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State Street forex settlement is notch in belt for Madoff whistleblower

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The U.S. government finally heard Madoff whistleblower Harry Markopolos loud and clear.
Markopolos, and his whistle-blower group Associates Against FX Insider Trading, were key players in a $530 million settlement announced Wednesday against State Street Bank and Trust Company for allegedly cheating several government bodies on the pricing of their foreign exchange transactions. Markopolos declined to comment.
In a joint announcement on Wednesday the DOJ, SEC, and DOL said that State StreetSTT, +2.67%   will pay $382.4 million, including $155 million to the Department of Justice, $167.4 million to the SEC and at least $60 million to pension plan clients to settle allegations that it deceived some securities custody clients on when it priced foreign currency exchange transactions. The alleged misconduct took place from 1998 to 2009.
The bank also agreed to pay $147.6 million to settle private class action lawsuits filed by bank customers alleging similar misconduct, the Justice Department said.
Markopolos’ group filed its largest forex case originally in California, on behalf of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. That suit was settled last November. Additional cases filed via False Claims Act whistleblower statutes in Virginia, Florida, New York State and Washington state have also already settled. Markopolos and his group have already been paid for their whistleblower efforts based on those settlements.
The payouts conclude almost all of the investigations State Street has faced since 2009, when Markopolos filed the California lawsuit. Associates Against FX Insider Trading and Markopolos are not named in the latest State Street settlement announcements, but Markopolos has previously acknowledged his involvement in the case.
State Street safeguards clients’ securities as part of its custody business and offers indirect foreign currency exchange trading when clients buy and sell foreign currencies as needed to settle transactions, such as interest and principal payments from foreign bond issuers.
State Street admitted in its settlement with the DOJ that it generally did not price FX transactions at prevailing interbank market rates, contrary to what it told certain custody clients. State Street admitted that FX transactions were marked-up or marked-down from the prevailing interbank rate.
State Street allegedly misrepresented to custody clients that it provided “best execution” on FX transactions, that it guaranteed the most competitive rates available on FX transactions and that it priced FX transactions based on a variety of factors. Instead prices were largely driven by hidden mark-ups that maximized State Street’s profits.
Markopolos has also filed a whistleblower claim in the SEC case. It may be at least two more years before that payout occurs based on similar cases.
A State Street Bank spokeswoman said that the negotiated settlement agreements are expected to resolve, subject to the courts’ final approval, the pending litigation and regulatory matters in the United States related to its indirect foreign exchange business.
“Each agreement depends upon certification, for settlement purposes, of a class of State Street’s custody customers that executed indirect foreign exchange transactions with State Street between 1998 and 2009, and final approval by the United States District Court for the District of Massachusetts of the settlement agreement between State Street and the class,” she said. “Matters of this nature can drain both time and resources; so where possible and appropriate we feel it is in our and our clients’ best interests to pursue settlements. Our previously established reserve will be sufficient to cover all costs associated with these agreements.”
Since the lawsuits were filed the foreign exchange markets have gone from an opaque, manual quote market to a fully electronic market where real-time quotes and historical information is available to institutional and retail customers. Every major bank that acts as a forex dealer has its own quoting and execution platform and multi-dealer platforms have sprung up that offer competitive quoting on worldwide currencies.
Checking on rates in advance or verifying after the fact was very difficult to do in the past. Calling around for competitive rates opened a customer up to potential front-running of the trade by other dealers.
He and other whistle-blowers filed a similar case against Bank of New York Mellon Corp. BK, -0.25%   in Massachusetts. A lawsuit filed on behalf of the New York City pension funds by New York Attorney General Eric Schneiderman in 2011 against Bank of New York Mellon Corp for allegedly shortchanging the funds in foreign currency exchange transactions is still pending.
The New York City BONY Mellon suit is the last open forex case for the Markopolos group.
The SEC has already fined Bank of New York Mellon $30 million in June for misleading certain of its custodial clients about pricing when executing standing instructions for foreign currency transactions.
Markopolos spent years on Bernie Madoff’s trail and tried to warn regulators about the fraud, but he was largely ignored. It’s a frustrating experience he documented in his book, No One Would Listen: A True Financial Thriller.
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HSBC Global Head Of FX Cash Trading Arrested At JFK Airport

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A historic event took place moments ago when Mark Johnson, the global head of cash FX at HSBC was arrested at JFK airport for his role in a “conspiracy to rig currency benchmarks”, and specifically for frontrunning customer orders. He is the first person charged by the US in the ongoing FX rigging probe.
As Bloomberg reports, a “senior manager at HSBC Holdings Plc was arrested in New York for his role in a conspiracy to rig currency benchmarks, according to two people familiar with the matter, becoming the first person to be charged in the Justice Department’s three-year investigation into foreign-exchange rigging at global banks.”
From Johnson’s bio:
Johnson is global head of foreign exchange cash trading at HSBC, based in London. Prior to joining HSBC in 2010, he was founding managing partner and chief investment officer at Johnson Stewart Partners. Before that, he was global head of trading at Deutsche Bank.
More details:
Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.
According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.
Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.
Also on Tuesday, the U.S. Federal Reserve banned former UBS Group AG trader Matthew Gardiner from the banking industry for life for his role rigging currency benchmarks.  Gardiner used electronic chat rooms, with names including The Cartel and The Mafia, to facilitate the rigging of foreign-exchange benchmarks and to disclose confidential customer information to traders at other banks, the Fed said in astatement Tuesday. That matter is separate from the one involving Johnson, the people said.
Recall that DOJ unwillingness to prosecute HSBC was the ultimate catalyst that prompted former AG Eric Holder to admit thatsome banks are “too big to prosecute.” Perhaps with this arrest things are slowly starting to change.
Now, if frontrunning clients is officially an arrest-worthy offense, we can’t wait for the DOJ to unleash a crackdown on criminal HFT algos whose only purpose in “life” is to do just that.
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8 Types of Investors That Entrepreneurs Need to Avoid

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Don’t assume that all investors are the same, just because their money is always the same color. Every entrepreneur should do the same due diligence on a potential investor that smart investors do on their startups. Check on their track records, values and management style. Taking on an investor is a long-term relationship, like getting married, that has to work at every level.
Let’s just say that every investor is different, without trying to define what is good or bad for you and your startup. Investors are human and subject to human tendencies, whether they are your rich uncle, an angel investor with personal funds or a venture capital investor with institutional money. Here is a summary of some key investor stereotypes that generally need to be avoided:

1. Investment sharks

I’m not talking about the Shark Tank TV show, but some might say the panel fits the definition. While the majority of investors are looking for a win-win deal, there are investors who like to prey on entrepreneurs who have little financial experience, don’t read the term sheet or are simply desperate for a deal. Seek out advisors to help you avoid these investors.

2. Investors who love to litigate

We all know that startups don’t have money to fight in court, so it’s easy for a few unscrupulous investors to jump to the conclusion that intimidation and lawsuit threats can improve their returns and control after the money changes hands. Here is where checking the track record pays off. Don’t assume you will be the exception.

3. Imperial investors

These are investors with such massive egos that they expect to dictate both the terms of the investment as well as all future strategic decisions of your startup. Unless you are preparing to work for Donald Trump someday, I recommend that you skip this investor in favor of a more equal partner.

4. Legal eagle investors

Negotiating terms is normal before the investment, but once the check is cashed, you don’t want to be second-guessed on every action. Be wary if the term sheet is a document longer than your business plan. Violation of abstract clauses may be used as a way to push you out, take over the company or pull the investment.

5. Academic coach investors

Coaching should be expected and appreciated, but you don’t have time for constant tutorials on how to run a business. A good advisor and mentor will tackle questions and then offer key insights. If an investor spends more than a day at your office before the check is written, it may be time to check your patience meter.

6. Pretend investors

These are “wannabe” investors who don’t have the means, or former entrepreneurs who don’t want to leave the arena. They always have one more issues to investigate or another set of questions, but never bring the checkbook. After a rational allocation of your team’s time, ask for a definitive close and be willing to walk away.

7. Investors without a clue

Many wealthy people make poor startup investors. They have long forgotten (or never knew) the challenges faced by a startup business. Many great real-estate people and doctors fall into this category. A synergistic long-term relationship in your business is not likely. Ask them for an introduction to wealthy business friends.

8. Investors for a fee

These are people who rarely invest their own funds, but promise to find the perfect match and live off a percentage of the action and preparation fees. They may be licensed investment brokers or consultants cold-calling real investors. The challenge is performing due diligence on the real investor.
Proactively seek out and build relationships with investors who interest you, rather than passively wait for potential investors to approach you. Finding investors is best done by talking to peers and attending networking events. Cold calling or emailing strangers will likely get you a sampling of all the eight stereotypes defined here.
Finally, you need to learn what investment terms make sense for your startup and craft your own term sheet, rather than rely on one being presented to you. Start with some legal advice from a source you trust. Do your homework and networking, but don’t chase investors like a one-night stand and expect it to lead to a mutually beneficial long-term relationship.
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How To Legally Steal $35,000 From Vladimir Putin

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Jim Rogers told me to come here.
We were having dinner a few weeks ago in Singapore, and Jim had just returned that morning from Russia full of optimism for the improving economy.
I had been meaning to come back here anyhow to scout out private equity deals.
But after hearing Jim’s take on Russia having just met with a lot of the country’s business elite, it really lit a fire.
As I’ve written so many times in this letter, I’m really a pathetic tourist. I’ve been to Paris countless times and have never bothered to visit the Eiffel Tower.
When I travel, it’s to either build and maintain relationships, or to put boots on the ground and seek out risks and opportunities first hand.
On my return to Russia, the country has not disappointed.
You’ve probably heard about how the Russian economy has been depressed over the last few years.
Much of this was due to international sanctions imposed after Russia annexed Crimea in 2014 against the wishes of Ukraine, Europe, and pretty much the whole world.
Russia’s credit rating was downgraded, and foreign businesses and investors started pulling their money out en masse.
The capital flight was extreme. Between 2014 and 2015, $210 billion fled Russia, more than 10% of the country’s GDP. That’s an enormous figure.
Then the price of oil collapsed– from $115 in June 2014 to less than $30 just over a year later. Natural gas and other major commodities also fell.
Bear in mind that oil and gas exports are a major component of the Russian economy, so the effects were devastating to both GDP and financial markets.
Russia’s economy didn’t just contract. It shriveled. And the stock market crashed.
On top of everything else, the Russian ruble went into freefall, losing 35% of its value in a matter of months.
This made imports a LOT more expensive, dramatically pushing up the rate of inflation.
Russia has essentially been suffering the worst combination imaginable– consumer price inflation, economic contraction, capital flight, credit downgrades, international sanctions, stock market crash, currency crisis– all simultaneously.
Frankly it’s pretty miraculous this place didn’t descend into Venezuela-style chaos.
But it didn’t. In fact the situation has stabilized and a lot of data shows the economy is turning around. The worst seems to be over.
And yet opportunities still abound.
For example, the Russian stock market is still incredibly cheap.
The average Russian company is selling for just 7.5 times earnings and 20% less than its book value. Plus it pays more than a 4% dividend.
This is like buying a dollar for 80 cents and receiving 3.3 cents on top of that each year.
(US stocks sell for 25 times earnings and 200% MORE than book value, meaning they are historically overvalued and very expensive compared to Russia.)
In addition to stocks, the Russian currency is still far below its historic average.
Aside from making the country dirt cheap for anyone with foreign currency, I discovered something very interesting today:
Some of Russia’s coins are now worth less than their metal values.
I’ll explain– all coins are made of some metal, usually some combination of nickel, copper, etc. And that metal has a certain cost.
A dime coin in the US, for example, has about 1.2 cents worth of metal, mainly copper (91%) and nickel.
So if you melted down a US dime, which has a 10 cent face value, and sold off the metal for 1.2 cents, you’d lose 8.8 cents in the process.
The Russian ruble has become so cheap, however, that some of its coins are basically worthless.
The 1 kopek coin, for example, is the smallest denomination Russian coin that’s worth 1/100th of a ruble.
At current exchange rates that’s $0.00015, or about 0.015 cents! It’s nothing.
And yet each kopek coin is comprised of 1.5 grams worth of copper, nickel, and steel; and the melt value of these metals is worth a hell of a lot more than 0.015 cents.
In fact Russian coin dealers have estimated that the metal value of this coin is worth more than THIRTY FIVE TIMES its face value.
That’s quite a return on investment.
So theoretically $1,000 worth of these coins could be worth more than $35,000 in profit because of the metal value.
Now, I’m not suggesting you book a flight to Russia to scoop up and melt down all the coins you can find.
But it’s worth pointing out that these sorts of anomalies don’t come around too often. And when they do, it’s important to pay attention.
Jim Rogers is one of many legendary investors who has been buying in Russia. Templeton’s Mark Mobius has called Russia the “bargain of the century.”
He may be right. Russia is incredibly cheap.
That’s not to say it can’t get cheaper. Or that it can’t stay cheap for a while.
There has to be a catalyst in order for all the pent-up value to be realized.
But that seems to be happening now. Slowly. Russia is mending fences with Europe. Oil prices have climbed 40% from their lows. Capital is returning. It’s getting better.
18th century British banking mogul Baron Rothschild is often quoted as saying “Buy when there’s blood in the streets [even when that blood is your own].”
That may be too hardcore for most investors.
I prefer to buy when assets are still ultra-cheap, but there are obvious signs that things have turned around.
That time seems to be now.
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Dutch Central Bank Prepares its Boldest Blockchain Experiment Yet

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The central bank of the Netherlands is preparing an ambitious experiment aimed at discerning if an entire financial market can be built on a blockchain.
While many so-called smart contract applications of blockchains can be replicated using existing technology, the man in charge of a series of experiments conducted by De Nederlandsche Bank says the distributed nature of blockchains could lead to entirely re-imagined financial market infrastructures (FMIs), ones that are much more difficult to hack.
Like the bitcoin network itself, the experiment envisions how an FMI’s internal operations could be distributed among participating nodes. To game the system – and break the financial market infrastructure — an attacker would need to gain more than half the computing power running the nodes.
News of the experiment, scheduled to begin later this year, comes as financial market infrastructures are increasingly being targeted by hackers. Earlier this month, the chairman of the Bank for International Settlements (BIS) went so far as to call for immediate action on potential solutions to the issue.
Now in a new interview, De Nederlandsche Bank’s head of market infrastructure, Ron Berndsen, explained why he believes blockchain could be the key to preventing more attacks.
Berndsen told CoinDesk:
“If hackers were to go through the trouble of taking down two or three data centers they would take down the financial markets infrastructure. With blockchain, you could distribute the nodes and you might not even know where they are.”
To learn if an FMI can be distributed via a blockchain, Berndsen is once again tapping into the team he assembled for earlier experiments at the central bank.
Berndsen said he recruited the team of seven around coffee machines and via email invitations sent to bitcoin enthusiasts he identified within the bank.
The academic and banker is rare in the world of global financial bankers in that he began running a full node on the bitcoin network and mining the digital currency in the early part of 2013. Though he said he never earned a mining reward for his efforts, he purchased bitcoin and other digital currencies to learn the advantages and disadvantages of each.

Lessons for central banks

As a result of that familiarity, Berndsen has been able to scale up his experiments.
Announced last month, the central bank began using the open-source bitcoin software to recreate conditions at the network’s inception in 2009 in an effort to model what the system might look like in 2140, when the last bitcoin is mined.
“As an academic it was very obvious to recreate the extreme points,” said Berndsen, who has a doctorate in economics and is a professor of FMIs and systemic risk at Tilburg University in the Netherlands. However, he said he now believes the test to be among the more unique globally.
“I thought every central bank would have done this,” he said, adding:
“I’m on many central bank committees and I expected they were all doing this, but so far they weren’t.”
Among the lessons he learned from the experiments, is that the bank was able to mine what the team called DNBcoins at a much faster rate by starting with an initial block reward of 1bn DNBcoins and halving the reward every two minutes.
Of note, he said his team observed that even if what they call the “max money parameter” was set to 21 million coins — as is the case with bitcoin — they were able to mine 10 billion coins.
They also “proved” that a network could continue to run on fees alone after the bitcoin reward is dispersed, he said.

High stakes

The third experiment, Berndsen said, will now be aimed in the area of financial markets infrastructure.
As defined by the Bank for International Settlements in a 2012 report, an FMI is a “multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling or recording payments, securities, derivatives, or other financial transactions.”
In Berndsen’s speech announcing the results of his first two experiments, he listed FMIs as one of three crucial components of “the overarching goal of financial stability” that his bank aims to provide.
But this year has proven a turning point in the history of FMIs, which have become increasingly alluring targets for sophisticated international attacks.
In March, Bloomberg reported that hackers linked to the Iranian government had attacked about four dozen US financial institutions, including the New York Stock Exchange and Nasdaq.
A month after the report, security expert Eugen Kapersky predicted an increase in financial market threats following a separate attack against Bangladesh’s central bank by hackers who moved the Russian ruble’s exchange rate, according to another Bloomberg report.
The threats against FMIs has been so pervasive that earlier this month the chairman of the BIS Benoit Coeure published “Guidance on cyber resilience for financial market infrastructures.”
In the report Coeure wrote:
“FMIs should immediately take necessary steps in concert with relevant stakeholders to improve their cyber resilience, taking into account this guidance. FMIs should also, within 12 months of the publication of this guidance, have developed concrete plans to improve their capabilities.”

Preparing for the big day

Holland’s central bank has been taking an increasingly public position in its efforts to lead other central banks to consider blockchain applications for a wide-range of possible solutions, now including financial market infrastructures.
In addition to speaking about their bitcoin blockchain experiments at last month’s Dutch Blockchain Conference, the bank last week announced its plans to open a blockchain campus by early September of this year.
Berndsen said it will take years before the full potential of blockchain becomes clear, and that his bank is working to help accelerate that learning curve.
In preparation for the FMI experiment, Berndsen told CoinDesk De Nederlandsche Bank is currently “engaged” with other parties in the industry and other central banks to see if they want to join the experiment as partners.
Berndsens said:
“We have the idea that this next prototype might require more coding, more thinking and we might need more people.”

http://coincenter.org/link/a-new-nyse-traded-bitcoin-etf-if-about-to-give-the-winklevoss-bitcoin-trust-a-run-for-its-money 

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A Computerized Trader Just Beat Banks in Top Currency Ranks

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Computerized trading firm XTX Markets Ltd. has come from nowhere to dethrone major banks including Deutsche Bank AG in the rankings of the world’s biggest spot currency traders.
The London-based proprietary trader is now the fourth biggest, accounting for 7.6 percent of spot foreign exchange — a subset of the overall currency market. It’s the first time an electronic specialist has displaced a bank in Euromoney Institutional Investor Plc’s annual survey.
Deutsche Bank has a 7.1 percent share of spot trading, according to Euromoney’s 2016 poll. The German bank was second only to Citigroup Inc. in 2015. XTX was the ninth biggest firm for overall foreign-exchange trading, which also includes swaps and options.
Its name is a reference to a mathematical expression, and the firm was spun off from quantitative hedge fund GSA Capital last year.
XTX’s sudden arrival in foreign exchange is part of an evolution that has already made itself felt in the stock market, where banks are surrendering market making to companies that specialize in electronic trading. XTX says it relies on quantitative research, machine learning and correlations between assets to generate prices.
“Electronic market making is entering other asset classes, whether it’s fixed income or others,” said Steve Grob, global director of group strategy at Fidessa Group Plc. “The foreign-exchange market is worth trillions and trillions — it would seem an obvious direction of travel.”
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