Dec. 23 (Bloomberg) -- Bank of New York Mellon Corp. will pay $1.3 million to New York, Texas and Florida to resolve a probe into manipulative trading of auction-rate securities.
The joint investigation by the Texas State Securities Board, the Florida Office of Financial Regulation and New York Attorney General Eric Schneiderman was tied to the actions of Mellon Financial Markets as an intermediary broker on behalf of Citizens Property Insurance Corp. of Florida, according to statements from Schneiderman’s office and the Florida and Texas agencies. The settlement includes penalties, fees and costs.
Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions. The market for the securities collapsed in February 2008 after major dealers withdrew their support for the auctions, causing most of them to fail.
From January 2008 to February 2008, Mellon Financial enabled Citizens Property to buy large quantities of its own auction-rate securities by placing bids in its own auctions as if it were an independent third-party buyer, Schneiderman’s office said in a statement.
Citizens Property knew that broker-dealers who were managing the securities would have rejected the bids and asked for help from Mellon Financial Markets, which agreed to submit the trades to help the Florida insurer avoid detection, Schneiderman’s office said.
Citizens Property’s bids were below market rates and resulted in the auctions clearing at rates lower than they would have had the insurer not intervened, Schneiderman’s office said. Investors earned $6.7 million less in interest than they would have had Citizens not joined the auctions, the Texas State Securities Board said.
Mellon Financial “traders and their managers understood that CPIC’s bidding would set clearing rates lower than they would have been in the absence of such bidding, and that this would be both detrimental and objectionable to other investors bidding on or holding CPIC’s auction rate securities,” Schneiderman’s office said.
“BNY Mellon Capital Markets is pleased to have resolved this matter, which centered on the isolated conduct of three individuals who are no longer with the company,” Ron Sommer, a Bank of New York Mellon spokesman, said in an e-mailed statement.
It would be inappropriate for Citizens Property Insurance to comment on the settlement, Christine Ashburn, director of legislative and external affairs for the Tallahassee-based company, said in an e-mail.
“It is important to recognize that Citizens was vigilant in obtaining guidance from outside legal counsel prior to engaging in these transactions,” Ashburn said. “We continue to believe that our actions were legally permissible, and we remain committed to providing any information regulators may request.”
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Ex-New Star Founder Refutes Former Fund Manager’s Bullying Claim
John Duffield, founder of New Star Asset Management Holdings Inc., denied claims made by a former fund manager that he bullied his staff.
Patrick Evershed made “extreme and colorful statements” at an employment tribunal hearing in a dispute that was subsequently settled this month, Duffield said in comments on a website. The case was settled before New Star could fully refute them in court, he said.
“Patrick made a number of statements that were exposed as misleading during cross-examination or were refuted under oath by New Star’s witnesses before he truncated the hearing,” Duffield said on his website.
Evershed sued New Star for unfair dismissal after being suspended in 2008 by the fund’s chief executive officer, Howard Covington. The suspension came shortly after Evershed wrote a letter to New Star’s human resources department complaining about Duffield’s conduct.
“I’d love to give a detailed response to some of the points, but I can’t,” Evershed said of Duffield’s comments in a telephone interview yesterday.
Evershed and New Star “reached an agreement which resolves the employment tribunal proceedings without admission of liability,” Henderson Group said in an e-mailed statement. “Both parties are satisfied with the terms of the agreement, and have agreed to keep them confidential.”
Ex-Secret Service Official Wins Dismissal of Conspiracy Charge
Conspiracy charges were dismissed against a former Secret Service official and five other security-company executives in the first prosecution of alleged foreign bribery based on a government sting operation run inside the U.S.
U.S. District Judge Richard Leon yesterday threw out the conspiracy charge at the defendants’ request after the government finished presenting its case to a federal jury in Washington. Five of the executives still face additional foreign bribery charges.
Prosecutors allege that R. Patrick Caldwell, former chief executive officer of Protective Products of America Inc. and an ex-deputy assistant director at the Secret Service, joined an illegal business deal by agreeing to make payments to an FBI agent posing as a representative of the west African country of Gabon.
Leon’s ruling, which he made from the bench after 12 weeks of trial, resulted in the acquittal of Stephen Giordanella, Caldwell’s predecessor at Protective Products.
“Judge Leon followed the law and made a correct and just decision,” said Paul Calli, lawyer for Giordanella. “Mr. Giordanella should have never been charged. He was innocent.”
Alisa Finelli, a Justice Department spokeswoman, declined to comment.
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