April 17, 2024

DealBook: At JPMorgan, an Inquiry Built on Tapes

Offices of JPMorgan Chase in London. The trade losses were associated with London workers.Carl Court/Agence France-Presse — Getty ImagesOffices of JPMorgan Chase in London. The trade losses were associated with London workers.

Federal authorities are using taped phone conversations to build criminal cases related to the multibillion-dollar trading loss at JPMorgan Chase, focusing on calls in which employees openly discussed how to value the troubled bets in a favorable way.

Investigators are looking into the actions of four people who previously worked for the team based in London responsible for the $6 billion loss, according to officials briefed on the case. The Federal Bureau of Investigation could make some arrests in the next several months, said one person who spoke on the condition of anonymity because the inquiry was ongoing.

The phone recordings, which were turned over to authorities by JPMorgan, have helped focus the investigation, the officials said. Authorities are poring over thousands of conversations, in English and French. They are also relying on notes that employees took during staff meetings, instant messages circulated among traders and e-mails sent within the group.

Authorities are examining how some traders in the chief investment office influenced market prices as their bets began to sour. Investigators are also looking into whether records were falsified to hide the problems from executives in New York. Based on those records, JPMorgan submitted inaccurate financial statements to regulators, another area of focus for investigators.

The scope of the inquiry suggests that the problems were isolated to a handful of executives and traders in an overseas division, and did not reflect a fundamental weakness with the bank’s culture and leadership. The investigation does not appear to touch the upper echelons of the executive suite, notably Ina Drew who oversaw the chief investment office. The findings could insulate JPMorgan and its chief executive, Jamie Dimon, from further fallout.

Timeline: JPMorgan Trading Loss

Five months into the investigation, attention is centered on four people: Javier Martin-Artajo, a manager who oversaw the trading strategy from the bank’s London offices; Bruno Iksil, the trader known as the London Whale for placing the outsize bet; Achilles Macris, the executive in charge of the international chief investment office; and a low-level trader, Julien Grout, who worked for Mr. Iksil and was responsible for marking the trading book.

The people briefed on the matter said the investigation was in the early stages, and federal prosecutors in Manhattan had not made a decision about whether to file charges. None of the current or former employees have been accused of wrongdoing.

Jamie Dimon, the chief of JPMorgan Chase.Yuri Gripas/ReutersJamie Dimon, the chief of JPMorgan Chase.

If they decide to bring charges, prosecutors will face significant challenges. Financial cases are notoriously difficult to prove in court. The intricacies of Wall Street, which are often central to such matters, can be difficult to explain to jurors. In the aftermath of the financial crisis, authorities have brought few cases against individual employees.

Complicating matters, some of the JPMorgan employees are from France, which does not extradite its citizens. Mr. Iksil has already returned home to France after leaving the bank, according to a person with knowledge of the matter. Mr. Grout, also a French citizen, has been suspended from the bank but remains in London, said another person briefed on the situation.

Prosecutors would also have to prove that employees intentionally masked losses by mispricing the positions. It is a high bar. In some derivatives markets, traders are allowed to estimate the value of their positions because actual prices may not be readily available.

Some people close to the investigation say the significance of the mismarked positions may be overstated since they represented a tiny fraction of the overall trades. They also cautioned that authorities could easily take an incriminating sentence from a single phone call out of context, and that many conversations took place in person at the London office.

“Mr. Martin-Artajo is confident that when a complete and fair reconstruction of these complex events is completed, he will be cleared of any wrongdoing,” his lawyer, Greg Campbell, said in a statement. “There was no direct or indirect attempt by him at any time to conceal losses.”

Lawyers for Mr. Macris and Mr. Grout declined to comment. A lawyer for Mr. Iksil did not respond to requests for comment. Spokesmen for the United States attorney’s office in New York, the F.B.I. in Manhattan and JPMorgan declined to comment.

The trading loss could get further scrutiny on Friday when JPMorgan is set to report third-quarter earnings. Since the blowup was first disclosed in May, the losses have increased to about $6 billion, from $2 billion.

As the bank continues to unwind the bet, investigators have held multiple meetings with lawyers representing people involved in the matter. Authorities plan to interview Mr. Macris this month in his native Greece, according to people briefed on the matter. Such discussions could provide a more detailed account of the employees’ actions and alter the course of the investigation. Some of the former employees could also cooperate with authorities.

While authorities are narrowing the focus of the criminal investigations, JPMorgan and its executives still face scrutiny from civil regulators, including the Securities and Exchange Commission, which is examining whether the bank misled investors about the severity of the losses. British authorities have also recently opened inquiries into the matter, according to the officials.

The trading losses have already prompted a broader management shuffle. Ms. Drew resigned in May. Douglas L. Braunstein, the bank’s chief financial officer, is expected to step down from his post later this year, according to two people with knowledge of the situation.

The investigations center on the chief investment office in London.

The group was created to invest JPMorgan’s own money and offset potential losses across the bank’s disparate businesses. For example, Mr. Iksil bought and sold derivative contracts — financial instruments tied to the value of corporate bonds and other investments — in an effort to protect the bank from market fluctuations.

By early 2012, the London team increased its risk. In response to adverse moves in the markets and regulatory changes, the group made a series of aggressive derivatives trades, betting on the strength of companies like American Airlines.

As these bets started to sour, the London team decided to double down instead of getting out, according to the bank. From late 2011 to March 2012, the bank’s net exposure to such contracts more than doubled to nearly $150 billion. Authorities are examining whether the large positions improperly influenced market prices.

The phone calls, which are taped as a part of JPMorgan’s routine practices, suggest that traders tried to limit the losses, according to people briefed on the matter. In some phone recordings, Mr. Martin-Artajo encouraged Mr. Iksil to record the value of certain trades in an optimistic fashion, the people said. Their boss, Mr. Macris, was also involved in valuation discussions, according to two people with knowledge of the matter.

The chief investment office was also trying to play down the potential risk. Some employees told top JPMorgan executives that the situation was “manageable” and that the position might even produce a slight gain in the second quarter of 2012.

But the estimates proved inaccurate. This summer, JPMorgan restated its first-quarter earnings downward by $459 million, conceding errors in the valuations.

At the time, the bank said that the traders in the chief investment office “generally” valued the holdings within a reasonable range. But JPMorgan also pointed to the potential for deeper problems.

“The restatement is really based upon recent facts that we’ve uncovered regarding the C.I.O. traders’ intent as they were marking the book,” Mr. Braunstein, the bank’s chief financial officer, said at the time, according to a transcript. “As a result, we questioned the integrity of those trader marks.”

Article source: http://dealbook.nytimes.com/2012/10/10/at-jpmorgan-inquiry-built-on-taped-calls/?partner=rss&emc=rss

DealBook: Ex-SAC Analyst Pleads Guilty in Insider Trading Conspiracy

Federal prosecutors say Jon Horvath was part of a seven-person conspiracy.Shannon Stapleton/ReutersFederal prosecutors say Jon Horvath was part of a seven-person conspiracy.

5:59 p.m. | Updated

The billionaire investor Steven A. Cohen and his hedge fund, SAC Capital Advisors, are again in the spotlight over insider trading crimes committed by former employees.

Jon Horvath, a onetime technology industry analyst at SAC, pleaded guilty on Friday to insider trading a month before his scheduled trial. He is the fourth former SAC employee to admit to illegal trading while employed at the fund, which manages $14 billion. SAC has been a focus of federal authorities since the government began its crackdown on insider trading at hedge funds five years ago.

The admission by Mr. Horvath, who entered his guilty plea in Federal District Court in Manhattan, increases the pressure on the co-defendants in his case: Anthony Chiasson, who was a co-founder of Level Global Investors, and Todd Newman, a portfolio manager at Diamondback Capital Management.

Federal prosecutors contend they were part of a seven-person conspiracy — a “circle of friends” — that earned about $62 million in illegal gains trading on secret tips from executives at publicly traded technology companies. Mr. Horvath, 42, is the fifth person to plead guilty and cooperate with the government. Several of the cooperators are expected to testify against Mr. Chiasson and Mr. Newman at their trial, which is set for Oct. 29.

Mr. Horvath’s guilty plea also puts the focus on another SAC trader. Michael Steinberg, who supervised Mr. Horvath at SAC, emerged as an unindicted co-conspirator in the case last week.

During his court appearance on Friday, Mr. Horvath said that he obtained confidential information about the technology companies Dell and Nvidia and then “provided the information to the portfolio manager I worked for and we executed the trades based on that information.” That portfolio manager is Mr. Steinberg, according to two people with direct knowledge of the matter who requested anonymity.

Mr. Steinberg, 40, is one of Mr. Cohen’s longtime lieutenants, having worked at SAC since 1997. Barry H. Berke, a lawyer representing Mr. Steinberg, declined to comment.

“Until today, Mr. Horvath maintained he had not violated the law and we gave him the benefit of the presumption of innocence,” said Jonathan Gasthalter, an SAC spokesman. “We are disappointed and angered to learn Mr. Horvath admittedly violated the law and SAC’s policies forbidding insider trading. We expect our employees to have integrity, play by the rules and follow the letter and spirit of the law.”

Steven R. Peikin, a lawyer for Mr. Horvath, declined to comment. John A. Nathanson, a lawyer for Mr. Newman, and Gregory Morvillo, a lawyer for Mr. Chiasson, also declined to comment.

Though he has not been charged in the case, Mr. Steinberg is now the fifth employee or former employee of SAC tied to insider trading while at the fund. Last year, two former SAC portfolio managers — Donald Longueuil and Noah Freeman — admitted to trading on illegal tips about publicly traded technology companies. Mr. Longueuil is serving a two-and-a-half-year jail term at a federal prison in Otisville, N.Y.; Mr. Freeman, who is cooperating with prosecutors, has yet to be sentenced.

Jonathan Hollander, a former SAC analyst, paid more than $220,000 to settle civil charges brought by the Securities and Exchange Commission accusing him of trading in his personal account on confidential information about the takeover of the Albertsons grocery store chain.

Several of Mr. Horvath’s co-conspirators also have deep SAC connections. Mr. Chiasson left SAC to co-found Level Global, which closed last year. Mr. Newman’s fund, Diamondback, was started by SAC alumni, including Mr. Cohen’s brother-in-law, Richard Schimel. Diamondback remains in business, and Mr. Schimel has not been implicated in the case.

Mr. Cohen and SAC have not been accused of wrongdoing. The fund, based in Stamford, Conn. with about 1,000 employees, has a 20-year track record that is one of the best investment records in the hedge fund industry. The fund is up about 8 percent year-to-date.

SAC has an unconventional structure. Unlike other hedge fund managers that make all the investment decisions, Mr. Cohen manages less than 10 percent of the fund’s money, distributing the rest to about 140 small teams. It is a high-pressure culture where Mr. Cohen will reward teams that perform well with increased allocations, while underperformers can get cut back or lose their jobs. The more money a team manages, the greater its potential earnings.

His success as a stock picker has made Mr. Cohen, 56, one of the richest people in the country, with a net worth of $8.8 billion, according to Forbes magazine. He has also minted a stable of multimillionaires; in profitable years, top traders at SAC have earned tens of millions of dollars.

Mr. Horvath, who now resides in San Francisco, faces a maximum sentence of 45 years in prison, though he is expected to receive a far more lenient sentence. He is a citizen of Sweden, and could face deportation after serving time.

The charges against Mr. Horvath are part of a sweeping investigation into insider trading at hedge funds by federal authorities in Manhattan. The crackdown has resulted in criminal cases against 72 people. With Friday’s guilty plea, 69 of those cases have resulted in convictions.

This post has been revised to reflect the following correction:

Correction: September 28, 2012

An earlier version of this article misspelled the surname of Steven A. Cohen’s brother-in-law. It is Richard Schimel, not Shimel.

Article source: http://dealbook.nytimes.com/2012/09/28/ex-sac-analyst-pleads-guilty-in-insider-trading-conspiracy/?partner=rss&emc=rss

DealBook: HSBC’s Rising Legal Liability

A HSBC branch in Manhattan. The bank is said to have already set aside $700 million to cover the cost of potential fines.Justin Lane/European Pressphoto AgencyAn HSBC branch in Manhattan. The bank has set aside $700 million to cover the cost of potential fines.

The legal headaches at HSBC may not go away anytime soon, and when they do, the resolutions could be costly.

The first problem is the extent of government scrutiny of the bank.

HSBC has been ensnared by some of the largest federal inquiries into the banking industry. The government is looking into whether the bank ran afoul of restrictions on dealings with countries subject to economic sanctions, including Iran and Cuba. It is investigating HSBC for possible violations of regulations against money laundering. Authorities are also focusing on HSBC as part of the broad inquiry into rate rigging.

White Collar Watch
View all posts

The eventual costs could be sizable.

In a recent filing, the bank disclosed that it had set aside $700 million to pay potential penalties associated with the investigation related to money laundering and one mounted by the Office of Foreign Assets Control into dealings with countries subject to economic sanctions. But that amount looks to be on the low side of its potential exposure, according to an article in The New York Times.

Federal authorities think HSBC could end up paying at least $1 billion. The bank itself said “it is possible that the amounts when finally determined could be higher, possibly significantly higher.”

And that does not account for the potential cost to beef up its compliance standards.

The government’s regulations enforcing economic sanctions could be portrayed as mere technicalities, a reflection of the long-standing antipathy between the United States and Iran and Cuba that have been foisted on the banking system. Money laundering, on the other hand, is something clearly prohibited by every developed nation because of fears the banks can be used to finance terrorists and drug dealers.

A report issued by a Senate subcommittee claims the bank ignored numerous warnings about the operation of its Mexican subsidiary, which allowed bulk cash transfers of billions of dollars on behalf of clients that may have included drug cartels.

A spokesman for HSBC asserted that this “case is not about HSBC complicity in money laundering. Rather, it’s about lax compliance standards that fell short of regulators’ expectations and our expectations, and we are absolutely committed to remedying what went wrong and learning from it.”

As such, any settlement over the matter is likely to require HSBC to enhance its compliance protocols for money laundering. In other cases involving accounting fraud, federal prosecutors have mandated the appointment of an outside monitors, sometimes for three or more years. With operations in 84 countries and 60 million customers, the cost of an outside monitor for HSBC would be significant if the government wants someone to keep an eye on the bank’s internal controls.

HSBC has been pushing to settle the investigations quickly, but whether prosecutors and regulators are willing to wrap up the cases in a short time period remains to be seen.

One potential roadblock is the investigation into rate manipulation. HSBC is among more than a dozen banks that helped set a benchmark rate known as the London offered interbank rate, or Libor.

Given that HSBC is part of that inquiry, authorities may be reluctant to settle the other matters before they know the full extent of the bank’s exposure to the Libor case. Prosecutors will want to avoid the appearance of going easy on HSBC by entering into a string of settlements in which the bank pays a chunk of money while only being required to promise to be good in the future.

The potential costs associated with the Libor case may only add to HSBC’s woes. Barclays paid $450 million to settle allegations by global regulators related to the Libor case. Along with the investigations by regulators around the global, the Libor case also holds the potential for significant financial exposure to civil lawsuits for antitrust violations.

HSBC has not begun to put a figure on its potential bill for Libor. In its latest earnings results, the bank said it had not yet set aside money for potential fines or settlements related to the global investigation.

“Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these regulatory investigations or private lawsuits, including the timing and potential impact on HSBC,” the bank said in a statement.

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

Article source: http://dealbook.nytimes.com/2012/08/28/hsbcs-mounting-legal-liability/?partner=rss&emc=rss

DealBook: Diamondback Avoids Criminal Charges in Insider Trading Case

Diamondback’s office in Stamford, Conn.Douglas Healey/Bloomberg NewsDiamondback Capital Management, based in Stamford, Conn., entered into a nonprosecution agreement with the government.

6:00 p.m. | Updated

Diamondback Capital Management, one of the largest hedge funds ensnared by the government’s insider trading crackdown, will not face criminal charges and will pay more than $9 million in civil fines to resolve its role in the investigation.

The hedge fund has entered into a nonprosecution agreement with the United States attorney’s office in Manhattan. The government agreed not to bring criminal charges against Diamondback, citing the fund’s prompt cooperation and voluntary adoption of remedial measures.

And under the terms of the proposed settlement with the Securities and Exchange Commission, Diamondback will forfeit $6 million in ill-gotten gains. It will also pay a civil penalty of $3 million.

In a departure from the S.E.C.’s historical practices, Diamondback’s pact with the S.E.C. does not include language that the fund “neither admits nor denies” any wrongdoing in the case.

This month, the S.E.C. announced that it would no longer permit defendants to “neither admit nor deny” charges if the defendant admitted to or had been convicted of criminal violations. The new policy also applies to cases like the Diamondback one in which a company enters a nonprosecution agreement with criminal authorities.

Diamondback, which is based in Stamford, Conn., was at the center of a big insider trading case brought by the government last week. Federal prosecutors announced criminal charges against seven individuals, accusing them of an insider trading scheme in which they earned a total of $62 million in illegal profits trading Dell stock while in possession of confidential information about the computer company.

Two of the defendants were Diamondback employees. Federal authorities arrested Todd Newman, a former portfolio manager, and announced that a former analyst, Jesse Tortora, had pleaded guilty and was cooperating with the government. The S.E.C. filed parallel civil charges against the fund and the two former employees.

“We believe that the proposed settlement appropriately sanctions the misconduct while giving due credit to Diamondback for its substantial assistance in the government’s investigation and the pending actions against former employees and their co-defendants,” George Canellos, the head of the S.E.C.’s New York office, said in a statement.

A lawyer for Mr. Newman did not immediately respond to a request for comment.

Diamondback was given little chance for survival when F.B.I. agents raided the fund in November 2010 in search of evidence of insider trading. The other three funds raided that fall — Level Global Investors, Loch Capital Management and Barai Capital — have shut down.

Diamondback continues to operate after struggling with negative publicity from the investigation and investor withdrawals. Its assets under management have been cut in half, dropping to about $2.5 billion from more than $5 billion at the peak, according to people briefed on the fund.

In a letter sent to its investors on Monday, Diamondback’s co-founders, Richard Schimel and Larry Sapanski, said that an extensive internal review by the fund’s outside counsel at WilmerHale found no evidence establishing improper trading by any Diamondback employees except for Mr. Newman and Mr. Tortora.

Mr. Schimel and Mr. Sapanski, who both started their careers at SAC Capital Advisors, the giant Connecticut hedge fund run by the billionaire investor Steven A. Cohen, said the fund’s principals, and not its investors, would bear all of the costs related to the investigation.

“We are gratified finally to have reached closure on the government proceedings, and deeply regret the difficulties caused to our investors during the last 14 months,” they wrote in a letter to the fund’s investors on Monday. “Everyone at Diamondback is looking forward to a successful 2012.”

This post has been revised to reflect the following correction:

Correction: January 23, 2012

An earlier version of this article misspelled the last name of Richard Schimel, one of Diamondback’s co-founders.

Article source: http://feeds.nytimes.com/click.phdo?i=2fd66200805e57b3e51eee04bac88dfb

DealBook: MF Global Scrutinized on Money Move

Jon S. Corzine testified at a House panel hearing on the collapse of MF Global.Jonathan Ernst/ReutersJon S. Corzine testified at a House panel hearing on the collapse of MF Global.

Federal authorities investigating the demise of MF Global think that the firm began improperly moving customer money to a middleman on Oct. 27, according to people briefed on the matter.

The transfers, which indicate the brokerage firm misused client funds earlier than previously believed, represent a new line of inquiry in the hunt for more than $1 billion in missing money.

In MF Global’s last days, the brokerage house was frantically winding down trades to shore up its balance sheet and stave off bankruptcy. Investigators are examining whether the firm — as part of that effort — began moving client funds to the Depository Trust Clearing Corporation, a financial intermediary responsible for closing out some of MF Global’s transactions, these people say.

The new details bolster claims that MF Global was careless with customer money, regardless of the company’s intentions. Authorities previously found that MF Global had used roughly $200 million of client funds to replenish an overdrawn account at JPMorgan Chase in London on Oct. 28, the last business day before the firm filed for bankruptcy.

Now, investigators are also looking at billions of dollars of transfers from MF Global to the Depository Trust Clearing Corporation, a fraction of which is believed to be customer funds. People briefed on the matter say the middleman passed some of the money to banks and other firms that traded with MF Global, which was once run by Jon S. Corzine, the former governor of New Jersey.

In addition, federal authorities are reviewing whether MF Global used customer money to pay the clearing corporation as part of a margin call. Financial intermediaries routinely require extra collateral when firms run into trouble. A different clearinghouse in London forced MF Global to pay roughly $300 million to back some of its bond holdings during its last week.

It is unclear how much customer money was transferred to the Depository Trust Clearing Corporation, and whether officials at MF Global knew they were using client funds. Haphazard recordkeeping and the flood of transactions in its final days might have concealed whether MF Global was deploying the customer cash for firm needs.

A spokesman for the clearing corporation declined to comment.

Kent Jarrell, a spokesman for the trustee overseeing the liquidation of MF Global’s brokerage unit, said that the trustee “has not made a determination about customer cash that went through” Depository Trust.

“We will make a legal determination about whether customer money can be recovered,” Mr. Jarrell said. If it can be recovered, “we will use all legal avenues to do so,” he added.

As MF Global transferred funds to the clearing corporation, regulators started to raise concerns about the customer money after a routine inquiry. In the firm’s final week, senior officials at the Commodity Futures Trading Commission asked MF Global employees to identify the whereabouts of the money. In response, the firm provided a document that highlighted specific MF Global units, according to a person briefed on the matter.

But one of the units, MF Securities, was not listed on the firm’s broader organizational chart, the person said. That discrepancy raised red flags among regulators that the firm might have been misusing customer money.

A person close to MF Global says that the firm’s broker-dealer unit used to be called MF Securities, and people in the company often referred to it by that name. Even so, regulators at the Commodity Futures Trading Commission pushed for assurances that the money was safe. MF Global asked for more time.

Three days later, on Oct. 30, MF Global alerted federal authorities to the shortfall.

Since then, regulators and the trustee, James Giddens, have been searching for the money. The shortfall is now estimated at $700 million to $1.2 billion. The situation has left customers like farmers and hedge funds without a third of the money in their MF Global accounts.

In Congressional hearings, Mr. Corzine and his top deputies have defended their actions, saying they were unsure what happened to the money. No one has been accused of any wrongdoing. A spokesman for the Commodity Futures Trading Commission, which is leading the investigation, declined to comment.

Regulators are focusing on transactions in the firm’s last days to determine when MF Global violated a strict rule that prohibits the mingling of customer money and firm funds.

On Oct. 28, the firm moved roughly $200 million to JPMorgan, after overdrawing an account in London. People briefed on the investigation have said that the money belonged to customers.

“At that time, I was trying to sell billions of dollars of securities to JPMorgan Chase in order to reduce our balance sheet and generate liquidity,” Mr. Corzine told lawmakers on the oversight panel of the House Financial Services Committee. “JPMorgan Chase told me that they would not engage in those transactions until overdrafts in London were cleaned up.”

After the transfer, JPMorgan, one of MF Global’s main banks, questioned Mr. Corzine about the source of the money. Mr. Corzine said he was assured that the cash was legitimate.

The transfers to Depository Trust are of particular interest to regulators. Authorities believe that the transactions represent one of the earliest misuses of customer funds by MF Global.

In part, MF Global transferred money to the clearing house to unwind large positions in its proprietary trading portfolio. The brokerage firm, for example, may have used some funds to cover losses when it sold corporate debt and commercial paper holdings.

The vast majority of the transfers were related to a common transaction on Wall Street known as repurchase and reverse repurchase agreements. In these arrangements, MF Global exchanged securities and short-term cash with investors like hedge funds or banks and promised to return the money and securities at a later date.

As MF Global started to deteriorate, the firm moved to unwind the transactions to reclaim money they posted to support the agreements, an amount of capital thought to be in the hundreds of millions of dollars. The transactions largely took place through the Depository Trust.

But trading partners and clearinghouses — dealing with a large amount of transactions and concerned about the welfare of MF Global — did not immediately return the cash to the brokerage firm, according to the people briefed on the transactions. Without the capital in hand, MF Global may have tapped customer funds to continue unwinding its portfolio, the people said.

At the same time, the clearing corporation ordered MF Global to hand over more cash against its remaining trades, as part of a margin call. The amount of money MF Global was required to post is unclear, but the brokerage unit may have used customer cash to meet those new demands, the people said.

Article source: http://feeds.nytimes.com/click.phdo?i=9b8bd8b9f36b8f68572608fa86c85cc4

DealBook: E-Mail Clues in Tracking MF Global Client Funds

Federal authorities investigating the collapse of MF Global have uncovered e-mails that detail the transfers of money in the firm’s last days, including transfers that contained customer money, according to people close to the investigation.

One e-mail chain refers to the transfer of roughly $200 million that MF Global owed JPMorgan Chase on Oct. 28 — the firm’s last business day before it filed for bankruptcy. In that chain, a senior official in the firm’s Chicago office was told to make the transfer, said the people close to the investigation who requested anonymity because the inquiry was still open.

That official, Edith O’Brien, a treasurer at MF Global, is considered a “person of interest” in the investigation, said two of the people, who added that authorities expected to interview her in the coming days. It was not clear who had directed Ms. O’Brien, whose job was to oversee the customer money, to make the Oct. 28 transfer. The roughly $200 million that JPMorgan Chase received is said to be entirely customer money.

Ms. O’Brien has hired a prominent criminal defense lawyer, Reid H. Weingarten of Steptoe Johnson, according to one of the people. Ms. O’Brien has not been accused of any wrongdoing. And there is no indication that she had reason to suspect that the money being transferred included customer money.

MF Global’s sloppy recordkeeping and a flurry of transactions in its final days may have obscured the fact that the firm was dipping into the cash of farmers, traders and hedge funds to cover its own needs.

Still, the interest in Ms. O’Brien and the e-mails suggest that, nearly two months after some $1 billion in customer money went missing, investigators have identified employees who may have played an important and perhaps unwitting role in the improper use of customer money.

Ms. O’Brien could not be reached for comment. Mr. Weingarten did not respond to several requests for comment. A spokesman for the Commodity Futures Trading Commission, which is leading the investigation, declined to comment.

Mr. Weingarten, a former Justice Department official, has also represented Bernard J. Ebbers, the former chief executive of WorldCom, and other top corporate executives. Lloyd C. Blankfein, the chief executive of Goldman Sachs, hired Mr. Weingarten this year.

The transfer to JPMorgan was not the only questionable one. Investigators suspect that later on Oct. 28, MF Global continued using customer money to settle payments with trading partners and others, leading to the roughly $1 billion hole in customer cash.

Regulators have spent nearly two months hunting for the missing money. Angry customers, who have yet to receive roughly a third of their money, have taken their grievances to Washington. Jon S. Corzine, the company’s former chief executive, has testified on Capitol Hill three times this month about the firm’s collapse.

Mr. Corzine, a former United States senator and New Jersey governor, testified that on the morning of Oct. 28, JPMorgan told him that one of the firm’s accounts at the bank in London was overdrawn. He said he passed the notice along to his staff.

“At that time, I was trying to sell billions of dollars of securities to JPMorgan Chase in order to reduce our balance sheet and generate liquidity,” Mr. Corzine told lawmakers. “JPMorgan Chase told me that they would not engage in those transactions until overdrafts in London were cleaned up.”

After the transfer, JPMorgan, one of MF Global’s main banks, questioned Mr. Corzine about the source of the money.

“Since I had no personal knowledge of the issue, I asked senior people in the back office and the legal department to become directly involved in responding to JPMorgan Chase’s request,” he told the House Financial Services Subcommittee on Oversight and Investigations.

Mr. Corzine testified that Ms. O’Brien assuaged any concerns that MF Global had been improperly using customer cash.

“I had explicit statements that we were using proper funds, both orally and in writing, to the best of my knowledge,” he told the panel. “The woman that I spoke to was a Ms. Edith O’Brien.”

But JPMorgan was not satisfied. The bank once again contacted Mr. Corzine, this time requesting a guarantee in writing. Mr. Corzine handed the request to his general counsel, Laurie Ferber. Ms. Ferber would not authorize the document, according to one of the people close to the investigation, saying the firm did not offer such special assurances.

Two days later, at about 6 p.m. on Sunday, Oct. 30, Ms. Ferber notified regulators that there was an apparent shortfall in customer money. She blamed an accounting error, according to the CME Group, the firm’s primary regulator and an exchange where it conducted business.

At about 1 a.m., Ms. O’Brien and another executive in Chicago told the exchange that the shortfall in the customer accounts was real, according to the CME.

Ms. O’Brien is considered an expert of sorts on the protection of customer money at futures firms.

In the last year and a half, Ms. O’Brien has made several appearances before the Commodity Futures Trading Commission. On at least two occasions, she was a panelist at roundtable discussions held at the agency on the topic of safeguarding customer money, and also attended at least three meetings with agency officials, including one titled “Practicalities of Individual Customer Protection.”

Since MF Global’s collapse, Ms. O’Brien has been working for the trustee overseeing the liquidation of the firm’s brokerage unit, helping lawyers and accountants understand the firm’s operations.

Article source: http://feeds.nytimes.com/click.phdo?i=3334ad159d8e18ab5e18bc0c72f846d0

DealBook: Judges Focus on Flight Risk of Galleon Chief

Patricia A. Millett, left, Samid Guha and Terence Lynam, lawyers for Raj Rajaratnam, outside a federal court in Lower ManhattanJin Lee/Bloomberg NewsPatricia A. Millett, left, Samid Guha and Terence Lynam, lawyers for Raj Rajaratnam, outside a federal court in Lower Manhattan.

9:52 p.m. | Updated

A lawyer for Raj Rajaratnam appeared before a judicial panel in a Lower Manhattan courtroom on Wednesday in a final effort to keep her client out of prison while he appealed his conviction on charges of insider trading.

The lawyer came prepared to discuss complex legal concepts related to the Fourth Amendment of the Constitution and Title III of the Federal Wiretap Act. Instead, all the judges wanted to discuss was whether there was a risk that Mr. Rajaratnam, if allowed to remain free on bail, would flee to his native Sri Lanka.

“Wouldn’t he rather be living as a centimillionaire in his own country rather than as a convict in a jail?” Judge Dennis Jacobs asked Patricia A. Millett, the lawyer for Mr. Rajaratnam.

Mr. Rajaratnam, who did not attend the hearing, is set to report to a federal penitentiary in Ayer, Mass., on Monday to begin serving his 11-year sentence. A jury convicted him earlier this year of orchestrating an enormous insider trading conspiracy at his hedge fund, the Galleon Group.

Three judges on the United States Court of Appeals for the Second Circuit are reviewing the trial court judge’s ruling that denied Mr. Rajaratnam bail pending the appeal of his conviction. If the panel rules in his favor, Mr. Rajaratnam will remain free while his case wends its way through the appellate process, which could take a year.

Raj Rajaratnam, the founder of the Galleon Group, was convicted of insider trading earlier this year.Andrew Gombert/European Pressphoto AgencyRaj Rajaratnam, the founder of the Galleon Group, was convicted of insider trading earlier this year.

Mr. Rajaratnam’s central argument is that federal authorities improperly obtained judicial authorization to wiretap his telephone and secretly record conversations between him and those accused of being his accomplices.

But the panel of judges at the appeal focused on Mr. Rajaratnam’s risk of flight.

Ms. Millett said he would not flee to Sri Lanka because he had no reason to go there. She pointed out that all of his family members were in the United States and that while he had an apartment in Sri Lanka, it was on the market.

“He can’t even get there,” she said. “His passport was surrendered.”

Jonathan Streeter, a federal prosecutor arguing on the government’s behalf, said that Mr. Rajaratnam had strong ties to Sri Lanka, had shown a disrespect for the law and had the financial wherewithal to flee.

There was some discussion of the validity of the government’s wiretap application, which will form the core of Mr. Rajaratnam’s appeal. The government argued that the appeals court should defer to the trial court judge, Richard J. Holwell, who concluded that even with errors in the application, the government appropriately obtained wiretap authorization.

Ms. Millett, the lawyer for Mr. Rajaratnam, countered that the government showed reckless disregard for the law in omitting crucial information about its investigation when asking for wiretap approval. As a result, the government should not have been able to use the wiretaps as evidence at trial.

“If there is a failure to do any of the requirements in Title III, it must be suppressed,” Ms. Millett said.

The panel said it was reserving judgment. A decision is expected before the week’s end.

Article source: http://dealbook.nytimes.com/2011/11/30/in-rajaratnam-hearing-judges-focus-on-flight-risk/?partner=rss&emc=rss

Deaths From Cantaloupe Listeria Rise

At least 12 people in seven states have died after eating cantaloupe contaminated with listeria, in the deadliest outbreak of food-borne illness in the United States in more than a decade, according to public health officials.

Many of the deaths involved elderly people, who are especially susceptible to the aggressive pathogen.

The cantaloupes were grown by a Colorado company, Jensen Farms, which issued a recall earlier this month. The melons, a type marketed as Rocky Ford cantaloupes, named after a region in Colorado, were sold around the country.

The federal Centers for Disease Control and Prevention reported last week that there had been 55 illnesses and eight deaths in the outbreak. Four people died in New Mexico, two in Colorado and one each in Maryland and Oklahoma, according to the C.D.C.

But the numbers have increased. On Monday, a state health official in Texas said that two people had died from the strain of the bacteria there. Officials in Kansas and Nebraska said Monday that lab tests showed that a death in each of those states was linked to the outbreak, bringing the death toll reported by state and federal authorities to at least 12.

The number could continue to rise as investigators wait for lab results that could confirm whether several other deaths were related to the outbreak.

In addition, the Missouri Department of Health said Monday that an elderly person in that state died after being infected with the bacteria but that the infection was not considered the primary cause of death. It was not clear whether that death would ultimately be counted as part of the outbreak.

The C.D.C. was expected to provide an updated count later on Tuesday.

Officials said that most of those who died were over age 60. At least two were in their 90s.

Listeria is a common but dangerous bacteria that can cause severe illness, especially among the elderly, the very young and people with compromised immune systems. The pathogen can also cause pregnant women to have miscarriages.

John N. Sofos, a professor of food safety at Colorado State University, said that many people who are infected might have only mild symptoms, such as diarrhea. But in others, especially those in the most vulnerable categories, the bacteria can aggressively move out of the gastrointestinal tract and attack muscle tissue or the spinal cord, leading to much more severe illness such as meningitis.

For that reason, the death rate in listeria outbreaks is often much higher than with other forms of food-borne bacteria.

William Marler, a Seattle lawyer who represents victims of food-borne illness, said this outbreak may turn out to be especially deadly simply because cantaloupe is a food eaten by many older people.

“Sometimes in outbreaks, it’s the population that’s consuming the food that drives the numbers,” Mr. Marler said. “In this instance, you’ve got a lot of people 60 and older who are consuming cantaloupe.”

The outbreak appeared to be the third worst attributed to any form of food-borne illness, in terms of the number of deaths, since the C.D.C. began regularly tracking such outbreaks in the early 1970s.

The deadliest outbreak in the United States since then occurred in 1985, when a wave of listeria illness, linked to Mexican-style fresh cheese, swept through California. A C.D.C. database says that 52 deaths were attributed to the outbreak, but news reports at the time put the number as high as 84.

The second deadliest outbreak was in 1998 and 1999, when there were 14 deaths in a listeria outbreak linked to hot dogs and delicatessen meats.

With Tuesday’s updated death toll, the Rocky Ford cantaloupe outbreak surpassed the 2008 deaths associated with salmonella-tainted peanuts and peanut butter produced by a Georgia company, the Peanut Corporation of America. That outbreak, which drew a large amount of news coverage, killed nine people and sickened more than 700.

The huge outbreak this year in Europe of a rare form of E. coli bacteria attributed to fenugreek sprouts killed at least 50 people.

Listeria is a common bacteria that can be found in soil, water, decaying plant matter and manure. A strain of the organism, called Listeria monocytogenes, was first found to cause illness linked to food in the early 1980s. Since then, only a handful of listeria outbreaks have been associated with fresh fruits and vegetables. The majority of outbreaks were caused by tainted meat or dairy products.

It can take more than two months for a person exposed to the bacteria to fall ill, which means that it is often difficult to identify a food that carried the pathogen.

Unlike some other bacteria, listeria also grows well at low temperatures, meaning it can be difficult to eliminate from refrigerated areas used to process or store foods.

The Food and Drug Administration said it has found the strain of the bacteria on melons and on equipment in the Colorado farm’s packing house. But investigators have not said how they believe the contamination occurred.

The first illnesses in the outbreak began appearing in August.

Article source: http://feeds.nytimes.com/click.phdo?i=14da3eef4967c61c4fcc10aa6dc4a654

Citi Says Many More Customers Had Data Stolen by Hackers

Previously, Citigroup said that more than 200,000 cardholders, or about 1 percent of its 21 million North American cardholders, were affected. The new revelations come as the bank was forced to respond to Connecticut’s attorney general and several other state regulators who have opened inquiries into the breach. They join federal authorities, including the Secret Service and the Federal Bureau of Investigation, who have been conducting investigations into how the bank was attacked.  

In the statement, Citigroup also pinpointed May 10 as the date when it discovered the breach, and it said that it had immediately rectified the problem and began an internal investigation. By May 24, bank officials concluded that the data thieves had captured the names, account numbers, and e-mail addresses of about 360,000 customers. Social security numbers, expiration dates, and the three-digit security password found on the back of the card were not exposed — a finding that security experts have said would make it hard for the thieves to commit fraud.

As of May 24, the bank began preparing to replace about 218,000 credit cards and to prepare notification letters to its customers. Those were mailed beginning June 3, but itwaited to notify the public until June 9.

Citigroup said it implemented “enhanced procedures” to prevent similar incidents from happening and also notified law enforcement and government officials. It did not indicate when they were contacted, however.

In its statement, Citigroup reassured customers that they would not be held liable for fraudulent charges and could take advantage of free identity theft protection assistance, available via a phone number on the back of their credit card, if they believed they were a victim. The bank also encouraged its customers to review their account statements and report any suspicious activity.

Citigroup, citing the ongoing law enforcement investigation, provided no additional details about how their system was left vulnerable.  

Article source: http://feeds.nytimes.com/click.phdo?i=89501f186083a2788aef061e75069198

DealBook: A Trader, an F.B.I. Witness, and Then a Suicide

Agents seizing materials in November from a Boston building housing three hedge funds.Brian Snyder/ReutersAgents in Boston last fall conducting one of three simultaneous raids on large hedge funds.

In a Manhattan courtroom last week, federal prosecutors played for a jury a secretly recorded telephone conversation between two Wall Street traders exchanging stock tips.

Two days later, one of those traders, Ephraim G. Karpel, hanged himself in his Fifth Avenue office, according to a law enforcement official.

Mr. Karpel was never charged with any wrongdoing, and until last week his name had not emerged in connection with the government’s vast investigation of insider trading.

Yet while working for a New York commodities firm, he had agreed in 2008 to cooperate with federal authorities, and for about a year he taped conversations with fellow traders, according to two people with direct knowledge of the matter who insisted on anonymity to discuss it.

“The government’s investigation changed his life forever and was his unraveling,” Fran Karpel, his wife, said in a telephone interview from her home in Livingston, N.J. “He sank deeper and deeper into a hole and couldn’t see a way out.”

Federal prosecutors’ increasingly aggressive and public stance in pursuing insider trading has led to headline-grabbing convictions and stepped-up compliance procedures at hedge funds.

But behind the scenes, the government’s hardball investigative tactics — using surveillance, pressuring witnesses and raiding offices — have also spawned a culture of fear on Wall Street and affected the lives of many who have not been accused of any crimes.

Whether the investigation played a role in Mr. Karpel’s death cannot be known. He had been depressed after losing his job, his wife said, and other factors may have contributed.

But according to Ms. Karpel, his death at age 50 came three years after a pair of agents from the Federal Bureau of Investigation approached him outside the Applejack Diner, on the corner of 55th Street and Broadway. The agents took him inside the restaurant and, seated at a table toward the back, told him they had evidence of his involvement in an insider trading network.

The government’s supposed evidence included a telephone conversation between Mr. Karpel and Zvi Goffer, a trader whose phone the F.B.I. had tapped.

On the call, recorded on Dec. 31, 2007, Mr. Karpel told Mr. Goffer that the drugstore chain Walgreens had made an offer to acquire Matria Healthcare.

“I’ve got the trade for the month of January for you,” Mr. Karpel said, according to a transcript of the call. “It’s coming from a banker.”

That call was one of more than 20 wiretapped conversations played during Mr. Goffer’s two-month trial, which is now in jury deliberations.

The Walgreens deal never happened, but the recorded conversation led federal authorities to approach Mr. Karpel and seek his help in building insider trading cases. It is unclear how investigators thought that Mr. Karpel could help them.

“Ephraim was a very popular guy and knew a lot of people,” his wife said. “He always called it a fishing expedition.”

Indeed, Mr. Karpel had many Wall Street connections. He worked for 18 years at Mutual Shares, an investment firm run by the fund manager Michael F. Price, rising to the position of head trader. Mr. Karpel then left Mutual Shares to work as an analyst, a job he considered more cerebral and respectable.

He developed an expertise in metals and mining stocks. After a stint at P. Schoenfeld Asset Management, Mr. Karpel joined Tigris Financial Group, a commodities firm run by the investor Thomas S. Kaplan.

None of Mr. Karpel’s former employers has been accused of any wrongdoing.

Over the past two years, the United States attorney’s office in Manhattan, which has led the federal investigative effort in this area, has charged 49 people with insider trading crimes. Thirty-nine of them have pleaded guilty or been convicted by a jury, including Raj Rajaratnam, the billionaire hedge fund manager.

But the federal authorities’ techniques have rarely been seen on Wall Street before.

Late last year, F.B.I. agents conducted three simultaneous raids of large hedge funds. Two of those funds have since closed. And for the first time in an insider trading inquiry, the government has been using wiretaps — a method typically reserved for drug crimes and organized crime cases — to record the telephone conversations of Wall Street traders.

In one instance, the government came under official criticism for its wiretap practices. Earlier this year, Judge Richard J. Sullivan rebuked law enforcement officials for monitoring an intimate call between a trader and his wife, a conversation that was not germane to the trader’s case.

“The court is deeply troubled by this unnecessary, and apparently voyeuristic, intrusion,” wrote Judge Sullivan, a federal judge in Manhattan.

It was wiretaps that led the F.B.I. to confront Mr. Karpel on the street.

After the encounter, Mr. Karpel retained Daniel R. Alonso, then a partner at the law firm Kaye Scholer, who advised Mr. Karpel to cooperate with the government.

Mr. Alonso, now the chief assistant district attorney for Manhattan, would neither confirm nor deny that he had represented Mr. Karpel, citing legal ethics rules. Representatives of the F.B.I. and the United States attorney in Manhattan declined to comment.

Ms. Karpel said Mr. Alonso had counseled her and her husband to keep Mr. Karpel’s cooperation with the government quiet.

“Our lawyer said, ‘You can only discuss this with me, your rabbi or your therapist,’ ” Ms. Karpel said. “We didn’t have therapists and we belonged to a synagogue but didn’t want to talk to our rabbi, so we kept it a secret from everyone, even our family.”

“We were terrified,” Ms. Karpel added. “We had nobody to turn to.”

Ms. Karpel said her husband had been in horribly conflicted about his cooperation. She said he had been so worried about entrapping his friends that he began cutting himself off from Wall Street contacts.

By mid-2009, the F.B.I. began to lose interest in Mr. Karpel, according to his wife, and stopped asking for his help.

Around that time, however, his employer, Tigris, learned of his involvement in the investigation, according to a firm spokesman. Tigris dismissed him, but he continued to work with the company as an outside consultant until his death.

In recent months, Mr. Karpel had been in talks to join Javelin Partners, a fledgling Toronto firm that advises small mining companies. He never joined the firm but had been subleasing space at Javelin’s New York office on lower Fifth Avenue, which is where he was found.

After he lost his job at Tigris he became very depressed, Ms. Karpel said.

“He loved Wall Street and he loved his friends there,” she said. “He felt like he had to reinvent himself.”

Article source: http://feeds.nytimes.com/click.phdo?i=d1a1409b7a71abff86add8e23c72ae5e