A Dose of Realism for the Chief of J.C. Penney

You should know you have a problem when sales at your stores fall 26.1 percent in one quarter.

That was the surprising decline J. C. Penney reported last week when it disclosed that it had lost $123 million in the previous three months.

However, inside the fantasy world that is the executive suite of J. C. Penney, apparently it was just part of the plan. Ron Johnson, the former head of Apple's retail business who was handpicked to turn around J. C. Penny a little over a year ago, was in full spin mode, brushing off the challenges and promoting the success of the company's store renovation plan as “gaining traction with customers every day and is surpassing our own expectations in terms of sales productivity, which continues to give us confidence in our long-term business model.”

To gain a more realistic view of J. C. Penney's prospects, however, here's the Deutsche Bank analyst Charles Grom: “Trends at J. C. Penney are obviously getting worse, not b etter, and we are becoming more and more convinced that sales in 2013 will also decline, which could lead to a going-concern problem next year.”

The company's stock has fallen nearly 50 percent since the beginning of the year. Even its online sales, through jcp.com, fell 37.3 percent last quarter from a year ago.

Yet Mr. Johnson, a well-regarded and charismatic retailer who worked at Target before his meteoric rise at Apple, appears to be trying to mimic Steve Jobs and create what Mr. Jobs's biographer, Walter Isaacson, called a “reality distortion field.”

Mr. Johnson has spent the last several months trying to persuade investors that his transformation of J. C. Penney was the equivalent of Mr. Jobs's efforts to turn around Apple a decade ago.

“You know, I watched this movie before. When I joined Apple in 2000, Apple was a company dwindling. Everyone said to me, ‘What are you doing there?' ” Mr. Johnson told investors in September. “Appl e wept through 2002 and I think sales were down 38 percent as we dreamed about becoming a digital device company. But Apple invested during that downturn. That's when Apple built, started to build its chain of stores. That's when Apple transitioned to Intel. That's when Apple started its app division. That's when Apple imagined and built the first iPod.”

O.K., Mr. Johnson, but that was Apple. And J. C. Penney is not Apple - and let's be honest, it can never be Apple. The company doesn't make its own magical, revolutionary products that bring tears of joy to its customers. It is a low-end department store that Mr. Johnson is hoping to turn into a slightly higher-end department store that sells clothing made mostly by other manufacturers.

Still, Mr. Johnson has sought to remake the company quickly, perhaps too quickly, by eliminating promotions and discounts, moving the stores more upscale, re-branding the company as JCP and putting in place a “fair and squareâ € pricing model. (J. C. Penney is, however, putting on a special sale for the holidays.)

Yet the renovations are hardly finished - or in some cases even started. Only 11 percent of its stores have adopted his successful specialty-store-within-a-store concept in which he has opened up outposts for brands like Levi's, Izod, Liz Claiborne and the Original Arizona Jean Company.

J. C. Penney may have been dying a slow death before Mr. Johnson's arrival - some rivals used call it “death by coupon,” given the retailer's penchant for discounts - but the company's decline has only accelerated.

But the lessons, and successes, of the rollout of Apple stores are proving that they do not apply to Penney. While the customer experience at Apple is in a class by itself, and Mr. Johnson should rightly receive credit for that, the success of the stores was in large part a function of stunning products with a fan base that would stand outside stores for days in the rain to get their hands on them without any chance of a discount. Do you think there are customers who will ever stand outside J. C. Penney overnight for the next Liz Claiborne sweater? (J. C. Penney bought the Liz Claiborne brand last year.)

“Ron Johnson's remake of JCP has assumed the consumer - the only one who matters - is the one who shops at Target or Macy's or Nordstrom's. Instead of pivoting on and strengthening the historic JCP brand, Johnson's decided to recreate the Target and Apple wheel, a move akin to Toyota suddenly deciding it's Porsche. In short, a ridiculous and condescending move,” Margaret Bogenrief, a partner at ACM Partners, a boutique crisis management and distressed investing firm, recently wrote.

There is something romantic about watching Mr. Johnson try to remake a dying classic icon. At some gut level, you have to root for Mr. Johnson. He's making a bold bet. Transitions are inherently painful. And everyone loves a great comeback story.< /p>

Here's the good news: In the stores that have been transformed, J. C. Penney is making $269 in sales per square foot, versus $134 in sales per square foot in the older stores. So the model itself is working. And Mr. Johnson has the support of the company's largest shareholder, Pershing Square's Bill Ackman, who personally recruited Mr. Johnson. If Mr. Johnson were starting with a blank slate, it might be a great business.

Mr. Ackman declined to comment. J. C. Penney did not make Mr. Johnson available.

Now here's the bad news. Mr. Johnson still has to convert nearly 90 percent of his square feet of shopping space. That will very likely take $1 billion and as long as three years. If the sales decline that occurred last quarter accelerates, the company could run out of money. It now has about a half-billion in cash and access to a credit line for as much as $1.5 billion.

Of course, it remains possible that Mr. Johnson, who people close to him say is a re alist, could always decide that the transformation isn't working and change course to return to the old model of J. C. Penney and save all that money remodeling. But that would be a huge setback.

The question Mr. Johnson may be asking himself now is: What would Steve do?

Trial to Open in $68 Million Insider Trading Case

In the sharp-elbowed world of Wall Street, Anthony Chiasson and Todd Newman stood out as two of the good guys.

Both were hard-working, below-the-radar types who eschewed the flashy lifestyle embraced by many millionaire hedge fund traders. Mr. Chiasson's mother told reporters that her son's idea of a fun weekend was to return to his hometown, Portland, Me., to attend church. Mr. Newman, also originally from New England, worked out of Boston, where he is raising a family in Needham, Mass., a low-key suburb.

Yet federal prosecutors say Mr. Chiasson and Mr. Newman were criminals, operating “a tight-knit circle of greed” along with six others who trafficked in secret information about technology companies.

On Tuesday, Mr. Chiasson, 39, a co-founder of the now-defunct Level Global Investors, and Mr. Newman, 47, a former portfolio manager at Diamondback Capital Management, are set to stand trial in Federal District Court in Manhattan. Prosecutors say they w ere part of a conspiracy that made about $68 million illegally trading the computer company Dell and the chip maker Nvidia.

The other six traders have pleaded guilty. Some are expected to testify against Mr. Chiasson and Mr. Newman.

Mr. Chiasson's and Mr. Newman's trial is expected to shed light on the trading strategies and techniques of SAC Capital Advisors, based in Stamford, Conn., a hedge fund giant run by the investor Steven A. Cohen.

SAC Capital, which has one of the best investment track records on Wall Street, has become a breeding ground for hedge fund managers. Both Level Global and Diamondback were started by traders who trained under Mr. Cohen. And one of the six traders who have admitted to the conspiracy was employed at SAC Capital.

The case is one of the larger prosecutions brought by the government in its broad investigation into insider trading, which has yielded 69 convictions and resulted in prison sentences for dozens of hedge fun d traders. Last month, Rajat K. Gupta, a former director of Goldman Sachs, was sentenced to two years in prison after a jury found him guilty of leaking boardroom secrets about the bank to the former hedge fund billionaire Raj Rajaratnam, who is serving an 11-year term.

Most of the defendants in the insider trading cases have pleaded guilty, but of the eight who have taken their cases to trial, all have been found guilty.

The case is the outgrowth of the Federal Bureau of Investigation's raid two years ago this month of Level Global and Diamondback. Last January, Preet Bharara, the United States attorney in Manhattan, brought the criminal case against Mr. Chiasson, Mr. Newman and six others.

Among those accused of being co-conspirators with the defendants are Spyridon Adondakis, a former trader at Level Global who worked under Mr. Chiasson, and Jesse Tortora, a onetime Diamondback employee. Both men have pleaded guilty to insider trading charges. They have cooperated with prosecutors and are expected to testify against their former colleagues.

Lawyers for Mr. Chiasson and Mr. Newman are expected to attack the cooperators, accusing them of trying to curry favor with the government by accusing their bosses of being involved in their illegal trading scheme.

The former SAC Capital trader who admitted being part of the scheme is Jon Horvath. Mr. Horvath admitted passing confidential information to his portfolio manager, who was named an unindicted co-conspirator in the case. The portfolio manager is Michael Steinberg, according to a person with direct knowledge of the case who requested anonymity because he was not authorized to discuss it publicly.

Barry Berke, a lawyer for Mr. Steinberg, declined to comment.

The reported conspiracy's origins are traced to Sandeep Goyal, a former Dell employee who left the technology industry to take a job on Wall Street. While working as a tech-stock analyst at the money m anager Neuberger Berman, Mr. Goyal tapped a contact inside Dell to obtain advance word about the computer maker's financial results. He then gave that information to his network of contacts on hedge fund trading floors, and it ultimately reached Mr. Chiasson and Mr. Newman, prosecutors say.

Mr. Goyal has pleaded guilty to insider trading charges; the unnamed Dell executive has not been charged in the case. Earlier in their careers, Mr. Goyal, Mr. Tortora and Mr. Adondakis all worked together at the Prudential Equity Group, and they socialized together in Manhattan and the Hamptons.

The F.B.I. raid had a devastating effect on Level Global, which was forced to close shortly after the federal agents seized trading records and hardware from the firm. Diamondback has remained in business. This year, it paid about $9 million to settle a lawsuit brought against it by the Securities and Exchange Commission related to the Dell trades. It also struck a nonprosecution agree ment with the Justice Department.

Level Global made by far the most profit in the conspiracy, pocketing about $57 million by betting against Dell stock ahead of a negative earnings announcement, prosecutors say.

Mr. Chiasson and David Ganek started Level Global in 2003 shortly after leaving SAC Capital. At Level Global's peak, they managed about $4 billion in assets and had marquee clients like New York's state pension fund. They used the name Level, Mr. Chiasson once said, because it was “a palindrome which connotes balance and adaptability - two key investing traits.”

Mr. Chiasson's reserved style contrasted with that of Mr. Ganek, a more voluble type. While Mr. Chiasson steered clear of New York society, Mr. Ganek and his wife, the novelist Danielle Ganek, became fixtures at Manhattan charity events and art auctions. Mr. Ganek has not been charged in the case.

Mr. Newman, who is accused of making about $3.8 million in illegal profit, worked at the Tudor Investment Corporation, one of the world's most prominent hedge funds, before joining Diamondback. He was part of a tight network of hedge fund traders based in Boston who specialized in technology stocks.

Lawyers for Mr. Chiasson and Mr. Newman tried to make their cases two separate trials, arguing that they were not part of a single purported conspiracy. Judge Richard J. Sullivan denied that request.

Reid H. Weingarten, a partner at Steptoe & Johnson who defended Bernard J. Ebbers, the former WorldCom chief executive, and Gregory Morvillo of the Morvillo law firm, represents Mr. Chiasson. Stephen Fishbein and John A. Nathanson, both of Shearman & Sterling, represent Mr. Newman.

Trying the case for the government are Antonia M. Apps and Richard C. Tarlowe, one of the prosecutors who secured a conviction of Mr. Gupta, the former Goldman director.

A 12-person jury has been impaneled after two days of jury selection. Lawyers dismissed a number of potential jurors with connections to the case, including a doorman at Mr. Chiasson's luxury Upper East Side apartment building and a former business-development executive at SAC Capital.

Why the Jefferies Deal Could Worry Wall Street\'s Giants

Is Jefferies, the pint-size investment bank, really a more valuable franchise than the mighty Goldman Sachs?

The Leucadia National Corporation announced Monday that it planned to acquire Jefferies for $3.6 billion. At that price, Leucadia is paying 1.2 times the firm's tangible book value, a measure of a company's worth. The important point is that a large financial company is willing put down real money to acquire a brokerage firm, paying more than its tangible book value.

Right now, firms like Goldman and Morgan Stanley would be happy just to see their shares trade above book. The stock market values Goldman at 0.9 times its tangible book value. Investors are even less sanguine about Morgan Stanley, awarding it a price to book value of only 0.6 times.

There seems to be little reason for Jefferies to have a superior valuation. It has a credit rating of Baa3 from Moody's, three notches below Goldman's rating of A3. Jefferies is paying around 6.2 percent w hen it borrows for longer periods in the market, whereas Goldman is paying only 2.1 percent. Solid credit ratings and a low cost of borrowing are critical for investment banks, which rely on markets for their financing.

Small investment banks like Jefferies are clearly vulnerable to market angst. Last year, the company's stock price plunged 60 percent on fears over its holdings of European sovereign debt.

So what explains the valuation gap?

One theory is that the market is unduly pessimistic about the health of Morgan Stanley and Goldman. The companies' valuations have actually improved as their stock prices have risen. That could continue until they trade about tangible book, especially if global markets continue to stabilize, economic growth strengthens and the uncertainty surrounding new Wall Street regulations lifts.

The alternative view is that the market doesn't like the size and complexity of Goldman and Morgan Stanley, which also have higher l everage than smaller investment banks.

With their “too big to fail” status, firms like Goldman and Morgan Stanley have had to hold more capital since the financial crisis of 2008. That depresses metrics like “return on equity,” which investors track when deciding whether to buy stock in investment banks.

If investors believe regulations permanently cap returns at lackluster levels, they will be loath to pay more than book value. The big Wall Street firms may then decide to exit certain businesses and downsize. UBS recently announced plans to do this, causing its shares to leap.

All this suggests that the government's soft-handed approach to the “too big to fail” problem may be working. Instead of forcing size explicit limitations on large banks, the overhaul focused on rules that effectively gave financial firms incentives to opt for simpler businesses and avoid excessive growth.

A simple, small balance sheet meant Jefferies could sell its elf for a premium price. Given the current valuations, Goldman and Morgan Stanley may want to pay attention.

With Jefferies Deal, a \'Baby Berkshire\' Goes Where Buffett Hasn\'t

For years, Ian Cumming and Joseph Steinberg prided themselves on being disciples of Warren E. Buffett, fashioning Leucadia National into something that investors have called a “mini Berkshire Hathaway.”

But on Monday, the two made one of their biggest deviations from Mr. Buffett's playbook to date. They bought an investment bank outright.

By buying the remainder of the Jefferies Group, Mr. Cumming and Mr. Steinberg are adding a growing investment bank to Leucadia's eclectic stable of holdings. It's in line with the Berkshire approach of buying up an array of undervalued companies, in the hopes of creating enormous shareholder value.

It's a business model that Mr. Cumming and Mr. Steinberg have pursued from the beginning. The two men, who were classmates at Harvard Business School, banded together to take over Talcott National in the late 1970s.

Just as Berkshire was a struggling textile maker before Mr. Buffett arrived, Talcott was a far differe nt animal from its current form. It was largely a specialized lender, founded in 1854 with a history that included helping finance sock purchases for the Union Army during the Civil War.

Rather than sell it for parts, as others had expected, Mr. Cumming and Mr. Steinberg instead chose to use it as their own investment platform. The two renamed the company Leucadia, after the seaside town in California, while driving up from San Diego in 1980.

Leucadia then turned into an enormously acquisitive deal machine, with Mr. Cumming and Mr. Steinberg acquiring reputations for being intelligent stock pickers. The company has orchestrated 28 takeover since 1994 alone, according to Standard & Poor's Capital IQ.

The target companies span a broad range of industries, from telecommunications (WilTel Communications) to hospitality (the Hard Rock Hotel and Casino in Biloxi, Miss.) to food (National Beef Packing). Leucadia also owns a wine producer, the Crimson Wine Group, t hat the company intends to spin off to its shareholders.

Financial services continued to be a core area of investing. It owned about 25 percent of AmeriCredit, an auto finance lender that caters to low-income borrowers, when the firm was sold to General Motors for $3.5 billion two years ago.

Leucadia actually teamed up with Berkshire to buy the Capmark Financial Group's commercial loan origination and servicing business three years ago, forming a joint venture known as Berkadia Commercial Mortgage.

Leucadia's ties to Jefferies stretch back years, with Mr. Steinberg having befriended the investment bank's chief executive, Richard Handler. Leucadia first invested in Jefferies in 2000 and subsequently increased its stake to nearly 29 percent.

The company has shown a fondness for reducing its tax bill, amassing tax assets like net operating losses that will be put to use helping Jefferies' earnings.

Such is the appreciation of Mr. Buffett's style at Leucadia that the company even follows the Berkshire model of a minimal Web site and long annual investor letters with musings on the current state of the markets and the world more broadly.

But unlike Berkshire, whose investments include blue-chip stocks like Coca-Cola and Burlington Northern, Leucadia doesn't necessarily focus on operating companies that throw off tons of cash. Instead, its investments tend to be more speculative bets.

And while Mr. Buffett has invested in banks before - he famously took stakes in Goldman Sachs and Bank of America - he has shied away from owning one entirely. Indeed, he has criticized investment banks for being opaque and being highly indebted, and was famously burned by an investment in Salomon Brothers. He has instead seemed content to either own firms seen as much safer, like Wells Fargo, or to offer rescue investments that yield lucrative dividends.

Still, shareholders have proved largely loyal to Mr. Cumming and Mr. Steinberg, even when the company's stock 55 percent in the immediate aftermath of the financial crisis. In December 2008, one investor told Barron's: “I don't think that they suddenly took stupid pills.”

But all partnerships must come to an end, and the Jefferies deal allows for a change in leadership at Leucadia. Mr. Handler will become chief executive of the combined company, while Mr. Steinberg will become chairman.

And Mr. Cumming, who was responsible for the idea behind Leucadia, will step down as chairman and chief executive, though he will hold onto a seat on the board.

He made no secret of his admiration for his successor, Mr. Handler, citing Jefferies' ability to assuage investors fears about the investment bank's holdings of European government debt as a good sign for Leucadia's future.

In a statement, Mr. Cumming said of Jefferies' leadership: “Their ability to manage and grow Jefferies through the elongated financial bubble, success fully navigate the crises that followed where others could not, and protect the firm from the attacks based on false information exactly one year ago with deftness and grace, should comfort all!”

HSBC\'s Multiplying Legal Issues

It went from bad to worse for HSBC last week. The bank added $800 million to its reserves to help address potential money-laundering charges. And it is also confronting more trouble after a whistle-blower pointed to questionable accounts at its subsidiary in Jersey, a tax haven.

The issue now is whether HSBC can find a way to settle all the investigations it faces at a reasonable price. That is very much an open question, as regulators in the United States and Britain take a hard look at the bank's internal compliance program.

In August, HSBC was the subject of an extensive report by the Senate Permanent Subcommittee on Investigations about money laundering problems at its Mexican subsidiary. That case included accusations that HSBC allowed multibillion-dollar bulk cash transactions that might have aided drug cartels. The bank was pushing for a quick resolution of a Justice Department inquiry of those transactions, and set aside $700 million to pay any fines a nd civil penalties.
But HSBC warned that any punishment might be “substantially higher,” and there were already indications that it had not set aside enough money.

In its most recent public filing, the bank disclosed that it had added the $800 million to help address the money laundering case as well as inquiries about its compliance with rules that limit dealings with Iran. The move to more than double its reserve position may signal that HSBC has found additional problems in its operations â€" or had them pointed out by government investigators.

As it did in August, HSBC warned last week that the potential penalties it faces might be substantially greater than its current reserves of $1.5 billion. A fine of that size would rank among the heaviest ever paid by a financial institution for violations of banking laws.

Further adding to its woes, a whistle-blower provided to Her Majesty's Revenue and Customs, Britain's tax authority, information abou t more than 8,000 accounts held at HSBC's subsidiary in Jersey, a well-known island tax haven. According to a report in The Daily Telegraph, the accounts contain about £669 million and several account holders have criminal connections.

While a majority of the accounts are held by British citizens, nearly 4,000 belong to citizens of other countries. One report indicates more than 100 Americans held accounts, so there is a good chance of a new investigation in the United States looking into what HSBC might have done to help shield clients' assets from tax authorities.

More important, if there is evidence that HSBC permitted its Jersey operation to be used for money laundering, then its problems with the Justice Department will increase substantially.

In describing what happened at its Mexican subsidiary, a bank spokesman said it was “not about HSBC complicity in money laundering. Rather, it's about lax compliance standards that fell short of regulato rs' expectations and our expectations.” The bank says it has cleaned up its Mexican operations and plans to spend more on compliance efforts to prevent money laundering.

But the case involving the Jersey accounts may lead prosecutors to wonder whether HSBC has learned any lessons from its problems elsewhere. If significant money laundering is uncovered in the Jersey operation, the bank's resolve to prevent such violations will be called into question.
At a minimum, the revelation about the Jersey accounts will slow efforts to settle the money-laundering investigations, while ratcheting up the costs that will be imposed on the bank once it does negotiate a resolution.

Federal prosecutors will need to review the information gathered by British tax authorities to determine whether HSBC's conduct might have violated United States laws.

That inquiry alone could take months, and the Justice Department is unlikely to conclude the Mexican money laundering i nvestigation until it is reasonably certain it has a complete picture of HSBC's conduct.

Of greater concern is whether prosecutors can trust HSBC's promises of future compliance. The bank will probably be required to conduct a broad review of its global operations before prosecutors would be willing to enter into a settlement. The last thing the Justice Department wants is to learn about other problems after it agrees to resolve the case.

One likely cost of any settlement - beyond the significant penalties already anticipated - will be some form of corporate monitor to ensure HSBC has adequate compliance measures in place. Prosecutors will want evidence that HSBC is putting mechanisms in place to compel the bank to follow rules against money laundering, regardless of the cost

In an earlier article about the money-laundering investigation, I noted that the bank's size meant “the cost of an outside monitor for HSBC would be significant if the government w ants someone to keep an eye on the bank's internal controls.”

HSBC may hope the $1.5 billion it has set aside is enough to resolve the money-laundering case, but at this point that sum looks like it will be just the beginning of the financial drain on the bank.

Los Angeles Money Manager Aletheia Files for Bankruptcy

Aletheia Research and Management, a money management firm that at its peak managed more than $7 billion, has filed for bankruptcy protection after suffering client terminations amid problems with federal securities regulators.

The Santa Monica, Calif.-based firm, has drawn attention for its role in a number of shareholder fights, including a battle with Barnes & Noble, made the filing late Sunday in United States Bankruptcy Court in Los Angeles.

Neither the firm's founder, Peter J. Eichler, Jr., nor the company's lawyer on the bankruptcy filing, Brian L. Davidoff, returned calls for commment.

Boasting one of the best long-term performance records for American growth stock funds, Aletheia attracted billions of dollars from large pension funds and foundations. It counted among its clients Michigan's state pension fund and Ewing Marion Kauffman Foundation in Kansas City. The firm had also attracted the brokerage units of Goldman Sachs, Morgan Stanley and Ban k of America Merrill Lynch, all of which had had Aletheia on its recommended managers list for its individual clients.

But Aletheia has had a number of setbacks in recent years, including subpar investment performance. In June 2011, Aletheia paid the Securities and Exchange Commmission $400,000 in June 2011 to settle civil allegations brought by the commission related to the maintenance of deficient books and records. Last year the firm named Steve Olson, a former federal prosecutor, as its president, only to see him depart within months.

Aletheia also made headlines in 2011 when Mr. Eichler was sued by one of the firm's senior executives, Roger B. Peikin, over his alleged wrongful termination. The lawsuit accused cited misconduct by Mr. Eichler related to “”trading practices, general disregard for regulatory controls, wanton expenditure of corporate assets for Eichler's personal benefit, and overall neglect of the business side of Aletheia's operations.”

In 2009, Proctor Investment Managers, a private equity firm based in New York, and Aletheia filed lawsuits against each other over the terms of a deal in which Proctor took a 10 percent stake in Aletheia.

Despite the various legal setbacks, Aletheia still managed $1.8 billion as of June 30, according to its most recent securities filing.

Mr. Peikin's lawsuit highlighted Mr. Eichler's lavish lifestyle, citing the use of private jets and $18,000-a-night hotel suites.

Aletheia made number of large stock investments alongside the billionaire Los Angeles investor Ronald W. Burkle, including their taking a big stake in the book retailer Barnes & Noble. In a legal dispute over whether Mr. Burkle and Mr. Eichler were improperly working in concert in accumulating the position, a judge in Delaware mocked Mr. Eichler's repeatedly following Mr. Burkle on his investments.

The judge wrote that the chance for Mr. Eichler to discuss stocks with Mr. Burkle was li ke an aspiring songwriter “getting to trade licks and lyrics with Bob Dylan.”

Creditors listed in the bankruptcy filing include Proctor Investments, which is said to be owed $16 million; California's state franchise tax board, which is said to be owed $2.5 million; and the law firm Bingham McCutchen, which has a claim for $730,000.

Aletheia Research and Management's bankruptcy petition

Reform and the Internet, With Chinese Characteristics

China's 18th Communist Party congress has two more days to run but preliminary reports predict that there will be no significant reforms coming out of the meeting. Some in the Chinese commentariat are not yet so bearish on the prospect, even though Hu Jintao unsurprisingly said “we will never copy a Western political system.”

It was never realistic to expect an announcement of major changes during the congress. There are signs in official statements of positive economic measures but it will take months or longer for Xi Jinping to consolidate his rule, especially since he will have to manage two predecessors - Hu Jintao and Jiang Zemin - and avoid directly challenging their legacies.

The lineup of the Politburo Standing Committee, expected to shrink to seven men in the 18th congress from nine in the 17th, will be a good but incomplete indicator of the likelihood for future reforms. There is much speculation about the identity and political leanings of the new leadership, but other than Xi Jinping and Li Keqiang, we know nothing and have just rumors until the official unveiling Thursday.

The goal of any reforms is to strengthen the rule of the Communist Party and ensure the continuation of what the leadership calls “the Great Chinese Renaissance.” That is why many observers, myself included, believe that Xi Jinping will have to to push through significant changes to stay in power, as the economic and social pressures in China have reached a dangerous level not seen in many years.

CHINA's MANAGEMENT OF THE INTERNET over the last few days has not been encouraging for those who want to believe the leadership will push reforms. Beijing blocked access to many Google services and thwarted usage of Virtual Private Networks, or V.P.N.'s, that foreigners and increasing numbers of Chinese use to scale the “Great Firewall.” I have lived in Beijing since 2005 and these have been the most draconian few days of Internet restrictions I have experienced.

Chinese “cybercrats” have tolerated V.P.N.'s as the vast majority of citizens on the Internet do not have one and foreign firms and financial institutions rely on them. Perhaps fear of publication of another story about the finances of a leader's family during the Congress led to the decision to upgrade the Great Firewall.

Indiscriminate blocking of major parts of the global Internet is not going to help China in its quest to internationalize the renminbi and make it a reserve currency. Internet controls at the level of the last few days may also deter foreign firms from moving their regional headquarters to China.

CHINA'S INTERNET IS BOOMING, with nearly 600 million “netizens,” one of the fastest growing markets in the world and more than a dozen Internet firms listed on stock exchanges in the United States. Clearly censorship has not been bad for business.

Baidu, China's dominant search engine whose shares have soared since Google's 2010 partial pullout, trades on the Nasdaq market at a $36 billion market capitalization. Tencent, listed in Hong Kong, is worth about $62 billion, making it the third or fourth largest Internet firm in the world by market cap. Alibaba recorded $3.1 billion in sales during Sunday's “Singles Day” event on its Tmall service, topping the $1.25 billion U.S. online retailers took in last year on Cyber Monday.

None of the Chinese Internet firms have made material expansions into the United States, Europe or Japan, but some are making inroads into the developing world. Tencent has been the most aggressive and Wechat, a mobile messaging app that already has 200 million users, is rapidly gaining global users.

American investors will have a chance to invest in another Chinese Internet company with the impending Nasdaq initial public offering of YY.com, a profitable communications platform for gamers whose investors include Steamboat Ventures, a fund affiliated with Disney.

The former United States ambassador to China, Jon M. Huntsman Jr., recently told a Stanford University conference that he expected Xi Jinping to relax Internet controls in the next couple of years. In July, Google's chairman, Eric Schmidt, said that the Great Firewall will eventually fall. Last week Bloomberg's editorial section published “Mr. Xi, Tear Down This Firewall!” I even predicted it in an August interview.

Foreign hopes aside, there is no reason that China cannot continue reforming its economy while maintaining some Internet controls. Political reforms and Internet restrictions will have a harder time coexisting. In the meantime, the world needs to get used to the fact that China is serious about building “Socialism with Chinese characteristics” and an “Internet with Chinese characteristics.”

Sherwin-Williams to Acquire Mexican Paint Maker for $2.4 Billion

Sherwin-Williams said on Monday that it had agreed to acquire Consorcio Comex, Mexico's leading paint producer, for $2.4 billion, including debt.

It is the biggest acquisition by far for Sherwin-Williams, whose brands include Dutch Boy, Thompson's Water Seal and Minwax, according to Standard & Poor's Capital IQ data.

Comex, based in Mexico City, is privately held. It manufactures and sells architectural and industrial coatings in Mexico, the United States and Canada, and reported revenue of $1.4 billion last year. It entered the United States market in 2004 by buying Professional Paint for $400 million.

“Sherwin-Williams and Comex Group are an ideal fit in every respect â€" geographically, strategically and culturally,” Christopher M. Connor, the chief executive of Sherwin-Williams, said in a statement. “This transaction will significantly increase our presence in markets where our store count is low, it builds upon our strategy to grow our archite ctural paint business in the Americas and it brings a high-quality, dedicated team of employees to Sherwin-Williams.”

Defense for Ex-UBS Trader Draws Comparisons to Spartacus

LONDON â€" The lawyer of Kweku M. Adoboli, the former UBS trader standing trial on fraud allegations, Monday likened his client to Spartacus, the main character in the 1960s Hollywood movie about a Thracian slave.

In his closing remarks to the jury, Charles Sherrard said Mr. Adoboli was like Spartacus, who was played by Kirk Douglas, because he stepped forward to take the blame. But unlike in the movie, where Spartacus's fellow gladiators all claimed to be Spartacus to avoid him being singled out for punishment, Mr. Adoboli's team members were just too happy for him to take responsibility.

“Mr. Adoboli stands up and says ‘I am Spartacus' and the other three stand up and said ‘yes, that's him!', Mr. Sherrard told the jury in a London courtroom.

“Mr. Adoboli believes more in community than the self,” Mr. Sherrard said before quoting email exchanges between Mr. Adoboli and colleagues, in which the former trader wrote “We are a team, we work toget her. One fails, we all fail. One succeeds, we all succeed.”

The prosecution previously argued that Mr. Adoboli was “arrogant” and a “gambler,” who sidestepped rules when it suited him. Mr. Adoboli, 32, is charged with six counts of fraud and false accounting in connection with a $2.3 billion trading loss at UBS. He could face more than 10 years in prison if convicted.

The defense has said that Mr. Adoboli's activities were well known in the bank. His supervisors, according to the defense, condoned the actions because they proved to be profitable.

The jury is expected to start deliberating on Tuesday or Wednesday, after a summary of the case by the judge. A verdict is not expected before the middle of next week.

UBS is not a defendant in the case, and is not permitted to comment on criminal cases, according to British law.

Leucadia to Acquire Jefferies

The Leucadia National Corporation said on Monday that it would buy the Jefferies Group in a deal worth about $3.6 billion. Shareholders of Jefferies will receive 0.81 of a Leucadia share for each of their shares, the announcement said. The transaction is expected to close in the first quarter of 2013.

 

A COMING SHOWDOWN OVER TAXES  |  The debate over taxes is set to become more heated in the coming months. President Obama said on Friday that he would insist on tax increases for the wealthy as part of an agreement to avoid a fiscal crisis at the end of the year, putting him on track for a showdown with Congressional Republicans, The New York Times reports. “On Tuesday night, we found out that the majority of Americans agree with my approach,” Mr. Obama said.

A behind-the-scenes effort by business leaders “could play a crucial role in shaping decisions on tax policy,” Nelson D. Schwartz and David Kocieniewski write in The New York Times. The chief executives are also involved in two separate advertising blitzes set to begin on Monday and Tuesday, which take their cue from ads by prominent companies like Nike and Dunkin' Donuts and feature slogans like “Just Fix It” and “Time to Fix the Debt.”

On Wednesday, the president is scheduled to meet with corporate executives at the White House to build support for his plan. “Though many of them backed Mitt Romney, scores have formed a coalition to push for a budget compromise similar to the one the president seeks,” Jackie Calmes writes in The New York Times. Timothy F. Geithner will be on hand to help negotiate a deal, the White House spokesman, Jay Carney, said on Friday. Though the Treasury secretary plans to step down eventually, he will stay in his job at least through the president's inauguration in January.

Jami e Dimon of JPMorgan Chase is building bridges. He said on CNBC that he had a “fine relationship” with Elizabeth Warren, who won a Senate seat after being fiercely challenged by Wall Street and its allies in Congress. “I called her up to congratulate her for winning the election,” Mr. Dimon said.

The prospect of higher taxes is not sitting well with some supporters of Mitt Romney. Two nights after the election, a hedge fund partner joined other financial types in a bar, according to The New Yorker. “Nobody cares about the difference between thirty-six and thirty-nine per cent, if that extra three per cent goes to the right things,” said the unidentified partner, who is said to be a former Lehman Brothers executive. “But we've spent six trillion dollars and don't have one building to show for it that you can hang anyone's name on.”

 

GREECE APPROVES AUSTERITY BUDGET  |  The Greek government approved a 2013 budget on Monday, moving a step closer to getting aid from its foreign creditors. But European officials are unlikely to sign off on the next tranche of aid until they receive a report on Greece's progress in meeting its fiscal goals, James Kanter reports in The New York Times.

The Greek government is going after possible tax dodgers in its search for cash. Tax experts are working through a list of about 15,000 Greeks, “lawyers, bankers, doctors, merchants and even farmers who for decades now have made up the cream of Greece's tax-avoiding crop,” Landon Thomas Jr. writes in The New York Times. These Greeks have sent a total of about $5 billion abroad in the last three years, government officials say.

 

ON THE AGENDA  |  The bond market is closed for Veterans Day. David M. Rubenstein, the Carlyle Group co-founder, is on Bloomberg TV at 10 a.m. Jack Dorsey, an entrepreneur behind Twitter and Square, is on CNBC at 4:30 p.m. A new documentary, “Park Avenue: Money, Power and the American Dream,” directed by Alex Gibney, is scheduled to air on PBS at 10 p.m.

 

A JUDGE IS REBUKED  |  One of the most colorful judges in the corporate world was reined in last week. Delaware's highest court issued a rebuke of Leo E. Strine Jr., the chief judge of the Delaware Court of Chancery, “criticizing him for what it said was an improper digression in an opinion,” DealBook's Peter Lattman writes. Judge Strine is known for his offbeat and sometimes hilarious musings. “I'm only surprised it took this long” for him to be called out, a corporate litigator from New York told DealBook.

 

 

 

Mergers & Acquisitions '

Precision Castparts to Buy Titanium Metals for $2.9 Billion  |  Precision Castparts agreed on Friday to buy the Titanium Metals Corporation, an industrial parts maker whose majority owner is the Texas billionaire Harold Simmons, for about $2.9 billion. DealBook '

 

AT&T's Biggest Problems Aren't Emboldened Rivals, Chief Says  |  AT&T's chief executive said his biggest problem was not renewed competition from the likes of Sprint Nextel. Instead, he is focused on the need to improve the company's network and the uncertainty over the country's fiscal future. DealBook '

 

Best Buy Said to Tap New Finance Chief  |  Sharon McCollam, Williams-Sonoma's former chief financial officer, “is coming out of retirement to be finance chief at Best Buy” at year's end, The Wall Street Journal reports, citing an unidentified person close to the company. WALL STREET JOURNAL

 

Rosneft Seeks Investors in TNK-BP Deal  | 
NEW YORK TIMES

 

INVESTMENT BANKING '

Julius Baer to Buy Stake in Italian Money Manager  |  The Swiss bank Julius Baer has agreed to buy a 19.9 percent stake in Kairos Investment Management of Italy for an undisclosed amount. DealBook '

 

Citigroup Awards Pandit $6.65 Million < span class="divider"> |  The board of Citigroup has awarded $6.65 million to Vikram S. Pandit after unexpectedly ousting the chief executive last month. DealBook '

 

Despite a Regulatory Black Mark, Trader Landed at Morgan Stanley  |  After being let go by Goldman Sachs, Matthew Marshall Taylor was hired by Morgan Stanley. On Thursday, the Commodity Futures Trading Commission filed an enforcement action against the trader. DealBook '

 

China's Banking Leaders Address Loan Quality  |  The New York Times reports: “China's top banking regulators and the chairmen of the four largest banks tried to allay concerns on Sunday that the country was allowing its banking system to grow at a reckless pace as a way to sustain short-term economic growth.” NEW YORK TIMES

 

Nomura Looks to Replicate Private Equity Returns With New Index  |  The Japanese firm Nomura is looking to “match the returns of private equity funds” by starting a new index focused on “publicly traded companies in sectors that are attracting attention from buyout groups,” The Financial Times reports. FINANCIAL TIMES

 

How Hurricane Sandy Hurt Municipal Bond Issuers  |  After Hurricane Sandy, “small towns could find it hard to bounce back because their tax rolls may be permanently reduced by the storm,” Gretchen Morgenson writes in The New York Times. NEW YORK TIMES

 

Goldman Sachs's Chairman for Southeast Asia to Retire  | 
WALL STREET JOURNAL

 

A Goldman Trading Executive in Australia Departs  | 
WALL STREET JOURNAL

 

PRIVATE EQUITY '

K.K.R. Opens Funds for Individual Investors  |  The private equity firm K.K.R. “is launching two investment funds to be distributed to individuals by Charles Schwab,” as it develops into more of an asset management firm, The Financial Times reports. FINANCIAL TIMES

 

In Australia, Accusations of Bid-Rigging in a Buyout Deal  |  Reuters reports: “A private equity deal involving a Canadian mining services company that was bought and sold on the same day has come under scrutiny in an Australian court.” REUTERS

 

HEDGE FUNDS '

Europe Offers Lessons for Navigating Fiscal Cliff  |  Reuters writes: “Battle-weary investors heading into another intense and market-sensitive period of political brinkmanship in Washington may do well to consult their European campaign maps.” REUTERS

 

Judge Insists Argentina Must Pay Creditors  |  The parties seeking to collect on Argentine debt include an affiliate of Elliott Management. REUTERS

 

I.P.O./OFFERINGS '

A Run on Groupon's Shares as Growth Slows Again  |  Shares of Groupon tumbled 28 percent by midday on Friday, to a low of $2.82, after the company posted yet another set of disappointing quarterly results. DealBook '

 

N.Y.S.E. Gains Ground on Nasdaq in Tech Listings  | 
WALL STREET JOURNAL

 

GrubHub Said to Plan I.P.O. Next Year  |  GrubHub, which allows customers to order food online, has chosen Citigroup to lead an I.P.O., Reuters reports, citing three unidentified people familiar with the matter. REUTERS

 

< div class="round-up">

VENTURE CAPITAL '

Social Media Manager to the Stars  |  A start-up called theAudience, which helps celebrities cultivate their online network of fans, recently got $20 million in financing from firms including the Founders Fund, Sean Parker's investment company, The New York Times reports. NEW YORK TIMES

 

Google Ventures Gets $1.5 Billion for Investments  |  Google is giving its venture capital arm “extra gunpowder to fuel growth in existing portfolio companies and scout for new, later stage deals,” The Wall Street Journal reports. WALL STREET JOURNAL

 

LEGAL/REGULATORY '

Reg ulator Faces Another Lawsuit Over Dodd-Frank  |  The CME Group, the giant Chicago exchange, sued its regulator on Thursday over a new rule that aims to shed light on the derivatives market in the latest legal assault on the Dodd-Frank regulatory overhaul. DealBook '

 

No Charges for Individuals in JPMorgan Mortgage Case?  |  Under a proposed plan, the Securities and Exchange Commission would not charge any individuals in its case against JPMorgan Chase over the sale of mortgage bonds, The Wall Street Journal reports, citing unidentified people close to the investigation. WALL STREET JOURNAL

 

Regulators Postpone Some Basel Rules  |  United States regulators said on Friday that the y were postponing a significant part of the financial regulatory overhaul after banks said they would not be ready for the new rules. DealBook '

 

Is Martha Stewart in Need of Oversight?  |  James B. Stewart writes in his column in The New York Times that Martha Stewart's “net worth is inextricably tied to the value of the shares” of her company. “That would seem obvious to everyone except, perhaps, Ms. Stewart herself.” NEW YORK TIMES

 

Morgan Stanley Sues Former FrontPoint Manager  |  Reuters reports that Morgan Stanley “is suing a former employee who was convicted of insider trading in order to recover $33 million it said it paid U.S. regulators to settle civil claims relating to the crimes, court papers showed.” REUTERS

 

Apple Ends Patent Battle with HTC  |  “But a wider truce in the patent battles engulfing the mobile industry is most likely still a long way off,” The New York Times writes. NEW YORK TIMES

 

Former UBS Trader Called Scapegoat for Bank's Woes  |  A lawyer for Kweku M. Adoboli, a former UBS trader in London, said the allegations against his client represented a “character assassination” that failed to highlight the role of UBS's management in condoning his trading activity. DealBook '

 

A Need for Clearer Disclosure Rules after Cyberattacks  |  Regulators need t o provide clearer guidance on cyberattack disclosure to help companies address the often competing obligations to law enforcement and their investors, Craig A. Newman and Daniel L. Stein write in a column for DealBook. DealBook '

 

Leucadia to Buy Jefferies in $3.6 Billion Deal

The Leucadia National Corporation said on Monday that it would buy the Jefferies Group in a deal valued at about $3.6 billion.

Shareholders of Jefferies will receive 0.81 of a Leucadia share for each of their shares, the announcement said. The transaction is expected to close in the first quarter of next year.

Upon the closing of the merger, Richard Handler, chairman and chief executive of Jefferies. will become the chief of Leucadia. Joseph Steinberg, Leucadia's president will become chairman of Leucadia and will continue to work full time as an executive.

Jefferies will continue to operate as a full-service global investment banking firm in its current form, and intends to regularly file financial reports to the S.E.C., the announcement said.

Julius Baer to Buy Stake in Italian Money Manager

LONDON â€" The Swiss bank Julius Baer agreed on Monday to buy about 20 percent of the Italian money manager Kairos Investment Management for an undisclosed fee.

The deal comes a month after Julius Baer announced about 1,000 job cuts after its deal with Bank of America Merrill Lynch to buy that bank's private banking operations outside the United States and Japan for around $880 million.

Under the terms of the deal with Kairos, Julius Baer will acquire a 19.9 percent stake in the firm, which has about 4.5 billion euros ($5.7 billion) of assets under management. Julius Baer currently manages assets worth 184 billion Swiss francs ($194 billion).

Julius Baer said its private client business in Italy would be combined with Kairos's existing business, adding that the two firms would set up a new private bank in Italy after receiving regulatory approval for the deal.

The combined wealth management division in Italy will be operated under the name Kairos Ju lius Baer, according to a company statement.

“Thanks to our strategic participation, we will increase our presence in the domestic Italian wealth management market,” Julius Baer's chief executive, Boris F.J. Collardi, said in a statement. “This move underlines our commitment to further grow and develop our business in Italy.”

The two firms said they would decide after a few years whether Julius Baer would increase its stake in Kairos, according to a statement from Julius Baer.

Shares in Julius Baer rose less than 1 percent in morning trading in Zurich on Monday.

The deal is expected to close during the first half of 2013.