To Find the Cause of the Crisis, Answer These Questions!

Sometimes, when you lose a debate, you have to just let it go. That seems to be a problem for those who are unwilling to accept the complex realities of what actually caused the financial crisis. I have been saying for a long time that many elements contributed to the global financial meltdown. From ultralow…

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Bailout Nation Chapter Summary

In my recent conversation with Scaramucci, he said some lovely things about Bailout Nation. I went back to look over some reviews, and I saw this Amazon review which I missed. I thought it was a fair overview:   I’m a long-time reader (addict?) of The Big Picture and bought this book when it first…

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Can Senator Warren Jumpstart Financial Crisis Prosecutions?

Today is the eighth anniversary of the Lehman Brothers bankruptcy. Not enough time has passed yet for me to recall those anxious days without getting angry. Senator Elizabeth Warren has used the occasion of this anniversary to suggest the next administration should “investigate and jail” those Wall Street bankers who committed crimes. Although I doubt…

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Could the Fed Have Saved Lehman?

An old meme in new clothing has been circulating recently: The Federal Reserve could have and should have saved Lehman Brothers. It had the resources, the legal authority and the obligation to do so; its failure to act let a modest financial fire become a full-blown credit crisis.

It is an interesting post-crisis theory from academia. But some of the claims are irrelevant, and almost all of them are wrong.

Larry Ball, chairman of the economics department at Johns Hopkins University and a researcher at the National Bureau of Economic Research, makes this argument in a new paper titled “The Fed and Lehman Brothers.” There are three issues here worth addressing, and one that time and space doesn’t allow for:

  1. Could the Fed have rescued Lehman?
  2. Was Lehman solvent?
  3. Was it capable of raising capital?

The issue I’m skipping for now (assuming the Fed could have rescued Lehman) is whether it should have done so. That’s a separate question.

Continues at Let’s Put the Lehman Bailout Debate to Rest

 

 

 

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The ‘Big Short’ Movie Gets It Right

One of the most widely anticipated films of the holiday season was released to big audiences and wide acclaim. It tells the tale of an epic battle between the forces of light and darkness, filled with arrogant but lovable characters, some of whom, despite their obvious flaws and shortcomings, redeem themselves by taking on and winning against an evil empire.

I refer not to “Star Wars: The Force Wakens,” but to the film adaptation of Michael Lewis’ book, “The Big Short.” It chronicles how a motley crew of assorted traders and fund managers came to understand the impending housing implosion, and discovered a novel way to make a bet on it. It isn’t a spoiler alert to say that the financial world collapses, the protagonists get rich and no one lives happily ever after.

The reviews have been mostly excellent – Rotten Tomatoes has the critics’ ratings at 87 percent; they call it a “scathingly funny indictment of its real-life villains.” Among movie-goers, it ranked at 90 percent; I loved the Lewis’ book, and to the extent the movie deviated by veering into some absurdist comedy, I’d give it an 80 or so out of 100. Perhaps the film “Margin Call” is a better Wall Street drama; “Trading Places” is certainly a much funnier movie. Regardless, it’s good wonky fun all around.

As someone who has studied the financial crisis, and written a well-regarded (see thisthis and thisbook on the subject, I can say that the film gets the broad strokes of the crisis correct. A complex set of factors led to a unique bubble in mortgage credit, followed by a crash in valuations that almost took down the rest of the economy.

A small group of pundits have criticized the movie, claiming that the fundamental narrative is wrong . . .

Continues here: The ‘Big Short’ Gets It Right

Gramm’s Unrepentant Cognitive Dissonance

 

 

Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action. My mother lived it as a result of a finance company making a mortgage loan that a bank would not make.

–former U.S. Senator Phil Gramm

Many elected or appointed officials have a specific belief system that they may act upon in the implementation of policies. When the policies that flow from those beliefs go terribly wrong, it is natural to want to learn why. As is so often the case, that underlying ideology is usually a good place to begin looking.

In the aftermath of the great credit crisis, we have seen all manner of contrition from responsible parties. Most notably, Alan Greenspanadmitted errorsaying as much in Congressional testimony. Greenspan was unintentionally ironic when he answered a question about whether ideology led him down the wrong path when it came to preventing irresponsible lending practices in subprime mortgages: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

Other contributors to the crisis have been similarly humbled. In “Bailout Nation,” I held former President Bill Clinton, and his two Treasury secretaries, Robert Rubin and Larry Summers, responsible for signing the ruinous Commodity Futures Modernization Act that exempted derivatives from regulation and oversight. The CFMA was passed as part of a larger bill by unanimous consent, and that Clinton signed on Dec. 21, 2000. Clinton joined Greenspan in admitting his contribution to the credit crisis, as well as saying the advice he received from his Treasury secretaries — Rubin and Summers — was wrong.

 

Continues here: The Few Who Won’t Say `Sorry’ for Financial Crisis

 

 

In AIG Case, Panic Gets a Slap on the Wrist

After seven years, the federal government has finally received its comeuppance. U.S. Judge Thomas C. Wheeler gave the Federal Reserve a severe tongue lashing, a tsk-tsking for the central bank’s financial-crisis overreach.

That ought to teach ‘em.

The actual result of the case is to confirm the status quo. In “emergencies,” restraint on government adds up to precisely nothing.

Consider the case at hand involving the bailout of the giant insurance company American International Group at the height of the 2008 panic.

Wheeler was confronted with an intriguing question of law: What are the limits of government intervention in the economy during times of crisis? It was a case with no good guys, only flawed actors, a suit I like to think of as Chutzpah v. Panic.  You may know the case by its formal name, Starr International Co. v. U.S. (11-cv-00779). In more common parlance, it was also referred to as that crazy suit former AIG head Hank Greenberg filed against the feds.

On the one hand, in the cool light of hindsight, this was a clear case of government overreach. The Fed regulates the banking system, and has no jurisdiction over insurance companies. But during the financial crisis the Fed stepped in, covered AIG’s liabilities and claimed majority ownership.

As Wheeler wrote, “The Board of Governors and the Federal Reserve Banks . . . did not have the legal right to become the owner of A.I.G. There is no law permitting the Federal Reserve to take over a company and run its business in the commercial world as consideration for a loan.”

On the other hand, you have a company that was one of the worst and most reckless actors in the financial industry — and that was the least of the problems in this litigation. Before the government bailout, AIG was hurtling straight off a cliff toward bankruptcy, all by its own hand. Its shareholders were destined to get wiped out. As Wheeler noted: “The inescapable conclusion is that A.I.G. would have filed for bankruptcy. In that event, the value of the shareholders’ common stock would have been zero.” Hence, Greenberg’s demand for $40 billion in compensation was why his claim represented pure chutzpah. (For more on AIG, see thisthisthisthisthisthis and of course this).

Continues here: Hank Greenberg’s Chutzpah vs. Fed’s Panic

 

 

 

Judge Wheeler: Fed Overreached with AIG, but No Damages

This is an amazing decision; you should read the entire thing!

“The main issues in the case are: (1) whether the Federal Reserve Bank of New York possessed the legal authority to acquire a borrower’s equity when making a loan under Section 13(3) of the Federal Reserve Act, 12 U.S.C. § 343 (2006); and (2) whether there could legally be a taking without just compensation of AIG’s equity under the Fifth Amendment where AIG’s Board of Directors voted on September 16, 2008 to accept the Government’s proposed terms. If Starr prevails on either or both of these questions of liability, the Court must also determine what damages should be awarded to the plaintiff shareholders. Other subsidiary issues exist in varying degrees of importance, but the two issues stated above are the focus of the case . . .”

The weight of the evidence demonstrates that the Government treated AIG much more harshly than other institutions in need of financial assistance. In September 2008, AIG’s international insurance subsidiaries were thriving and profitable, but its Financial Products Division experienced a severe liquidity shortage due to the collapse of the housing market. Other major institutions, such as Morgan Stanley, Goldman Sachs, and Bank of America, encountered similar liquidity shortages.

Thus, while the Government publicly singled out AIG as the poster child for causing the September 2008 economic crisis (Paulson, Tr. 1254-55), the evidence supports a conclusion that AIG actually was less responsible for the crisis than other major institutions. The notorious credit default swap transactions were very low risk in a thriving housing market, but they quickly became very high risk when the bottom fell out of this market. Many entities engaged in these transactions, not just AIG. The Government’s justification for taking control of AIG’s ownership and running its business operations appears to have been entirely misplaced. The Government did not demand shareholder equity, high interest rates, or voting control of any entity except AIG. Indeed, with the exception of AIG, the Government has never demanded equity ownership from a borrower in the 75-year history of Section 13(3) of the Federal Reserve Act. Paulson, Tr. 1235-36; Bernanke, Tr. 1989-90 . . .

The Government’s unduly harsh treatment of AIG in comparison to other institutions seemingly was misguided and had no legitimate purpose, even considering concerns about “moral hazard.”4 The question is not whether this treatment was inequitable or unfair, but whether the Government’s actions created a legal right of recovery for AIG’s shareholders.

Turning to the issue of damages, there are a few relevant data points that should be noted. First, the Government profited from the shares of stock that it illegally took from AIG and then sold on the open market. One could assert that the revenue from these unauthorized transactions, approximately $22.7 billion, should be returned to the rightful owners, the AIG shareholders. Starr’s claim, however, is not based upon any disgorgement of illegally obtained revenue. Instead, Starr’s claim for shareholder loss is premised upon AIG’s stock price on September 24, 2008, which is the first stock trading day when the public learned all of the material terms of the FRBNY/AIG Credit Agreement. The September 24, 2008 closing price of $3.31 per share also is a conservative choice because it represents the lowest AIG stock price during the period September 22-24, 2008. Yet, this stock price irrefutably is influenced by the $85 billion cash infusion made possible by the Government’s credit facility. To award damages on this basis would be to force the Government to pay on a propped-up stock price that it helped create with an $85 billion loan. See United States v. Cors, 337 U.S. 325, 334 (1949) (“[V]alue which the government itself created” is a value it “in fairness should not be required to pay.”).

* * *

In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value . . .

Particularly in the case of a corporate conglomerate largely composed of insurance subsidiaries, the assets of such subsidiaries would have been seized by state or national governmental authorities to preserve value for insurance policyholders. Davis Polk’s lawyer, Mr. Huebner, testified that it would have been a “very hard landing” for AIG, like cascading champagne glasses where secured creditors are at the top with their glasses filled first, then spilling over to the glasses of other creditors, and finally to the glasses of equity shareholders where there would be nothing left. Huebner, Tr. 5926, 5930-31; see also Offit, Tr. 7370 (In a bankruptcy filing, the shareholders are “last in line” and in most cases their interests are “wiped out.”).

 

OPINION AND ORDER

WHEELER, Judge.

Plaintiff Starr International Company, Inc. (“Starr”) commenced this lawsuit against the United States on November 21, 2011. Starr challenges the Government’s financial rescue and takeover of American International Group, Inc. (“AIG”) that began on September 16, 2008. Before the takeover, Starr was one of the largest shareholders of AIG common stock. Starr alleges in its own right and on behalf of other AIG shareholders that the Government’s actions in acquiring control of AIG constituted a taking without just compensation and an illegal exaction, both in violation of the Fifth Amendment to the U.S. Constitution. The controlling shareholder of Starr is Maurice R. Greenberg, formerly AIG’s Chief Executive Officer until 2005, and one of the key architects of AIG’s international insurance business. Starr claims damages in excess of $40 billion.

On the weekend of September 13-14, 2008, known in the financial world as “Lehman Weekend” because of the impending failure of Lehman Brothers, U.S. Government officials feared that the nation’s and the world’s economies were on the brink of a monumental collapse even larger than the Great Depression of the 1930s. While the Government frantically kept abreast of economic indicators on all fronts, the leaders at the Federal Reserve Board, the Federal Reserve Bank of New York, and the U.S. Treasury Department began focusing in particular on AIG’s quickly deteriorating liquidity condition. AIG had grown to become a gigantic world insurance conglomerate, and its Financial Products Division was tied through transactions with most of the leading global financial institutions. The prognosis on Lehman Weekend was that AIG, without an immediate and massive cash infusion, would face bankruptcy by the following Tuesday, September 16, 2008. AIG’s failure likely would have caused a rapid and catastrophic domino effect on a worldwide scale.

On that following Tuesday, after AIG and the Government had explored other possible avenues of assistance, the Federal Reserve Board of Governors formally approved a “term sheet” that would provide an $85 billion loan facility to AIG. This sizable loan would keep AIG afloat and avoid bankruptcy, but the punitive terms of the loan were unprecedented and triggered this lawsuit. Operating as a monopolistic lender of last resort, the Board of Governors imposed a 12 percent interest rate on AIG, much higher than the 3.25 to 3.5 percent interest rates offered to other troubled financial institutions such as Citibank and Morgan Stanley. Moreover, the Board of Governors imposed a draconian requirement to take 79.9 percent equity ownership in AIG as a condition of the loan. Although it is common in corporate lending for a borrower to post its assets as collateral for a loan, here, the 79.9 percent equity taking of AIG ownership was much different. More than just collateral, the Government would retain its ownership interest in AIG even after AIG had repaid the loan.

The term sheet approved by the Board of Governors contained other harsh terms. AIG’s Chief Executive Officer, Robert Willumstad, would be forced to resign, and he would be replaced with a new CEO of the Government’s choosing. The term sheet included other fees in addition to the 12 percent interest rate, such as a 2 percent

commitment fee payable at closing, an 8 percent undrawn fee payable on the unused amount of the credit facility, and a 2.5 percent periodic commitment fee payable every three months after closing. Immediately after AIG began receiving financial aid from the Government on September 16, 2008, teams of personnel from the Federal Reserve Bank of New York and its advisers from Morgan Stanley, Ernst & Young, and Davis Polk & Wardwell, descended upon AIG to oversee AIG’s business operations. The Government’s hand-picked CEO, Mr. Edward Liddy, assumed his position on September 18, 2008. Although the AIG Board of Directors approved the Government’s harsh terms because the only other choice would have been bankruptcy, the Government usurped control of AIG without ever allowing a vote of AIG’s common stock shareholders.

Out of this nationalization of AIG, Starr has identified two classes of common stock shareholders that were affected by the Government’s actions: (1) a class comprised of AIG shareholders who held common stock during September 16-22, 2008 when the Government took 79.9 percent ownership of AIG in exchange for the $85 billion loan; and (2) a reverse stock split class comprised of AIG shareholders who held common stock on June 30, 2009 when the government-controlled board engineered a twenty-for- one reverse stock split to reduce the number of AIG’s issued shares, but left the number of authorized shares the same. The Court formally certified these two classes of shareholders as plaintiffs on March 11, 2013. See Starr Int’l Co. v. United States, 109 Fed. Cl. 628 (2013). Under the Court’s Rule 23 “opt in” procedure to join in a class action, 274,991 AIG shareholders have become class plaintiffs in this case.

The main issues in the case are: (1) whether the Federal Reserve Bank of New York possessed the legal authority to acquire a borrower’s equity when making a loan under Section 13(3) of the Federal Reserve Act, 12 U.S.C. § 343 (2006); and (2) whether there could legally be a taking without just compensation of AIG’s equity under the Fifth Amendment where AIG’s Board of Directors voted on September 16, 2008 to accept the Government’s proposed terms. If Starr prevails on either or both of these questions of liability, the Court must also determine what damages should be awarded to the plaintiff shareholders. Other subsidiary issues exist in varying degrees of importance, but the two issues stated above are the focus of the case.

Continues here

 

 

 

The Delusional Dick Fuld

Richard Fuld, the former chief executive officer of Lehman Brothers, is the Shaggy of finance. On the cause of the financial crisis and the collapse of Lehman Brothers, his claim is, “It wasn’t me.”

Seven years after he drove the 158-year old firm he ran with an iron fist into bankruptcy, he has reappeared to accept blame for, well, absolutely nothing. Fuld seems to believe himself blameless for either his role in the crisis or the collapse of Lehman. Speaking at a penny stock event, Fuld is still confused about the differences between ownership and control. He made the bizarre claim that “Regardless of what you heard about Lehman Brothers’ risk management, I had 27,000 risk managers because they all owned a piece of the firm.”

As if an employee e-mail to Fuld would have changed the firm’s direction: Imagine “Hi Dick, I own 10,000 shares of Lehman. Please divest all of our risky derivatives and securitized subprime mortgages because I think we’re going to take losses on them.” For the man known as “The Gorilla” to make such an assertion is beyond absurd.

Before we take a closer look at Fuld, a preface: The crisis was notcaused by Fuld or by Lehman Brothers alone. If we look at the top 25 things to blame, the five biggest Wall Street firms (Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs) and their CEOs all fall somewhere in the middle of the list.

Keep also in mind that causation is a complex matter, and that finance is an intricate, interconnected system. There were many, many forces at work that led to the collapse. However, this complexity doesn’t excuse bad actions, poor judgment, and terrible decision-making. I’ve spilled too many pixels explaining why Lehman crashed and burned, but for those of you who may have forgotten:

Continues here: The Dick Fuld Denial

 

Institutional Recidivism

Dissenting Statement Regarding Certain Waivers Granted by the Commission for Certain Entities Pleading Guilty to Criminal Charges Involving Manipulation of Foreign Exchange Rates

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 athttps://www.sec.gov/rules/other/2015/33-9778.pdfIn 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.pdfIn 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.pdfIn 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 athttps://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.pdfIn 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.pdfIn 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 athttps://www.sec.gov/rules/other/2015/33-9785.pdfIn 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.pdfIn 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.” SeeDivision 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 athttp://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfroyalbankorder111114.pdfIn 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 athttp://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcitibankorder111114.pdfIn 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 athttp://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 athttp://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 athttp://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 athttp://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 athttp://www.justice.gov/iso/opa/resources/1392012121911745845757.pdf; U.S. Department of Justice Letter Re: Barclays Bank PLC (June 26, 2012), available athttp://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 athttp://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”).

 

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