S.E.C. Acts on Suspicious Heinz Trading

Regulators investigating possible insider trading in the $23 billion takeover of H. J. Heinz have a frozen account linked to suspicious trades, according to a court filing on Friday.

In the filing made in Federal District Curt in Manhattan, the Securities and Exchange Commission took action against a Zurich-based trading account that reaped $1.7 million in gains. The emergency action, the S.E.C. said on Friday, will prevent the suspects from collecting their profits or moving the money overseas.

The identity of the Heinz traders is not yet clear. An S.E.C. statement referred only to “unknown traders.” The gency said its investigation is continuing.

“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information,” Daniel M. Hawke, head of the S.E.C.’s market abuse unit, said in a statement.

As the agency took action on Friday, it could cast a cloud over the Heinz deal. Authorities will no doubt turn their focus toward the limited universe of insiders who tipped traders to the takeover.

The S.E.C. opened the insider trading inquiry on Thursday as Berkshire Hathaway and the investment firm 3G Capital agreed to pay $72.50 a share for Heinz. The inquiry is centered on a suspicious spike in options trading that came as rumors of the deal circulated Wall Street.

The trading patte! rn stood out. For months leading up to the deal, there was scant activity in Heinz options. But on Wednesday, options trading jumped to a possible record, according to data from Bloomberg.

Using what is known as a call option, the traders placed a bullish bet on Heinz , without actually committing to buy the company’s shares. Instead, investors have the opportunity to buy at a given price and future date.

The S.E.C. was alarmed by both the volume of trading and the origin of the bets. The traders who purchased the options, the S.E.C. said, had no history trading Heinz over the last six months.

“The timing, size and profitability of the defendants’ trades, as well as the lack of prior history of significant trading in Heinz” in the account, the commission said in the court filing, “makes these trades highly suspicious.”

The S.E.C.’s inquiry mirrors an action it took last year in another deal involving 3G Capital, a company with Brazilian roots. In September, the agency btained an emergency court order to freeze the assets of a Brazilian man suspected of insider trading ahead of 3G Capital’s takeover of Burger King. The trader, who worked at Wells Fargo, reportedly received the tip from a 3G investor.

Neither the company nor any individual at 3G has been accused of any wrongdoing in that case or in the Heinz inquiry.

Herbalife a Playground for Activist Investors

Herbalife has become the ultimate financial plaything.

Carl C. Icahn cemented the status by joining uppity investors William A. Ackman and Daniel S. Loeb in the war over the nutritional supplements seller. One idea of his is for Herbalife to go private â€" again. The controversial business model and rich cash flow make it easy for Wall Street to keep imprinting fresh narratives on the company.

The renewed batting around of Herbalife began last April when another agitator, Greenlight Capital’s David Einhorn, raised questions about whether the “distributors” of Herbalife weight-loss powders and vitamins actually sell them to other customers or mainly consume them personaly. The shares swiftly tumbled from over $70 apiece to $46.

Then Mr. Ackman, founder of Pershing Square Capital, came along at the end of 2012 with his $1 billion short thesis about the company being a doomed pyramid scheme. That pushed the stock well below $30.

Third Point’s Mr. Loeb gave the market something else to think about. He said Mr. Ackman was trotting out a tired, old bogeyman about multi-level marketing and that government action against Herbalife was unlikely. Mr. Loeb pointed to a $950 million stock buyback plan as a reason to buy.

Mr. Icahn, the fourth activist to weigh in on Herbalife, disclosed a 13 percent stake on Thursday, sending the shares up initially about 14 percent. The 76-year-old billionaire, whose personal animosity toward Mr. Ackman blew up in spectacular fashion last month live on CNBC, reckons that Herbalife is ripe for a leveraged buyout.

It’s an idea as old as Mr. Ackman’s skepticism. Private equity firm J.H. Whitney took Herbalife private in 2002 after the founder’s tabloid-fodder death sent the shares plunging. About two years later, Herbalife returned to the public markets, minting J.H. Whitney a fortune. In 2007, the firm tried to repeat the trick, but shareholders shot down the $38-a-share buyout offer.

For a company whose business is hard to comprehend and which operates in a constantly challenged gray area, it’s easy to alter perceptions. Its stock is 80 percent more volatile than average, according to Thomson Reuters data. The many varied and confident opinions about Herbalife seem to have equally powerful influence. That’s why it’s so important for these multi-millionaire investors to get in the ast word.

Robert Cyran is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

SAC Investors Ask to Withdraw $1.7 Billion

Clients of SAC Capital Advisors have asked to withdraw $1.7 billion from the giant hedge fund amid an intensifying insider trading investigation involving the fund, according to people briefed on the matter.

That amount represents slightly more than a quarter of the $6 billion that SAC manages for clients, and is the largest amount ever withdrawn from the fund. Clients had to inform SAC by Thursday - a regularly scheduled quarterly redemption deadline - whether they wanted to redeem their money.

While the outflows are a blow to the fund founded by Steven A. Cohen, which boasts one of the best investment track records on Wall Street, they are expected to have little impact on the fund’s business. More than half of SAC’s assets under management, which stood at $15 billion as of mid-January, belong to Mr. Cohen and his employees.

“As we have been saying, the redemptions will have no significant impact on our funds,” an SAC spokesman said in a statement.

Still, the amount higlights the reputational damage wrought on SAC by the wave of insider trading cases involving the Stamford, Conn.-based hedge fund. Among the high-profile clients taking money out of the fund include a Citigroup unit that manages money for wealthy families and Lyxor Asset Management, a division of the French bank Societe Generale.

Other SAC clients have taken a more wait-and-see approach, keeping their money with the fund while monitoring developments in the insider trading inquiry. Blackstone Group, SAC’s largest outside investor, took this r! oute, saying it would keep its $550 million investment with the fund for at least the next three months while it learns more information about the latest criminal case against SAC.

In late November, the government brought charges against Mathew Martoma, a former SAC portfolio manager, in a prosecution that they are calling the most lucrative insider trading scheme ever uncovered. The trades at the center of the case involve Mr. Cohen, who has not been charged and denied wrongdoing. Mr. Martoma has pleaded not guilty.

At least seven other current or former SAC employees have been tied to allegations of insider trading while working there, four of whom have pleaded guilty. And the Securities and Exchange Commission has advised SAC that they might file a civil fraud acion against the firm related to the Martoma trades.

A Deal-Making Craze Yes, With Caveats

Are we in the middle of a bull run for mergers

If you read the front pages of many newspapers on Friday, you’d think so. And the articles are right to some extent: we will most likely see a lot more deals than we’ve had in previous years. But the premise of these pieces is based more on prognostications than a clearly established trend.

The examples cited - the Buffett-Heinz deal, the American Airlines-US Airways merger, Dell’s leveraged buyout and the Comcast-NBCUniversal deal - have virtually nothing in common. They also have very little to do with the trends that bankers on Wall Street say they believe will drive a new cycle of deal-making.

Let’s take each deal one by one.

Berkshire Hathaway’s deal for Heinz, according to Warren Buffett himself, has nothing to do with more confidence in the marketplace, low interest rates or just about any other factor signaling a clear direction for deals.

“It was a one-off opportunity,” he said, dismissing talk of trends. e said if the opportunity had come at any other time, he probably would have taken it. And given that Mr. Buffett is financing a large portion of the deal with his company’s own cash, it is hard to argue that the deal is being driven by easier lending by banks.

Now let’s look at the American Airlines-US Airways tie-up. This deal has been in the works for more than six months. The fact that it happened to occur on the same day as the Berkshire-Heinz deal is just coincidence.

The chief executive of US Airways has been stalking American ever since it put itself into bankruptcy in 2011. About the only thing you can say about the timing of the deal to suggest it is part of a trend is that American’s business improved faster than some had expected, as a result of an uptick in the economy, and therefore had more leverage in its negotiations with US Airways. Rather than emerge out of bankruptcy independent and then merge with US Airways, it chose to merge now. But this deal was always going! to happen one way or the other.

How about Dell’s leveraged buyout This deal is unique. How many companies have a billionaire founder - with billions of dollars of excess cash not tied up in the business - willing to finance taking their company private That’s Michael Dell.

The company had wild amounts of cash on its balance sheet, so yes, that is a part of a trend of cash-rich companies. But the deal could have never been done without Mr. Dell’s being willing to put up his own capital. The role of Microsoft as financier had less to do with confidence than defense. Microsoft wanted to keep a main supplier and close ally in business. And the role of Silver Lake is what Silver Lake and other private equity firms have always done.

Finally, there’s Comcast’s purchase of the 49 percent of NBCUniversal that it did not own for $16.7 billion from G.E. That deal was an acceleration of a plan that was going to happen in several years anyway. It wasn’t driven by the deal markets but rathe by a much quicker turnaround in the NBC business than either officials and Comcast or G.E. thought was possible as a result of successful new programming and sports.

Comcast’s chief, Brian Roberts, said that he did the deal sooner rather than later because he expected it would cost him more to buy the rest of the business in the future. (Disclosure: I am a co-anchor of “Squawk Box” on CNBC, whose parent company will soon be Comcast solely.)

So there you have it. Yes, we will see a lot more deals based on the “pipeline” that bankers and other deal makers say they see coming. But any crystal ball-gazing should probably discount, at least a little bit, this week’s raft of deals.

Warren Buffett\'s Kind of Deal

It is by now almost trite to say that there are deals and then there are Warren Buffett deals. And the $23 billion acquisition of H.J. Heinz is certainly a Warren Buffett deal.

Warren E. Buffett is known for picking public targets, setting his price and the targets agreeing without much bargaining to be acquired. If you need examples, look at Berkshire’s big acquisitions of Burlington Northern, Lubrizoil and Wrigley’s. In those deals, once Mr. Buffett showed up, the companies appeared to lose interest in finding any other bidders.

We don’t know the full story of what Heinz, a legendary consumer products company, did to find other suitors or to make sure shaeholders were getting a full price. We will learn more once the proxy statement for the deal is filed. But this is an unusual deal already even at the beginning. For evidence, you need look no further than the agreement for the deal filed on Friday morning.

The reason is that there is no “go-shop” provision, which allows the company to search for other bidders after the deal is announced. Go-shop provisions are common in private equity deals, and even some strategic ones, because they allow a target to negotiate with only one bidder before announcing a deal. After the deal is announced, the target will do a market check and see whether if there are any other bidders. If a bidder comes along, the termination fee that it would pay t! o acquire the company would be lower than if there were no go-shop provision.

There are good reasons for this type of mechanism. First, it allows the board to feel comfortable that it is getting the best price reasonably available. Second, while a go-shop provision is not mandated under Delaware law, companies feel that it helps them satisfy their so-called Revlon duties, which require a board to get the highest price reasonably available in a sale of the company.

As you might have gathered, the Heinz deal doesn’t have a go-shop provision. Instead, the company has negotiated only with Mr. Buffett and 3G Capital, according to reports. If another bidder comes along, it would have to pay a $750 million termination fee, plus $25 million in expenses. That’s about 3 percent of the transaction value and standard for a deal but about three times whatwould be paid if there had been a typical go-shop provision. Any way you slice it, it is a very large sum.

And this deal is structured more as a private equity deal than a strategic one. Mr. Buffett and 3G are financial buyers, and this deal depends on financing. They negotiated a common right in private equity deals that if the financing fails, Heinz can sue to force them to obtain it. But if it is still unavailable, the two buyers can walk from the deal by paying Heinz the hefty sum of $1.5 billion.

I stop here to note to merger agreement aficionados that 3G (represented by Kirkland & Ellis) and Berkshire (represented by Munger Tolles) also negotiated a unique financing extension provision that defers the ability for Heinz to force payment of this fee right away in the event of a financing failure. It allows the buyers to delay such termination to force the banks to finance the deal. We’ll call this new requirement, the ketchup provision.

But back to my main point: Heinz a! ppears to! have consciously limited its options. Why would it do this One reason is simple market dynamics - Mr. Buffett and 3G wouldn’t allow a go-shop provision it. But mergers are market driven, and the common use of go-shop provisions in these situations would have given Heinz good grounds to draw a line in the sand. After all, it would satisfy shareholders that this really is the best deal out there.

But here another reason comes into play: the peculiarities of Heinz. The company is not incorporated in Delaware, as most American corporations are, but in Pennsylvania.

And the state’s law is intended to give complete latitude to boards in deciding whether to accept or reject a takeover. Accordingly, under Pennsylvania statute, a board does not have to consider the interests of shareholders as dominant in deciding to sell the company. Instead, the directors can base their decision on the interests of “employees, suppliers, customers and creditors of the corporation, and upon communities in hich offices or other establishments of the corporation are located.”

The net effect of this statute is to repudiate Delaware’s Revlon rule. A Pennsylvania company like Heinz is under no obligation to get the highest price available for shareholders, and its courts have specifically rejected this doctrine. Instead, other interests like the community can come into play. (Section 7.15 of the agreement requires Mr. Buffett and 3G to, among other things, keep Heinz’s headquarters in Pittsburgh, keep the company named Heinz, preserve the company’s heritage and charitable commitments and, of course, honor the naming rights on Heinz Stadium).

So on the advice of its lawyers (Wachtell, Lipton for the special committee and Davis Polk for the company), Heinz probably told the board that although best practices weren’t required, this wasn’t Delaware and it could basically look at other interests to justify selling to Mr. Buffett and 3G.

This has been done before to great critici! sm. In 2! 009, Bankrate sold itself to Apax Partners. Because it was a Florida corporation, it didn’t adopt the safeguards you also normally see in a private equity deal, primarily because this was Florida and the law didn’t require it. Bankrate’s board, also advised by Wachtell, decided to go with the letter of the law rather than best practices.

Ultimately, this also means that if there is another bidder who wants to put in an offer even without a go-shop provision, the Heinz board is within its rights to turn it down, even if it is a higher bid. The reason is that the board can justify the rejection as being better for Heinz’s long-term interests in the community.

In other words, Mr. Buffett’s magic here was handed an assist by the State of Pennsylvania itself.

Gleacher Confirms It Has Called Off Sales Process

The struggling investment bank Gleacher & Company confirmed on Friday that it had ended attempts to sell itself, at least for the moment, as it settled on the sale of its mortgage lending unit.

In disclosing its fourth-quarter results, including an $11.5 million loss from continuing operations, Gleacher said that it had struck a deal to sell its ClearPoint subsidiary to Ocwen Financial.

But the company said that it had concluded a review of strategic alternatives, including a sale of some or all of the firm, showed that none of the options was in “the best interests of Gleacher’s stockholders at this time.”

Gleacher & Company’s decision comes several weeks afer its namesake founder, the veteran deal maker Eric Gleacher, left the firm. By the time Mr. Gleacher had left, the investment bank already appeared unlikely to pursue a sale, despite having hired Credit Suisse as an adviser last year.

Gleacher & Company’s board had already rejected a proposed sale to Stifel Financial last fall, believing it too low.

Since then, the investment bank has been exploring ways to lift a sagging stock price in an effort to avoid being delisted by the Nasdaq stock market for trading below $1 a share for an extended period of time. Shares in the firm traded around 80 cents each as of Friday afternoon.

Several Ex-Partners Ask Judge to Reject Dewey\'s Bankruptcy Plan

Two weeks before a judge decides whether to confirm the bankruptcy plan of Dewey & LeBoeuf, several of the law firm’s former partners have objected to the proposal and accused Dewey’s former management of fraudulent conduct.

Six onetime Dewey partners have filed legal papers this week urging a judge to reject the plan, which delineates how the defunct firm plans to pay back its creditors. A hearing before Judge Martin Glenn, who sits in federal bankruptcy court in Manhattan, is scheduled for Feb. 27.

Two former partners said that the plan “was designed and conceived to perpetrate a fraud on the firm’s former partners.” A former partner who joined the firm just 10 months before its collapse, called its bankruptcy plan “ill-conceived.” Another pair said the plan is not in the “best interest” of creditors, who say they are owed some $600 million.

The partners’ complaints laid bare the acrimony that still exists among many of the former partners of Dewey, which entered Chpter 11 protection last May after financial mismanagement and a partner exodus doomed the firm. While nearly all of the partners have landed jobs elsewhere, Dewey’s bankruptcy has spawned a crush of lawsuits and much ill will.

In spite of the rancor, Dewey’s restructuring team, led by Joff Mitchell of the advisory firm Zolfo Cooper, has made substantial progress in winding down the law firm during its nine months in bankruptcy. “I am confident that Dewey’s plan of liquidation will be confirmed at the end of the month, despite the recent objections filed,” Mr. Mitchell said.

One objection, filed by a former Dewey partner, Michael L. Fitzgerald, also highlighted the outsized compensation packages that Dewey’s management used to poach star lawyers from other firms. It also raises questions about whether the leadership of Dewey misrepresented the firm’s perilous financial state in luring to recruits.

A corporate lawyer specializing in Latin American deals, Mr. Fitzgerald s! aid that the firm owed him $38 million in compensation. He detailed the extraordinary deal he received when he joined Dewey from Milbank, Tweed, Hadley & McCloy in July 2011. Dewey guaranteed Mr. Fitzgerald fixed monthly and annual sums in unspecified amounts for five years, but they were “not tied to the profits or losses of the firm.” In addition, Dewey agreed to compensate him for the $9 million pension he gave up when leaving Milbank, paying him that amount in installments over seven years.

Mr. Fitzgerald said that he was “fraudulently induced” into joining Dewey because of management’s “false representations” about the firm’s business and financial performance. Now a partner at Paul Hastings, Mr. Fitzgerald did not immediately return a request for comment. Mr. Fitzgerald’s filing, along with those filed by other partners, was first reported on The American Lawyer’s Web site.

At the heart of the partners’ complaints is a “partner contribution plan” that nearly two-thirds of the firm’s 672 former partners - active, former, and retired - agreed to. That plan requires the partners to return a portion of their pay from 2011 and 2012 to compensate creditors. The amount was based on a complex formula tied to their income, ranging from a minimum of $5,000 for retired partners to $3.5 million for Dewey’s highest-paid partners.

By agreeing to the deal, the partners protected themselves from future lawsuits connected to the firm’s demise. That portion of the overall plan, which has already been approved by Judge Glenn, is expected to return $71.5 million to the creditors of Dewey. At its peak, Dewey had 1,400 lawyers across 26 offices worldwide.

But Mr. Fitzgerald and others blasted that plan. Among its problems, they say, is that it benefits some of the members of Deweyâ€! ™s leader! ship at the expense of the rest of the partnership. One filing, made by former partners Elizabeth B. Sandza and Andrew J. Fawbush, accuses Martin J. Bienenstock, the former head of Dewey’s bankruptcy practice, of masterminding a plan that allowed him to get paid $6 million in 2010 while other partners had their pay deferred.

Mr. Bienenstock, now a partner at Proskauer Rose, declined to comment.

Last week, Zolfo Cooper’s Mr. Mitchell and the team winding down Dewey secured a victory when they reached a deal with a group of retirees fighting with the firm’s estate. The retirees agreed to make a payment to compensate the firm’s creditors. In an e-mail, Dan Bicks, a retired partner, said that they were pleased with the terms of the deal they received.

“The best course for both side was to lay down their arms and avoid the travail and cost of continued litigation,” said Mr. Bicks. “The retirees can now put behind them this difficult chapter in their lives.”

Commerzbank Chief Gives Up Bonus Amid Lackluster Results

FRANKFURT â€" The chief executive of Commerzbank, one of Germany’s largest banks, on Friday became the latest in a series European bank leaders to recognize that collecting a big bonus might appear unseemly while banks struggle with layoffs and financial losses.

The chief, Martin Blessing, said Friday he would not take a bonus for 2012, after the bank reported a net loss of 716 million euros, or $959 million. in the fourth quarter. Other Commerzbank executives will also take steep cuts in their bonus pay, the bank said.

However, Mr. Blessing still collected a substantial raise for last year because his salary was no longer restrained by the terms of a government bailout in 2008. His base pay increased to 1.3 million euros, or $1.7 million, from 500,000 euros, the limit set by the government and then voluntarily extended by the bank.

Commerzbank, which is still 25 percent owned by German taxpayers, continues to struggle with bad investments made before the beginning of the financial criis. The bank has said it would cut 4,000 to 6,000 jobs by the end of 2016.

Other bank chief executives have made similar gestures to give up bonuses. Antony P. Jenkins, the new chief executive of Barclays, said this month that he would forgo his bonus, which would have been £2.75 million on top of his £1.1 million salary. The British bank has struggled to rebuild its reputation after recent missteps.

Stephen Hester, the chief executive of the Royal Bank of Scotland, refused a bonus of £963,000, or $1.5 million, for 2011. But he will receive up to £7 million for 2012, including pension contributions and long-term investment deferrals, in addi! tion to his £1.2 million salary, according to recent testimony.

Commerzbank had disclosed this month that it would have a quarterly loss, but offered more details about its earnings on Friday. Net profit for 2012 fell to 6 million euros from 638 million euros a year earlier, as the bank booked losses related to the sale of a unit and a recalculation of its tax liabilities.

Without those one-time items, net profit from the year would have been 990 million euros, the bank said.

Commerzbank said it increased the amount it set aside to cover bad loans in 2012 to almost 1.7 billion euros, from 1.4 billion euros in 2011. Most of the increase came from loans made to the shipping industry, which is in the midst of a severe downturn. Hundreds of ships are anchored idly in ports around the world because they lack customers, creating a severe burden for Commerzbank and other European lenders.

Mark Scott contributed reporting from London.

Herbalife Shares Rise After Icahn Reveals Stake

Herbalife is experiencing the Icahn effect.

Shares of Herbalife, a nutritional supplements company, jumped as much as 17 percent in early trading on Friday, after Carl C. Icahn disclosed a 12.98 percent stake in the company. The stock price then fell slightly, to around $42.50 a share, as investors locked in gains.

For Mr. Icahn, the stock’s rise must be particularly sweet.

While his stake in Herbalife may very well be a bet on vitamins and protein shakes, it also puts him squarely in opposition to a longtime rival, the hedge fund manager William A. Ackman, who revealed in December a big wager that Herbalife shares would fall.

Herbalife has become a venue for a fresh dispute between the two financial titans, whose beef extends back a decade. M.. Icahn and Mr. Ackman, head of Pershing Square Capital Management, engaged in a heated argument on live television on Jan. 25, riveting traders across Wall Street.

And now, on Friday at noon, Mr. Icahn is scheduled to appear again on CNBC, presumably to discuss his newly disclosed investment.

Last month’s show will be a hard act to follow, but the appearance on Friday will no doubt be closely watched.

“Hey listen, I didn’t get on to be bullied by you,” Mr. Icahn barked at the CNBC host on Jan. 25, after being asked to discuss Herbalife. “I want to say what I want to say. And I’m not going to talk about my Herbalife position because you want to bully me.”

As a regulatory filing revealed on Thursday, M! r. Icahn did indeed have a stake in Herbalife at that point, but he was more interested in arguing with his rival.

In the following weeks, Mr. Icahn ramped up his purchases of Herbalife stock and options, accumulating a stake of about 14 million shares.

Mr. Ackman contended in December that Herbalife was a fraud, saying he was short-selling the company’s shares. Mr. Icahn, though, predicted during his television appearance that Herbalife could be “the mother of all short squeezes,” in which shares substantially rise.

One Step Toward Rethinking Taxes

Tax reform, at least in American politics these days, is generally discussed at only the most abstract level. There is general agreement that it would be nice to lower tax rates while broadening the base by getting rid of loopholes. The latter, of course, are seldom specified in any detail, and are very much in the eye of the beholder.

Dave Camp, left, and Sander Levin of the House Ways and Means Committee have appointed task forces to examine tax issues.

If real tax change is ever to be adopted, we are going to have to be specific on small things as well as large.

Representative Dave Camp, the Michigan Republican who heads the House Ways and Means Committee, has taken an impressive step in that direction with a proposal to make substantial changes in the taxation of financial instruments.

Mr. Camp’s proposal got relatively little attention in the media, although it has set off alarm bells in some Wall Street precincts, where it threatens to dismantle some cherished ways that Wall Street has invented to allow banks to profit by taking a cut of tax benefits they offer to customers.

“Congressman Camp’s proposal reflects his efforts to respond to the changing realities of modern financial markets,” said Mark Price, who leads the financial institutions and products group at KPMG’s Washington national tax practice.

Studying Mr. Camp’s proposal is not always easy sledding. This is an area of law that has grown exceedingly complicated, in large part because each change in the law is greeted by new tax avoidance tactics and strategies, which eventually lead to new provisions that combat those but may open the way to still more maneuvers. And on and on. Many innovations in finance accomplish nothing for the overall economy, but instead are aimed solely at gaming either tax or regulatory rules.

Lobbyists for one part of the financial services industry or another have gotten provisions passed to benefit their products over those of competitors, leading to demands by competitors for equal treatment.

It would be nice to report that the chairman has found a magic way to end these games, but he has not. Some on Wall Street are already talking about ways that some of his proposals, if enacted, could be abused.

Mr. Camp understands that and has called his proposal a “discussion draft,” one that is aimed at getting comments from those who would be affected.

He will get plenty of them.

One principle that the Camp proposal would establish is to provide what the congressman calls “uniform tax treatment of financial derivatives.” The definition of derivative is very wide â€" it includes short sales of stock as well as options, swaps and futures.

Under the Camp proposal, a derivative could create only ordinary gains or losses no matter how long it was held. And changes in value would be subject to tax every year, as the market price changed, whether or not the investor sold. There could never be a long-term capital gain involving a derivative, and therefore the investor could never qualify for the preferential tax rate on long-term capital gains.

There are many tax-oriented strategies to create differing tax treatments for what are actually offsetting investments. The idea is to have a loss treated as ordinary income, and recognized as soon as possible, while the offsetting gain is delayed and then treated as a long-term capital gain if that is possible.

The Camp proposal would establish a general rule that both arms of an offsetting strategy will be taxed as ordinary income or loss on a mark-to-market basis at the end of each year. So if one position made money while the other lost, they would wash each other out. There would be little reason to enter into many such transactions. And derivatives â€" except those that businesses use in ways that qualify for hedge accounting â€" will automatically be marked to market.

One type of product that appears to be targeted is so-called exchange-traded notes. They are devised to be alternatives to other investments, but with better tax treatment. Consider a mutual fund that invests in the stocks in the Standard & Poor’s 500. If you buy shares in that fund, dividends will be distributed to you each year, and you pay taxes on them even if you reinvest them in the fund. But if a bank issues a “note” tied to the total return on the same index, you will not owe taxes until you sell the note. The effect is to defer taxes on the dividend income.

To get that tax break, you pay a fee to the bank that issued the note, and you take the credit risk. If the bank fails, you will suffer no matter how well the index does.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

A version of this article appeared in print on February 15, 2013, on page B1 of the New York edition with the headline: One Step Toward Rethinking Taxes.

Big Deals Are Back

THE RETURN OF BIG DEALS  |  Wall Street deal makers and chief executives are getting their groove back. After a fallow few years following the financial crisis, merger activity has roared back to life in the opening weeks of 2013, DealBook’s Peter Lattman writes. On Thursday, Warren E. Buffett’s Berkshire Hathaway teamed up with the Brazilian firm 3G Capital Management to buy H. J. Heinz for $23 billion, as American Airlines and US Airways agreed to merge in an $11 billion deal. Those transactions came on the heels of the $24 billion agreement to take Dell private and the $16 billion deal by Liberty Global to buy Virgin Media.

“Since the crisis, one by one, the stars came into alignment, and it was only a matter of time before you had a week like we just had,” said Jame B. Lee Jr., the vice chairman of JPMorgan Chase. Higher stock prices have helped fuel the activity, and signs of economic improvement have bolstered confidence. In addition, banks, which provide both financing and advice, are becoming healthier, more willing to help companies spend the cash that has accumulated on their balance sheets. There also may be a psychological component. “In the same way that success breeds success, deals breed more deals,” said John A. Bick, a partner at the law firm Davis Polk & Wardwell, who advised Heinz on its acquisition. Still, Mr. Lattman notes, “bankers and lawyers remain circumspect, warning that it is still too early to declare a mergers-and-acquisitions boom.”

The Heinz deal signals the rise of investors from once-emerging markets like Brazil, Michael J. de la Merced and Andrew Ross Sorkin write. 3G, which bought control o! f Burger King two years ago, made the first move in the Heinz transaction, when its principal backer, Jorge Paulo Lemann, approached Mr. Buffett with the idea. “Heinz will be 3G’s baby,” Mr. Buffett said on CNBC. Berkshire and 3G are splitting ownership 50-50.

Trading surrounding the deal is already drawing regulatory scrutiny. The Securities and Exchange Commission opened an insider trading inquiry on Thursday after noticing that trading in Heinz call options soared earlier this week, Ben Protess reports. “As recently as Tuesday, there was scant activity in Heinz options. But by Wednesday, as the companies were putting the finishing touches on the deal, options trading jumped, data from Bloomberg shows.”

The transaction will turn Heinz into a riskier company, loading it up with debt,Peter Eavis writes. “And there is an element to the deal that shows Mr. Buffett is well aware of its risks.” Berkshire is getting preferred shares that will pay a 9 percent return, according to a person familiar with the deal’s terms. For comparison, the preferred shares in Goldman Sachs that Berkshire purchased in the financial crisis paid a return of 10 percent.

For Pittsburgh, where Heinz has its headquarters, the deal underscores the city’s transition “from one of the great hubs of corporate and industrial America to a new economy based on small technology and medical companies with unfamiliar names,” Nathaniel Popper writes. Still, “like other historic names of the city â€" like Carnegie, Mellon and Frick â€" the Heinz brand still courses through the civic blood of Pittsburgh’s heart.”

BLACKSTONE KEEPS MOST OF ITS MONEY WITH SAC  |  Despite an investigation into suspicious trading, SAC Capital Advisors is holding on to its largest outside investor, the Blackstone Group, which said on Thursday that it would keep most of its $550 million with the hedge fund for three more months. Thursday was the regularly scheduled deadline for clients of SAC to decide whether to ask for their money back, and the hedge fund, run by Steven A. Cohen, had warned its employees it could face at least $1 billion of withdrawals.

“Blackstone negotiated a way to buy itself time without delaying its ability to withdraw its investment from the fund,” Mr. Lattman writes. “SAC agreed to a new redemption policy that it will extend to other clients, allowing them to keep their money with SAC for another quarter. After that, if clients decide t end their relationship with SAC, the fund will return their money in three installments. Under the new policy, SAC is letting clients take a wait-and-see approach, monitoring the investigation for developments that could damage the fund. If they withdraw, they will still have all of their money returned by year-end.”

ICAHN REVEALS HERBALIFE STAKE  |  Carl C. Icahn officially has a dog in the Herbalife fight. Mr. Icahn, the billionaire investor, has built up a 12.98 percent stake, or 14 million shares, in Herbalife, a nutritional supplements company that has been at the center of a public spat involving prominent Wall Street investors. Mr. Icahn paid about $214.1 million for shares and call options in the company, according to a filing on Thursday. Mr. Icahn amassed his position recently, ramping up his purchases in la! te Januar! y and February after a heated debate on live television with another investor, William A. Ackman, who is betting against Herbalife. Herbalife’s shares jumped as much as 20 percent in after-hours trading on Thursday. The stock rose 5 percent during the day to close at $38.27 a share.

ON THE AGENDA  |  Please note that the DealBook newsletter is taking a break on Monday as the stock market closes in observance of Washington’s Birthday, but the site will continue to be updated with news. Mr. Icahn will be on CNBC at noon today to discuss Herbalife. Alan Greenspan is on CNBC at 4:20 p.m. Kraft Foods, Burger King and J.M. Smucker report earnings before the market opens. Data on industrial production in January is out at 9:15 a.m. The Thomson Reuters/University of Michigan onsumer sentiment index for February is out at 9:55 a.m.

WARREN COMES OUT SWINGING  |  Elizabeth Warren grilled top banking regulators in her inaugural appearance as a member of the Senate Banking Committee â€" something she had once experienced on the other side, during her tenure as a regulator. Senator Warren, a Democrat from Massachusetts who helped create the new consumer protection agency, pressed officials to justify how they police big banks. “If they can break the law and drag in billions in profits and then turn around and settle paying out of those profits, then they don’t have much incentive to follow the law,” she said. “The question I really want to ask is about h! ow tough ! you are.”

Mergers & Acquisitions Â'

Former Co-Chief of BlackBerry Sells Off His Shares  |  Jim Balsillie, the former co-chief executive and co-chairman of BlackBerry, has sold all of his shares in the struggling company, according to a regulatory filing, Ian Austen reports on the Bits blog of The New York Times.
DealBook Â'

Airline Merger May Lead to Service Cuts  |  As American Airlines and US Airways agreed to merge, “some economists and consumer advocates warn that all this consolidation comes at a price for travelers,” The New York Tmes writes.
NEW YORK TIMES

Cardinal Health Is Buying Large Medical Supplier for $2 Billion  |  Cardinal Health, a distributor of prescription drugs, plans to expand into the growing home health care market with the acquisition of AssuraMed.
DealBook Â'

INVESTMENT BANKING Â'

Europe’s Diminished Banking Sector  |  The Economist writes: “Of the more than half a dozen European bank! s that st! ood astride the world’s capital markets five years ago, only two real powerhouses remain: Deutsche Bank and Barclays. Both are fighting to retain their perch.”
ECONOMIST

For Wells Fargo, an Opportunity in Britain  |  Bloomberg News reports: “Wells Fargo & Co., the lender that’s expanding its securities unit to challenge Wall Street competitors, is broadening U.K. commercial property lending as European banks are forced to retreat.”
BLOOMBERG NEWS

Barclays Executive Expresses Confidenc in New Strategy  |  “I’m not going anywhere and I fully support what Antony is doing,” Rich Ricci, head of investment banking at Barlcays, told Financial News, in reference to the chief executive, Antony Jenkins.
FINANCIAL NEWS

JPMorgan Said to Let Some Employees Go  |  Bloomberg News reports: “JPMorgan Chase & Co.’s equities unit dismissed about two dozen U.S. traders and sales staff and cut pay 4 percent to more closely align it with revenue after the industry’s worst year for stock trading since 2008.”
BLOOMBERG NEWS

PRIVATE EQUITY Â'

A Note of Caution as Buyouts Revive  |  Reuters reports: “As buyout kings once again flirt with mega deals, they are pledging to avoid relying on cheap debt, clever financial tricks and the other excesses of the heady days that preceded the financial crisis.”
REUTERS

HEDGE FUNDS Â'

Hedge Funds Unloaded Apple Stock in 4th Quarter  |  Reuters reports: “Some of the biggest hedge funds that helped make Apple Inc a stock market darling lost faith and dumped their stakes in thefourth quarter, fueling the massive drop in the iPhone maker’s share price.”
REUTERS

Einhorn Bought More Apple Shares  |  Greenlight Capital, the firm run by David Einhorn, raised its holdings of Apple by nearly 50 percent in the fourth quarter. Mr. Einhorn is engaged in a prominent struggle to encourage Apple to return some cash to shareholders.
FINANCIAL TIMES

Third Point Discloses Stake in Morgan Stanley  |  Third Point, the firm run by Daniel S. Loeb,! built up! a $148.2 million stake in Morgan Stanley in the fourth quarter, according to a filing on Thursday.
WALL STREET JOURNAL

I.P.O./OFFERINGS Â'

Russia’s Main Stock Exchange Begins Trading  |  The Moscow Exchange, better known by its original name, Micex, garnered enough investor interest for an initial public offering.
DealBook Â'

VENTURE CAPITAL Â'

Hearst Ventures Invests in Technology ‘Studio’  |  The investment arm of the Hearst Corporation is investing in Science, which is “somewhat akin to a start-up accelerator,” AllThingsD writes. “Sources with awareness of the deal said it was close to $30 million for a stake above 20 percent.”
ALLTHINGSD

LEGAL/REGULATORY Â'

Tax Proposal Raises Alarm on Wall Street  |  A proposal by Representative Dave Camp, the Michigan Republican who heads the House Ways and Means Committee, “has set off alarm bells in some Wall Stre! et precin! cts, where it threatens to dismantle some cherished ways that Wall Street has invented to allow banks to profit by taking a cut of tax benefits they offer to customers,” the New York Times columnist Floyd Norris writes.
NEW YORK TIMES

Rule Advances to Allow Banks More Freedom in Valuing Assets  |  The New York Times reports: “The board that sets American accounting rules moved on Wednesday to substantially reduce the use of market values in financial statements. The move, if adopted, would give banks more freedom to value financial assets as they deem appropriate.”
NEW YOR TIMES

Japan’s Central Bank Defends Yen Policy  |  Japanese officials said their actions were done to lift the country’s economy out of deflation, not to manipulate currency.
NEW YORK TIMES

Ex-Stanford Executives Sentenced to Prison  |  Two defendants were each sentenced on Thursday to 20 years over their role in a $7.2 billion Ponzi scheme.
REUTERS

Lehman Brothers Looks to Question JPMorgan’s ‘Whale’!  |  Reuters reports: “Lehman Brothers Holdings Inc is seeking court permission to question the JPMorgan Chase & Co trader known as the “London Whale” in connection with its $8.6 billion lawsuit accusing the largest U.S. bank of driving it into bankruptcy.”
REUTERS