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2. Intern death leads to calls for reform

U.S. District Judge Jed Rakoff has emerged as a bête noire of Wall Street banks over the last few years, when he's not being slapped down by appellate judges.

If you are trying to secure approval of a high-profile civil settlement with the SEC, you do not want him ruling on the issue. He'll likely raise all sorts of embarrassing issues.

On the important issue of the Financial Institutional Reform, Recovery and Enforcement Act (FIRREA) and how it has been used to charge banks, he has weighed in with a ruling favorable to prosecutors. Rakoff ruled this week that a "straightforward application of the plain words" of the Financial Institutional Reform, Recovery and Enforcement Act (FIRREA), one sought by the government, was legitimate.

"The law has a low burden of proof, strong subpoena power and a 10-year statute of limitations, twice as long as the typical limit for fraud cases. Rarely asserted until recently, it has become the basis of three lawsuits by lawyers under Manhattan U.S. Attorney Preet Bharara against banks including Bank of America Corp, Wells Fargo & Co and Bank of New York Mellon Corp.," notes Reuters.

"The FIRREA law allows the government to pursue civil penalties against those who commit frauds 'affecting a federally insured financial institution.' Under the government's position, claims under FIRREA can be asserted against a bank when the affected financial institution is the bank itself."

Banks have objected to this "affect yourself" theory, saying it ignores the statute's original purpose.

In the end, this hardly means that the government will prevail in its cases against banks over toxic mortgages. But the case specifically against Bank of America will go forward.

For more:
- here's the article

Read more about: Litigation
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By Jim Kim

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3. System integrity steps up as an issue

The tragic death of Moritz Erhardt, an intern at Bank of America Merrill Lynch in London, has sparked some hand-wringing about the intern work culture at top banks. In the wake of any workplace tragedy, calls for some sort of reform are understandable. They will be heard. In this case, it would perhaps be unwise to conclude that all interns are being worked into the ground at all banks.

To be sure, the hours may be long at some banks. But if interns are made to feel that the only way they can be successful is to pull three all-nighters in a row, then something is truly wrong.

Is this happening regularly?

Some say, Yes. As noted by the Financial Times, Intern Aware, a charity campaigning for the better treatment of interns, "hit out at what it said was a 100-hour working culture for students who spend their summers working at investment banks."

The charity's co-founder told the paper that there needed to be a "change in culture and HR procedures where employees are assessed not on the total number of hours they are able to grind out, but on the quality of work they are able to produce."

To be sure, at some banks, the internship period is designed to be more fun than work, not unlike internships at law firms. Baseball games and parties should be part of the program.

Many interns are near-desperate to make a good impression. Knowing that they will be pulling all-nighters if they get hired, perhaps they are out to prove that they can withstand the heat. That's understandable.

Bank HR units ought to take some time to think about their risks in this area. If an intern is being given critical work that requires all-nighters, something is wrong managerially. That work would be better placed with associates.

For more:
- here's the article
- here's an article in the Guardian

Read more about: Interns, jobs
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By Jim Kim

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4. Are we in for more admissions of guilt?

System integrity has been a big issue on Wall Street, as the dazzling technical complexity of all markets continues to advance. Unfortunately, controls and QA mechanisms have not kept pace.

We've seen a laundry list of system snafus that have victimized the likes of Nasdaq, Facebook, BATS and of course Knight Capital. Recall that Knight Capital, thanks to a system bug that cropped up as part of the company's efforts to connect with a new NYSE retail liquidity program, ended up suffering a $440 million in less than an hour. It ultimately forced the firm to put itself up for sale, at a fraction of what it was previously worth.

To be sure, regulators have tried to deal with this phenomenon. The SEC for example has proposed Regulation SCI , which has been criticized by the industry. It may be given a boost given the news that no less than Goldman Sachs has become the latest bank to become embroiled in a system glitch-driven trading incident. A programming error of some sort caused the firm "to send unintentional stock options orders in the first minutes of trading, pushing prices on dozens of contracts to a dollar each," according to Bloomberg. "Any losses for Goldman Sachs, the fifth-largest U.S. bank by assets, won't be known until exchanges determine which contracts should be canceled."

Apparently, "An internal system that Goldman Sachs uses to help prepare to meet market demand for equity options inadvertently produced orders with inaccurate price limits and sent them to exchanges yesterday, according to the person familiar with the situation. Some of the transactions have already been voided, data compiled by Bloomberg show.

A 'large number' of trades from the session's first 17 minutes for tickers beginning with the letters H through L are being examined and most of the transactions may be canceled, according to a statement yesterday from NYSE Euronext's U.S. options business."

For Goldman Sachs, this represents an unfortunate stain on its image as among the most technically proficient banks in the trading industry.

System integrity has emerged as a global issue as well. The state-run brokerage Everbright reported a system glitch that has cost it $32 million so far. The rush of erroneous orders sparked the biggest intraday swing in China's benchmark index since 2009 this month.

For more:
- here's the article

Read more about: System Integrity, Reg SCI
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By Jim Kim

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5. Local media still loves banking stories

You certainly have to give the SEC credit for trying to force more settling companies to admit they did something wrong. The old "neither admit nor deny guilt" was starting to wear thin, in public mind, if not the minds of all judges.

So it was certainly significant when no less than Phil Falcone, the embattled former hedge-fund manager, admitted to "multiple acts of misconduct" that harmed investors as part of deal that called for him to pay more than $18 million. He also agreed to be barred from the hedge-fund industry for five years. It's unclear how this will affect him moving forward. He will still be able to participate in other industries, perhaps as a director. But will anyone want to hire him or work with him now that he has admitted to serious crimes. We'll find out soon enough.

In the push to hold defendants more accountable, a bigger test case looms.

The SEC's inquiry into the London Whale fiasco at JPMorgan Chase has been heating up, and the bank reportedly is ready to strike a deal as early as this fall. The goals of the bank are likely to prevent any executives from being personally charged, to pay a reasonable (relatively speaking) amount and to avoid admitting fraud of any kind.

As of now, the admission of guilt is a wildcard. It will be interesting to see if the prosecutors try to force this on the bank. If this ends up at trial, it will likely be because of this issue.

There is a chance that some sort of compromise will be sought. Recall that in the much publicized settlement by Goldman Sachs over its ABACUS dealings in 2010 called for a $550 million payments and a pledge to reform its practices. The deal also called for the bank to "acknowledge" that its "marketing materials for the subprime product contained incomplete information." That's not the same as admitting fraud, but it was likely a compromise position.

For more:
- here's some background from Reuters

Read more about: Enforcement Action
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By Jim Kim

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