The Cartel” or “The Mafia.”[6]  Additionally, salespeople and traders lied to customers in order to collect undisclosed markups in certain transactions.[7]  This criminal behavior went on for years, unchecked and undeterred.[8]

There are compelling reasons to reject these requests to waive the automatic disqualifications required by statute or rule.  Chief among them, however, is the recidivism of these institutions.   For example, in the face of the FX criminal action, a majority of the Commission has determined to grant Citigroup yet another WKSI waiver, its fourth since 2006.  It is worth noting that Citigroup was automatically disqualified from WKSI status between 2010 and 2013 for unrelated misconduct, meaning that it has effectively now triggered WKSI disqualifications five times in roughly nine years.  Further, through this latest round of Orders, the Commission has granted:

Barclays its third WKSI waiver since 2007;
UBS its seventh WKSI waiver since 2008; 
JPMC its sixth WKSI waiver since 2008; and 
RBSG its third WKSI waiver since 2013.
The Commission has thus granted at least 23 WKSI waivers to these five institutions in the past nine years. The number climbs higher if you include Bad Actor and other waivers.

This latest round of criminal charges also comes on the heels of the Department of Justice’s actions against UBS, Barclays, and RBSG for their collusive manipulation of the London Interbank Offered Rate (“LIBOR”), a benchmark used in financial products and transactions around the world.  The manipulation of LIBOR was flagrant and “impact[ed] financial products the world over, and erode[d] the integrity of the financial markets.”[9]  As part of the settlements in the LIBOR matters, UBS, Barclays, and RBSG each entered into agreements with the Department of Justice in which they undertook not to commit additional crimes during the term of the agreements.[10]

Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored.  It is not sufficient to look at each waiver request in a vacuum. 

And today the Commission heads further down this path.  After the LIBOR guilty pleas, UBS was granted a WKSI waiver that was explicitly conditioned on compliance with the judgment in the LIBOR-related matter.[11]  That explicit condition has now been violated.  Yet, the Commission has just issued UBS a new WKSI waiver.   

It is troubling enough to consistently grant waivers for criminal misconduct.  It is an order of magnitude more troubling to refuse to enforce our own explicit requirements for such waivers.   This type of recidivism and repeated criminal misconduct should lead to revocations of prior waivers, not the granting of a whole new set of waivers.  We have the tools, and with the tools the responsibility, to empower those at the top of these institutions to create meaningful cultural shifts, yet we refuse to use them.

In conclusion, I am troubled by repeated instances of noncompliance at these global financial institutions, which may be indicative of a continuing culture that does not adequately support legal and ethical behavior.  Further, I am concerned that the latest series of actions has effectively rendered criminal convictions of financial institutions largely symbolic.  Firms and institutions increasingly rely on the Commission’s repeated issuance of waivers to remove the consequences of a criminal conviction, consequences that may actually positively contribute to a firm’s compliance and conduct going forward.  


[1] In the Matter of UBS AG, Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer, available at https://www.sec.gov/rules/other/2015/33-9782.pdf;  In the Matter of Barclays Plc, Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer, available at https://www.sec.gov/rules/other/2015/33-9778.pdf; In the Matter of Citigroup Inc., Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer, available at https://www.sec.gov/rules/other/2015/33-9779.pdf; In the Matter of JPMorgan Chase & Co., Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer, available at https://www.sec.gov/rules/other/2015/33-9780.pdf; In the Matter of The Royal Bank of Scotland Group Plc, Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer, available at https://www.sec.gov/rules/other/2015/33-9781.pdf;  In the Matter of UBS AG, Order Under Section 27A(b) of the Securities Act of 1933 and Section 21E(b) of the Securities Exchange Act of 1934, Granting Waivers of the Disqualification Provisions of Section 27A(b)(1)(A)(i) of the Securities Act of 1933 and Section 21E(b)(1)(A)(i) of the Securities Exchange Act of 1934 as to UBS AG, available at https://www.sec.gov/rules/other/2015/33-9784.pdf; In the Matter of Barclays Plc, Order Under Section 27A(b) of the Securities Act of 1933 and Section 21E(b) of the Securities Exchange Act of 1934, Granting Waivers of the Disqualification Provisions of Section 27A(b)(1)(A)(i) of the Securities Act of 1933 and Section 21E(b)(1)(A)(i) of the Securities Exchange Act of 1934 as to Barclays Plc, available at https://www.sec.gov/rules/other/2015/33-9783.pdf; In the Matter of JPMorgan Chase & Co., Order Under Section 27A(b) of the Securities Act of 1933 and Section 21E(b) of the Securities Exchange Act of 1934, Granting Waivers of the Disqualification Provisions of Section 27A(b)(1)(A)(i) of the Securities Act of 1933 and Section 21E(b)(1)(A)(i) of the Securities Exchange Act of 1934 as to JPMorgan Chase & Co., available at https://www.sec.gov/rules/other/2015/33-9785.pdf; In the Matter of UBS AG, Order Under Rule 506(d) of the Securities Act of 1933 Granting a Waiver of the Rule 506(d)(1)(i) Disqualification Provision, available at https://www.sec.gov/rules/other/2015/33-9787.pdf; In the Matter of Barclays Plc, Barclays Bank Plc, and Barclays Capital, Inc., Order Under Rule 506(d) of the Securities Act of 1933 Granting a Waiver of the Rule 506(d)(1)(iii) Disqualification Provision, available at https://www.sec.gov/rules/other/2015/33-9786.pdf.

[2] Created by the Commission as part of the Securities Offering Reforms of 2005, WKSI, or well-known seasoned issuer, status is available “for the most widely followed issuers representing the most significant amount of capital raised and traded in the United States.” See Division of Corporation Finance’s Revised Statement on Well-Known Seasoned Issuer Waivers (Apr. 24, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp-031214.htm.  This status confers on the largest companies certain advantages over smaller companies.  For example, WKSIs are granted nearly instant access to investors through the capital markets.  In addition, WKSIs enjoy greater flexibility in their public communications and a streamlined registration process with less oversight than smaller businesses.

[3] Based on a loophole contained in Rule 506(d)(2)(iii), the CFTC is allowed to opine on the Commission’s Rule 506 jurisprudence.  In Orders dated November 11, 2014, the CFTC determined RBSG, Citibank, N.A., and JPMorgan Chase Bank, N.A., should receive a waiver from automatic disqualification under SEC rules.  See In the Matter of the Royal Bank of Scotland plc, Order Instituting Proceedings Pursuant to Sections 6(c)(4)(A) and 6(d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC Docket No. 15-05, at 15-16 (Nov. 11, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfroyalbankorder111114.pdf; In the Matter of Citibank, N.A., Order Instituting Proceedings Pursuant to Sections 6(c)(4)(A) and 6(d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC Docket No. 15-03, at 17 (Nov. 11, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcitibankorder111114.pdf; In the Matter of JPMorgan Chase Bank, N.A., Order Instituting Proceedings Pursuant to Sections 6(c)(4)(A) and 6(d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, CFTC Docket No. 15-04, at 17 (Nov. 11, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfjpmorganorder111114.pdf.

[4] Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) required the Commission to adopt rules that disqualify certain securities offerings from reliance on Rule 506 of Regulation D.  The Commission adopted final rules disqualifying felons and other “Bad Actors” from Rule 506 offerings on July 10, 2013.  See SEC Release No. 33-9414, available at http://www.sec.gov/rules/final/2013/33-9414.pdf.

[5] See e.g., U.S. v. Barclays Plc, Plea Agreement, ¶ 2 (May 20, 2015), available at http://www.justice.gov/file/440481/download.

[6] Id. ¶ 4(h).

[7] See, e.g., id. Attachment C, Disclosure Notice.

[8] “Citicorp, which was involved from as early as December 2007 until at least January 2013, has agreed to pay a fine of $925 million; Barclays, which was involved from as early as December 2007 until July 2011, and then from December 2011 until August 2012, has agreed to pay a fine of $650 million; JPMorgan, which was involved from at least as early as July 2010 until January 2013, has agreed to pay a fine of $550 million; RBS, which was involved from at least as early as December 2007 until at least April 2010, has agreed to pay a fine of $395 million….

UBS participated in this collusive conduct from October 2011 to at least January 2013” and “UBS agreed to pay a criminal penalty of $203 million.” See Press Release, Five Major Banks Agree to Parent-Level Guilty Pleas, U.S. Department of Justice (May 20, 2015), available at http://www.justice.gov/opa/pr/five-major-banks-agree-parent-level-guilty-pleas.  

[9] Press Release, Department of Justice, RBS Securities Japan Ltd Sentenced for Manipulation of Yen LIBOR (Jan. 6, 2014), available at http://www.justice.gov/atr/public/press_releases/2014/302785.htm.

[10] See U.S. Department of Justice Letter Re: UBS AG (Dec. 18, 2012), available at http://www.justice.gov/iso/opa/resources/1392012121911745845757.pdf; U.S. Department of Justice Letter Re: Barclays Bank PLC (June 26, 2012), available at http://www.justice.gov/iso/opa/resources/337201271017335469822.pdf;  United States of America v. the Royal Bank of Scotland plc, Deferred Prosecution Agreement (Feb. 5, 2013), available at http://www.justice.gov/iso/opa/resources/28201326133127414481.pdf.    As part of this package of plea agreements, rather than pleading to the deceptive FX trading and sales practices in which it engaged, UBS AG agreed to “plead guilty to manipulating the London Interbank Offered Rate (“LIBOR”) and other benchmark interest rates and pay a $203 million criminal penalty, after breaching its December 2012 non-prosecution agreement resolving the LIBOR investigation.”  Moreover, “Barclays has … agreed that its FX trading and sales practices and its FX collusive conduct constitute federal crimes that violated a principal term of its June 2012 non-prosecution agreement resolving [DOJ’s] investigation of the manipulation of LIBOR and other benchmark interest rates.”  Press Release, Five Major Banks Agree to Parent-Level Guilty Pleas, U.S. Department of Justice (May 20, 2015), available at http://www.justice.gov/opa/pr/five-major-banks-agree-parent-level-guilty-pleas.

[11] See Letter from the Division of Corporation Finance Re: United States of America v. UBS Securities Japan Co., Ltd., UBS AG – Waiver Request of Ineligible Issuer Status under Rule 405 of the Securities Act (Sep. 19, 2013), available at https://www.sec.gov/divisions/corpfin/cf-noaction/2013/ubs-ag-091913-405.pdf ) (finding good cause to waive ineligibility for WKSI status “[b]ased on the facts and representations in your letter, and assuming [UBS AG] and UBS Japan comply with the Judgment”).

Topics: Stein  SEC  Waivers  BrokeAndBroker  Bill Singer  
 

Written: May 21, 2015

Yesterday, I tried to predict the future. A few hours before the United States Department of Justice announced its settlement with JPMorgan Chase, Citigroup, Barclays, the Royal Bank of Scotland (“RBS”) and UBS over charges of having manipulated the foreign currency markets, I offered my take on what I thought was coming down the old regulatory and prosecution pike. UPDATE: Bill Singer's Ennui In Response To The DOJ FOREX Press Junket (BrokeAndBroker.com Blog, May 20, 2014). Based upon the subsequent news conference and press releases, it seems that I was indeed plugged into the hidden mysteries of the Universe. Fact is, many of you have joked with me about how spot on I was. I am now working on the next winner of the Belmont Stakes.

I have little expectation that this current round of market regulation will produce anything more than the highly-touted billions of dollars in fines. Stripped of the fanfare and over-used admonitions, the federal regulators and prosecutors involved in this latest round of dealing with the too-big-to-fail and the too-big-to-do-anything-about accomplished little more than what I frequently refer to as "checkbook diplomacy." As I lamented in  yesterday's commentary:

And then, tomorrow, a lot of folks will head out for their Memorial Day vacation.

The banks will still be open for business as usual.

The ensuing press releases from the banks will tell us that they are happy to put this incident behind them. The folks in charge are no longer here. We’ve hired consultants and academics to tell us how to set things right. It’s a new day. We’d like to offer you a free toaster with a new bank account. Can we interest you in a new credit card?

At some point, we will learn, perhaps in a footnote to some financial document that the banks set aside reserves for the eventuality of large DOJ fines.  No big deal, they will assure us. We’re just going to pay the DOJ fines from the reserves and go on our merry way.  Yes, we know, it’s actually a fine coming out of the pockets of our public shareholders but, hey, what else did you expect?

Posted this morning on the Securities and Exchange Commission's website is this array of links:

Divisions

Division of Corporation Finance

Staff No-Action, Interpretive & Exemptive Letters

By way of brief example (all of the submitted waiver requests are similar), let's consider some of the content in the "Incoming Letter: Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc.:

This letter is submitted on behalf of our client, Barclays PLC ("Barclays PLC"), Barclays Bank PLC ("Barclays Bank") and Barclays Capital Inc. ("BCI" and, together with Barclays PLC and Barclays Bank, "Barclays") and its affiliates. Barclays hereby requests, pursuant to Rule 506(d)(2)(ii) of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), a waiver of any disqualification from relying on the exemption provided by Rule 506 of Regulation D ("Rule 506") that may be applicable . . .

Bill Singer's Comment: As I read this opening paragraph, Barclays (and by implication, the other banks) are all saying that we don't have much of a problem paying the hundreds of millions each in fines or agreeing to all the reforms BUT this Reg D disqualification -- now that's gonna kill us!  Puhlease don't disqualify us. Pulhelase grant us an exemption.
. . .

A. CFTC FX Order 

Barclays Bank consented to the entry of the CFTC FX Order, in which Barclays Bank acknowledges, among other things, the following: 

1. As a result of the actions of certain of its traders in the FX Spot Market, Barclays Bank engaged in acts of attempted manipulation of certain FX benchmarks - which are considered commodities in interstate commerce - in violation of the Commodity Exchange Act (the "CEA"). 

2. Certain Barclays Bank FX traders knowingly submitted the false bids and offers relating to certain Russian ruble I U.S. Dollar FX transactions. This conduct resulted in Barclays violating Section 9(a)(2) of the CEA, which makes it unlawful for any person "knowingly to deliver or cause to be delivered for transmission through the mails or interstate commerce by telegraph, telephone, wireless, or other means of communication false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce ... ".

3. Through the actions of certain Barclays Bank FX traders, Barclays Bank aided and abetted attempts of certain FX traders at other banks to manipulate FX benchmark rates in violation ofthe CEA.

Bill Singer's Comment: Ah, yes, "certain Barclays Bank FX traders."As I so brilliantly predicted and admonished in yesterday's BrokeAndBroker.com Blog:

Well, at least some if not all of the banks will be pleading – alas, the vagaries of last-minute rumors. And, sure, the spin will likely be that it wasn't actually the banks that did this but a small group of renegade employees, who conspired sub rosa and unbeknownst to the higher-ups who actually ran the banks. Then there's that thing about the higher-ups because, you know, those higher-ups who were running things at the times cited by DOJ have largely moved on and out and there is a whole new cadre of higher-ups, untainted by this current scandal. I'm guessing (going out on a limb here) that the banks will argue we shouldn't blame a humongous international organization for the misdeeds of a few out-of-control traders who kept it all off the firms' state-of-the-art compliance radar screens.

. . .

B. Other FX Settlements 

Concurrently with Barclays Bank consenting to the entry of the CFTC FX Order, Barclays PLC entered into a Plea Agreement pursuant to Rule 11(c)(1)(C) of the Federal Rules of Criminal Procedure on May 20, 2015 (the "Plea Agreement"). Under the Plea Agreement, Barclays PLC pleaded guilty to a charge of participating in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids for the purchase and sale of U.S. dollars and euros exchanged in the FX Spot Market in the United States and elsewhere from at least as early as December 2007 and continuing until at least January 2013, in violation ofthe Sherman Antitrust Act, 15 U.S.C. § 1. Under the Plea Agreement, Barclays PLC also agreed to (i) pay a criminal fine of $650 million and (ii) a term of probation of three years which includes certain conditions, which include, among other things, remediation undertakings. 

In addition, Barclays Bank consented to an order by the Federal Reserve imposing a civil monetary penalty of $342 million and ordering Barclays Bank and its New Y ark Branch to cease and desist and take certain affirmative actions to enhance internal controls and compliance programs (the "Board Order"). 

Barclays Bank and its New York Branch also consented to the entry of an order by the New York State Department of Financial Services (the "NYDFS") pursuant to Sections 44 and 44-a of the New York Banking Law imposing a civil monetary penalty of $485 million and requiring Barclays Bank and its New York Branch to take certain disciplinary actions against employees that were involved in the wrongful conduct and to continue to engage the independent monitor previously selected by the NYDFS to conduct, consistent with applicable law, a comprehensive review of Barclays Bank's compliance programs, policies, and procedures (the "NYDFS Order" and, together with the Plea Agreement, the CFTC FX Order and the Board Order, the "FX Settlements"). 

Furthermore, by a Final Notice dated May 20, 2015, the U.K. Financial Conduct Authority imposed a financial penalty of £284,432,000 on Barclays Bank for failing to control business practices in its FX business in London (including G 10 and emerging market spot FX trading, FX options and FX sales).

. . .

REASONS FOR GRANTING A WAIVER 

Barclays respectfully requests that the Commission waive any disqualifying effects that the Orders may have under Rule 506 of Regulation D. Barclays believes that the facts support a conclusion that the granting of a waiver would be consistent with the guidelines for relief published by the Division of Corporation Finance. 1 Applying the Rule 506 disqualification to Barclays and its affiliates would be disproportionately and unduly severe, for the reasons described below. 

Bill Singer's Comment: "Disproportionately and unduly severe" . . . and if there was ever a textbook example of when a firm should be disqualified under Rule 506, please, tell me what it would look like if not the myriad of penalties imposed by the regulators cited prior to this request for a waiver? I would be hard-pressed to come up with a better definition of what should constitute an "ineligible issuer."

Nature of Violations: Responsibility for the Alleged Violations 

The violation addressed in the Orders does not pertain to Regulation D offerings, or to offers and sales of securities generally. With respect to the CFTC FX Order, the employees responsible for the violation of the CEA were FX spot traders. With respect to the CFTC ISDAFIX Order, the employees responsible for the violation of CEA were USD swaps and USD options traders. None of these individuals was an officer or held a position on the Board of Directors of Barclays PLC or any of its subsidiaries. There are no findings that the misconduct described in the Orders occurred at the direction of senior management of Barclays. Moreover, there is no indication that the wrongdoing reflected "a tone at the top" that condoned or chose to ignore the misconduct. Rather, Barclays has accepted responsibility for the conduct of the FX, USD swaps and USD options traders involved in the conduct described in the Orders. 

Bill Singer's Comment: It's always the "employees responsible" and, gee, how nice that none of the actual traders was "an officer or held a position on the Board of Directors." I mean, for godsakes, did y'all sleepwalk through all of this massive market manipulation?  Do you really think that your firm made a meaningful commitment to effective, pre-emptive compliance policies?  Are you still hiding behind that deflection of "no findings" and "no indication." In the end, if I understand your implications, the firm did nothing wrong and was victimized by a handful of "employees responsible." Yeah, right.

Importantly, the Orders do not (i) allege fraud in connection with offerings by Barclays PLC, Barclays Bank or any of their subsidiaries of their securities, (ii) allege that members of the Board of Directors, the Executive Committee, the Disclosure Committee or the Financial Reporting and Control unit within the Global Finance Department of Barclays PLC knew about the violation or (iii) allege that members of the Board of Directors, the Executive Committee, the Disclosure Committee or the Financial Reporting and Control unit within the Global Finance Department of Barclays PLC ignored any warning signs or "red flags" regarding the violation. As a result, Barclays believes that a disqualification under Rule 506 is not required for the public interest or the protection of existing and potential investors. 

Bill Singer's Comment: Gimme a goddamn break! Of course the manipulation of the Forex market had nothing to do with "offerings" by the parent or subsidiaries. We're talking about rigging a spot market for currency trading NOT the offering of a private placement or initial public offering in currencies. Are you truly going to split those hairs? The issue of invoking the Reg D "ineligible issuer" disqualification is that you (or, if you prefer, your "employees responsible") had engaged in horrific acts in furtherance of a conspiracy to rig the Forex markets, thus causing massive financial harm to the markets -- which, as you know, include existing and potential investors. The invocation of the disqualification is supposed to get your attention and ensure that you feel some pain for the acts set forth in the settlement. You're not supposed to be rewarded by the grace of a pretense or legal fiction.

Duration of the Alleged Violation 

The misconduct occurred over a period of approximately five years. However, as mentioned above, the misconduct was isolated to the actions the Barclays FX, USD swaps and USD options traders, and remedial action, as described below, has been implemented to ensure that the misconduct does not reoccur. . .
 
Bill Singer's Comment: Oh, I'm sorry, I guess that I misunderstood. Now that you explain it, sure, I see your point. The misconduct only took place for about five years. That's not so bad. It could have taken place for ten or twenty years because you apparently were clueless as to the dimensions of this illegal activity. Of course, now that you have taken remedial action, we will all sleep better. But, lemme ask you a question, you know all those other past settlements involving you and other banks?  How come we seem back at square one? Maybe, just maybe, if the SEC rejects your request for a waiver of the Reg D disqualification, you will really feel some pain and make an even better attempt to run a legal and compliant business?


Investment Company Act Notices and Orders

Other Commission Orders, Notices, and Information


 

Written: May 20, 2015

It is now 8:30 a.m. EDT on May 20, 2015 and I am posting this BrokeAndBroker.com Blog without much enthusiasm – I think the fancy French word for how I feel is "ennui." Look it up. It will make you feel cosmopolitan and sophisticated. Nothing like expanding your vocabulary on a Wednesday.

According to rumors running rampant in the media, we are all breathlessly awaiting an announcement, perhaps at 10 a.m., that the United States Department of Justice (“DOJ”) has settled its pending currency market rigging case with JPMorgan Chase, Citigroup, Barclays, the Royal Bank of Scotland (“RBS”) and UBS.  Word has it that the five banks will be pleading guilty to criminal antitrust and fraud charges attendant to their manipulation of the foreign-exchange markets (“FOREX”).

Well, at least some if not all of the banks will be pleading – alas, the vagaries of last-minute rumors. And, sure, the spin will likely be that it wasn't actually the banks that did this but a small group of renegade employees, who conspired sub rosa and unbeknownst to the higher-ups who actually ran the banks. Then there's that thing about the higher-ups because, you know, those higher-ups who were running things at the times cited by DOJ have largely moved on and out and there is a whole new cadre of higher-ups, untainted by this current scandal. I'm guessing (going out on a limb here) that the banks will argue we shouldn't blame a humongous international organization for the misdeeds of a few out-of-control traders who kept it all off the firms' state-of-the-art compliance radar screens.

I have a pretty good idea of what the fanfare will be like at DOJ in a few hours. 

The blowing of the horns will trumpet the largest fines in the history of mankind going back to the beginning of time as we know it and running through the present.

We will be told that today’s announcement marks the culmination of many years of hard work. We will learn that the miscreants engaged in a foul conspiracy that undermined the “integrity” of the markets and investor confidence.

The high notes will cheer us with admonitions that a message is being sent to the financial community that such crimes and conspiracies will no longer be tolerated. Oh, yes, this time, DOJ means business! The low notes will recount the gazillon dollars, Euros, and other currencies that were stolen from other market participants. The refrain will be that business as usual in the FOREX community must end, that this is just the beginning of a new regime of oversight and consequences, and that today’s announcement is not the end of this investigation/prosecution because individuals responsible for crimes will be brought before the bar of justice to pay for their misdeeds.

And then, tomorrow, a lot of folks will head out for their Memorial Day vacation.

The banks will still be open for business as usual.

The ensuing press releases from the banks will tell us that they are happy to put this incident behind them. The folks in charge are no longer here. We’ve hired consultants and academics to tell us how to set things right. It’s a new day. We’d like to offer you a free toaster with a new bank account. Can we interest you in a new credit card?

At some point, we will learn, perhaps in a footnote to some financial document that the banks set aside reserves for the eventuality of large DOJ fines.  No big deal, they will assure us. We’re just going to pay the DOJ fines from the reserves and go on our merry way.  Yes, we know, it’s actually a fine coming out of the pockets of our public shareholders but, hey, what else did you expect?

What was that word I suggested you look up?  Oh, yes, “ennui.”

Call me cynical.. I love that accolade. Call me sarcastic, caustic, and a gadfly. Pile it on. I’ve heard it before and it’s a badge of honor.

You want a real barometer of how much (or little) things are going to change after today’s historic settlement of epic proportions that will forever alter the primordial forces of FOREX and Wall Street? Here’s an idea: Visit the Financial Industry Regulatory Authority’s (“FINRA”) online roster of that self-regulatory organization’s Board of Governors at https://www.finra.org/about/finra-board-governors. Listed among the sitting Governors is “Joseph M. Mecane, Barclays, New York, NY.”

If, in fact, Barclays does plead out today, I wonder whether FINRA will ask Mecane to step down. When Mecane was hired by Barclays in 2014, Reuters reported in “Barclays hires ex-NYSE official to bolster trading after lawsuit” (Reuters, November 18, 2014, Reporter Herbert Lash):

Barclays Plc (BARC.L) said on Tuesday it hired a former senior executive at the New York Stock Exchange to help with the bank's electronic trading, an area in which it was accused of fraud by the New York attorney general in a pending lawsuit.

. . .

New York Attorney General Eric Schneiderman in June said Barclays misled clients by not protecting them from "predatory" high-frequency traders in its "dark pool," a trading venue known as LX, despite the bank's assurances it was doing so.

. . .

Mecane will help Barclays develop its electronic product offerings, with a focus on equities and credit markets, the bank said in a statement. . .

Shortly after he was hired, Mecane was named to FINRA’s Board. As reported in"Barclay’s Joe Mecane brings expertise in market structure issues" (Investment Executive, December 10, 2014, Reporter James Langton):

In a nod to rising importance of market structure issues, the U.S. Financial Industry Regulatory Authority (FINRA) has named an expert in electronic trading to its board.

[T]he self-regulatory organization notes that Mecane is a "recognized industry expert in market structure issues and the regulation of markets."

"Joe's valuable expertise and depth of experience in market structure issues will help FINRA's board move forward as we advance our mission of protecting investors and ensuring the integrity of our markets," said Richard Ketchum, FINRA's chairman and CEO.

Mecane was recently hired by Barclays to help develop its electronic product offering, with a particular focus on equities and credit markets. Before joining the firm, Mecane served as executive vice president and head of U.S. equities at the NYSE. Prior to that, he was managing director at UBS, responsible for overseeing the firm's wholesale and retail trade execution business. He was also previously managing director and chief operating officer at the Schwab Capital Markets division of Charles Schwab & Co., where he oversaw Schwab's broker-dealer business. . .

So, where’s the smart money placed?  Will Mecane resign from FINRA’s Board? Will he be asked to resign? Will he be removed? Or will the press machinery wind up to admonish us that Barclays is a banking and finance conglomerate and that Mercane is merely an officer of a division or a subsidiary or some entity that’s not exactly the same as the one settling.

To be clear, very clear, given that he was first hired in 2014, Mecane had no role whatsoever with the FOREX issues before DOJ. Also, to be clear, to be very clear, it does appear that Barclays (Mecane's ultimate employer/parent) did have a role.

It's interesting how the sending of messages often takes on nuance when there is a discomforting issue to resolve, such as whether a firm that settles with a criminal prosecutor should be permitted to retain a seat on the Board of Governors of Wall Street's self-regulatory organization. Then again, readers of the BrokeAndBroker.com Blog know that I am no fan or FINRA or supporter of self regulation.

If and when DOJ posts an online copy of the settlements, I will come back to this page later today or whenever and add the links. Until then. Have a nice day. Remember, today’s word was “ennui.”

UPDATE 10:11 a.m:

The remarks of Attorney General Lynch:

Good morning, everyone. I am joined by William Baer and Leslie Caldwell of the Criminal Division, as well as our partners from the FBI and CFTC, Andrew McCabe and Aitan Goelman .

We are here to announce a law enforcement action against financial institutions that participated in a display of collusion and foreign-exchange rate market manipulation. They will pay a total of nearly $3 billion in fines and penalties. The resolution is the latest in our ongoing efforts to investigate and prosecute financial crimes and serve as a reminder that this Department of Justice will vigorously prosecute all of those who tilts the economic system in their favor, who subvert our market places and enrich themselves at the American consumer.

Starting as early as 2007, currency traders at several banks formed a group they dubbed the Cartel. It is fitting they chose that name as it describes the illegal behavior they were engaged in on a five-year basis. Almost every day for five years, they used a private electronic chat room to manipulate the exchange rate between euros and dollars using coded language to conceal their collusion. They acted as partners rather than competitors to push the exchange rate in directions favorable to their banks, but detrimental to many others. The prices the market sets for the currency influences every sector of every economy in the world. It harmed countless consumers, investors, and institutions around the world. Including the banks' customers who placed their faith in the market and relied on it to produce a competitive exchange rate. Four of the largest banks have agreed to plea guilty to antitrust violations.

Citicorp, JPMorgan Chase and Company, Barclays, and the Royal Bank of Scotland: These banks having acknowledge their role in this conspiracy and are committed to changing corporate cultures starting at the highest levels. They have agreed to pay criminal fines totaling more than 2.5 billion dollars. The fine that Citicorp alone will pay, $925 million, is the largest fine ever imposed for a violation of the Sherman Act. These figures appropriately reflect the conspiracies, the systemic reach and significant impact.

A fifth bank, Switzerland's UBS has agreed to pay a criminal penalty for breaching the non-persecution agreement -- the nonprosecution agreement. The breach of the nonprosecution agreement was based in part on UBS' fraudulent sales practice related to exchange markets and its failure to take adequate action to prevent unlawful conduct after prior civil, criminal, and criminal resolutions. UBS promised not to commit additional crimes, but it did. This represents the first time in recent history that the department of justice has found a company breached a nonprosecution agreement over the objection of that company. I want to be clear. The Department of Justice will not hesitate to file criminal charges for financial institutions that reoffend. Banks that cannot or will not clean up their act need to understand it carries real consequences and it will be enforced. It is commensurate with the harm that was done. It should deter competitors from chasing profits without regard to fairness to law or public welfare.

The resolutions are a testament to the efforts of the Antitrust Division’s Criminal Enforcement Division, the Fraud Section, and the FBI's Washington field office. I want to thank everyone who contributed their time and talents to achieve these results. I want to express appreciation for the cooperation and assistance we received from the agencies who stood with us and our pursuit of justice, including the bodies I mentioned, the Commodities Futures Trading Commission, The Office Of The Comptroller Of Currency, The Security Exchange Commission and The Federal Reserve Bank. I would like to acknowledge my predecessor, Eric Holder, who oversaw this investigation. His work made this possible. I want to thank him for his commitment to this work. I would like to introduce William Baer, who will provide additional details on the announcement. Thank you.

UPDATE 12:07 p.m.

FIVE MAJOR BANKS AGREE TO PARENT-LEVEL GUILTY PLEAS

Citicorp, JPMorgan Chase & Co., Barclays PLC, The Royal Bank of Scotland plc Agree to Plead Guilty In Connection With The Foreign Exchange Market and Agree to Pay More Than $2.5 Billion In Criminal Fines

UBS AG Agrees to Plead Guilty to Manipulating LIBOR; Admits its Conduct in Foreign Exchange Market Breached Its Non-Prosecution Agreement Resolving the LIBOR Investigation and Agrees to Pay $203 Million

UPDATE May 21, 2014
 

 
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