A20 Economy & Business
S
KLMNO
U.S., Germany divided on regulation
Split remains over how to police markets
to avoid another crisis
by Howard Schneider
berlin — Top U.S. and German officials on Thursday acknowl- edged differences over key finan- cial regulation issues, and they said a “broad agreement” on basic concepts may not produce uni- form rules in all the world’s cap- ital markets. After what German Finance Minister Wolfgang Schaeuble de- scribed as “very intense discus- sions,” Treasury Secretary Timo- thy F. Geithner ended a two-day European trip meant to smooth out differences in how the major economies are approaching fi- nancial regulation in the wake of the recent crisis. It is not clear how much progress he made. Schaeuble, defending a Ger- man approach that has become more unilateral in tone and sub- stance, said that Germany had “done its national homework” be- fore adopting a ban on certain types of stock trading, known as naked short selling. The ban, an- nounced last week, surprised U.S. and European officials, who were expecting cooperation over such decisions. In addition, Schaeuble said
Thursday, new taxes and restric- tions had to be tailored to local economic circumstances. He spoke amid continued un-
certainty about the broader Euro- pean economy. Markets here were up sharply and the euro gained value against the dollar on Thurs- day, a sign of possible trust build- ing in European Union and Euro- pean Central Bank promises that the continent’s weaker econo- mies, notably Greece and Spain, will not default on their debts. At the same time, a major budget- cutting plan passed the Spanish parliament by a single vote, and the country’s powerful unions threatened a walkout in a sign of the political tension developing over efforts to reorder European government spending — and its longstanding social compact. Geithner’s trip was in part an
effort to assess where Europe stands and try to keep the larger
FRIDAY, MAY 28, 2010
SEC settles charges over insider trading
Lawmakers had said agency mishandled earlier inquiry
by Zachary A. Goldfarb
MICHELE TANTUSSI/BLOOMBERG NEWS
Treasury Secretary Timothy Geithner, left with German Finance Minister Wolfgang Schaeuble, has been trying to keep the larger financial reform effort from being derailed by competing national priorities.
financial reform effort from being derailed by competing national priorities. The heads of the world’s major economic powers committed in September in Pittsburgh to try to create a better-regulated and more stable global financial sys- tem, and they also agreed that the rules governing banks and traders needed to be roughly similar in the world’s major money centers. Geithner said his talks in London, Frankfurt and Berlin on Wednes- day and Thursday left him con- vinced that European leaders were “completely committed to making sure we move forward” on a number of basic issues — get- ting banks on a more stable foot- ing, ensuring markets more safely manage risk, and finding ways for the financial sector to more fully bear the cost of the most recent and any future crisis. But differences have emerged on a host of issues between the United States and Europe. The United States favors a more nar- rowly drawn levy on large firms to underwrite the recent financial crisis, while some European offi- cials — including Schaeuble — want to tax all financial trans- actions for a fund that might be dedicated to crisis resolution or that might go into each govern-
ment’s general account. Europe wants to more strictly clamp down on what it views as specula- tors, while the United States is counting more on disclosure and transparency to curb excesses, and U.S. officials speak more fre- quently about the risk of stifling innovation if regulations become too rigid. Legislation nearing pas- sage on Capitol Hill would force banks to pare many trading-relat- ed activities, something Europe feels might hobble its major fi- nancial institutions. Underlying those technical points: fundamental differences rooted in the nature of the Euro- pean and American banking sys- tems, and in differing visions of how markets are best controlled. Other countries involved in the
debate, such as South Korea and Canada, have yet another set of priorities based on the fact that their banks did not indulge in some of the riskier practices that caused the recent crisis, and they don’t want punitive taxes im- posed on them. The issue is expected to dom-
inate the agenda when leaders of the Group of 20 economically powerful countries meet in To- ronto next month.
Amid optimistic talk that a common framework will still
emerge, Geithner said the true depth of the potential disagree- ment won’t be clear until further into the negotiations — when, for example, a committee reports on new recommendations for bank capital standards. The United States favors stronger capital standards for banks and has been upset that European institutions have not made as much progress in clearing bad loans from their books and raising new invest- ment — a problem complicated by local issues such as the collapse of the Spanish real estate market and broad ones such as the crisis over government debt. European banks are large hold- ers of European government bonds, and the possibility of a de- fault by Greece or another coun- try has made financial firms begin to mistrust each other and raise interbank lending rates in a dy- namic similar to the one that de- veloped around holdings of sub- prime mortgages in the United States. “We have a lot in common. We
are going to have slightly different approaches,” Geithner said at the German Finance Ministry. “I don’t think we’ll know what sep- arates us until we get to the next stage.”
schneiderh@washpost.com
The Securities and Exchange Commission settled insider-trad- ing charges Thursday with a prominent hedge fund and its chief executive after facing with- ering criticism from lawmakers that the agency had mishandled an earlier investigation of the matter. Pequot Capital Management and its chief executive, Arthur Samberg, agreed to pay $28 mil- lion to settle the SEC’s charges that the firm traded shares of Mi- crosoft based on insider informa- tion.
SEC Enforcement Director
Robert Khuzami said the case was a high priority for the agen- cy, but several years ago law- makers accused the agency of not conducting a thorough in- quiry. The agency concluded in 2006
that there was not enough evi- dence that Pequot traded Micro- soft shares based on information about an upcoming earnings re- port.
Soon after, the case attracted congressional scrutiny from key senators when Gary Aguirre, an SEC lawyer who worked on the probe, said his superiors had botched it. In January 2007, Sens. Charles
E. Grassley (R-Iowa) and Arlen Specter (Pa.), who was then a Re- publican, called on the SEC to re- open the case and issued a 700- plus-page report on the matter that accused the agency of turn- ing a blind eye to one of Wall Street’s most prominent inves- tors. It wasn’t until new evidence came to light in a divorce pro- ceeding a year and a half ago that investigators reopened the case. “There was clearly a case to be made against Pequot, and the SEC has finally admitted it,” Grassley said Thursday. “Federal regulators have finally followed the evidence to its logical conclu-
“There was clearly a case to be made against
Pequot.”
— Sen. Charles E. Grassley
sions after years of unnecessary delays and timidity.” Jonathan Gasthalter, a spokes- man for Pequot and Samberg, de- clined to comment. After the scrutiny generated by the in- vestigation, Pequot announced last year that it would wind down its business. The SEC says it obtained, in the years since it closed the case, clear evidence that Samberg made trades based on insider information. In its civil complaint filed
Thursday, the SEC said Samberg obtained the confidential infor- mation from David Zilkha, a for- mer Microsoft employee who asked a colleague for details about an upcoming earnings re- port. Shortly after providing the material to Samberg, Zilkha joined Pequot as an employee. Pequot made $14million from the trade, according to the com- plaint. An attorney for Zilkha did not
return a call seeking comment. In January 2009, the SEC ob- tained “direct evidence that Zilk- ha had material, nonpublic infor- mation about Microsoft,” accord- ing to a statement accompanying the complaint. The evidence was e-mails that were found on a computer hard drive in the pos- session of Zilkha’s ex-wife, ac- cording to the SEC. The SEC says that, in its earlier
investigation, Zilkha hid the fact that he had obtained informa- tion about Microsoft’s earnings and that he had conveyed what he learned to Samberg. “The cases have two partic- ularly troubling aspects — a hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investiga- tion,” Khuzami said.
goldfarbz@washpost.com
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