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Archive for July, 2011

MassMutual unit agrees to $1 billion Madoff settlement

A hedge fund group owned by Massachusetts Mutual Life Insurance Co. has agreed to pay more than $1 billion to customers of imprisoned fraudster Bernard Madoff, in one of the largest settlements with the trustee in Madoff bankruptcy case.

Under the agreement, announced today, Tremont Group Holdings of Rye, N.Y., and its Rye Select family of funds, will pay more than $1 billion to the fund for defrauded Madoff clients. The entities were the second-largest of the so-called feeder funds to Madoff, private portfolios that directed billions of dollars in client assets to Madoff.

The settlement agreement includes Tremont’s former chief executive; the group’s owner, Oppenheimer Acquisition Corp.; and Springfield-based MassMutual, Oppenheimer’s parent.

According to the complaint, the Tremont Group and related entities were aware, through warnings in both internal communications and publicly available information, that the Madoff operation could be a fraud.

FINRA Fines SunTrust Robinson Humphrey, SunTrust Investment Services a Total of $5 Million for Auction Rate Securities Violations

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined SunTrust Robinson Humphrey, Inc. (SunTrust RH) and SunTrust Investment Services, Inc. (SunTrust IS) for violations related to the sale of auction rate securities (ARS). SunTrust RH, which underwrote the ARS, was fined $4.6 million for failing to adequately disclose the increased risk that auctions could fail, sharing material non-public information, using sales material that did not adequately disclose the risks associated with ARS, and having inadequate supervisory procedures and training concerning the sales and marketing of ARS. SunTrust IS was fined $400,000 for having deficient ARS sales material, procedures and training.

FINRA found that beginning in late summer 2007, SunTrust RH became aware of stresses in the ARS market that raised the risk that auctions might fail. At the same time, SunTrust RH was told by its parent, SunTrust Bank, to reduce its use of the bank’s capital and began to examine whether it had the financial capability in the event of a major market disruption to support all ARS in which it acted as the sole or lead broker-dealer. As these stresses increased, the firm failed to adequately disclose the increased risk to its sales representatives while encouraging them to sell SunTrust RH-led ARS issues in order to reduce the firm’s inventory. As a result, certain SunTrust RH sales representatives continued to sell these ARS as safe and liquid. In February 2008, SunTrust RH stopped supporting ARS auctions, knowing that those auctions would fail and the ARS would become illiquid.

Moody’s Adds 5 States to Creditwatch List

Moody’s Investors Service placed its ratings on five Aaa-rated states on watch for downgrade, saying if the U.S. government’s ratings were to be lowered, those states would face probable cuts as well.

The ratings agency’s action on Maryland, New Mexico, South Carolina, Tennessee and Virginia affect a combined $24 billion of general obligation and related debt. It follows Moody’s announcement last week that it would consider a downgrade on the U.S. government’s bond rating, citing the “rising possibility that the statutory debt limit will not be raised on a timely basis,” which would lead to a default on U.S. Treasury debt obligations.

Moody’s on Tuesday said it would review each of the five states on a case-by-case basis and plans to act on the ratings within seven to 10 days following a sovereign action.

OTC Dealers Catch a Major Break due to Dodd-Frank Setback

Thanks to a sudden slowdown in the implementation of key financial market reforms, banks have found themselves in the lucrative position of being able to hold on to over-the counter derivatives for longer than expected.

The proposal to shift over-the-counter derivatives to electronic trading platforms during the post-crisis clean-up of the financial system was brought forward in the G20 commitments and finally agreed upon in 2009.

The derivatives, including credit default swaps and interest rate swaps, were initially destined to be processed through clearing houses in order to help safeguard the financial system against possible future default fallouts. Yet implementation of the Dodd-Frank act has been put back about six months, after the Commodity Futures Trading Commission and the Securities and Exchange Commission agreed to delay implementation from a deadline set by Congress of July 15 to the end of the year.

Larry Tabb, chief executive of Tabb Group, a consultancy, said the delay, coupled with moves by Republicans in the House of Representatives to curtail funding of the two US regulators, meant dealers had won a reprieve from a requirement to relax their grip on the $600,000bn OTC derivatives market.

In a statement made to the Financial Times by Michael Spencer, chief executive of Icap, the world’s largest interdealer broker, Mr. Spencer remarked that “Because the Dodd-Frank process has been caught in treacle, many in the financial industry aren’t pushing electronification yet”.

“I think if you go back six to eight months, when the pressure was on to get everything done by July, the dealers were moving quickly toward trying to resolve the issues to make electronic trading and clearing happen,” Mr Tabb said. “However, we see a definite slowdown of the dealers and everyone in the market to adapt to the new practices. No one knows what’s going to happen.”

The European parliament this week postponed finalisation of the European Market Infrastructure Regulation (Emir), which contains similar provisions on clearing of OTC derivatives to Dodd-Frank. “Everyone has realised this legislation is much more complex than was originally given credit for,” said David Clark, chairman of the Wholesale Markets Brokers’ Association, a London-based trade group representing interdealer brokers.

According to Steve O’Conner, Chair Member for the International Swaps and Derivatives Association (Isda) and Morgan Stanley banker, “Dealers reject any suggestion that they are reluctant to embrace the reforms.” Regardless of the major delays encompassing this topic, Isda says that more than 90 per cent of eligible credit and interest rate derivatives currently traded, have in fact already been cleared.

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