Despite Setbacks, Investor Is Bullish on Clean Technology

Vinod Khosla crowed about the clean energy industry last year. Three of the biofuel start-ups in his venture capital portfolio had just gone public, and the stocks had risen considerably after their debuts. “I challenge anybody to claim that clean tech done right is a disaster,” Mr. Khosla said at a conference, rebuffing recent criticism. “We've generated more profits there than anybody has.”

Since then, Mr. Khosla, the founder of Khosla Ventures, has watched much of those paper gains evaporate. As the clean energy industry broadly has taken a hit, shares of the biofuel companies - Amyris, Gevo and KiOR - have slumped 70 percent to 90 percent from their peaks. His stakes, once worth as much as $1.3 billion, are currently valued at roughly $378 million.

The billionaire investor has been caught in the cyclical downdraft.

The public stocks of solar, wind and biofuel companies are suffering amid industrywide pressures. The price of natural gas remains low. Europe has pulled back on incentives. American subsidies are in question after the bankruptcy of the solar panel maker Solyndra. And China is providing formidable low-cost competition.

“The whole clean tech sector has been out of favor,” said Pavel Molchanov, an analyst at Raymond James & Associates, a brokerage firm. “I'd be hard pressed to name one trading above its I.P.O. price.”

Despite the crosscurrents, Mr. Khosla seems unwavering in his commitment. He is pouring money into start-ups. Khosla Ventures recently invested more in LightSail Energy, a three-year-old start-up working to develop low-cost energy storage. He is also sticking with his public companies. His firm, for example, still owns 54 percent of KiOR.

“He's a visionary who likes to make big bets on ideas that can really change the world,” said Andy Bechtolsheim, who co-founded Sun Microsystems with Mr. Khosla 30 years ago and shares a house with him at Big Sur on the Califo rnia coast. “I would think he's made a larger personal bet on green tech than anybody else.”

While the public markets are raising short-term doubts, the long-term investment thinking remains unchanged. Governments around the globe are pushing to find alternative sources of energy in an effort to reduce their dependence on fossil fuels that may hurt the environment. In a television interview in 2007, Mr. Khosla said “mainstream solutions” could replace up to 80 percent of oil-based power. Without them, he said, “this planet is history the way we know it today.” After Hurricane Sandy, the subject of global warming - and changing climate conditions - has again come to the forefront.

In a recent blog post on the Forbes Web site, Mr. Khosla acknowledged the shift in market sentiment. “Clean tech went through a time when it was in vogue and now it is not,” he wrote. “The financing environment for clean tech companies is tough today,” he added. But h e said he still expected “to do better than industry averages by keeping our losing companies to a minority.”

Since founding his venture capital firm in 2004, Mr. Khosla has become one of the most vocal advocates for clean tech innovation, buying stakes in about 60 industry start-ups. Ausra, a solar thermal start-up that had drawn $130 million in venture backing, was sold in 2010 to the French nuclear plant builder Areva for about $250 million, according to one industry estimate. And SeaMicro, a low-power server maker, was bought this year by Advanced Micro Devices for $334 million, more than five times the amount invested by its venture backers, according to a SeaMicro co-founder, Andrew Feldman.

It's unclear how the broader clean tech portfolio has performed at Khosla Ventures. Mr. Khosla declined to disclose the firm's returns or to comment for the article.

But one of his funds, which raised $1 billion to invest in clean tech and other start-ups, is up 30 percent since inception in 2009, according to filings by the California Public Employees' Retirement System, the largest state pension. In his Forbes blog post, Mr. Khosla said a recent fund, which raised $1.05 billion in October 2011, was “oversubscribed,” and his firm's broader performance since 2006 had “well exceeded typical venture funds.” In that period, venture funds over all have returned 7.25 percent annually after fees, according to industry data.

Mr. Khosla's commitment is an outgrowth of his three decades at the cutting edge of technology.

A native of India, Mr. Khosla, 57, earned a master's degree in biomedical engineering from Carnegie Mellon and an M.B.A. from Stanford in 1980. After starting the design automation company Daisy Systems in 1982, he co-founded Sun Microsystems, then a growing technology company.

At Sun, he supplied drive and vision. But Mr. Khosla, who is known for his blunt talk and intense manner, was replaced a s chief executive two years later and left the company shortly thereafter.

In 1986, he joined the venture capital firm Kleiner Perkins Caufield & Byers. Over the next two decades, Mr. Khosla scored sizable returns betting on the growth of fiber optic networks. Two companies, Cerent and Siara Systems, were sold for a combined $15 billion-plus at the height of the late-1990s dot-com bubble.

Mr. Khosla had been looking into alternative fuel technologies at Kleiner Perkins when a business plan for an ethanol start-up crossed his desk in 2003. The plan “sat on a corner of my desk for nearly 18 months while I read everything I could about petroleum and its alternatives,” he later wrote in an article for Wired magazine in 2006.

When he branched out on his own in 2004, Mr. Khosla invested millions in the ethanol start-up, Celunol. He soon established himself as a top venture capitalist in clean tech, attracting prominent outside investors like Microsoft's found er, Bill Gates. Former Prime Minister Tony Blair of Britain joined the firm as a senior adviser.

Over the years, Mr. Khosla has experienced his share of blowups.

In September 2011, Khosla-backed Range Fuels, a wood-chips-to-ethanol company, went bankrupt after receiving a $44 million grant from the Department of Energy and $33 million under a Department of Agriculture loan guarantee. When The Wall Street Journal editorial page criticized Range Fuels as an “exercise in corporate welfare,” Mr. Khosla lashed back, saying the authors inhabited an “ivory tower” that is “full of people who don't understand technology.”

Sometimes, Mr. Khosla's companies had to pivot from their original plans and focus on new markets. For example, Calera was founded in 2007 with plans to use power plant exhaust to make cement. Mr. Khosla called its technology “game changing” in 2008.

But the company encountered some setbacks. It postponed plans for commercial- scale production in 2010 pending further research and later cut its 145-employee work force by two-thirds. Since then, Calera has broadened its focus, developing other products like fillers for paper and plastics.

Like many venture capital investors, Mr. Khosla will risk a few strikeouts for the chance to hit home runs. “My willingness to fail is what gives me the ability to succeed,” the investor has said frequently.

The odds can be especially brutal in clean technology. The projects are often capital-intensive - like $200 million or more for a biofuels plant - and they can take years to pay out, said Sam Shelton, a research engineer at Georgia Tech. By comparison, social media start-ups often require little upfront money and few employees. “The economics are totally different,” Mr. Shelton said.

In part, Mr. Khosla aims to take stakes when the companies are still getting off the ground, rather than waiting until they're more mature and more expens ive. He first bought a stake in KiOR, which aims to convert wood chips to gas and diesel fuel, in 2007. The company is now completing the first of five planned plants in Mississippi with the help of a $75 million interest-free loan from the state.

Mr. Khosla is “always thinking at a very high level about the potential of an idea,” KiOR's chief executive, Fred Cannon, said. “He has a very good feel for when to step on the gas.”

After jumping in early, Mr. Khosla appears willing to ride out the swings, in both directions. Over the years, public filings indicate he has plowed roughly $80 million into KiOR, amassing a 54 percent stake in the company. Although the stock is off its peak levels and I.P.O. investors are still underwater, his holdings are worth $356 million - a fourfold gain.

Barclays to Contest Energy Market Manipulation Case

Barclays on Thursday vowed to fight a proposed $470 million fine from American regulators who accused the British bank of manipulating rates in California's energy markets.

The issue stems from late October, when the Federal Energy Regulatory Commission threatened to seek a $435 million penalty and disgorgement of an additional $35 million from Barclays over trades it made on energy prices. The potential penalty, part of a broader crackdown that includes recent cases against JPMorgan Chase and Deutsche Bank, would be the regulator's largest fine ever.

But in a regulatory filing on Thursday, Barclays indicated that it would seek a Federal District Court hearing if the commission moved forward with the sanction. Barclays, which plans to challenge the agency's analysis of the questionable trading, said that it would fight the case in court rather than accept the fine or seek an administrative hearing.

In its initial order against the bank, the commission sa id Barclays employees had made trades that were designed to skew the prices for electricity in what the industry calls the “physical” market. Through complex calculations and citing vulgar internal e-mails, the agency argued that the bank booked gains in financial bets that were greater than losses on the physical trades. The trades, according to the order, resulted in a loss of $4 million over the period while allowing the bank to record gains of $35 million on the financial contracts.

At the time of the filing, Barclays issued a statement challenging the commission's allegations, saying the bank's “trading was legitimate and aboveboard” and said it intended to “vigorously defend this matter.”

The commission did not immediately comment.

Status Quo at Groupon as Board Stands by Chief

You may have noticed a certain frenzy around Groupon in recent days, as speculation swirled about the fate of the daily deals pioneer's chief executive, Andrew Mason. More specifically, that the company's board would discuss at a meeting on Thursday whether he should remain in his post.

Well, here's what happened at that regularly scheduled meeting: not much.

A Groupon spokesman, Paul Taaffe, told DealBook on Thursday afternoon that the board and the management team are “aligned.” For now, it appears, Mr. Mason isn't going anywhere.

He added: “The board and management are focused on the performance of the company, and they are all working with their heads down to achieve their objectives.”

That doesn't mean that everything is well at Groupon, once lauded as one of the fastest-growing members of the new generation of Internet companies. Its shares have fallen 83 percent in the year and change that it has been publicly traded.

And questi ons still swirl about the long-term viability of the daily deals business. Groupon's closest competitor, LivingSocial, announced on Thursday that it would cut 400 jobs, or about 10 percent of its work force.

Mr. Mason seems to be aware of the depths of the problems he faces.

“When your stock is down 80 percent, your board is going to ask if you're doing the right things,” he said at Business Insider's Ignition conference on Wednesday.

But while he hopes to stay in his job, as a co-founder and a large shareholder of the company, he hinted that he would step aside if that step were deemed necessary.

“I want what's best for Groupon,” he said.

At Orient-Express, the Board Holds All the Cards

Orient-Express Hotels, the Bermuda-based owner of luxury hotels, has received an unsolicited offer to be acquired by the Indian Hotels Company, a subsidiary of the Tata Group. In surveying the potential battle for control, I am certain of only one thing: It's good to be a director of Orient-Express â€" and it's likely to stay that way.

It's not because Orient-Express's chairman gets to stay at the hotels for free, or that other directors get a 75 percent discount. Or that these directors have largely served without consequence despite Orient-Express's poor performance.

Rather, it is because these directors can elect themselves, a unique characteristic among companies worldwide. Shareholders have no real say in the selection of Orient-Express's directors.

Orient-Express's shares are divided into Class A and Class B shares, with the Class B shares controlling 64 percent of the votes. Who owns the Class B shares? It is actually Orient-Express itself. Th e shares are owned by a company subsidiary and voted by the four directors of the subsidiary, two of whom are also directors of Orient-Express.

The reason this structure exists is because of a unique Bermuda law. In 2000, Orient-Express was slowly spun out of Sea Containers, a now-defunct shipping company. Sea Containers gradually sold off its shares.

But the executives of the shipping company apparently wanted to ensure that even if Sea Containers' stake went below 50 percent, the company would be safe from a hostile bid. They accomplished this by placing majority voting control with this subsidiary. And because two of the four directors on this subsidiary are also directors of Orient-Express, they are necessary for any action with respect to these shares. The other two directors, by the way, are lawyers at Orient-Express's law firm, Appleby Global.

It's a structure that wouldn't be allowed under Delaware law, but one that effectively gives the directors control over the company. This wouldn't be so bad, except Orient-Express has a history of poor performance.

In 2007, the Jumeirah Group of Dubai made a $60-a-share bid for the company. Indian Hotels also expressed interest.

Both bids were vigorously rebuffed by the chief executive at the time, Paul White, and his board. Orient-Express's strategy was clear. Because it controlled the shares, it didn't even need to engage with these bidders. At that time, Taj Hotels, the Tata subsidiary with an interest in Orient-Express, wrote that “the Taj Hotels and Dubai Holdings, the two largest public shareholders of OEH, have been unable to enter into any meaningful dialogue with the OEH Board.”

By 2008, Orient-Express was still under siege, this time by two hedge funds, D.E. Shaw and CR Intrinsic, a division of Steven A. Cohen's SAC Capital. The two funds proposed at an October 2008 shareholder meeting that the Class B shares be treated as treasury shares with no v oting rights. The proposal was defeated with the company's Class B shares voting against it, despite the approval of over 90 percent of the Class A shares.

The funds then sued in a Bermuda court to have the structure ruled invalid. But in a June 1, 2010, decision the Bermuda court upheld this structure under Bermuda law. Basically, the court stated that the petitioners could not challenge the voting structure as “per se” illegal under Bermuda law without a showing that the directors were acting against the company's best interest.

Orient-Express's directors have continued to do a less-than-stellar job. The company's stock has plummeted almost 85 percent from its high, and in November 2008, Orient-Express undertook a $55 million dilutive capital raise.

In July 2011, Mr. White resigned. Since that time, the company has been largely rudderless. The board chairman, J. Robert Lovejoy, took over for a time. In May, Philip Mengel, another director, was named the interim head.

In October, the Tata Group, which owns 7.63 percent of Orient-Express, made another offer to acquire the company. With the stock at $9 a share, the $60-a-share offer of a few years ago was now an impossible dream. Tata and its co-bidders are offering $12.43 a share, a roughly 45 percent premium. Notably, Mr. White has re-emerged as part of the bidding group.

Orient-Express has responded with a two-pronged strategy. First, it has made the usual complaint that Tata's bid is severely underpriced, an effort to acquire the company at a low point in the economic cycle. When rejecting Tata's offer, Orient-Express's board stated that “the current macroeconomic environment, conditions in the luxury hotel business and factors unique to Orient-Express would make this a highly disadvantageous time to sell the company to realize its true value.”

Second, Orient-Express has finally hired a permanent chief, John M. Scott III, who did a decent tur naround job at Rosewood Hotels Resorts, a group of 17 ultra-luxury hotels, eventually selling the company in 2011 for $229.5 million. There has also been some turnover at the board, with four new directors added in the last few years.

But Orient-Express is once again refusing to meet with Tata to discuss this offer. In doing so, it would seem the Orient-Express board is unwilling to sell at any price.

Still, Tata's bid is merely the opening price. A report by a Citigroup analyst puts the share price north of $15, while one from Barclays gives a higher estimate at $18 a share.

The Barclays valuation analysis is done on a per-key or price-per-room basis and seems to be in the ballpark. Barclays assigns Orient-Express's two premium hotels, the Cipriani and Splendido, a $3 million per-key valuation. That amounts to a total of roughly $285 million and $240 million, respectively. This appears comparable with the recent offer of $2.4 million per room made on the Four Seasons in New York.

There may be a Russian oligarch willing to pay more, and that is what Orient-Express will argue. But it is hard to see how value can go much higher without a change in the direction of Orient-Express.

Orient-Express seems to be putting all their valuation eggs in the basket of one chief executive, a man who has done well with a small private company. It may well be that Mr. Scott can create value beyond what these hotels are worth through branding and expansion.

But this is a risky bet, and one that shareholders do not seem to want to take. Who can blame them, given past performance?

Of course, none of this really matters, because the directors hold all the cards. Tata could sue to challenge this share structure again, arguing that the directors are breaching their fiduciary duties by keeping themselves in office despite a fairly priced offer. But the directors could simply say they need yet more time to allow this chief ex ecutive to implement his plan, whatever it may be.

Dual-class share structures are not uncommon. But there are none that I know of where directors rather than shareholders can vote their stock. Shareholders have the duty only to themselves in deciding not to sell. But directors have duties to all shareholders, and this would be the basis of such a challenge.

Still, don't count on a lawsuit. Tata seems intent on appearing friendly. And such a suit has only a small likelihood of success because the board will again hide behind its new chief executive and his plans. While it's easy to point fingers at the board here, the shareholders also need to take some of the blame for buying into this structure while knowing about this problem.

Whatever your conclusion, the directors appear poised to wait it out, perhaps in the Cipriani, where I hear the cocktails are quite nice. And there is really nothing to stop these board members from doing so, given their position and stated beliefs.

Laptop Buyers Should Pay Some Attention to the Chromebook

November 29, 2012, 2:22 pm

There seem to be a trillion variations on tablet/laptops these days. There are laptops with keyboards that slide, with screens that flip, with hinges that bend backward. I have a strong feeling most of them will wind up in the junk drawers of history.

But one of them is eminently successful, and it's not getting enough attention: Google's new Chromebook.

The Chromebook laptop concept has been kicking around for years now - handed out as loaners on Virgin flights, sent to reviewers as prototypes - but the 2012 version should make a lot of sense to a lot of people. Simply put, it's a great second computer for $250.

The laptop's shell is plastic, but it performs an excellent impersonation of silver brushed aluminum. It feels really, really good. The Samsung logo is the only thing on the top. The Chromebook is very light - 2.4 pounds - and its extremely clean, satisfying keyboard is carefully modeled on the MacBook Air's. The keys are black with white lettering, and they poke up through holes in the “deck.” The trackpad works perfectly.

There are HDMI, USB 2.0 and USB 3.0 jacks - on the back, alas - and a memory-card slot on the side for transferring camera photos. And a headphone jack. (For $330, you can get a version that gets online over the cellular data networks.) The 11.6-inch screen isn't glossy, which is good, but it's a little washed out. It has Bluetooth and Wi-Fi. Google claims 6.5 hours for the battery, and that seems about right.

The Chromebook concept takes some getting used to: It's exclusively for online activities. Web, e-mail, YouTube, and apps like Google Drive (free, online word processor, spreadsheet and slide show programs). The laptop has no moving parts: no fan, no DVD drive, not even a hard drive. It's silent and fast, as long as you don't try to do two things at once (video playback and music playback, for example).

And it comes with very little storage; you're supposed to keep your files online. Google starts you off with 100 gigabytes of storage for two years; after that, you have to pay for more storage (although you get to keep whatever you've already used, no charge).

There are all kinds of payoffs to this approach. The laptop turns on instantly. The operating system is updated automatically every six weeks or so. It has “insane levels” of security, according to Google.

Google also gives you 12 free passes for Gogo, the service that gives you Wi-Fi on plane flights, so you can keep working in the air. If you use Chrome on your real computer, and you sign in with your Google account, your bookmarks and online files synchronize across all your machines.

The Chromebook runs something Google calls the Chrome OS - it's not the Mac, it's not Windows. It doesn't run “real” softwa re like Photoshop, iTunes, Spotify, Pandora, Skype, and so on. It's basically just a Web browser, although it does offer accounts to help keep family members' stuff separate.

Now, if this laptop cost $450 (like the last Chromebook), it would appear to be laughably limited. You'd mock the screen and the speed (it has an ARM chip inside, not Intel inside). You'd scoff at the lightweight plastic.

But $250 changes everything. A price of $250 means you don't spend hours online comparing models. A price of $250 means half the price of an iPad, even less than an iPad Mini or an iPod Touch. And you're getting a laptop.

(There's an even less expensive Chromebook from Acer - $200 - although reviewers seem to find it somewhat cheap-feeling.)

For so many things people do with their computers (and tablets) these days, the Chromebook makes eminent sense. Flash videos play. Netflix movies play. Office documents open. In other words, Google is correct when it asserts that the Chromebook is perfect for schools, second computers in homes and businesses who deploy hundreds of machines.

It's also a perfect computer for the technophobic. It's very hard to get lost in an operating system that basically has no features.

It's been a long, patient slot for Google to get here, but with year after year of careful tweaks and improvements - and a jaw-dropping $250 price - the Chromebook is finally ready for prime time.

Interest in Hostess\' Brands Coming in \'Fast and Furious,\' Adviser Says

A little over a week after Hostess Brands formally announced its plans to wind itself down, the bankrupt maker of Twinkies and Devil Dogs is dealing with more interest from potential buyers than it can handle.

Advisers to the Hostess are in active talks with about 110 suitors, ranging from regional bakeries up to national supermarket chains, an investment banker for the company said in federal bankruptcy court for the Southern District of New York on Thursday. In perhaps a more reassuring sign, many of these suitors appear ready to spend big amounts of money.

Since Hostess won interim approval from a judge to begin selling off its stable of junk-food brands, the company has been bombarded by a flurry of calls.

“To be honest, it's been so fast and furious that we haven't had time to make all the outbound calls we've wanted to,” the banker, Joshua Scherer of Perella Weinberg Partners, testified.

At least a half-dozen potential buyers have retained what Mr. Scherer described as “large bank advisers,” a promising sign that they are preparing to spend “substantial sums” of money.

Among those that have expressed interest are 25 regional bakeries, five national supermarket chains and at least two overseas companies interested in securing distribution rights to Hostess products in India and other countries, he added.

Some potential buyers were touring Hostess facilities on Thursday, Mr. Scherer added.

Hostess is seeking final approval of its liquidation plan, which would see off Ding Dongs, Ho Hos and Drake's coffee cakes to new homes. Some interested buyers, such as the investment firm Sun Capital Partners and the company that owns Pabst Blue Ribbon beer, have publicly disclosed their desire for parts of the business - including in some cases all of Hostess.

Sales of the company's brands could exceed $1 billion, Mr. Scherer said. He added that he expected initial bids to come in by early to mid December. A so-called “stalking-horse bidder,” which would set the floor for an auction, would likely be picked by mid-January.

In Battle With Hedge Funds, a Small Victory for Argentina

A decade-long quest by hedge funds led by Elliott Management and Aurelius Capital Management to force Argentina to pay up on the country's defaulted debt is going to last a bit longer.

On Wednesday, the United States Court of Appeals for the Second Circuit issued a stay of a lower court's order that would have required Argentina to set aside $1.33 billion to pay holders of its old, defaulted debt if and when it made any payments on its new debt.

It's a minor victory for Argentina, but in this case it may have a ancillary effect, signaling a reversal of fortune for the country.

To understand the implications of the judicial order, a bit of history is needed.

This litigation arises out of Argentina's default on $80 billion worth of sovereign bonds in 2001. In 2005 and 2010, Argentina subsequently pushed the holders of this debt to exchange the old bonds for new ones at 25 to 29 cents on the dollar. The stick here was Argentina's steadfast refusal to pay any amount on the old bonds. Since that time, the remaining holders of the old bonds, including Elliott and Aurelius, have been enmeshed in worldwide litigation against Argentina to force it to pay.

In October, the appeals court handed the two hedge funds a stunning victory. The court ruled that the “pari passu” clause in the bond indenture for Argentina's old debt required the country to make payments on its old debt any time it made a payment on its new debt. Pari passu is a Latin phrase meaning, roughly, “on equal footing.”

The court also held that, given Argentina's continued refusal to pay this old debt, the Foreign Sovereign Immunities Act of 1976, which prevents courts from attaching the property of sovereigns, did not prohibit a federal court from ordering Argentina to comply with the pari passu clause by issuing an injunction to such effect.

The appeals court did not hand a complete victory to the hedge funds. It remanded the case to J udge Thomas P. Griesa, the lower court judge hearing the case, to decide two issues: whether the injunction requiring Argentina to make payments on the old bonds applied to third parties, and how much Argentina would be required to pay to holders of the old bonds if it made payments to holders of the new ones.

It appears Judge Griesa had clearly grown tired of Argentina's intransigence. At a hearing earlier in November, he handed full victory to the plaintiffs. He ruled that Argentina must set aside the full $1.33 billion it owed to the plaintiffs if and when Argentina made a $3 billion payment due on Dec. 15 to holders of the new bonds.

Argentina, as a sovereign, could ignore this order, but Judge Griesa put teeth in it by applying it to third parties. He ordered the bond indenture trustee as well as the clearing systems that transmit money for Argentina to comply with this order.

The judge's actions were particularly aggressive for two reasons. First, Art icle 4-A of New York's Uniform Commercial Code provides a safe harbor for third parties from this type of injunction, the purpose of which is to ensure that only Argentina's banks are drawn into these disputes. Argentina has argued that the bond indenture trustee is not its bank and so immune from the injunction. Argentina also argues that payment system operators are immune under long-settled New York law.

Judge Griesa additionally ordered the $1.33 billion due and owing to holders of the old bonds to be paid all at once instead of pro rata over time as holders of the new bonds are paid. The judge made the order effective immediately, refusing to stay his order until it had been fully considered by the appellate court. Argentina's response was to appeal to the Second Circuit and request an emergency stay.

On Wednesday, the appeals court stayed the implementation of Judge Griesa's order, and it set up a briefing schedule for the case, to be heard on Feb. 27 by th e same judges who previously ruled against Argentina.

At first blush, this is not much of a victory for Argentina. Given what is at stake, it is no surprise that the appeals court would call a break to the confrontation to review Judge Griesa's order.

The same judges who previously ruled against Argentina will now revisit the case. Argentina has already filed a motion asking the entire Second Circuit to rehear the prior decision of these judges. That motion will probably remain in limbo while Judge Griesa's order is reviewed.

While on its face the stay is a small matter, the question now is whether it can provide a bigger opening for Argentina.

Judge Griesa's order is going to require the Second Circuit to grapple with questions about the scope of the court's authority that it may not have fully considered earlier. The United States government, third-party financial institutions affected by the judgment and even the holders of new bonds have been ene rgized by the prior ruling.

The appeals court has set a Jan. 4 deadline for the interested third parties to submit their views. Expect all of these parties to now enter the fray with briefs in support of Argentina, with many arguing that applying this injunction to third parties would upset the orderly flow of payments in many other instances.

This will require the appellate court to decide whether this injunction should apply to third parties, an issue the judges already seemed to be uneasy with in their prior opinion.

And if the judges do find that the injunction issued by the lower court should not apply to third parties, then the Second Circuit is going to have to again confront the basic question of what it is trying to do against Argentina.

The Foreign Sovereign Immunities Act of 1976 prohibits a court from legally attaching sovereign property unless It is used in commercial activity. The act has been used to prevent lawsuits against scores of countries. And even though Argentina submitted to the jurisdiction of the New York courts, it did so after passage of this act, so clearly the parties knew that these limits existed.

If the Second Circuit is unwilling to apply the injunction to third parties, then it may be required to determine how the lower court's order is not really just a legal attempt to attach Argentine property â€" a tactic that could be used against any other sovereign, something the Foreign Sovereign Immunities Act appears to prohibit.

It remains to be seen whether the Second Circuit will bite at these arguments â€" some of which it has already rejected. But expect Argentina and its allies, including the United States government, to press the court hard as they attempt to turn the February hearing into a reconsideration of the entire case.

The plaintiffs will no doubt continue to argue forcefully that Argentina is unique because of its egregious behavior and that the actions of th e three judges will not have a wider effect on the financial system. They are also likely to argue that the lower court's order is not an attachment, because Argentina can simply ignore it and refuse to pay on the new and old bonds.

The question now is whether the hedge funds can keep the court focused on the narrow issue of Argentina and the morality of its nonpayment of debt, or whether wider legal issues push the Second Circuit to reconsider the case. And that is what is really at stake in this February hearing.

British Banks May Be Undercapitalized, Bank of England Governor Warns

LONDON - Britain's banks need more capital to protect them against fallout from the crisis in the euro zone, the Libor litigation and other potential costs, the Bank of England warned Thursday.

Current capital ratios at major U.K. banks - a measure of the banks' ability to withstand financial shocks - are probably overstated because possible future losses and costs of bad loans or other past business decisions might be bigger than expected, the British central bank said in its latest report on financial stability.

It also said that banks should be more transparent in communicating their credit buffers and look more prudently at risks to their financial soundness.

“We need to ensure that reported capital ratios do in fact provide an accurate picture of banks' health,” Mervyn A. King, governor of the Bank of England, said in a press briefing as he presented the report. “At present there are good reasons to think that they do not.”

Capital ratios of Britain's four biggest banks - Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC - could be overstated by between £5 billion, or $8 billion, and £35 billion, according to a hypothetical example in the report. That means that the banks would, under certain scenarios which the central bank did not disclose, need to raise an additional £5 billion to £35 billion.

The central bank declined to give a more concrete figure on how much it thinks the banks should raise. Mr. King, whose term as governor ends next summer, has previously suggested that banks should cut bonuses and use the money to expand capital buffers instead. He has repeatedly warned during his tenure that banks' capital cushions were too thin.

Mr. King said Thursday that banks would not have to turn to taxpayers for more capital. Initiatives by the Treasury and the Bank of England, including cheaper funding for banks if they commit to increase lending, have been helping banks to access funds.

The Bank of England called on the Financial Services Authority, Britain's financial regulator, to talk to the banks and encourage a more realistic valuation of their assets, future costs and risks.

The F.S.A. should sit down with the banks and say, “Look, I think you should look more prudently” at the credit levels, Mr. King said.

Mr. King did not suggest that banks were dishonest in booking provisions or taking into account future possible losses, but that reporting standards did not require them to be more vigilant and therefore many banks are unwilling to be more prudent about possible future losses.

The additional capital is needed because even though the sentiment in financial markets “improved a little,” global growth remains weak and “significant adjustments” on debt in the euro zone are still expected, Mr. King said.

Lloyds, Barclays and R.B.S. have had to recently increase the amount they set aside to compensate customers who were inappropriately sold some payment insurance, sparking concerns among investors that such provisions could rise further.

It is also not yet clear how much banks may have to pay in penalties as a result of the ongoing investigations into the rigging of the London interbank offered rate, or Libor.

Higher capital levels should help banks to regain investor confidence and as a result make it easier and cheaper for them to raise money in the financial markets, Mr. King said. “Our aim must be to get to a point where private investors again have confidence in banks and banks themselves have the confidence to lend,” he said.

A version of this article appeared in print on November 30, 2012, in The International Herald Tribune.

Regulator Warns SAC Capital

The once-reclusive Steven A. Cohen has found himself thrust into the very public role of defending SAC Capital Advisors, his $14 billion hedge fund, against an intensifying government investigation.

Regulators warned SAC that they were preparing to file a civil fraud lawsuit against the hedge fund, after years of investigating insider trading. The warning from the Securities and Exchange Commission, in the form of a so-called Wells notice, stems from a criminal insider trading case brought last week against a former SAC employee, and is “the boldest regulatory shot yet across SAC's bow,” DealBook's Peter Lattman reports.

Clients learned the latest news during a conference call on Wednesday, when Mr. Cohen was in the unusual position of having to shore up investor support. “We take these matters very seriously, and I am confident that I acted appropriately,” said Mr. Cohen, who has not been accused of wrong doing. The case against the former employee, Mathew Martoma, is the first time the government has linked Mr. Cohen to questionable trades.

Mr. Lattman reports: “A person briefed on the investigation said that an additional action against SAC, or even Mr. Cohen, could involve accusations of fraud based on the so-called controlled-liability theory, meaning that it was in ‘control' of Mr. Martoma when he engaged in insider trading.” SAC could survive possible penalties from an S.E.C. lawsuit, Mr. Lattman notes, but “the blow to its reputation could cause some investors to flee and prompt some banks to avoid doing business with it.”

The government has an additional trader in its sights, whom Bloomberg News identifies as Phillipp Villhauer. He has not been accused of wrongdoing, but is featured anonymously in the complaints against SAC filed last week, Bloomberg News reports. As the case unfolds, William D. Cohan of Bloomberg Businessweek is taking a skeptic al stance. He writes: “It's worth asking whether relentlessly hunting insider-trading suspects like Cohen is a wise use of the government's resources - especially considering that the people responsible for the worst financial crisis since the Great Depression continue to get off scot-free.”

 

RACE TO LEAD S.E.C. SHIFTS  |  The field of potential candidates to lead the Securities and Exchange Commission has shifted, as Mary J. Miller, a senior Treasury Department official, has removed her name from consideration, DealBook reports. That makes Sallie L. Krawcheck, a longtime Wall Street executive, a potential front-runner. Ms. Krawcheck has emerged as a consumer advocate since leaving Bank of America last year, but she lacks government experience and may be seen as too close to the financial industry. Simon Johnson, a professor at the M.I.T. Sloan School of Management, raises concerns about Ms. Krawcheck in a post on the Economix blog. The agency's next leader, expected to be named next year, would take over from Elisse B. Walter, who was chosen to succeed Mary L. Schapiro.

 

TOO MANY FRIENDLY FACES IN WASHINGTON?  |  The Office of Financial Research, a wonky agency created by the Dodd-Frank Act to monitor risks to the financial system, “is looking as if it will be a tool of the financial services industry, instead of a check on it,” Jesse Eisinger writes in his column, The Trade. The agency, which has been slow to get off the ground, announced its advisory committee this month. Mr. Eisinger writes: “By my count, 19 of the 30 committee members work directly in financial services or for private sector entities that are dependent on the industry. There are academics, but many of them have lucrative ties to the financial services industry.” Th e Treasury Department, which houses the fledgling agency, takes a different view. “We were looking for people with a range of perspectives who understand keenly the systemic risks in the financial system,” said Neal S. Wolin, the Treasury deputy secretary.

 

ON THE AGENDA  |  Two House Financial Services subcommittees are holding a joint hearing at 10 a.m. on the effect of proposed rules to comply with the international Basel standards on capital. Another House Financial Services subcommittee is conducting a hearing at 2 p.m. called “The Future of Money: Dollars and Sense.” Barnes & Noble and Tiffany & Company report earnings before the opening bell. A revised estimate of gross domestic product in the third quarter is released at 8:30 a.m. Jeff Jordan, a general partner of Andreessen Horowitz, is on CNBC at 1:30 p.m. Janice Fukakusa, the chief financial officer and chi ef administrative officer of the Royal Bank of Canada, is on Bloomberg TV at 2:10 p.m. Antoine Drean, the chief executive of Palico, an online marketplace for private equity, is on Bloomberg TV at 5:10 p.m.

 

C.E.O.'S DESCEND ON WHITE HOUSE  |  President Obama has had a complicated relationship with the business world, to say the least. But chief executives who met with Mr. Obama on Wednesday came away sounding supportive of the president's approach to the fiscal negotiations in Washington. Lloyd C. Blankfein of Goldman Sachs said on CNBC that the president's plan was “very credible.” He added, “I would say that an agreement was reachable.” Mr. Blankfein and others said that tax increases would probably be part of a deal to avoid the so-called fiscal cliff.

Another financial chief, Larry Fink of BlackRock, has also been active in Washington as he considers his nex t job. Mr. Fink “has made little secret of his wish to join a second-term Obama administration as Treasury secretary,” succeeding Timothy F. Geithner, The Financial Times writes. Mr. Fink and Mr. Geithner are friends, according to the newspaper, which reports: “In wishful moments, Mr. Fink may hope that some day, after he has left the Treasury, Mr. Geithner would consider joining BlackRock. But Mr. Fink appreciates that any conversation with Mr. Geithner about this while he is in his current position would be inappropriate.”

 

 

 

Mergers & Acquisitions '

Siemens to Buy Rail Business for $2.9 Billion  |  Siemens, Germany's largest diversified industrial group, has agreed to buy the rail signaling business of the British company Invensys for $2.9 billion. DealBook '

 

Two Firms Make Offers For Knight  |  Two firms have offered to buy the Knight Capital Group, a financial services firm that had a $440 million trading loss in August because of a technology error. DealBook '

 

United's Integration With Continental Is Still Troubled  |  Two years after merging with Continental Airlines, United still deals with “myriad problems” in combining the airlines, leading to “hobbled operations, angry passengers and soured relations with employees,” The New York Times reports. NEW YORK TIMES

 

Vivendi Said to Field Offers for Brazilian Unit  |  Reuters re ports that Vivendi “is examining four nonbinding offers above 6 billion euros ($7.75 billion) for its Brazilian broadband company GVT SA, according to a source familiar with the situation.” REUTERS

 

NCR to Buy Retalix for $650 Million  |  NCR agreed on Wednesday to buy Retalix, a maker of software for cash registers and other retail sales equipment, for about $650 million. DealBook '

 

INVESTMENT BANKING '

Spanish Banks Accept Cuts in Order to Receive Funds  |  The New York Times reports: “The European Commission on Wednesday approved a payment of 37 billion euros, or $48 billion, from the euro zone bailout fund to four Spanish banks on the condition that they lay off thousands of employees and close offices. The most significant cuts will be made by Bankia.” NEW YORK TIMES

 

Wells Fargo Says Regulators Have Dropped Mortgage Investigation  |  The bank said in a filing that the Securities and Exchange Commission had closed an investigation into the sale of certain mortgage-backed securities, Reuters reports. REUTERS

 

Wells Fargo Names Ex-Partner of PricewaterhouseCoopers to Board  | 
REUTERS

 

Citigroup's Chairman Acquires $1 Million of Stock  | 
BLOOMBERG NEWS

 

< p>Goldman's Blankfein Exercises Stock Options  | 
REUTERS

 

PRIVATE EQUITY '

Aston Martin in Talks to Secure Financing  |  Bloomberg News reports: “Aston Martin, the British luxury-car maker controlled by Investment Dar Co., is in ‘advanced' talks to sell new shares to investors to boost funding for future development.” BLOOMBERG NEWS

 

Buyout Firms Circle Gardner Denver  |  Advent International, K.K.R. and a partnership of TPG Capital and Onex are in a second round of bidding for Gardner Denver, a machinery maker that is also being pursued by a rival, Reuters reports. REUTERS

 

HEDGE FUNDS '

Argentina Wins More Time to Pay Bondholders  |  The beleaguered government of Argentina secured more time to pay holders of defaulted bonds, after a United States court had ruled the government would have to make the payments when it paid other bondholders this month, Bloomberg News reports. The latest development is considered a setback for Elliott Management and other hedge funds. BLOOMBERG NEWS

 

Activist Fund Buys Into Timken  |  Relational Investors has built up a stake of almost 6 percent in Timken, a company that makes bearings and transmission parts, and plans to push for a breakup, The Wall Street Journal reports. WALL STREET JOURNAL

 

I.P.O./OFFERINGS '

Old Mutual Expected to Take U.S. Unit Public  |  Analysts expect the British insurer Old Mutual to plan an I.P.O. for its United States money management unit, Reuters reports. REUTERS

 

VENTURE CAPITAL '

Political Gulf Between Wall Street and Silicon Valley  |  “Since Democrats had the support of 80 percent or 90 percent of the best and brightest minds in the information technology field, it shouldn't be surprising that Mr. Obama's information technology infrastructure was viewed as state-of-the-art exemplary,” Nate Silver writes in the FiveThirtyEight blog. NEW YORK TIMES

 

Genealogy Site Attracts $25 Million  |  MyHeritage, a genealogy company based in Israel, raised $25 million and also acquired a rival, Geni.com, TechCrunch reports. TECHCRUNCH

 

LEGAL/REGULATORY '

Regulators Approve Rule on Derivatives  |  The Commodity Futures Trading Commission said it had voted to complete the final determinations for a rule requiring big firms to guarantee certain derivatives trades at clearinghouses, Bloomberg News reports. BLOOMBERG NEWS

 

Volcker Rule Expected to Be Completed Next Year  |  Regulators had aimed to finish the Volcker Rule by the end of this year, but officials are now indicating that the regulation probably will not be completed until the first quarter of 2013, according to CNBC. CNBC

 

Fed Expected to Continue Buying Bonds In 2013  |  The Wall Street Journal reports: “Three months after launching an aggressive push to restart the lumbering U.S. economy, Federal Reserve officials are nearing a decision to continue those efforts into 2013 as the U.S. faces threats from the fiscal cliff at home and fragile economies elsewhere in the world.” WALL STREET JOURNAL

 

Former Baseball Star Charged With Securities Fraud  |  Reuters reports: “Former Baltimore Orioles third baseman Doug DeCinces has been indicted by a federal grand jury for insider trading, the Justice Departme nt said on Wednesday.” REUTERS

 

Conservative Lawmaker to Lead House Financial Panel  |  Jeb Hensarling, a Texas Republican who supports abolishing Fannie Mae and Freddie Mac, was named the next chairman of the House Financial Services Committee. WALL STREET JOURNAL

 

In Defense of a Law School Education  |  Law schools have been a target of criticism recently, taking fire for high tuition and a bleak outlook for jobs. But Lawrence E. Mitchell, the dean of Case Western Reserve University's law school, writes in an Op-Ed essay in The New York Times: “The hysteria has masked some important realities and created an environment in which some of the brightest potential lawyers are, largely irrationally, forgoing the possibility of a rich, rewarding and, yes, profitable, career.” NEW YORK TIMES

 

Greece Agrees to Borrow to Buy Back Debt  |  The New York Times reports: “With Greece's coffers nearly empty, the government said Wednesday that it would have to borrow 10 billion to 14 billion euros to pay for a debt buyback that its international creditors have demanded in exchange for releasing more bailout money to the troubled country.” NEW YORK TIMES

 

H.P. Shareholders Sue Audit Firms Over Autonomy Deal  |  Deloitte and KPMG were named in a new lawsuit. REUTERS

 

Jerry Finkelstein, New York Power Broker, Dies at 96  |  Jerry Finkelstein, who made a fortune in business, real estate and newspapers, including The New York Law Journal and The Hill, and for many years was a self-styled Democratic power broker in New York, died on Wednesday at his home in Manhattan, Robert D. McFadden reports in The New York Times. DealBook '

 

Bondholders of AMR Push for New Board  |  Reuters reports: “A group of some of bankrupt American Airlines' most significant bondholders said it will not support a stand-alone restructuring unless a new board is brought in, a move that may increase hurdles for Chief Executive Tom Horton and his team.” REUTERS

 

SNC-Lavalin the Focus of Fraud Case in Canada  |  The New York Times report s: “SNC-Lavalin, a Canadian engineering firm already under investigation in three countries for its dealings in Libya, became the focus of domestic corruption allegations on Wednesday after the arrest of its former chief executive.” NEW YORK TIMES

 

Siemens to Buy Rail Business for $2.9 Billion

LONDON â€" Siemens, the largest diversified industrial group in Germany, has agreed to buy the rail signaling business of the British company Invensys for 2.2 billion euros, or $2.9 billion.

Under the terms of the deal, which were announced late on Wednesday, Siemens said it was acquiring Invensys Rail, the signaling systems unit of the British company, in an effort to expand its market share in the rail automation sector.

‘‘With the addition of Invensys Rail, we are in an excellent position to offer best-in-class solutions and technology to rail operators worldwide,'' Sami Atiya, head of Siemens' mobility and logistics division, said in a statement.

Invensys, an engineering and technology company, said it would return £625 million from the deal to investors. Shares in the company rose 10 percent in morning trading in London on Thursday.

Siemens, whose stock price increased by less than 1 percent on Thursday, said it expected to achieve ar ound 100 million euros of cost savings related to the acquisition by 2018. It plans to combine the Invensys rail signaling operations, which have annual revenue of around £800 million, with Siemens' own rail automation division, according to a company statement.

Siemens also added that it would be selling its baggage handling, postal and parcel sorting units. The divisions have combined revenues of around 900 million euros.

The deal for Invensys Rail is expected to close in the second quarter of next year.

JPMorgan Chase, Ondra Partners and the law firm Freshfields Bruckhaus Deringer advised Invensys on the deal.