A Dubious Case Found Lawyers Eager to Make Some Money

It always seemed like a scam.

For the last two years, Facebook's founder, Mark Zuckerberg, had been locked in a bizarre battle with a suspected huckster, Paul Ceglia, who claimed that he owned as much as 84 percent of the social networking site. Mr. Ceglia produced a series of contracts and e-mails as proof of the deal he said he struck in 2003 with Mr. Zuckerberg, who was then still a student at Harvard.

Facebook called the evidence “phony” and “fraudulent.” Yet the media couldn't get enough of the case, often taking it very seriously, in part, because Mr. Ceglia had what appeared to be an all-star cast of lawyers by his side, vouching for the credibility of the case.

There was DLA Piper, the largest law firm in the nation, whose former chairman was Senator George Mitchell. Dennis Vacco, the former New York State attorney general, also took Mr. Ceglia as a client. Mr. Ceglia had also signed up, albeit only briefly because the firm quickly droppe d him, Kasowitz Benson Torres & Friedman, which has counted as clients the Federal Housing Finance Agency and the private equity firm Apollo Management.

Terry Connors, a respected former federal prosecutor, took on Mr. Ceglia and then dumped him as well.

Last Friday, Mr. Ceglia was charged with fraud, accused of forging the documents at the heart of the case. The United States attorney in Manhattan, Preet Bharara, stated: “By marching into federal court for a quick payday based on a blatant forgery, Paul Ceglia has bought himself another day in federal court for attempting a multibillion-dollar fraud against Facebook and its C.E.O.”

But guess who has come away seemingly unscathed?

The lawyers who represented Mr. Ceglia and - with dollar signs in their eyes - seemingly aided his cause.

Some of the law firms that worked for Mr. Ceglia not only took on the case, they argued volubly that they had vetted Mr. Ceglia's evidence.

“I would no t have gotten involved and DLA would not have gotten involved if we had any doubts about the facts or evidence in the case,” Robert Brownlie, a partner at DLA Piper, told The American Lawyer last year.

Mr. Brownlie ultimately withdrew from the case, but only after Kasowitz Benson dropped Mr. Ceglia first and wrote Mr. Brownlie a letter saying that it was “withdrawing from the case based on a determination that the purported contract at issue is a fraud,” according to a court filing. Still, it took Mr. Brownlie two more months before he chose to sever ties with Mr. Ceglia. What took him so long after it became clear his own client was suspected of engaging in fraud? The once-chatty Mr. Brownlie is not returning calls from reporters.

Mr. Vacco declined to comment, citing attorney-client privilege as the reason he could not explain why he no longer represented Mr. Ceglia.

Lawyers who initially agreed to take Mr. Ceglia's case clearly hoped that they woul d make tens of millions if not billions of dollars as a result of a settlement, similar to the one that Mr. Zuckerberg reached with the Winklevoss twins and Eduardo Saverin, an early investor and friend of Mr. Zuckerberg's. The twins were paid at least $65 million; Mr. Saverin, reportedly more than $1 billion.

When Mr. Ceglia was first looking for a high-powered lawyer to represent him, he had a local lawyer, Paul Argentieri, based in Hornell, N.Y., draft the equivalent of a promotional memo meant to attract other lawyers to the case. Mr. Argentieri indicated that he would be prepared to agree to a contingency fee arrangement - which would probably give any lawyer representing Mr. Ceglia a big chunk of any verdict or settlement in his favor. The memo also explicitly highlighted Mr. Zuckerberg's previous settlements with Mr. Saverin and the Winklevosses, even though “they had no written agreements” with Mr. Zuckerberg, according to the memo.

As for the documen ts in Mr. Ceglia's case, any lawyer worth his salt would have been quickly skeptical. According to the fraud case against him, Mr. Ceglia replaced one page of a two-page contract with Mr. Zuckerberg with a fake. Mr. Ceglia had a contract with Mr. Zuckerberg to do work on a site called StreetFax, not Facebook. “The spacing, columns and margins of page one of the alleged contract are different from the spacing, columns and margins of page two of the alleged contract,” the complaint says. In addition, Mr. Ceglia is accused of forging a series of e-mails that sounded rather fantastical on their face.

His lawyers, however, turned a blind eye until they had no choice but to withdraw - but not before burning through millions of dollars and the integrity of the justice system.

“Now that Ceglia is being brought to justice for his crimes, Facebook intends to hold accountable all of those who assisted Ceglia in this outrageous fraud,” Orin Snyder, a lawyer for Faceb ook and Mr. Zuckerberg, said in a statement on Monday. “Facebook will send a strong message that it does not tolerate legal shakedowns and will take aggressive action against all those who file abusive lawsuits against the company.”

Now that the big law firms have dropped Mr. Ceglia, who is representing him?

Dean Boland, a Lakewood, Ohio, lawyer who was once ordered to pay $300,000 to two minors for using their pictures in making a digitally crafted image of child pornography.

Reached by telephone, Mr. Boland said, “If I thought this was a fraud, I would have bailed out two seconds later,” adding that he'd “be the first one marching to the court” to turn Mr. Ceglia in. He said he was convinced that Mr. Ceglia had a strong civil case, which is still continuing, against Mr. Zuckerberg and Facebook.

Mr. Boland went so far as to say that the criminal complaint against Mr. Ceglia “will help in the civil case,” arguing that the government's complaint suggests that the second page of Mr. Ceglia's two-page contract with Mr. Zuckerberg is authentic.

Asked why so many other law firms had withdrawn from the case, Mr. Boland said, “You'd have to ask them.”

Asked to comment on the child pornography case he was involved in, he said, “I'm not getting into that. It's on appeal.”

After Accusations of Insider Trading, a Profession of Innocence

A Denver businessman who was arrested on Friday on insider trading charges e-mailed his family and friends over the weekend, proclaiming his innocence and comparing his plight to challenges faced by Nelson Mandela and Steven P. Jobs.

“No great man, woman, or company has achieved greatness without going through massive adversity,” wrote Michael Van Gilder, a Denver insurance executive.

As DealBook reported, federal prosecutors accused Mr. Van Gilder, 45, of trading based on secret information he obtained in advance of a private investment firm acquiring a significant stake in an oil and gas company. Mr. Van Gilder's lawyer, David B. Savitz, said that his client was set to be arraigned on Wednesday and would plead not guilty.

According to the indictment, Mr. Van Gilder traded in the stock of Delta Petroleum, a company based in Denver. A Delta executive was his close, personal friend, and his firm, Van Gilder Insurance, which was started by his great-gra ndfather, did business with the energy company.

The government says he traded on inside tips from the Delta executive on several occasions. In one instance cited, in November 2007, Mr. Van Gilder learned from his source that Tracinda, a California investment firm controlled by the billionaire financier Kirk Kerkorian, was planning to acquire a 35 percent stake in Delta. After hearing this confidential news, Mr. Van Gilder bought Delta stock and call options, according to prosecutors. He also tipped off relatives, sending them e-mails with the subject line “Xmas present,” the complaint says. He and those he tipped are alleged to have made more than $161,000 in illegal profits.

DealBook has obtained the e-mail that Mr. Van Gilder sent out on Saturday afternoon. The subject line is “Michael Van Gilder - Charges Against Me.”

Here is the e-mail in full:

Saturday greetings,

If you are getting this e-mail you are a family member or a friend of mine. There is a massive amount of gossip and press as a result of my having been charged yesterday in an indictment, so I feel compelled and have wanted to reach out to you so you hear directly from me.

Yesterday was nothing short of a tough and bizarre day. Emotions included anger, humiliation, depression and gratitude. The last emotion was created by the outpouring support from family, friends and truly amazing employees at Van Gilder Insurance. For this, I am extremely humbled and thank each and every one of you for your love, friendship and support.

I never in my wildest dreams imagined I would be the cause of my employees fighting for our company and reputation. For this there is no end to my agony.

For starters please recognize that for legal reasons I cannot give you details regarding the assertions made in the indictment. I simply ask that you have faith in me, you know me, my character, and my family. This will be a grind but I'm c onfident you will see my side unfold as I strive to be exonerated.

I'm 45 years old, I've spent these years striving to build a sterling personal and business reputation, wow, did it hurt seeing what is in the press. . . .

100 years in prison and a $25,000,000 fine! Apparently reported by someone who has no clue about the federal sentencing process. While I feel I won't spend one day in jail, “if,” I were guilty of these “allegations,” then it would be months of possible confinement, not years.

As you know, I have worked very hard to become C.E.O. of Van Gilder Insurance, an amazing 107 year old company started by my great-grandfather, Hal Van Gilder. During my more than 20 years with the company, our employees have become a family to me. As a leader it's critical to recognize when change is needed. Knowing this legal situation was heating up it was critical that I separate what is personal from what is business, therefore I stepped down this pas t week as C.E.O. This indictment has nothing to do with Van Gilder Insurance; it is not named in the indictment because the company had absolutely nothing to do with any of the allegations contained in that document. This is strictly personal. I feel extremely fortunate to have a deep and talented leadership team and mature group of employees. Many of you know Don Woods, there could not be a better man to take the reins of Van Gilder. Of course my father Dell Van Gilder is our Chairman and remains highly active in the operations of our business.

By the way, I'm still working for our company and will continue to work to maintain its leadership status in our industry.

So what's an indictment? As explained to me, an indictment is purely the vehicle in which accusations are brought against an individual in federal court. An indictment is just that, it is merely an accusation. It has absolutely no evidentiary value and is not considered evidence of any charge alleged in the indictment.

An indictment is returned after a limited and selected amount of information is presented by the government attorney to a grand jury, which consists of up to 23 citizens. The grand jury meets in secret, and the government prosecutor exclusively decides who he will call as a witness in order to obtain an indictment. No judge presides over this limited presentation of evidence and no attorneys for any witness or targeted accused can be present during the grand jury proceedings. Thus, my attorney was not permitted to attend these proceedings and cross examine any witness who testified. Finally, it takes only 12 of the 23 grand jury members to agree to the returning of an indictment.

In order for me to better understand the nature and quality of evidence needed to obtain an indictment versus unanimously convicting 12 jurors at trial beyond a reasonable doubt, this is what has been explained to me. It may take the relatively low weight of a 10 â€" p ounds of selected evidence to convince 12 out of 23 grand jurors to return an indictment, but it will require the much heavier weight of a 100 â€" pounds of legally admissible evidence to convince each and every one of the 12 trial jurors to render a finding of guilt.

Until the 100 â€" pounds of evidence convinces 12 jurors unanimously of my guilt, I am presumed innocent of each and every charge in the indictment. This constitutional presumption of innocence is one of our bedrock constitutional rights. No one in the world, except the 23 grand jurors, has even heard the 10 pounds of selected evidence presented by the government, which is why I am hopeful that no one will prejudge me on the mere basis of an indictment but instead allow the judicial processes to unfold so I can have the right to my day in court. It goes without saying that I will defend this vigorously and fully expect to be exonerated.

I've been dealing with my situation for months now, I'd like t o share with you how I've made a massive mental shift in the way I look at adversity.

No great man, woman, or company has achieved greatness without going through massive adversity.

Two examples:

Nelson Mandela spent 27 years in prison before becoming president, leading the people. During that time in prison a white man taught him the white man's language. Because of this, when he was released he was able to speak to all the people, thus allowing him the ability to be elected president. When asked don't you wish you could have become President w/out the 27 years in prison? His response: NO! I needed every day to enable me to become president!

Steve Jobs founded Apple in his basement, later he was FIRED as C.E.O.! What did he do? He founded Pixar Entertainment. In the meantime Apple was spiraling down when he was asked to come back. You know the rest, Steve Jobs built the greatest company our planet has ever seen.

Through adversity comes growth, strength and determination!

Regardless of what happens to me, I am going to grow, get stronger, be smarter. I will become a better son, brother, father, friend, and leader.

You might think I'm going to stay home and hide, stay invisible? Wrong, I plan to be as visible as ever, I won't let this beat me down.

Your outpouring of support has been nothing short of amazing, I am truly blessed.

Warm Regards and Love,

Michael

Mr. Savitz, the lawyer for Mr. Van Gilder, declined to comment on his client's e-mail.

Milken\'s Past Invoked in Gupta Sentencing

More than two decades after pleading guilty to securities fraud, the financier Michael Milken still looms large. The demand for junk bonds, a market that he helped create, have touched record levels this year. A number of his disciples, like Leon Black of Apollo Global Management, are among the most powerful players on Wall Street.

And though it was a generation ago that Mr. Milken â€" who earned a $550 million bonus in 1986 â€" became a symbol of Wall Street greed, he remains a presence in the world of white-collar crime. Mr. Milken's continued influence became clear during the sentencing of Rajat K. Gupta.

Last Wednesday in Federal District Court in Manhattan, Mr. Gupta, a former Goldman Sachs director, received a two-year prison term for leaking boardroom secrets about the bank to the hedge fund manager Raj Rajaratnam.

Judge Jed S. Rakoff, the presiding judge in Mr. Gupta's case, made a surprising reference to Mr. Milken during the hearing. It came af ter Mr. Gupta's lawyer, Gary P. Naftalis, made a plea for a lenient sentence. Mr. Naftalis cited the hundreds of letters of support for Mr. Gupta, who in addition to his business accomplishments has played a leading role in fighting global disease. He read a letter from Barry Bloom, the former dean of the Harvard School of Public Health.

“Dr. Bloom stated, ‘To my knowledge, as someone who has worked in global health for 40 years, with the sole exception of Bill Gates, no leader of the private sector or corporate world has invested so much of his time, energy, and personal credit to do so much for the poorest people of the poorest countries than Rajat Gupta,” Mr. Naftalis said.

“I'm glad he didn't say except for Michael Milken,” Judge Rakoff responded.

The comment by the judge caught the courtroom by surprise. Over the last several decades, Mr. Milken has been a prominent philanthropist. Still, while his family foundation has been a significant con tributor to education initiatives and medical research causes, it has not been involved in global public health matters.

“Michael Milken wasn't there on this issue,” Mr. Naftalis said.

Later in the hearing, Judge Rakoff referenced his earlier comment about Mr. Milken. The judge rejected the recommendation by Mr. Gupta's lawyer that his client receive a probationary sentence and perform community service in Rwanda, saying that said this would amount to insufficient punishment because Mr. Gupta had already devoted himself to such activities. He called the Rwanda idea “innovative” but at the same time mocked it, noting that it sounded like a “Peace Corps for insider traders.”

“Moreover, someone who has suffered a reputational loss has a strong motive to do those kinds of things,” Judge Rakoff said. “I somewhat unfairly made a joke at the expense of Mr. Milken previously, but he is a good example of a person who has attempted to recapture his reputation by doing good works.”

Both Judge Rakoff and Mr. Naftalis, the lawyer for Mr. Gupta, have more than just a passing interest in Mr. Milken. Both men have deep connections to the late 1980s insider trading scandal that featured Mr. Milken's former firm, Drexel Burnham Lambert. As a criminal defense lawyer, Mr. Rakoff represented Martin A. Siegel, a former Kidder Peabody investment banker who admitted to leaking inside information to the financier Ivan Boesky. And Mr. Naftalis represented Kidder Peabody in the case, working closely with Mr. Rakoff.

A spokesman for Mr. Milken, Geoffrey Moore, took umbrage at Judge Rakoff's comments. He bristled at the idea that Mr. Milken's philanthropic efforts were solely a function trying to restore his reputation.

In a statement to DealBook, Mr. Moore listed Mr. Milken's numerous charitable efforts and emphasized that Mr. Milken endowed his family foundation with several hundred million dollars in 1982, long bef ore his legal troubles.

“Mike's efforts today are no more than a continuation of the same efforts that began long before his reputation was damaged,” Mr. Moore said. “He is far too busy trying to advance medical science to worry about what others think of him.”

Behind Estimated $30 Trillion Drain, a Lot of Hypothetical Assumptions

Imagine a situation in which the world's banks have to find as much as $30 trillion to comply with just one new regulation. That might be something of a stretch, given that the gross domestic product of the United States is only $15.8 trillion, and the world's 10 largest banks hold only $25 trillion of assets.

Yet a banking industry group recently looked into a new rule and sketched out a possibility in which banks are forced to come up with as much as $30 trillion in cash.

The potential cash call is outlined in a letter the International Swaps and Derivatives Association sent in September to regulators. It is latest eye-popping number that lobbying firms and banks have produced to support their view that many new regulations will be damagingly expensive - and the big scary numbers seem to be gaining traction.

Some of the concern may be warranted, especially in Europe, where certain stressed banks have had trouble borrowing regular amounts in the markets . But a deeper look at industry association's $30 trillion figure suggests that many of the worries might be overdone.

The gargantuan sum relates to the market for derivatives, which are financial contracts that banks and investors use to bet on interest rates, stock prices, creditworthiness of corporations and the like.

Derivatives played a central role in the 2008 financial crisis. The market for many contracts was opaque, which stoked panic when the certain players started to falter.

Before the financial crisis, big participants like large Wall Street banks were often able to avoid following certain rules intended to make the market safer. One of those practices involves something called initial margin. This is the cash or easy-to-sell assets that parties have to set aside at the outset of a derivatives trade. If one side can't pay up, it can make a claim on the initial margin.

Now, regulators want to tighten up the margin rules. To do so, they are introducing regulations aimed at pushing derivatives trades through entities called central clearinghouses. These organizations effectively agree to pay out if one side of the original trade cannot pay.

Because of that pledge, clearinghouses have to make sure they can pay out if one party defaults. One way they do this is to demand margin from the parties that trade through them.

But a large number of derivatives trades won't necessarily go through clearinghouses, even after the overhaul is in place. Such trades will still be done directly between two financial firms.

Regulators have proposed rules that force firms to supply initial margin on these so-called bilateral trades, too. These rules, which won't apply to pre-existing trades, may not come into effect until late 2013 in the United States.

The International Swaps and Derivatives Association and many others want to stop or water down those margin rules on bilateral trades. In its paper, the a ssociation argued against initial margin rules, saying they “are likely to lead to a significant liquidity drain on the market, estimated to be in the region of $15.7 trillion to $29.9 trillion.” In other words, it believes there is a possibility in which the rule costs $30 trillion.

So, how likely is such a drain? A clue can be found in the $14 trillion range of the association's estimates.

Under its lower estimate, the industry group assumes that many banks calculate their derivatives exposures in an advantageous manner sanctioned by the proposed regulations. Specifically, the rules allow banks to offset certain trades with each other. This has the effect of reducing a bank's overall derivatives exposure for the purposes of calculating margin.

The upshot: Less margin is needed. At one stage in its analysis, the derivatives association says using this approach might reduce by half the overall amount of derivatives in the margin calculation.

But why wouldn't the reduction be far more than $14 trillion, or roughly 50 percent? After all, net exposure can be reduced quite drastically by using the offsetting method. For instance, a bank may have $50 billion of trades betting that stocks go up and $49 billion on trades betting stocks go down, leading to a $1 billion net exposure for the bank.

Steven Kennedy, a spokesman for the association, says it chose 50 percent partly based on its estimates of how many firms might have the required technology to carry out offsetting. In essence, the numbers involve a lot of hypothetical assumptions.

This weakness applies to other, lower-margin estimates from opponents of the new rules.

Last year, the Office of the Comptroller of Currency, an American banks regulator, estimated that initial margin rules could lead to a $2 trillion burden for banks, a smaller but still alarming figure. The number was cited in several letters and studies from lawyers and lobbyists arg uing against the margin rule. The comptroller listed three factors that might lead to banks posting less than $2 trillion. But, the study added, “at present, we are unable to estimate the mitigating effects of these three factors.”

Bryan Hubbard, a spokesman for the comptroller, said the paper reflected the comptroller's best analysis at the time. He added, “The O.C.C. is likely to update the analysis when a final rule is issued.”

Other opponents of initial margin rules have been similarly vague when gauging factors that might reduce the burden. JPMorgan Chase sent a letter last year to regulators critiquing the initial margin rule, saying it might need to collect a $1.4 trillion from its trading partners if it did not use the offsetting approach. The letter did say an offsetting approach might “produce smaller initial margin amounts.” Still, it didn't specify how much smaller.

The initial margin rules may prompt some firms to simply stop doing bilateral derivatives trades, removing the need for any margin at all. Some financial companies have even started down that path.

In the face of new margin rules, Berkshire Hathaway said earlier this year that it won't be entering any big new derivatives bets. “We shun contracts of any type that could require the instant posting of collateral,” Warren Buffett, the company's chief executive, wrote in its latest annual report.

U.S. Markets to Be Closed on Tuesday

Stock markets in the United States will be closed again on Tuesday for a second day without trading as Hurricane Sandy roared closer to the New York area.

The New York Stock Exchange and BATS Global Markets said in separate statements that they have agreed to close, after consulting with other exchanges and clients. The N.Y.S.E. added that it planned to operate on Wednesday, pending developments in weather conditions.

The decision came as little surprise, with market operators already hinting that they would stay closed as the storm's impact intensified. And the Securities Industry and Financial Market Association, an industry trade group, recommended that United States bond markets stay closed on Tuesday as well.

The two-day stoppage is the first weather-related closure of the American stock markets since Hurricane Gloria in 1985. And it is the first unscheduled trading stoppage since the Sept. 11 terrorist attacks.

Representatives for the exchange s emphasized that the safety of their employees was paramount, relying on skeleton crews to run critical operations. And a slew of Wall Street firms, some of whose offices are based in evacuated areas of Manhattan, have asked employees to continue working remotely.

A continued stoppage in trading is expected to have some costs for exchanges like the N.Y.S.E. and the Nasdaq stock market. Richard Repetto, an analyst at Sandler O'Neill & Partners, estimated that stock and option exchanges would lose about $1 million in transaction fees for every day that they are closed.

That loss of revenue would likely have little impact on those companies' earnings, he added, though Mr. Repetto added that he did not factor in lost revenue from exchanges' other businesses.

Chairman of CVC Capital Partners to Retire

LONDON - Michael Smith, chairman of the European private equity firm CVC Capital Partners, will retire early next year, the firm announced on Monday.

Mr. Smith, who joined CVC in the early 1980s when it was part of Citicorp, will be succeeded by Donald Mackenzie, Rolly van Rappard and Steve Koltes, who will act as co-chairmen of the company.

Mr. Mackenzie will oversee CVC's investment and portfolio committees, while Mr. van Rappard will chair the two private equity boards that control the firm's daily operations. Mr. Koltes will assume Mr. Smith's investor relations duties.

“Having spent 30 years in the business from its origins with Citicorp in the early 1980s through to independence in 1993, and the subsequent development of the business to where it is today, I have decided to retire from CVC in January,” Mr. Smith said in a statement on Monday.

CVC manages capital for about 300 institutional, governmental and private investors worldwide.

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How Bank of America Could Fight a Government Lawsuit

Legal minutiae may give Bank of America a basis to fight the claims in a recent Justice Department lawsuit.

The Justice Department filed a lawsuit last week seeking at least $1 billion in penalties against Bank of America for troubled loans sold to the mortgage finance giants Fannie Mae and Freddie Mac. The government complaint focuses on a program to push out mortgages implemented by Countrywide Financial, which Bank of America acquired in July 2008.

The program, referred to as the “High-Speed Swim Lane” or “the hustle,” was designed to get mortgages approved by dropping a number of credit quality protections to speed up the approval process. The program began in 2007 after the subprime mortgage market collapsed, and Countrywide tried to prop up its loan volume by concentrating on higher quality mortgages that met the underwriting requirements of Fannie and Freddie.

According to the complaint, Countrywide did not disclose that “the hustle” el iminated many checks on the quality of the borrowers when it sold the loans to Fannie and Freddie. The Justice Department accuses Bank of America of continuing the program after it acquired Countrywide, and claims the bank has improperly fought taking back defaulted loans that should not have been sold to Fannie and Freddie.

The complaint relies on two statutes in seeking penalties: the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.

The False Claims Act dates to the Civil War, when it was enacted to combat defective products supplied to the Union army. The law now allows a penalty of up to $11,000 and triple the amount of damages sustained by the government for submission of any “false or fraudulent claim for payment.”

An important aspect of the act is that private individuals can serve as whistle-blowers by suing on behalf of the government in what is known as a qui tam action. A former vice president of Country wide initially filed the suit against Bank of America, and if the case is successful he would be eligible to receive up to 30 percent of the government's recovery.

The Financial Institutions Reform, Recovery and Enforcement Act is of much more recent vintage, having been adopted in 1989 during the savings and loan crises. It allows the government to recover civil penalties of up to $1 million for each violation of the federal mail and wire fraud statutes when it affects a federally insured financial institution.

One potential problem the Justice Department faces is proving that Countrywide's sales of the mortgages to Fannie and Freddie constituted the submission of a “claim” to “an officer, employee or agent of the United States.” The statute requires that the recipient of the claim be an instrumentality of the federal government, which is very much an open question.

Fannie and Freddie operated as for-profit enterprises until they were put into cons ervatorship overseen by the Federal Housing Finance Agency in September 2008. While they were “government sponsored enterprises” created by Congress and subject to extensive regulatory oversight, they looked like any other private company with shares listed on the New York Stock Exchange.

The Justice Department's complaint provides details of a few questionable mortgages sold by Countrywide as examples of the types of transactions that constituted fraudulent claims under the False Claims Act. The problem is that these transactions took place in 2007, before the federal takeover of the two companies.

The financial crisis hit around the time Bank of America took control of Countrywide. As a result, Bank of America could argue that the statute does not apply to any sales to Fannie and Freddie before they were bailed out, and before then the law is uncertain concerning their status as instruments of the federal government.

In Lebron v. National Railroad Pas senger Corp., the Supreme Court found that Amtrak was an instrument of the federal government. The court found that it was created “by special law, for the furtherance of governmental objectives, and retains for itself permanent authority to appoint a majority of the directors of that corporation.”

Like Amtrak, Congress created Fannie and Freddie, and they serve an important government purpose in maintaining the mortgage market. But shareholders elected a majority of the directors before the 2008 government takeover, and ownership of their shares was in private hands, with no direct federal control of the companies.

Bank of America can point to a 1996 decision by the United States Court of Appeals for the Ninth Circuit in American Bankers Mortgage Corporation v. Federal Home Loan Mortgage Corporation to support an argument that the two companies are not government instruments.

In that case, a mortgage company sued Freddie Mac for violating its due proce ss rights when it transferred loan servicing contracts to â€" of all companies â€" Countrywide Financial because of violations of Freddie's guidelines. The appellate court rejected the claim that Freddie Mac was an arm of the federal government because shareholders elected 13 of its 18 directors and the government had far less control over its operations than it exercised at Amtrak.

But there are also cases that have found the two companies to be government instruments for determining whether they are subject to state and local taxation or come under federal securities laws. The Justice Department is sure to point to these in support of its position that the False Claims Act applies to Fannie and Freddie.

Bank of America can also challenge the claim for penalties under the Financial Institutions Reform, Recovery and Enforcement Act by arguing that Countrywide's conduct falls outside the statute.

The Justice Department complaint asserts that the troubled loa ns caused substantial losses at Fannie and Freddie, which in turn led to losses at a number of banks that bought securities sold by the two companies. This is essentially a trickle-down theory: Countrywide's fraud prompted losses at Fannie and Freddie that then spread to other federally insured financial institutions.

That is a very broad reading of what constitutes “affecting,” and arguably means that any mail or wire fraud at a company whose shares are owned by a federally insured financial institution could trigger liability for civil penalties under the Financial Institutions Reform, Recovery and Enforcement Act. Determining whether a financial institution has been affected usually requires some direct impact on a bank and not just that the fraud rippled through the financial system.

An article for DealBook by Ben Protess described the many legal claims against Bank of America from its Countrywide acquisition that might cost it as much as $40 billion. T he bank has already paid $2.5 billion to Fannie and Freddie for problematic loans Countrywide sold to them, and the latest lawsuit tries to pile on more penalties for those transactions.

Bank of America can point to requirements for pursuing a case under both statutes to try to get the complaint dismissed and keep its costs down. Other banks that sold bad mortgages to Fannie and Freddie will certainly be watching closely to see whether they might face similar claims in the future.

Business Day Live: Storm Gains Strength

Hurricane Sandy bears down on the Northeast. | A catastrophe risk analyst on the dangers for insurance companies. | Examining the potential economic impact of the storm. | Reports from the field.

Hurricane Preparations on Wall St., Social Media Edition

The streets of lower Manhattan were deserted on Monday as Wall Street workers took shelter from Hurricane Sandy.

But as with any big event in the city, social media sites were buzzing with photographs and other updates about the approaching storm. Manhattan's financial district, located in a designated evacuation zone, looked like a ghost town.

Hurricane Sandy Multimedia

In photos passed around Twitter, the entrance to the New York Stock Exchange was shown lined with sandbags. The exchange is closed for trading on Monday, the first time it has gone dark because of the weather in nearly three decades.

Sandbags and wooden boards also lined subway entrances at Bowling Green. With the city's subways closed, the Metropolitan Transportation Authority posted pictures on Flickr that showed Grand Central Terminal and the station at Times Square eerily empty.

Financial firms,including Goldman Sachs and Citigroup, told em ployees to work from home on Monday, but apparently not everyone on Wall Street got the memo. Twitter user Dutch Book, who blogs for Stone Street Advisors, wrote: “Boss sent me a ‘feel free to work from home today' email after I was already at my desk. #helpful”

John Carney of CNBC weighed in:

@dutch_book Completely typical. A bunch of people around the street just sent me similar stories. Really inconsiderate.

- John Carney (@carney) October 29, 2012

But most people seemed to have left the financial district by Monday morning.

WABC reporter on flooded Battery Park walkway: “really the only people out here are reporters.”

- Heidi N. Moore (@moorehn) October 29, 2012

A live video of the Wall Street bull was passed around Twitter, showing flashing emergency lights illuminating the bronze statue. The video also showed that tourists were apparently still roaming the streets.

Big retail banks announced plans to waive certain fees and to close some branches in preparation for the storm. Chase took to Twitter to give updates. The tone was predictably cheerful:

Good morning! We hope you all had a great weekend. We're back to answer ?s or concerns until 9PM ET today. How can we help you? ^EM

- Chase Support (@ChaseSupport) October 29, 2012

Weather reporters provided information about the storm. Eric Holthaus of The Wall Street Journal tweeted:

New data from the Hurricane Hunters (945mb) confirms #Sandy is now the most intense hurricane ever north of NC, beating LI Express of 1938.

- Eric Holthaus (@WSJweather) October 29, 2012

Hurricane Sandy also inspired its share of jokes. A parody account gave the hurricane a voice.

Some questio ned the disaster prevention efforts. Henry Blodget of Business Insider tweeted:

Gotta say, in era of electronic trading and distributed computing, it's pretty silly that local storm closes stock markets for whole USA

- Henry Blodget (@hblodget) October 29, 2012

And Felix Salmon of Reuters wrote:

what are the chances that the surge will be big & powerful enough to reach your sandbags, but small & weak enough that they will repel it?

- felix salmon (@felixsalmon) October 28, 2012

With the news changing by the hour, The New York Times and The Wall Street Journal opened access to their sites, and the Times set up a camera on the roof of its building. Having access to news was considered critical:

My NYT was delivered home today. But no WSJ or FT. Just saying.

- Tunku Varadarajan (@tunkuv) October 29, 2012< /p>

Riverbed Technology to Buy Opnet for $993 Million

Riverbed Technology said on Monday that it plans to buy Opnet Technologies for $993.3 million in cash and stock, bolstering its business in speeding up software on corporate networks.

Under the terms of the deal, Riverbed will pay $36.55 in cash and 0.2774 of a share for each Opnet share in a two-step merger. That represents a roughly 34 percent premium to the target company's Friday closing price.

By buying Opnet, Riverbed is hoping to add to its software management services, a complementary business to its own network hardware offerings. Opnet specializes in what's known as application performance management, which is meant to optimize the way that business software operates on networks.

“The addition of Opnet establishes Riverbed as the clear leader in the high-growth and converging application and network performance management markets,” Jerry Kennelly, Riverbed's chairman and chief executive, said in a statement. “This acquisition also transfor ms Riverbed into a billion dollar revenue company.”

Riverbed will combine Opnet with its Cascade business unit. It said that the deal will add to its earnings per share on a pro forma basis beginning next year.

The deal comes as Opnet has been hurt by rising expenses. Separately on Monday, the company reported a nearly 19 percent drop in its profit for the second quarter of its 2013 fiscal year. Its 22 cents of adjusted earnings per share fell short of the average analyst estimate of 25 cents, according to Standard & Poor's Capital IQ.

The cash portion of the deal will be financed by Riverbed's cash on hand and financing that will be provided by Goldman Sachs and Morgan Stanley. The deal is expected to close by year end.

Riverbed was advised by Goldman and the law firms Weil, Gotshal & Manges and Wilson Sonsini Goodrich & Rosati. Opnet was advised by Lazard and Cooley.

Evercore Announces Strategic Agreement with VTB Capital

DateTitle  10/25/12Evercore Partners Reports Third Quarter 2012 Results; Increases Quarterly Dividend to $0.22 Per Share10/10/12Evercore Partners to Announce Third Quarter 2012 Financial Results and Host Conference Call on October 25, 201209/12/12Evercore Chief Financial Officer, Robert B. Walsh to Present at the JMP Securities Financial Services & Real Estate Conference o n September 13, 201208/02/12Brett Pickett and Lowell Strug to Join Evercore as Senior Managing Directors to Lead Its Consumer and Retail Group07/19/12Evercore Pa rtners to Announce Second Quarter 2012 Financial Results and Host Conference Call on July 26, 201206/14/12Evercore to Add Coverage of REITs to its Institutional Equities Business06/05/12Research Analysts Recognized for Outstanding Work in the Technology Sector04/26/12Evercore Partners Reports First Quarter 2012 Results; Quarterly Dividend of $0.20 Per Share04/17/12Evercore Partners to Announce First Quarter 2012 Financial Results and Host Conference Call on April 26, 201204/17/12Steve Wellington to Join Evercore as a Senior Managing Director in Europe03/16/12Evercore Chief Financial Officer, Robert B. Walsh, to Present at the Sidoti & Company Sixteenth Annual New York Institutional Investor Forum on March 19, 201201/19/12Evercore Partners to Announce Fourth Quarter and Full Year 2011 Financial Results and Host Conference Call on February 2, 2012

Clean Harbors to Buy Safety-Kleen for $1.25 Billion

After filing for an initial public offering, Safety-Kleen has found another way to let its owners cash out: by selling the company.

On Monday, Safety-Kleen said that it will be acquired Clean Harbors, a provider of environmental cleanup services, for $1.25 billion in cash.

If completed, the transaction will mark yet another new owner for Safety-Kleen, which focuses on recycling used oil and cleaning industrial parts.

Founded in 1963 as a parts-washing business, the company later became publicly traded. It was then acquired by Laidlaw in 1998, following a hostile takeover campaign. Questions over Safety-Kleen's accounting practices prompted the company to file for bankruptcy protection two years later, handing over control to creditors like Highland Capital Management, Contrarian Capital Management and JPMorgan Chase.

After emerging from bankruptcy, Safety-Kleen sought to go public in 2008, but it was forced to scrap those plans during the financial crisis. It filed for an I.P.O. again in August, giving investors a potential opportunity to pare back their holdings.

The company currently has more than 200 locations in North America, including massive oil re-refineries in East Chicago, Ind. and Breslau, Ontario. It reported $1.3 billion in revenue and $135 million in net income last year.

Its new owner is Clean Harbors, which has expanded in part through takeovers. Monday's deal is by far the largest in the company's 32-year history, according to Standard & Poor's Capital IQ.

“This acquisition is a landmark achievement for Clean Harbors that we believe will build significant long-term value for our shareholders,” Alan S. McKim, Clean Harbors' chairman and chief executive, said in a statement. “Adding Safety-Kleen's re-refining and recycling capabilities to our current offerings will enhance the sustainability options available to our existing customers and significantly broaden the range of service s we can offer customers of both companies.”

The two companies have previously done business together. In 2002, Clean Harbors purchased Safety-Kleen's chemical services division for $310 million.

The latest transaction is expected to close by year end, with Clean Harbors continuing to use the Safety-Kleen brand.

Safety-Kleen was advised by Credit Suisse, Morgan Stanley, Houlihan Lokey and the law firm Skadden, Arps, Slate, Meagher & Flom. Clean Harbors was counseled by the law firm Davis, Malm & D'Agostine.

Wall Street Braces for the Storm

WALL STREET BRACES FOR THE STORM  |  Wall Street is preparing for Hurricane Sandy. All stock and options markets in the United States will be closed on Monday as the storm approaches New York. Financial firms like Goldman Sachs and Citigroup, which have offices in the designated evacuation zones, are telling employees to work from home.

This is the first time the New York Stock Exchange has closed trading for weather reasons since Hurricane Gloria in 1985, DealBook's Michael J. de la Merced writes. The exchange had planned to stay open electronically while closing its physical trading floor, but with the city going into emergency mode on Sunday night, the N.Y.S.E. took the extra precaution. “It was a judgment decision based on the safety of a lot of market participants, especially as the storm seems to be getting more severe,” Lawrence E. Leibowitz, chief op erating officer of NYSE Euronext, told Bloomberg News. The Nasdaq and BATS stock markets are also closing.

Wall Street firms are implementing contingency plans. Most Goldman Sachs employees are working from home, with some reporting to sites in Greenwich, Conn., and Princeton, N.J., according to an internal memorandum reviewed by DealBook. Morgan Stanley is having employees at its lower Manhattan offices work remotely, according to The Wall Street Journal. Citigroup, Bank of America, JPMorgan Chase and the Blackstone Group are also closing offices in Manhattan.

It is not clear when trading will open again. Officials warned that New York City might be dealing with the storm until Wednesday.

 

RANDOM HOUSE AND PENGUIN TO MERGE  |  Two major publishing houses are joining forces. Bertelsmann, the German owner of Random House, plans to combine the publisher with Penguin, owned by the British media conglomerate Pearson. According to the terms of the deal announced on Monday, Bertelsmann is set to control 53 percent of the venture with Pearson holding the rest. The deal comes as publishers try to protect themselves against the rising clout of Amazon and other online retailers. The announcement says the two companies plan to invest more in “new digital publishing models.”

 

FACEBOOK LOCKUP EXPIRES  |  What do Facebook's employees think of the company's prospects? The market will soon find out as more than 270 million shares become eligible to be sold. The shares, which amount to more than 10 percent of the total outstanding, are mostly controlled by employees.

The social network's battered stock price got a lift last week after better-than-expected quarterly results. But some analysts predict the rally could be short-lived. “I would i magine that half of that stock will get sold,” Michael Pachter, a Wedbush analyst, told CNBC. There is still more potential pressure coming in November, when more shares can be traded.

 

ON THE AGENDA  | 
Plans are changing due to the hurricane. A spokeswoman for Bloomberg TV said on Sunday that Monday's guest lineup was “in flux.” The schedule is thinner than usual at CNBC, but Richard Kovacevich, Wells Fargo's former chairman and chief executive, is scheduled to appear at 4:30 p.m. Kweku Adoboli, a former UBS trader on trial for fraud and false accounting, takes the stand in London. In Madrid, Prime Minister Mariano Rajoy of Spain meets with Premier Mario Monti of Italy to discuss the European debt crisis. Burger King Worldwide, which rejoined the public markets in June, reports earnings before the market opens. Herbalife and Tumi Holdings report results Monday eve ning. Data on personal income and outlays in September is to be announced at 8:30 a.m.

 

NOMURA SWINGS TO A SLIGHT PROFIT  | 
Nomura Holdings reported a small profit of 2.8 billion yen ($35 million) for the recent quarter, compared with a loss of 46.1 billion yen in the period a year earlier. The Japanese firm said it benefited from rising sales in its fixed-income business, which helped offset weakness in its equities division. Still, the results fell short of the 5 billion yen profit that analysts surveyed by Bloomberg News were expecting. “I get the impression Nomura was just making ends meet,” Mitsushige Akino, an investment manager in Tokyo, told Bloomberg News.

 

 

 

Mergers & Acquisitions '

Petr onas to Renew Bid for Progress Energy  |  Petronas, the Malaysian state oil firm, may try again to buy Progress Energy Resources after the Canadian government blocked the earlier bid, Reuters reports. REUTERS

 

The Dairy Industry's Well-Paid Deal Maker  |  The chief executive of Dean Foods, Gregg L. Engles, was once hailed as a deal maker in the dairy industry, but he has recently become better known for his paychecks that “continued to be hugely generous even as his company's fortunes tumbled,” The New York Times writes. NEW YORK TIMES

 

TNT Expects European Union to Approve U.P.S. Deal  | 
REUTERS

 

Advertising Technology Company OpenX to Acquire JumpTime  |  The Media Decoder blog reports: “On Monday, OpenX Technologies, a provider of digital advertising technologies, will announce that it has acquired JumpTime, a company that helps publishers determine what each piece of their digital content is worth.” NEW YORK TIMES MEDIA DECODER

 

Pursuing Orient-Express Hotels, Indian Firm Takes a Softer Tone  |  The Indian Hotels Company sent a letter to the board of Orient-Express Hotels on Friday, offering to “dispel any misunderstandings” about its bid to buy the roughly 93 percent of the company that it did not already own. DealBook '

 

Oshkosh Rejects Icahn's Offer and Moves to Protect Itself  |  The truck company Oshkosh Corporation rejected Carl C. Icahn's $3 billion unsolicited takeover bid on Friday, deeming it too low. It also adopted a poison pill to protect itself against further moves by the billionaire investor. DealBook '

 

INVESTMENT BANKING '

UBS to Eliminate 10,000 Jobs  |  The cuts would equal about 16 percent of UBS's work force as of June 30, Bloomberg News reports. The bulk of the layoffs are likely to come from the Swiss bank's trading business. BLOOMBERG NEWS

 

Greek Editor Publishes List of Swiss Bank Accounts  |  After publishing a list of Greeks who were said to have Swiss bank accounts, the e ditor of Hot Doc magazine was arrested and then released, The New York Times reports. NEW YORK TIMES

 

Deutsche Bank Wins More Business  |  Deutsche Bank's share of stock and bond offerings rose to 5.8 percent from 4.3 percent a year earlier, beating some European rivals, Bloomberg News reports. BLOOMBERG NEWS

 

Credit Suisse Equities Chief Said to Be Stepping Down  |  The executive, Bob Jain, is set to oversee in-house hedge funds at Credit Suisse, according to Bloomberg News. BLOOMBERG NEWS

 

Scrutinizing the Growth of the Financial Industry  |  Gretchen Morgenson writes in The New Yo rk Times that “we are still tallying” the costs of the expanded access to credit that came with the growth of the financial industry. NEW YORK TIMES

 

PRIVATE EQUITY '

A Private Equity Boss Sets Loftier Goals  |  Damon Buffini, the founder of Permira, is overseeing a new venture that aims to invest in ways that are beneficial for society, The Telegraph reports. TELEGRAPH

 

Dymon Starting a Private Equity Fund  |  The hedge fund Dymon Asia Capital has backing from a unit of Temasek Holdings for its new private equity fund, Reuters reports. REUTERS

 

TPG Said to Be Bidding fo r Stansted Airport  | 
FINANCIAL TIMES

 

HEDGE FUNDS '

Romney's Connection to Hollywood  |  The Republican presidential candidate Mitt Romney has been an investor in the hedge fund Elliott, which has backed various Hollywood movies, The Financial Times reports. FINANCIAL TIMES

 

Robertson on ‘Disaster' Funds  |  Julian Robertson, the founder of Tiger Management, warned against hedge funds taking too bearish of a view, saying on Bloomberg TV that firms preparing for a crisis were “scared.” BLOOMBERG NEWS

 

Smaller Hedge Funds Perf orm Better, Study Shows  | 
FINANCIAL TIMES

 

I.P.O./OFFERINGS '

PTT Shareholders Approve $3.1 Billion Offering  |  The sale of shares would be Thailand's biggest ever, according to Reuters. REUTERS

 

South Korean Cable Company Raises $267 Million in I.P.O.  |  CJ Hellovision sold shares near the bottom of its expected range, Reuters reports. REUTERS

 

Telefonica's German Unit Narrows Expected Range, Again  |  The phone company altered the expected price range for its I.P.O. again on Monday, after narrowing it on Friday, according to MarketWatch. MARKETWATCH

 

VENTURE CAPITAL '

Goldman Sachs Goes Artisanal  |  An entrepreneur behind the Brooklyn Flea secured a $25 million investment from Goldman Sachs for a new development that would host emerging food businesses, The New York Times writes. NEW YORK TIMES

 

Tech Industry Gains Political Clout in San Francisco  |  Successful lobbying by the billionaire investor Ron Conway is paving the way for others, Reuters writes. REUTERS

 

Mobile Apps Devour Personal Data  | 
NEW YORK TIMES

 

LEGAL/REGULATORY '

Citigroup Pays Fine and Fires Star Technology Analyst  |  Citigroup paid a $2 million fine and fired two employees after authorities accused the bank of improperly disclosing confidential information to media outlets about YouTube's earnings and Facebook's initial public offering. DEALBOOK

 

Man Claiming Facebook Ownership Arrested on Fraud Charges  |  Federal prosecutors say that Paul Ceglia filed a sham federal lawsuit claiming to have been promised a 50 percent share of Facebook, and then doctored, fabricated and destroyed evidence to support his allegations. DEALBOOK

 

Another Day, Another Set of Insider Trading Cases  |  Prosecutors say an insurance executive in Denver traded on secret information about Kirk Kerkorian's firm acquiring a significant stake in an oil and natural gas company. Also on Friday, a former employee of the former hedge fund manager Raj Rajaratnam agreed to pay $1.75 million to settle a civil lawsuit brought by the Securities and Exchange Commission. DealBook '

 

Ford to Sell Climate-Control Unit

Ford Motor said on Monday that it plans to sell a climate-control unit to a joint venture comprised of Valeo of France and V. Johnson Enterprises, completing the car maker's plan to sell off a collection of auto parts manufacturing businesses.

The climate control unit, which was sold for an undisclosed price, was one of 17 facilities that Ford took over from Visteon, its struggling former car parts arm, in 2005. The idea was to ensure that the car maker would have access to crucial components even if Visteon failed.

Ford organized those businesses into Automotive Component Holdings, or ACH, with the aim of selling off the divisions over time. The remaining business was the climate control unit, which is based in Plymouth, Mich.

“Few companies take the longer-term, comprehensive approach we took with the restructuring of ACH,” Mark Fields, Ford's president of the Americas, said in a statement. “From the start, our eye was on what was required to tran sform these operations into businesses that would attract the world's best suppliers needed to move Ford's business forward â€" and at the same time, preserve as many jobs as possible. We are proud of what we accomplished.”

The business will now be run by Detroit Thermal Systems, a partnership between Valeo and V. Johnson, a car parts maker owned by Vinnie Johnson, a former player for the Detroit Pistons basketball team. V. Johnson will own 51 percent of the new business, while Valeo will own the balance.

Detroit Thermal plans to transfer the climate control unit's assets and operations to Romulus, Mich. starting in the middle of next year and ending in 2014.

“This acquisition is a strategic breakthrough for Valeo that will not only enhance our presence across North America, but also strengthen our ties with the Ford Motor Company in North America and the rest of the world,” Jacques Aschenbroich, Valeo's chief executive, said in a statement.

Nomura Reports Meager Quarterly Profit After Insider Trading Scandal

Nomura Holdings on Monday reported a meager profit in the latest quarter as the large Japanese bank continues to deal the fallout from an insider trading scandal and the weak industry conditions.

Nomura said its net profit totaled 2.8 billion yen ($35 million) in the three months ending Sept. 30, compared to a 46.1 billion yen loss for the same period last year.

The Japanese firm said it had benefited modestly from rising sales in its fixed income business. The unit helped to offset a sluggish performance in the firm's equities unit, which has been hampered by the country's struggling stock market.

The earnings announcement was the first by Nomura's chief executive, Koji Nagai, who took over in July after his predecessor, Kenichi Watanabe, was forced to resign in the wake of an insider trading scandal.

Mr. Watanabe and the bank's chief operating officer, Takumi Shibata, left Nomura after the firm acknowledged that some employees had leaked informati on on public offerings to a number of fund managers, who then profited from trading on the stocks ahead of the expected drop in the share price.

In the aftermath of the scandal, the Japanese bank has scaled back its international operations, in a reversal of its expansion efforts following the financial crisis. In 2008, Nomura bought the Asian and European operations from Lehman Brothers after the American investment bank collapsed.

Last month, Nomura announced a broad reorganization plan that includes around $1 billion of cost reductions. The bank said around 45 percent of the savings would come from its European operations, while the firm's Americas unit would provide a further 21 percent of the reductions. The savings include $450 million related to job losses, according to a company statement.

On Monday, Nomura said it had reduced its global workforce by 1 percent, to almost 35,000, by the end of Sept. 30.

The Japanese bank's wholesale business, w hich includes its investment banking division, reported a small 200 million yen net profit in the three months through Sept. 30, compared to a 71 billion yen loss in the same period last year.

The firm said sales from its fixed income unit more than doubled, to 88.6 billion yen, over the period, while revenue from the bank's equities business fell 4 percent, to 32.1 billion yen.

By the end of trading in Tokyo on Monday, shares in Nomura had fallen less than 1 percent.

Random House and Penguin Announce Merger

Pearson and Bertelsmann today announce an agreement to create the world's leading consumer publishing organisation by combining Penguin and Random House.

The combination brings together two of the world's leading English language publishers, with highly complementary skills and strengths. Random House is the leading English language publisher in the US and the UK, while Penguin is the world's most famous publishing brand and has a strong presence in fast-growing developing markets. Both companies have a long history of publishing excellence, and both have been pioneers in the dramatic industry transformation towards digital publishing and bookselling.

Under the terms of the agreement, Penguin and Random House will combine their businesses in a newly-created joint venture named Penguin Random House. Bertelsmann will own 53% of the joint venture and Pearson will own 47%. The joint venture will exclude Bertelsmann's trade publishing business in Germany and Pearson will retain rights to use the Penguin brand in education markets worldwide.

Bertelsmann will nominate five directors to the Board of Penguin Random House and Pearson will nominate four. John Makinson, currently chairman and chief executive of Penguin, will be chairman of Penguin Random House and Markus Dohle, currently chief executive of Random House, will be its chief executive.

In reviewing the long-term trends and considerable change affecting the consumer publishing industry, Pearson and Bertelsmann both concluded that the publishing and commercial success of Penguin and Random House can best be sustained and enhanced through a partnership with another major international publishing house. They believe that the combined organisation will have a stronger platform and greater resources to invest in rich content, new digital publishing models and high-growth emerging markets. The organisation will generate synergies from shared resources such as warehousing, distribution, printing and central functions. Pearson and Bertelsmann intend that the combined organisation's level of organic investment in authors and new product models will exceed the total investment of Penguin and Random House as independent publishing houses.

The two companies believe that the combination will create a highly successful new organisation, both creatively and commercially, with the breadth and investment capacity to deliver significant benefits. Readers will have access to a wider and more diverse range of frontlist and backlist content in multiple print and digital formats. Authors will gain a greater depth and breadth of service, from traditional frontlist publishing to innovative self-publishing, on a global basis. Employees of the new organisation will be part of the world's first truly global consumer publishing company, committed to sustained editorial excellence and long-term investment in a rich diversity of content. And shareholders will benefit from participating in the consolidation of the consumer publishing industry without having to deploy additional capital.

The combination is subject to customary regulatory and other approvals, including merger control clearances, and is expected to complete in the second half of 2013.

In 2011, Random House reported revenues of "1.7bn (£1.48bn) and operating profit of "185m (£161m). Penguin reported revenues of £1.0bn and operating profit of £111m with total assets of £1.0bn. After completion, Pearson will report its 47% share of profit after tax from the joint venture as an associate in its consolidated income statement.

Under the terms of the agreement, neither Pearson nor Bertelsmann may sell any part of their shareholding in Penguin Random House for three years. To protect Pearson's interests as a minority shareholder, if Bertelsmann declines a Pearson offer to sell its entire shareholding, Pearson may require a recapitalisation by which Penguin Random House raises debt of up to 3.5x EBITDA, with a dividend distributed to shareholders in line with their ownership. In addition, from five years after completion, either partner may require an IPO of Penguin Random House.

Marjorie Scardino, chief executive of Pearson, said: “Penguin is a successful, highly-respected and much-loved part of Pearson. This combination with Random House â€" a company with an almost perfect match of Penguin's culture, standards and commitment to publishing excellence â€" will greatly enhance its fortunes and its opportunities. Together, the two publishers will be able to share a large part of their costs, to invest more for their author and reader constituencies and to be more adventurous in trying new models in this exciting, fast-moving world of digital books and digital readers.“

Thomas Rabe, chairman and CEO of Bertelsmann, said: “With this planned combination, Bertelsmann and Pearson create the best course for new growth for our world-renowned trade-book publishers, to enable them to publish even more effectively across traditional and emerging formats and distribution channels. It will build on our publishing tradition, offering an extraordinary diversity of publishing opportunities for authors, agents, booksellers, and readers, together with unequalled support and resources.”

ENDS

For more information

Pearson

Luke Swanson / Simon Mays-Smith / Charles Goldsmith +44 (0) 20 7010 2310

Penguin

Becca Sinclair +44 (0) 20 7010 4279

Brunswick (for US media enquiries)

Oliver Phillips + 1 212 333 3810 ext 669

About Pearson

Pearson is an international education and information company with world-leading businesses in education, business information and consumer publishing.

Pearson is the world's leading learning company, providing educational materials, technologies, assessments and related services to teachers and students of all ages. We publish across the curriculum under a range of respected imprints and are also a leading provider of electronic learning programmes and of test development, processing and scoring services to educational institutions, corporations and professional bodies around the world.

The Financial Times Group provides business and financial news, data, comment and analysis, in print and online, to the international business community. It includes the globally-focused Financial Times newspaper and FT.com website; a range of specialist financial magazines and online services; and Mergermarket, which provides proprietary forward-looking insights and intelligence to businesses and financial institutions.

Penguin, founded by Allen Lane in 1935, is today one of the world's leading English language publishers and the most famous brand in the industry. Penguin publishes 4,000 titles every year for readers of all ages and in print and digital formats. Its extensive range of titles includes top literary prize winners, classics, reference volumes and children's titles.