FERC Takes Aim at Wall Street

Wall Street finds itself in a bare-knuckle brawl with a government agency.

Yet the fight is not with the Federal Reserve or another banking regulator, but a less-known agency more accustomed to patrolling the nation's energy pipeline than a trading floor.

The Federal Energy Regulatory Commission, the government watchdog overseeing the oil, natural gas and electricity business, has lately taken aim at three major banks suspected of manipulating energy prices. After taking action against JPMorgan Chase and Deutsche Bank, the agency on Wednesday threatened to impose its largest fine ever against Barclays.

The agency - building on a 2005 law, additional resources and a string of personnel moves - is increasingly exercising its new enforcement muscle to pursue not only energy companies but some of the nation's biggest banks. Indeed, the case against Barclays, which could cost the British bank $470 million, stems from a broad crackdown on questionable trading t hat has prompted 19 actions in the last two years.

“It's the most powerful agency that no one knows about,” said Tyson Slocum, the director of the energy program for Public Citizen, a nonprofit advocacy group.

And it is a regulator that has so far had unusually fierce clashes with Wall Street. While they may push back against regulations and enforcement actions, financial firms typically tread softly in dealing with their regulators, preferring to strike settlement deals that swiftly resolve scandals. In June, for example, Barclays paid $450 million to settle regulators' accusations that it had manipulated interest rates during the financial crisis.

But Barclays and JPMorgan are mounting counterattacks against the Federal Energy Regulatory Commission, casting the accusations against them as wrongheaded and overreaching. Even Deutsche Bank, which faces a meager $1.5 million fine, has vowed to fight.

“People have to be held accountable, but there also has to be clarity and due process,” said Nora Mead Brownell, a former commissioner at the agency who became a founding partner at Espy Energy Solutions, an energy consulting firm.

The banks sense that a larger regulatory battle is at stake. Unlike financial regulators, the energy commission can fine firms $1 million a day for every violation. The string of recent cases, banks fear, could lay the groundwork for years of costly litigation.

The agency's effort is rooted in a 2005 law passed in the aftermath of the Enron fraud. The law created an enforcement unit at the agency and gave it the authority to assess hefty fines.

Under the Obama administration, the enforcement unit expanded its ranks and received a nearly 50 percent budget increase.

The unit, which this year created a specialized group to analyze arcane data and detect manipulation, also hired seasoned criminal investigators. The enforcement team is led by Norman C. Bay, the former Unit ed States attorney for New Mexico. One of his top deputies is a former general counsel of the Federal Bureau of Investigation.

The overhaul is starting to bear fruit. The energy commission in March imposed a $245 million fine on Constellation Energy over charges that the company manipulated markets in New York to benefit its trading portfolio.

As several banks set up energy trading desks over the last decade, aiming to fill the business that Enron vacated, the agency expanded its focus to Wall Street.

The commission disclosed this summer that it was investigating JPMorgan Chase over potential manipulation of markets in California and the Midwest, exploring whether the firm had engaged in abusive bidding for energy prices.

The fight also centers on a technical issue: whether JPMorgan must turn over internal e-mail. The bank initially refused to turn over documents to the California agency that oversees the state's power grid, citing attorney-client pri vilege.

In September, the federal energy commission ordered the bank to produce evidence that it had not violated market rules, or risk losing its license to sell power at market rates. Last month, JPMorgan apologized and turned over some of the documents, blaming miscommunication for the impasse. The broader inquiry into the bank continues.

“The message from the cases is fairly simple: Traders have to play it straight,” said Susan Court, the agency's first enforcement director who is now the principal of SJC Energy Consultants.

JPMorgan has said in a statement: “We believe we have complied in all respects with the law, as well as FERC rules and applicable tariffs, governing this market.”

In its most significant case yet, the energy commission this week took action against Barclays. It outlined accusations that Barclays put on trades that were designed to skew the prices for electricity in what the industry calls the “physical” market.

Those prices then lifted the value of separate financial bets Barclays had placed, according to the commission. The agency argued that the gains in the financial bets were greater than the losses on the physical trades, effectively leaving Barclays with an overall profit. Citing complex calculations, the agency argued that the physical trades resulted in a loss of $4 million over the period, against gains of $35 million on the financial contracts.

The commission, emphasizing the nature of the conduct, sprinkled its order with excerpts from colorful and often explicit messages between traders.

In one e-mail, a trader wrote in vulgar terms that he would make trades that would lower one market to weigh down another.

The traders also discussed how one trader asked the others to help her “prop up” certain indexes, which would require taking a “daily loss” in the physical markets.

In testimony before the agency's investigators, bank employees sai d that traders were forbidden from intentionally forcing losses.

“The golden rule was always, under no circumstances, lose money on a transaction for the intention of making money on another transaction,” the Americas head of Barclays' commodities unit, Joseph Gold, said in testimony.

Barclays issued a statement this week challenging the commission's allegations, saying the bank's “trading was legitimate and aboveboard.” The bank added that it intended to “vigorously defend this matter.”

Barclays plans to challenge the agency's tally of gains and losses, according to people briefed on the matter. Bank officials, who have 30 days to respond to the charges, are also expected to argue that regulators cherry-picked a handful of salacious e-mails from hundreds of thousands of documents.

Despite the onslaught of cases, Mr. Slocum of Public Citizen says the agency has yet to shake its backwater reputation. It still relies on private companies to police the front lines of energy manipulation, he said, and takes years to file cases.

“They're catching a few scraps,” he said. But the recent actions have less to do with a reinvigorated agency than “companies engaging in widespread manipulation.”

Peter Eavis contributed reporting.

A version of this article appeared in print on 11/02/2012, on page B1 of the NewYork edition with the headline: An Energy Regulator Vs. Wall St..

Advance Auto Parts Said to Consider a Sale

Private equity firms may be looking to Advance Auto Parts for the next big leveraged buyout - at least, by the standards of the post-financial-crisis era.

Advance Auto has hired the Blackstone Group‘s deal advisory arm to help it consider a potential sale, a person briefed on the matter said on Thursday.

News of the sale deliberations, which was first reported by CNBC, propelled the auto parts retailer's shares up 14 percent on Thursday, to $81. That is the highest that Advance Auto has traded since May, when the company said that it expected comparable store sales for the year to hit the low end of its guidance range.

Thursday's closing price valued Advanced Auto at nearly $6 billion, making any potential buyout cost more than $7 billion. That would make the company potentially too big to swallow for any one of the private equity firms that is considering buying the company, forcing them to team up.

Buyout firms have been largely constrained by m ore stringent lending by banks. While leveraged buyout prices have slowly been rising since the fall of 2008, they remain well below the peaks set by the takeovers of TXU and HCA. The largest on record thus far include the $7.2 billion acquisition of the Samson Investment Company by a group led by Kohlberg Kravis Roberts and the takeover of the El Paso Corporation's exploration and production assets by a consortium headed by Apollo Global Management.

Advance Auto may be a decent candidate to become another major private equity target. It carried only about $600 million in long-term debt as of July 14. And the company generates relatively stable cash flow from its operations, reporting $770.7 million for the year ended in July, allowing it to service the amount of leverage that be needed for a leveraged buyout.

Founded in 1929 and based in Roanoke, Va., the company runs 3,460 stores, mostly east of the Rocky Mountains.

R.B.S. Expects Fine Over Libor Investigation

8:53 a.m. | Updated

LONDON - Royal Bank of Scotland said on Friday that it would probably face financial penalties connected to a broad investigation into rate-rigging, as the bank reported a net loss in the third quarter of the year.

The bank, which is 81 percent owned by the British government after receiving a bailout during the recent financial crisis, is the latest British firm to disclose legal troubles this week.

On Wednesday, the Federal Energy Regulatory Commission in the United States recommended a $470 million fine against Barclays related to past energy trading activity in the firm's North American operations. The bank said it would defend itself against the allegations. Barclays and a local rival, the Lloyds Banking Group, also disclosed that they had set aside additional money to compensate clients who had been inappropriately sold insurance.

Royal Bank of Scotland's legal woes relate to a broad industry investigation into potential rate-rigging.

The Commodity Futures Trading Commission, the Justice Department and other authorities around the world are looking into whether big banks tried to influence benchmark rates, including the London interbank offered rate, or Libor. In June, Barclays agreed to pay $450 million to settle charges that it tried to manipulate Libor to improve profits and make its financial position look stronger.

Royal Bank of Scotland, which is based in Edinburgh, said on Friday that it expected to enter into negotiations with authorities about a potential settlement in the near future. The firm's chief executive, Stephen Hester, declined to say when those talks might begin or how big the potential fine could be. Mr. Hester said the that bank was likely to make an announcement over the matter before reporting its next earnings on Feb. 28.

“We have to dance to the tune of the relevant regulators,” Mr. Hester said in a confer ence call with journalists.

Royal Bank of Scotland faces a broader set of troubles.

On Friday, the bank said it posted a net loss of £1.4 billion, or $2.3 billion, in the three months through Sept. 30 after setting aside more money to compensate customers who were inappropriately sold insurance and taking a charge on its own debt. The bank reported a £1.2 billion net profit in the same period last year after it benefited from a financial gain on its own debt.

Without the adjustments, its pretax profit in the third quarter rose to just over £1 billion, compared with £2 million in the same period last year.

Analysts said Royal Bank of Scotland had made great strides to reduce its exposure to risky assets and pare back its balance sheet since the financial crisis began. Yet continued weakness in its underlying performance, coupled with expected future losses in the fourth quarter related to one-off charges like a potential Libor f ine, remains a concern.

“The management has made good progress,” said Ian Gordon, a banking analyst at Investec Securities in London. “But for me, the bank's earnings outlook hasn't improved.”

Royal Bank of Scotland shares fell 1 percent in morning trading in London. Stock in the bank has risen almost 22 percent so far this year.

The British bank said it had made a new provision of £400 million to reimburse clients who were sold payment protection insurance, which covered customers if they were laid off or became ill. Many customers did not know they had been sold the insurance when they took out loans or mortgages. Others have found it difficult to make claims on the policies, which often paid out only small amounts.

In total, the bank said it had now set aside a combined £1.7 billion to compensate customers. Britain's banks, including Barclays and HSBC, have made total provisions worth almost £11 billion to reimburse client s, and analysts say that figure may rise to £15 billion.

“All of the banks have been guilty of underestimating the response rate,” to payment protection insurance, Bruce Van Saun, chief financial officer of R.B.S., told reporters on Friday.

In an effort to repay the British government's bailout, the bank has been trying to sell assets and raise additional cash. Last month, the firm earned £787 million through the initial public offering of its insurance unit Direct Line. The bank failed to sell a number of its branches in Britain for around £1.7 billion, however, after Banco Santander of Spain backed out of the deal.

Despite the tough economic conditions across Europe, the bank said pretax profit in its investment banking unit reached £295 million in the third quarter, compared with a £348 million net loss during the same period last year. The bank has been scaling bank its risky trading activities through actions like clos ing or selling its cash equities unit and spinning off of its advisory business.

The number of employees in the investment banking division fell 5 percent, to 11,900, in the three months through Sept. 30. Earlier this year, the bank said it planned to layoff around 3,500 people in the unit.

The bank's retail and commercial banking unit continued to suffer from weak consumer confidence related to the European debt crisis. Pretax profit in the division fell 7 percent, to £1.1 billion, in the third quarter.

This post has been revised to reflect the following correction:

Correction: November 2, 2012

An earlier version of the story incorrectly state that Barclays settled over the rate-rigging investigation in July. It settled the matter in June.

Berkshire to Buy Oriental Trading Company

8:10 p.m. | Updated

With the holidays approaching, Warren E. Buffett has found a way to stock up on elf hats and reindeer paper plates: by buying an 80-year-old retailer overflowing with them.

On Friday, Mr. Buffett's company, Berkshire Hathaway, agreed to buy the Oriental Trading Company, acquiring a catalog-based arts-and-crafts company whose wares include Santa doorknob kits and a color-your-own Christmas photo holder. Berkshire paid about $500 million, according to people briefed on the matter.

“Oriental Trading is a leader in its industry, has a strong management team and delivers exceptional customer value and service,” Mr. Buffett said in a statement. “We are delighted to have them join the Berkshire Hathaway family and continue their quest to make the world more fun.”

The deal signals the end to a series of ownership changes for Oriental Trading, which has been passed among private equity fir ms and retooled under bankruptcy protection. Its current owners include Kohlberg Kravis Roberts, which took a big stake in it during the Chapter 11 process.

Oriental Trading was founded in 1932 by Harry Watanabe, a Japanese immigrant in Omaha who found a profitable niche in selling Kewpie dolls and other trinkets through local stores and carnivals.

His son, Terry, expanded the business enormously by bolstering a catalog business that drew in direct sales to churches and schools. Terry Watanabe sold Oriental Trading to Brentwood Associates in 2000. Six years later, Brentwood sold it to the Carlyle Group for $1 billion. K.K.R. had also looked at buying the company through its private equity unit, but was outbid.

Soon afterward, however, Oriental Trading struggled with both rising mailing costs and the recession, as well as the enormous amount of debt that was placed on the company. The company filed for bankruptcy in 2010, prompting K.K.R.'s special situation s team to consider expanding upon a small investment in the retailer's debt. The division specializes in investing in distressed companies, usually by buying debt or providing rescue financing. It currently oversees about $2 billion.

Early in 2011, the unit bought up what eventually became one-third of Oriental Trading's first-lien debt, putting K.K.R. in line to take control by converting its holdings into equity. Using knowledge gleaned by the leveraged buyout side years earlier, the team decided that the retailer appeared headed for a recovery and would make an attractive investment.

“In our view the business was stabilizing and starting to turn positive,” Jamie Weinstein, a co-head of the special situations group, said in an interview. “That was a different view from a lot of distressed investors at the time.”

In recent months, K.K.R. and the company's other owners, Par IV Capital Management and the Crescent Capital Group, decided to look for a potential exit, according to people briefed on the process. Oriental Trading hired Lazard as an adviser to reach out to potential buyers, including Berkshire.

Given Mr. Buffett's aversion to bidding in auctions, bankers showed Berkshire a number for a potential deal, one of these people said. He accepted.

The deal has been a good one for K.K.R., which should earn twice its initial investment, according to the people briefed on the process.

Jeremiah Lane, another member of the K.K.R. team, said in a statement: “Over the past two years the company has transitioned to steady growth, both top and bottom line, and there is no question the company has a bright future as part of the Berkshire Hathaway enterprise.”

Wall Street\'s New Foe

WALL STREET'S NEW FOE  |  A little-known agency, the Federal Energy Regulatory Commission, is becoming a thorn in the side of big banks. This week, the agency threatened to impose its largest-ever fine against Barclays, after previously turning up the heat on JPMorgan Chase and Deutsche Bank. “It's the most powerful agency that no one knows about,” said Tyson Slocum, the director of the energy program for the nonprofit advocacy group Public Citizen.

The watchdog, which oversees the oil, natural gas and electricity markets, started going after Wall Street in the aftermath of the Enron fraud, report DealBook's Ben Protess and Michael J. de la Merced. A law passed in 2005 gave the agency an enforcement unit, which received an expanded budget under the Obama administration. That unit also hired some seasoned criminal investigators an d this year created a specialized group to detect manipulation, DealBook writes. “The overhaul is starting to bear fruit.” The order filed against Barclays, for instance, “suggests that the fragmented markets for electricity are vulnerable to wily trading schemes,” DealBook's Peter Eavis writes.

POSSIBLE LIBOR FINE FOR R.B.S.  |  The Royal Bank of Scotland said on Friday that it expected to face penalties related to the broad industry investigation into potential rate manipulation. The bank, which is being investigated by various regulators over potential rigging of Libor, said it could make an announcement about the matter before before reporting earnings on Feb. 28. This summer, Barclays, R.B.S.'s rival in Britain, agreed to pay $450 million to settle charges that it attempted to influence rates.

R.B.S., which is still majority owned by the British government, is deali ng with a broader set of woes. The bank reported a net loss of £1.4 billion, or $2.3 billion, in the third quarter, after it took a charge on its own debt and set aside more money for customers who were inappropriately sold insurance.

THE ‘TOO BIG TO FAIL' LIST  |  Of all the big American banks, regulators are apparently most worried about JPMorgan Chase and Citigroup. The two banks are in the top “bucket” of institutions that are officially considered “systemically important,” meaning they will be required to hold the equivalent of 9.5 percent of their risk-adjusted assets in capital. Bank of America, Bank of New York Mellon, Goldman Sachs, Morgan Stanley, State Street and Wells Fargo are also on the list, albeit with lower capital requirements than JPMorgan and Citigroup. While the “too big to fail” designation imposes stricter rules o n these banks, it “may do little to answer the concerns of some analysts who feel the capital surcharges are too small,” writes DealBook's Peter Eavis.

ON THE AGENDA  |  The big data release of the day is the jobs report, which comes out at 8:30 a.m. With the presidential election on Tuesday, you can expect the numbers to be thoroughly scrutinized by political pundits. Economists predict that 125,000 jobs were added in October and that the unemployment rate ticked up to 7.9 percent. Restoration Hardware is set to start trading on the New York Stock Exchange under the ticker symbol RH, after pricing shares at the high end of its expected range. Chevron and the Washington Post Company report earnings before the opening bell. Mort Zuckerman of Boston Properties is on Bloomberg TV at 8 a.m. Jan Hatzius, Goldman Sachs's chief economist, is on CNBC at 10:30 a.m.

The best business book of the year, according to The Financial Times and Goldman Sachs, is “Private Empire: ExxonMobil and American Power,” by Steve Coll, a staff writer at the New Yorker.

The list of the world's 200 richest people, according to Bloomberg Markets magazine, includes “more than 30 hidden billionaires” that were “unmasked” by Bloomberg News. One of these little-known billionaires is Amancio Ortega, the founder of the Spanish clothing retailer Inditex, who overtook Warren E. Buffett to rank third on the Bloomberg Markets list.

BLOOMBERG MAKES HIS ENDORSEMENT  |  President Obama may not have many friends in finance these days, but he has the support of one Wall Street billionaire. Mayor Michael R. Bloomberg surprised New Yorkers on Thursday by endorsing the president's bid for a second term. Mr. Bloomberg argued that Mr. Oba ma would do a better job than Mitt Romney of tackling global climate change, which he said played a role in causing Hurricane Sandy. The destruction from the storm, the mayor said, “brought the stakes of next Tuesday's presidential election into sharp relief.”

It remains to be seen whether Mr. Bloomberg's endorsement will sway anyone on Wall Street. One Obama supporter, the hedge fund manager Whitney Tilson, said he “genuinely felt business risk” in backing the president, according to Bloomberg Businessweek.

Mergers & Acquisitions '

Berkshire Hathaway to Buy Oriental Trading  |  Warren E. Buffett's company said it would buy Oriental Trading, known for its catalogs of party supplies. The price, which was not disclosed, is said to be “about $500 million,” according to The Wall Street Journal. The deal would pro vide an exit for K.K.R.
REUTERS  |  WALL STREET JOURNAL

Rothschild Said to Plan Rival Bid for Bumi  |  Nathaniel Rothschild is forming a group to challenge the Bakrie family's plan to take over Bumi, the mining company, Reuters reports, citing unidentified people familiar with the matter.
REUTERS

What Next for Netflix?  |  Carl C. Icahn will probably push for a sale of Netflix, which the company may try to defend even if shareholders want a sale to happen, writes Steven M . Davidoff in the Deal Professor column.
DealBook '

Netflix Says It Is Open to Icahn's ‘Perspective'  |  In response to Carl C. Icahn's announcement that he had built up a roughly 10 percent stake in Netflix, the company said it is open to his perspective on how to build success.
DealBook '

George Lucas Plans to Use Lucasfilm Profit for Philanthropy  |  A spokesperson for Mr. Lucas told Vanity Fair that he would donate “the majority of the proceeds” from the sale of Lucasfilm to “philanthropic endeavors.”
VANITY FAIR

INVESTMENT BANKING '

Should the C.E.O. and Chairm an Roles Be Separate?  |  Bloomberg Businessweek says it conducted a study that found that separating the role “tends to reverse a company's performance: Low-performing firms benefit from a separation event, while high-performing firms suffer.”
BLOOMBERG BUSINESSWEEK

Deutsche Bank Names Chief of North American Unit  |  Jacques Brand has been appointed chief executive of Deutsche Bank's North American operations.
DealBook '

A.I.G. Profit Beats Expectations  |  But the insurer's shares fell in after-hours trading, amid questions about the government's plan to sell its stake, Reuters reports.
REUTERS

Editor Who Published Names of Greeks With Swiss Bank Accounts Is Acquitted  | 
NEW YORK TIMES

PRIVATE EQUITY '

Advance Auto Parts Said to Consider a Sale  |  Private equity firms may be looking to Advance Auto Parts for the next big leveraged buyout, at least by the standards of the post-financial-crisis era.
DealBook '

Inside Private Equity's Lobbying Effort  |  In its effort to improve its image, the buyout industry is looking to sway “about 70 members of Congress who represent districts in presidential battleground states or who hold key committee positions,” The Wall Street Journal reports.
WALL STREET JOURNAL

Alcatel-Lucent Considers Selling Assets  |  Alcatel-Lucent, the phone equipment company that offloaded a business to Permira last year, is considering options “such as reprofiling our debt or an infusion of liquidity, including asset sales,” the chief financial officer said.
REUTERS

HEDGE FUNDS '

Clearwire Investor Demands Sale of Spectrum  |  Sprint Nextel may have designs on the struggling cellphone network operator Clearwire, but a minority investor in Clearwire is calling on the company to remember its smaller shareholders.
DealBook '

Edoma Partners Hedge Fund to S hut Down  |  A hedge fund run by Pierre Henri-Flamand, a former head of proprietary trading at Goldman Sachs, is closing, Reuters reports. The fund's assets have shrunk to $855 million from a peak of $2 billion, according to Reuters.
REUTERS

Hedge Fund's Wager on Greek Bonds Pays Off  |  Adelante Asset Management, a London-based hedge fund, “has made a 70 percent gain on a sale of Greek bonds,” Reuters reports.
REUTERS

I.P.O./OFFERINGS '

Chinese Insurer Said to Prepare for I.P.O.  |  The People's Insurance Company of China “plans to start gauging investors' interest this month for an initial public offering in Hong Kon g that could raise up to $4 billion,” according to MarketWatch, which cites unidentified people familiar with the matter.
MARKETWATCH

LEGAL/REGULATORY '

Company That Sold Shares Under New Rules Is Charged With Fraud  |  A company called Caribbean Pacific Marketing “appears to have become the first ‘emerging growth company' as defined by the JOBS Act to have prompted charges of securities fraud by the Justice Department and an effort by the Securities and Exchange Commission to halt sales of the stock,” writes Floyd Norris in his column in The New York Times.
NEW YORK TIMES

The Bruce-Bharara Bromance  |  At a concert attended by the United States attorney for Manhattan, Bruce Springsteen shouted, “This is for Preet Bharara!” before ripping into “Death to My Hometown.”
DealBook '

At American Express, Warnings About the ‘Fiscal Cliff'  |  Companies are starting to warn investors about the harsh effects of federal spending cuts and tax increases, which would begin to take effect after Dec. 31.
DealBook '

A Mortgage Regulator's Digs  |  Edward DeMarco, a regulator who has resisted calls to forgive homeowners' debt, “lives in a 1961 split-level brick house with a bas ketball hoop in the driveway and a green Subaru in the carport,” according to Bloomberg Businessweek.
BLOOMBERG BUSINESSWEEK

Nomura Faces Another Insider Trading Case

The Japanese bank Nomura faces more legal problems.

On Friday, Nomura said it was likely involved in a new insider trading case, months after the firm's chief executive, Kenichi Watanabe, resigned following similar allegations.

Nomura has been engulfed in an insider trading investigation since the bank acknowledged this year that employees leaked information on at least three public offerings in 2010 to favored fund managers. The clients then profited from trading on the stocks ahead of the expected drop in the companies shares.

The latest case relates to activities by the hedge fund Japan Advisory, which is subject to a fine recommended by Japanese authorities.

Nomura said that Japan Advisory might have traded ahead of the public offering of the Japanese chipmaker Elpida last year. The hedge fund traded the stock for a profit after it realized that Nomura, which was underwriting the capital raising, had left the company off its research reports in the run-up to the sale.

“Our client was able to infer non-public, corporate-related information from documents provided by Nomura,” the Japanese bank said in a statement, adding that it continued to cooperate with authorities' investigations.

The latest acknowledgement of potential insider trading comes as Nomura pares back its global operations and tries to rebuild its business. The Japanese bank, which reported a small net profit of 2.8 billion yen, or $35 million, in the three months that ended Sept. 30, has announced a $1 billion cost reduction plan, including proposed layoffs in the firm's North American and European operations.

The strategic shift, implemented by Nomura's new chief executive, Koji Naga, represents a reversal of the bank's international ambitions. The bank had bought the Asian and European units of Lehman Brothers after its American rival collapsed.

Shares in Nomura rose 4.2 percent in Tokyo on Friday.

Restoration Hardware Jumps in Market Debut

Hurricane Sandy appears to have done little to dent investor appetite for Restoration Hardware, as the home furnishings retailer's stock enjoyed a surge in its trading debut.

Shares in Restoration Hardware, which trade under the symbol “RH” on the New York Stock Exchange, opened up at $32.28, more than 35 percent higher than their initial offer price. The company already looked on track for a strong debut, with its shares having priced Thursday night at $24, the top of their range.

With shares at $31.73 as of midday on Friday, the retailer is worth nearly $1.2 billion.

All told, Restoration Hardware raised about $123.8 million in its offering. The company's cut of the proceeds will be used to pay down debt taken on by its 2008 leveraged buyout. Several existing shareholders will also cash out some of their holdings.

The retailer is the most prominent of the three companies that began trading on Friday after a storm-shortened week. The stocks of all three - Restoration Hardware and the oil industry companies Delek Logistics and Southcross Energy Partners - opened with double-digit gains.

Gary Friedman, the company's chairman emeritus and a top adviser, recalled how the usual I.P.O. roadshow was shortened by a few days because of the storm. But after talking with investors during the roughly week-and-a-half trip, executives determined that they should still seek to price the stock sale.

“We have had to sail through a storm on this one,” Mr. Friedman said, adding that “our hearts go out to all of those who have been victimized by the storm.”

Other moments during the run-up to Restoration Hardware's debut on the N.Y.S.E. proved painful as well. Perhaps chief among them was the departure of Mr. Friedman as co-chief executive, following a board inquiry into his relationship with a 26-year-old employee. (“I never knew my personal life would be so popular with the press,” he joked.)

Mr. Friedman, who joined the retailer in 2001 and is credited with saving it from bankruptcy, remains the company's biggest shareholder. He has formed a new company, Hierarchy, that will offer fashion and apparel, but he said that the “vast majority” of his time was being spent on Restoration Hardware.

He called Friday's debut the ultimate response to those who thought the company doomed at points during his tenure.

“A lot of people thought that this company would never make it, a lot of naysayers said that we'd go bankrupt,” Mr. Friedman said. “For all the people who fought through the adversity, this is a day of great pride and day of great opportunity.”

The question now is what road Restoration Hardware will take as a public company. Carlos Alberini, who is now the sole chief executive, said that the retailer would shutter what he called duplicative stores in many markets, though it will also embark on international expansion.

Mr. Friedman described a vision of elaborate destination stores that showcase not only the retailer's signature premium furniture but also art, clothing and furnishings that go well beyond chairs and sofas. The Boston store, as Mr. Friedman described in a pitch reminiscent of the late Steven P. Jobs, features a granite plaza, elevators patterned after the Bradbury Building in Los Angeles, a tea salon and a wine bar.

“It's an expression of home furnishings that people have yet to see,” he said.

Reading the Fine Print in Abacus and Other Soured Deals

A common refrain from the financial crisis is that poor disclosure was a big contributor, if not the cause, of the financial crisis. Buyers of even the most complicated financial instruments were misled or were not provided full information concerning their investments. The results were catastrophic when the mortgage market crashed.

The story sounds convenient: investors were deceived! That would imply that all we need to do to prevent a similar problem in the future is to provide better disclosure.

The problem is that when you actually look at the documents from some of the troubled investments during the financial crisis, in many cases the disclosure was copious. There were warnings of the risks; investors just failed to heed the warning signs that should have led them to further investigation. In other words, the disclosure failed to work.

In a new paper, “Limits of Disclosure,” Claire Hill and I examine the types of disclosure that were made be fore the financial crisis. Specifically, we examine disclosure made in connection with the sale of synthetic collateralized debt obligations, or C.D.O.'s, where the reference securities were mortgage-backed securities. These were synthetic bets on the value of mortgage securities with one party taking the long side and the other the short.

The investments had names like Timberwolf and Class V Funding III. The now infamous Abacus C.D.O. promoted by Goldman Sachs was also a synthetic C.D.O. And these products were at the epicenter of the financial crisis. One analysis estimates that asset-backed C.D.O. write-downs alone will be $420 billion, or 65 percent of the original balance, with C.D.O.'s issued in 2007 losing 84 percent of their original value.

In the wake of this colossal failure, allegations have been made that the banks promoting these financial instruments did not disclose that they also had short positions in them. Alternatively, in the Abacus cas e, the allegation was that Goldman allowed John Paulson's hedge fund to hand-select the securities to bet against, thereby creating an investment that was “doomed to fail.”

But a review of the offering documents for these deals shows that there were ample warning signs, had buyers looked deeper. Take the Abacus C.D.O., for example. The pitch book for the deal stated specifically that Goldman Sachs “shall not have a fiduciary relationship with any investor.” That is, Goldman was not bound to see if the investment was suitable for an investor or to act in investors' best interest.

Not only that, these materials warned investors that they should do their own investigation. Again, the Abacus pitch book stated that “Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information.” It continued, “Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.” In other words, Goldman told its customers to do their own investigation and not rely on the firm.

As for allegations that Goldman's trading arm was simultaneously taking a short position in the housing market, there is disclosure on that too. The Abacus offering memorandum stated that “Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions” adding that the firm may have “potential conflicts of interest.”

Despite the warnings, the evidence is that the buyers of these synthetic collateralized debt obligations did not do a thorough investigation into the securities themselves, let alone follow up on the above disclosure.

The recent S.E.C. case against the Citigroup employee Brian Stoker shows this. The S.E.C. contends that Citigroup had sold another such investment, the Cl ass V Funding III C.D.O., while simultaneously planning to short the security, a fact it did not disclose to buyers. Citigroup settled the action, but Mr. Stoker disputed the allegations.

The largest buyer of Class V Funding III was Ambac, the mortgage-backed security insurer, which was a very sophisticated investor. When David Salz, the Ambac manager who made the decision to invest in this security, was asked at trial whether he had done an investigation of the securities underlying the C.D.O., he claimed that Ambac had not because it had relied on the work of the portfolio selection manager, Credit Suisse Alternative Asset Management.

Yet, the offering memorandum for Class V Funding III stated that the Credit Suisse unit was not acting as “advisors” or “agents” to the buyer, and that any buyer should make its investment decision determine “without reliance” on either. The memorandum further stated that not only could Citigroup and Credit Suisse have conflicts, but also that the firms' “actions may be inconsistent with or adverse to the interests of the Noteholders.” And the offering memorandum had the same disclosure as the Abacus that place the onus on the investors to do their own homework.

All these various offering memos did not even acknowledge that the mortgage market was heading downward. This disclosure taken from Timberwolf C.D.O., a residential mortgage-backed security and another Goldman deal that has resulted in litigation, began to appear in 2007: “Recently the residential mortgage market in the U.S. has experienced a variety of difficulties and changed economic conditions that may adversely affect the performance and market value of R.M.B.S.” It continued: “In addition, in recent months, housing prices and appraisal values in many states have declined or stopped appreciating. A continued decline or expected flattening of those values may result in additional increases in delinquenci es and losses on R.M.B.S. generally.”

Yet, not only did investors ignore this disclosure, they ignored it despite reading it. At the Class V Funding III trial, Mr. Salz of Ambac was asked at trial about the risk factor disclosure in the Class V Funding III offering memo. Asked if he read it, he replied: “Yes. It's boilerplate language. . . . it was standard language.”

In other words, Ambac felt comfortable to ignore it because it the language was commonly appearing in documents. Furthermore, Ambac's legal counsel even marked up the offering document and made comments on the offering memorandum.

Ambac lost $300 million on this deal. Mr. Stoker was acquitted by a jury of the civil charges against him.

What is so troubling about all of this is that the investors in these C.D.O.'s were the most sophisticated investors with considerable money - $100 million or more - under management. Class V Funding III's buyers included not only Ambac but als o the Koch brothers and a number of hedge funds.

These were not the “stupid” sophisticated investors that Michael Lewis depicted in his book “The Big Short.” These were investors who should have known that this disclosure should have prompted further inquiry. In particular, these investors knew that for them to take a long position on the C.D.O. there had to be someone on the short side.

So why did these investors make these investments if they did not do their due diligence or even pay real attention to the disclosure? From the testimony given at the Class V Funding III trial, it appears that these investors made macroeconomic bets on housing, following the herd, which thought housing would go up. In this regard, arguments that the securities were too complex to understand don't bear out.

This is a problem. Sophisticated investors are supposed to read the documents. We all know that retail investors don't often take the time to read disclosur e, but the securities laws are based on the idea that information is filtered into the markets through disclosure to sophisticated investors who then set the real price of the security.

This is a form of the efficient market hypothesis. If sophisticated investors can't be bothered to read the documents and act on them, then we have a real gap in the entire disclosure regime and asset pricing generally.

Unfortunately, this is what the evidence from the C.D.O. market before the financial crisis shows. And because of this, the idea that requiring still more, better or clearer disclosure is likely to be unfruitful in many cases.

I have no great solution to this. Until we better understand how sophisticated investors process and read disclosure, regulators should be wary of trying to solve the problem by simply requiring more disclosure.

This post has been revised to reflect the following correction:

Correction: November 2, 2012

An earlier version of this article misstated the name of the financial products that were in part blamed for the financial crisis. They are collateralized debt obligations, not credit-default obligations.

Around Goldman\'s Headquarters, an Oasis of Electricity

As many in Lower Manhattan spent the workweek without power, one area near the Hudson River was bustling: Goldman Alley.

Though some power was being gradually restored to parts of Manhattan on Friday, it was a curious sight to see the hub of activity. The shops and restaurants surrounding Goldman Sachs's 200 West Street headquarters were doing brisk business on Friday, lights glowing and music playing, even as the streets beyond lay dormant. At the local Shake Shack, the line on Friday afternoon ran out the door.

Hurricane Sandy, which claimed at least 41 lives in New York City this week and knocked out power for more than a million residents, cast an eerie darkness over the downtown area. Flooding damaged businesses and subways, and crews of workers were still pumping out water on Friday.

The lively scene near Goldman's offices illustrated the quirks of the city's electrical system, which has been both kind and punishing to New Yorkers this week.

I t so happens that the electricity for Goldman and the surrounding area was never shut off. That grid - spanning from Chambers Street down to Battery Park, and from West Street over to the Hudson River - remained on as the storm swept through the neighborhood, said Allan Drury, a spokesman for Con Edison.

The network immediately to the east, though, was shut down as the storm hit. West Street now traces a border of the dead zone, as it has come to be known. (Con Edison aims to restore power to all of Manhattan by Saturday.)

In addition, Goldman ran its backup generators during the storm. That helped power the shops that are located in the same building, including Artsee Eyewear, Battery Place Market and Vintry Fine Wines.

Goldman opened its offices to employees on Wednesday, after closing Monday and Tuesday as stock and bond markets were shut because of the storm. Heaps of sandbags lined the building early in the week - a barrier against flooding that helped shield local businesses as well.

“We used our generators to ensure that our employees would be able to work and that the small businesses on our ground floor would, too,” David Wells, a Goldman spokesman, said in an e-mail.

On Friday, some Goldman employees wore jeans and sneakers. The atmosphere inside the offices was congenial, with partners making sure their teams were all right, said a Goldman employee who asked not to be identified because he was not allowed to speak to the news media.

“Frankly, it was almost a relief for me to go to work where there was power and water,” he said.

Shake Shack, which is located across a passageway from Goldman's offices, opened for limited hours on Wednesday, after evacuating the area Sunday on the mayor's orders, said Zach Koff, vice president of operations for the restaurant chain. Mr. Koff was serving customers hamburgers on Friday.

At Bloom, a florist and home furnishings store a few doors down, employees were assembling bouquets of flowers. Harry's Italian restaurant was packed on Friday afternoon, with pizzas flying out of the ovens.

North End Grill, a southern outpost in the empire of the restauranteur Danny Meyer, also never lost power. The restaurant, in the Conrad hotel building, which is owned by Goldman Sachs, opened with a limited menu on Wednesday. The chef, Floyd Cardoz, posted a picture on his Twitter account of more than 100 guests enjoying food and drinks.

The restaurant even got some trick-or-treaters on Wednesday, Halloween night, said Kevin Richer, the general manager.

Mr. Richer said he grew concerned for the restaurant early in the week when he learned that the Brooklyn Battery Tunnel was flooding.

“We were worried big time,” he said.