‘Shareholder Democracy’ Can Mask Abuses

Martin Lipton, one of the nation’s top corporate lawyers, was dismayed.

Having watched David Einhorn, the activist investor, go to battle with Apple in the last two weeks to push it to distribute some of its $137 billion cash hoard to shareholders, Mr. Lipton had seen enough. Mr. Einhorn, he thought, had gone too far.

A longtime counselor to the Fortune 500 as one of the founding partners of Wachtell, Lipton, Rosen & Katz, he sat down and wrote a scathing memo to his clients on his view that “shareholder democracy” has run amok.

“The activist-hedge-fund attack on Apple â€" in which one of the most successful, long-term-visionary companies of all time is being told by a money manager that Apple is doing things all wrong and should focus on short-term return of cash â€" is a clarion call for effective action to deal with the misuse of shareholder power,” he wrote. The memo was entitled, “Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the Economy.”

Mr. Lipon said that long-term shareholders in public companies are being undermined “by a gaggle of activist hedge funds who troll through S.E.C. filings looking for opportunities to demand a change in a company’s strategy or portfolio that will create a short-term profit without regard to the impact on the company’s long-term prospects.”

While “shareholder democracy” may be a good sound bite, Mr. Lipton has a point worth considering.

It increasingly appears that the rise of “shareholder democracy” is leading, in some cases, to a perverse game in which so-called activist investors take to the media to pump or dump stocks in hopes of creating a fleeting rise or fall in a company’s stock price. The battle over Apple is just one minor example. Carl Icahn’s investment in Herbalife, betting against William Ackman’s accusation that the company is a “pyramid scheme,” is another.

That’s not to say that shareholder democracy is a bad thing. Shareholders have successfully and properly brought pressure to bear on underperforming companies, pushed out entrenched directors and, in some cases, pressed for operational changes to address health and the environment.

At a time when investors are calling for managements and directors to think more about the long term, this latest breed of activism is also multiplying. But are these activists interested in the long term

According to Leo E. Strine Jr., the chief judge of the Delaware Court of Chancery, the answer is usually obvious: no.

“Many activist investors hold their stock for a very short period of time and may have the potential to reap profits based on short-term trading strategies that abitrage corporate policies,” he wrote in a widely circulated essay for the American Bar Association. Near the beginning of his essay he asked: “Why should we expect corporations to chart a sound long-term course of economic growth, if the so-called investors who determine the fate of their managers do not themselves act or think with the long term in mind”

The academic literature provides a mixed and inconclusive assessment of the true effect of activism on shareholder value over the long-term.

In fairness, it must be said that not all activist investors are created equal and not all of their investments should be considered in the same way. Nelson Peltz, once called a corporate raider, fought his way onto the board of Heinz in 2006. He is still on the board and approved the sale of the company to Berkshire Hathaway and 3G Capital just weeks ago.

Daniel Loeb, the founder of Third Point Management, similarly fought his way onto the board of Yahoo after exposing its former chief executive, Scott Thomson, for lying on his résumé. He is now a board member and helped recruit Marissa Mayer to be chief executive. Whether he likes it or not, Mr. Loeb is a long-term sharholder in Yahoo. Just weeks ago, however, he announced that he had made an investment in Herbalife that his peer, Mr. Ackman, is betting against. Part of Mr. Loeb’s bet was simply a short-term gamble; he has since sold some of his investment, taking profits off the table.

Similarly, Mr. Ackman has made some long-term bets â€" he held his short position in MBIA for years and is now a long-term investor and director of J. C.Penney â€" but he has also made a series of short-term investments as well.

As for Mr. Einhorn’s fight with Apple, it is hard to argue he is a short-term investor in the company; his firm, Greenlight Capital, has held a stake for the past three years. But the measures he is pressing the company to pursue â€" creating a “iPref” or preferred share that pays a dividend to shareholders in perpetuity â€" feel a lot like financial engineering to create some quick value for investors.

In a news release announcing his proposal, which would have Apple create $50 bil! lion in p! erpetual preferred stock, Mr. Einhorn said that amount of the new shares “would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share.” He continued, “Greenlight believes additional value may be realized when Apple’s price-to-earnings multiple expands, as the market appreciates a more shareholder-friendly capital allocation policy.”

In truth, Mr. Einhorn’s proposal is a lot more long-term thinking than just pressing Apple to distribute a special one-time dividend or pursue a series of stock buybacks; his proposal requires shareholders to remain so as to reap the dividends the special “iPrefs” would throw off. But make no mistake, Mr. Einhorn is also hoping that Apple’s common shares will jump in price if Apple takes up his proposal.

Mr. Einhorn declined to comment for this column.

I’ve had my own un-ins with Mr. Lipton. In 2008, before the financial crisis, I wrote a column questioning Mr. Lipton’s various efforts “to stiff-arm the people who actually own the company.” At the time, he wrote a memo arguing that the “limits on executive compensation, splitting the role of chairman and C.E.O. and efforts to impose shareholder referendums on matters that have been the province of boards should be resisted.”

As the inventor of the anti-takeover maneuver called the “poison pill” and as one who has made a career trying to protect boards from agitators, Mr. Lipton was talking his own book. I wrote, “Mr. Lipton’s advice isn’t just wrongheaded. It’s dangerous.”

But nearly five years later, with the perspective of the financial crisis, Mr. Lipton’s underlying worry that certain shareholders will abuse the powers of democracy is not unfounded. The question, as is often the case, is whether the influence of a few interested in the short term overwhelms the best intere! sts of th! e many in the long term.

Banks Fear Court Ruling in Argentina Bond Debt

A fierce battle between the government of Argentina and hedge funds and other investors led by a group of hedge funds has already led to the seizure of a naval ship and dragged in the United States Treasury. Now a federal appeals court is hearing the dispute, and how it rules could have a major impact on world debt markets.

The investors â€" including the hedge fund tycoon Paul E. Singer â€" sued Argentina seeking payment for $1.3 billion in bonds that the country defaulted on in 2001. On Wednesday, the case comes before the United States Court of Appeals for the Second Circuit, which has already sided with the hedge funds on their main arguments.

But the issue that the appeals court is still undecided about is perhaps the most important. It involves devising a method to pressure Argentina to pay up on the disputed bonds. And that has left the investors who hold a majority of Argentina’s foreign debt vulnerable, as well as the banks that process the payments to those investors.

While te hedge funds have grabbed the headlines â€" winning a temporary court order to seize an Argentine naval ship docked in Ghana, for example â€" most of the other holders of Argentina’s nearly $100 billion in defaulted debt agreed over the last decade to accept new bonds, taking big losses in the process. The country has since faithfully paid on the exchange bonds.

At the same time, Argentina has vehemently repeated that it will not pay the hedge funds and other holders of its old debt and has passed laws forbidding the government from paying anything to the bondholders who didn’t participate in the exchanges.

But last year, Judge Thomas P. Griesa of the Federal District Court in Manhattan ruled that if Argentina wanted to pay the holders of the restructured debt, it would have to pay the hedge funds and othe! r holders of the defaulted debt, too. The judge included third-party banks in his injunction, and prohibited them from processing payments to holders of the exchange bonds unless all debt holders were paid.

Large banks, investors and the United States Treasury Department have objected to the judge’s order. In short, they say, using the sanction could cause financial losses for innocent bystanders and lead to unnecessary disruption in the bond markets.

“They are trying to block the payments system,” said Vladimir Werning, executive director for Latin American research at JPMorgan Chase. “This is unprecedented in the New York jurisdiction.”

In an e-mail, Kevin Heine, a spokesman for Bank of New York Mellon, which handles bond payments, said the ruling, “will create unrest in the credit markets and result in cascades of litigation, which is precisely the opposite effect that an injunction should have.”

A ruling in favor of the hedge funds would also have ripple effects throughout the debt markets.

“Any time you have something that can change of balance of power, it can matter beyond Argentina,” said Robert Kahn, a fellow at the Council on Foreign Relations.

Despite the legal worries, investors have so far been keen to hold higher-yielding emerging markets debt, given that interest rates are so low. Apart from Argentine bonds, debt issued by developing countries has performed strongly.

Unlike Argentina, many of the! se countr! ies have held their noses and cut deals with holdouts in the past to get on with important economic overhauls, most recently Greece on certain smaller foreign-law bonds.

And in the years since Argentina’s default, most sovereign bonds have special clauses in them that make it much harder for holdouts to succeed. These are called collective action clauses, which state that if a certain majority of bondholders agree to take losses in a bond restructuring, those losses would be forced on all bondholders, even would-be holdouts who don’t agree.

But large amounts of bonds, those issued more than 10 years ago, do not have collective action clauses. And those that do have the clauses may not act as intended if the holdouts win their Argentina case, said Mr. Werning of JPMorgan.

Right now, a bond with a collective action clause might get restructured if 75 percent of the holders agree to it. If Judge Griesa’s ruling is upheld, more bondholders might be reluctant to enter a restructuring and he required majority might not be achieved. Bondholders might not enter the restructuring because they fear holdout litigation depriving them of payments later on.

“This could adversely affect the level of participation in a swap,” Mr. Werning said.

Still, others contend that the market for sovereign debt may be improved if the judge’s ruling is upheld, with the sanction on payments banks mostly intact. Countries like Argentina, they say, have taken advantage of the fact that there is no bankruptcy regime in the sovereign debt market to allow creditors to recoup money in a default. Indeed, Judge Griesa has said the Argentina case is partly about creating safeguards for creditors in the absence of bankruptcy regime.

But Anna Gelpern,a professor at the Washington College of Law at the American University, said that if the federal court’s rulings are upheld, it might just end up underscoring the limitations of the American courts’ power.

“What if Argentina still doesn! ’t sett! le How does the court look then” she said. “It can only isolate Argentina and Argentina seems content to be isolated.”

While there is a chance that the appellate court’s decision could be appealed to the United States Supreme Court, it is more likely that its ruling will be the final word on the lower court order.

According to that order, if a bank chose to channel payments from Argentina to the owners of the restructured debt, the bank would not be in compliance with his order. A payments bank, Bank of New York Mellon in the case of Argentine exchange bonds, would then decline to process the exchange bond payments, and the bonds could fall into default, inflicting big losses on their holders.

Some market specialists have raised the prospect that Argentina could keep paying the exchange bondholders by avoiding payments banks that operate in the United States. It could, for instance, swap the exchange bonds for new instruments registered under Argentine law that make payments throug an Argentine entity.

But the court may decide that, in such a situation, the exchange bondholders themselves would be breaking its injunction. One of the things the appeals court is looking into is how to determine which third parties should sit outside the reach of the district court’s ruling.

It is not just hedge funds who are hoping to gain from an affirmation of the lower court ruling. This group also includes many individual investors, who are now feeling more optimistic about getting their money back as the case comes before the appeals court.

“We are hopeful the ruling will stay as issued,” said Horacio Vázquez, who helps lead a group in Buenos Aires that represents bondholders.

Confirmation Hearing for Mary Jo White Said to Be Scheduled for March

Mary Jo White appears poised to face a confirmation hearing next month, a crucial step for the former federal prosecutor on her path to becoming the top Wall Street regulator.

Ms. White, whose nomination to lead the Securities and Exchange Commission has lingered for over a month, plans to testify in March before the Senate Banking Committee, two Congressional officials briefed on the matter said. The committee has not set a firm date for the confirmation hearing, the officials said, though lawmakers have tentatively scheduled her to appear the week of March 11.

The committee, which oversees the S.E.C. and other financial regulators, must bless her appointment before the full Senate holds a vote. While some officials have quietly expressed concerns about Ms. White’s role as a Wall Street defense lawyer, her nomination is not expected to face major complications.

The timetable laid out on Monday represents a slight delay from earlier plans. An S.E.C. official who spoke anonymously said he agency initially expected Ms. White to face a confirmation hearing in early February.

The extra time has proved helpful. Over the last couple weeks, Ms. White has received multiple briefings from agency staff members about new securities rules and the structure of the stock market, the official said. The briefings will in part prepare her for the confirmation hearing, which is expected to cover a broad scope of topics.

While Ms. White is a skilled litigator, she lacks experience in financial rule-writing and regulatory minutiae, a potential stumbling block for her nomination. Lawmakers also expect to raise questions about her movements in and out of the revolving door that bridges government service and private practice. Some Democrats, a person briefed on the matter said, will question whether she is too cozy with Wall Street.

In private practice, Ms. White defended some of Wall Street’s biggest names, including Kenneth D. Lewis, a former chief of Bank of America. As the head! of litigation at Debevoise & Plimpton, she also represented JPMorgan Chase and the board of Morgan Stanley. Her husband, John White, is co-chairman of the corporate governance practice at Cravath, Swaine & Moore, where he represents many of the same companies that the S.E.C. regulates.

(Ms. White has agreed to recuse herself from many matters that involve former clients, while her husband agreed to convert his partnership at Cravath from equity to nonequity status.)

Despite some reservations, she is expected to receive broad support on Capitol Hill. When President Obama nominated her last month, Senator Charles E. Schumer of New York was one of several Democrats to praise her prosecutorial prowess, calling her “tough-as-nails” during stints as a federal prosecutor in Brooklyn and as the first female United States attorney in Manhattan.

While she handled some white-collar and securities cases, her specialty was terrorism and mafia cases. As a top federal prosecutor in New York City fo more than a decade, she helped oversee the prosecution of the crime boss John Gotti and directed the case against those responsible for the 1993 World Trade Center bombing. She also supervised the original investigation into Osama bin Laden and Al Qaeda.

St. Joe Co. Investors Lose Appeal of a Fraud Lawsuit

In October 2010, the hedge fund manager David Einhorn took the stage at an investor conference and announced a large bet against the St. Joe Company, a large owner of Florida real estate. He walked the audience through a presentation titled “Field of Schemes: If You Build It, They Won’t Come,” in which he laid out his case that St. Joe vastly overvalued its property holdings. The company’s stock promptly plummeted 20 percent.

Aggrieved shareholders sued the company, saying they were blindsided by the assessment. They accused St. Joe’s of securities fraud based on the revelations in Mr. Einhorn’s critique.

On Monday, the United States Court of Appeals for the 11th Circuit in Atlanta threw out the case, ruling that the shareholders could not rely on Mr. Einhorn’s report in bringing a fraud claim against the company. The court said tat his presentation merely repackaged information that was already public.

“Einhorn was a maven of Wall Street,” said Judge Charles R. Wilson, who wrote the opinion for the three-judge panel. “It is no great surprise that investors might flee like rats from a sinking ship upon news that he viewed a stock’s prospects as grim.”

Mr. Einhorn, who runs the hedge fund Greenlight Capital, has made a name for himself with his aggressive bets against companies, including Lehman Brothers before the bank collapsed, and Green Mountain Coffee Roasters. As he has gained acclaim, so has his ability to move stock prices.

He is part of a ! generation of stock pickers that has taken an increasingly activist stance, using investor conferences, or the cable television airwaves, to publicize their views about companies. The investor William A. Ackman has recently made waves claiming that Herbalife, the supplements marketer, is a fraud.

The latest appeals court ruling will most likely make it harder for shareholders to base fraud claims on an analyst’s report or a short-seller’s opinion.

“The court got it exactly right,” said Sharon Nelles, a lawyer at Sullivan & Cromwell who represented St. Joe. “The opinion of a short-seller that he has made a good bet is not a basis for a shareholder fraud complaint.”

Mr. Einhorn made headlines last week after winning an unrelated court ruling against Apple that was part of his campaign to get the tech giant to distribute more of its ash to investors. (Mr. Einhorn owns Apple shares outright, so he is hoping that the stock, which is down about 37 percent from its 52-week highs, will rise in value).

In the case of St. Joe, Mr. Einhorn spoke at the Value Investing Congress in Manhattan in 2010 and said that the company had vastly overstated the worth of its real estate holdings, which included about 570,000 acres of land, much of it in the Florida panhandle. His 139-page slide presentation showed empty lots, half-built houses and vacant storefronts.

“This is a ghost town,” he said of one abandoned development at the time.

A few months after Mr. Einhorn’s presentation, St. Joe disclosed in a public filing that the Securities and Exchange Commission had initiated an inquiry into St! . Joe’s! valuation policies.

St. Joe shareholders, led by the City of Southfield Fire and Police Retirement System in Michigan, sued the company. They claimed that the information in Mr. Einhorn’s report and the disclosure about the S.E.C. inquiry should have been previously revealed. The trial court threw out the lawsuit, and the appeals court affirmed that action on Monday.

The court said that “Einhorn’s opinion revealed no fact to the market” and nothing suggested that St. Joe “obfuscated or concealed the information on which Einhorn relied.”

As for the disclosure of the S.E.C. inquiry, the court said that it alone was not an actionable securities fraud claim. “The announcement of an investigation reveals just that â€" an investigation â€" and nothing more,” the court said.

Although St. Joe disputed Mr. Einhorn’s claims, it eventually wrote down the value of some of its assets. The S.E.C. never brought any action against the company, whose share price has recovered to abut where it was on the day of Mr. Einhorn’s presentation.

Rajat Gupta Ordered to Reimburse Goldman Sachs $6.2 Million

A federal judge on Monday ordered Rajat Gupta, the former Goldman Sachs director, to pay the bank more than $6.2 million to reimburse it for legal expenses connected to his insider trading case.

Last May, a jury convicted Mr. Gupta, 64, of leaking boardroom secrets about Goldman to the hedge fund manager Raj Rajaratnam. The presiding judge, Jed S. Rakoff, sentenced Mr. Gupta to two years in prison. He free on bail while he is appealing the conviction.

Goldman had sought $6.9 million in reimburement from Mr. Gupta, which represented the total amount that the bank had paid to its primary outside counsel at the law firm Sullivan & Cromwell for an internal investigation and other legal expenses. The bank filed the claim based on the Mandatory Victims Restitution Act, a law that allows corporations to get reimbursed as a corporate victim of an insider trading crime by a rogue employee.

After reviewing the firm’s 542 pages of billing records related to the case, Judge Rakoff said that Mr. Gupta raised no “colorable challenge to the veracity of the records.” He cut the bill by 10 percent, he said, because he noted that there were some extraneous entries.

“On a few occassions,” Mr. Rakoff wrote, “the number of attorneys staffed on a task â€" while perhaps perfectly appropriate on the assumption that Goldman Sachs wished to spare no expense on a matter of great importance to it â€" exceeded what was reasonably necessary” under the statute.

Michael Duvally, a Goldman! spokesman, said the bank was pleased the court ordered Mr. Gupta to pay it restitution. Gary P. Naftalis, a lawyer for Mr. Gupta, declined to comment.

Goldman is not the only bank that has asked to get paid back because of an employee’s insider trading crimes. Last March, a federal judge ordered that Joseph F. Skowron, a former Morgan Stanley hedge fund manager, pay the bank $10.2 million in legal fees and a portion of his past compensation. Mr. Skowron is appealing the ruling.

The money that Mr. Gupta now has to pay Goldman is separate from the cost of Mr. Gupta’s legal defense, which has thus far exceeded more than $30 million. That legal tab has been paid for by Goldman because the bank’s bylaws require it to pay the legal fees of its top officers and directors. But under a deal reached before his trial, Mr. Gupta agreed that if he was fond guilty of insider trading, he would reimburse the bank for the legal fees advanced to him. Goldman must continue to pay his bills until the resolution of his appeal.

Mr. Gupta should be able to afford the $6.2 million payment to Goldman. In April 2008, he had a net worth of about $84 million, according to testimony during the trial. But the case also revealed that his assets took a major hit during the financial crisis.

For Goldman, Mr. Gupta’s case was a huge distraction. Among other hassles, the bank’s chief executive, Lloyd C. Blankfein, was forced to testify over three days in Federal District Court in Manhattan, reviewing for a jury the details and sanctity of Goldman’s boardroom discussions.

Liquidation Authority and the Bankruptcy Clause

The litigation against the Dodd-Frank Act’s orderly liquidation authority continues, with an amended complaint filed last week, adding a few more states to the mix, and the deadlines with regard to the government’s motion to dismiss reset accordingly.

The revised complaint (see below) continues to assert that the authority “constitutes an exercise of Congress’s power under the Bankruptcy Clause.”

The Bankruptcy Clause - Article I, Section 8, Clause 4 of the Constitution - is something of an oddball. After all, Congress was already granted the power to regulate interstate commerce in the clause just before, so why single out bankruptcy for separate treatment And why lump bankruptcy with nationalzation

To the extent the Bankruptcy Clause is given any thought at all, the modern conception of the clause is to assume it part of a larger Hamiltonian effort to federalize the economy: the Commerce Clause, the Bankruptcy Clause and the Contracts Clause, combined perhaps with the Supremacy Clause and the Necessary and Proper Clause, working together to provide that the most important aspects of commerce are federalized, and kept from piecemeal regulation by the states. Indeed, this conception has probably been the most common understanding for almost a century.

But is orderly liquidation authority even an exercise of Congress’ power under the Bankruptcy Clause

It’s a little unclear, because Congress did not say what power it was exercising when it enacted Dodd-Frank. Presumably, some parts are enacted under the Commerce Clause, but it is plausible that the authority comes u! nder the Bankruptcy Clause, whether Congress knew it or not. After all, there are reasons to doubt whether Congress can enact debtor-creditor law under any other part of the Constitution.

The plaintiffs then argue in Count VI of their complaint that the orderly liquidation authority is defective, because it gives so much power to the Federal Deposit Insurance Corporation and the Treasury secretary that it constitutes a nonuniform bankruptcy law, in violation of the Bankruptcy Clause’s requirements.

Here the litigation goes seriously off the rails. First, it is not at all clear that the uniformity requirement is all that powerful of a restraint. The only case where the Supreme Court has struck down a bankruptcy law on this basis involved a law that applied to a single railroad. Apparently, uniformity requires application of the la to some broader group of debtors.

After that, all bets are off. For example, the court did uphold a law that applied only to Northeastern railroads.

More generally, the Bankruptcy Code is all about providing the debtor with options. Today, an individual debtor can file under as many as four distinct chapters. During the New Deal era, the bankruptcy laws included Section 77 for railroads, Chapters X and XI for other corporations and liquidation, reorganization and composition proceedings for individuals. At this same time, Congress created the F.D.I.C. and vested it with authority over bank insolvencies - probably under the Bankruptcy Clause, whether or not the banking lawyers know it.

In Chapter 11 alone, the debtor is given broad flexibility to shape a plan that fits the debtor’s particular needs. There is no requirement that all debtors follow any specific path.

The orderly liquidation authority litigation proceeds from the faulty notion that Chapter 11 provides a on! e-size-fi! ts-all solution, whereas its quite clear that one reason Chapter 11 and its predecessors have been so successful rests in the flexible nature of the proceedings.

But it may be that the court will never have to decide this issue.

After all, it seems a bit strange to challenge the constitutionality of an insolvency provision that might never be invoked.

Complaint gainst Dodd-Frank’s orderly liquidation authority by

Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethcs at Seton Hall Law School and an expert on bankruptcy.

Buyout Offer Will Likely Not End Elan’s Merger Ambitions

Royalty Pharma’s $6.6 billion indicative offer for Elan probably won’t be enough to end the latter’s ambitious dreams. Elan has grand acquisition plans after selling most of the rights to its blockbuster drug, Tysabri, for $3.25 billion earlier this month. Royalty Pharma may well use that cash more wisely than Elan’s current management, but the 4 percent premium it offered won’t seal the deal.

Elan sold most of its interest in Tysabri, a multiple sclerosis treatment, to its partner, Bogen Idec, for a big chunk of cash and 12 percent of next year’s sales. The royalty could increase to as much as 25 percent if Tysabri brings in more than $2 billion a year. As a result, Elan is now primarily a cash-rich royalty machine rather than a drug producer.

The danger with this kind of cash shell is that management pursues value-destructive deals, overpays itself for doing relatively little, or both. Elan’s decision to buy back $1 billion of stock, which coincided with Royalty Pharma’s approach last week, reduces this risk somewhat as does its plan to refinance $600 million of debt. But all that will still leave the company with close to $2 billion to spend buying other assets. Elan’s Irish jurisdiction offers tax advantages, but there are plenty of other pharmaceutical companies with lots of cash which could extract real operational synergies from such deals, increasing the risk Elan would have to overpay.

Royalty Pharma is a specialist at managing largely passive dru! g-related revenue. The new Elan would fit the bill, and snapping it up would remove any concern about profligate M.&A. But the price isn’t right. Royalty Pharma thinks its measly 4 percent premium to Friday’s closing price is fair because so much of Elan’s value is in cash and the company sold Tysabri at a similar valuation.

But acquirers pay big premiums for cash-rich companies all the time, and Elan sold its rights to its partner - the only credible buyer - on the cheap. Moreover, the deal increases the incentive for Biogen to sell Tysabri instead of other drugs, because Biogen now captures a greater share of the economic spoils.

With Elan set to receive a higher payout if Tysabri sales improve, it looks as though Royalty Pharma is trying to score a bargain. Investors seem to think it will have to pay more - Elan’s shares traded about 3 percent above the offer price on Monday afternoon. Elan’s dreams may be oversized, but for now Royalty Pharma’s alternative for the biotech’s shaeholders is too scrawny.

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

The Challenge of Sentencing White-Collar Defendants

Are white-collar defendants treated more favorably than other criminals when it comes to sentencing A case involving the chief executive of a technology firm in Ohio that collapsed in 2003 after fraud allegations seems to indicate that perhaps there is such a thing as being too lenient, according to a Federal Appeals Court.

The recent case involves Michael E. Peppel, the former chairman and chief executive of MCSi, who pleaded guilty to conspiracy, money laundering and filing false documents with the Securities and Exchange Commission. Federal authorities said he inflated revenue and earnings to prop up MCSi’s stock price at a time when the company was failing after years of having grown throug acquisitions.

Even though the firm collapsed after the fraud came to light, the judge overseeing the case took into account the letters of support and handed down just a seven-day prison sentence because the defendant was “a remarkably good man.”

An appeals court, however, recently concluded that the district judge abused her discretion by taking into account factors that were not permissible in imposing sentences in white-collar cases.

The recommended sentence was approximately eight to 10 years, based largely on the estimated loss to shareholders of $18 million when the company disclosed the fraud. By imposing only seven days in prison, the United States Court of Appeals for the Sixth Circuit in Cincinnati noted that this was “a 99.9975% reduction” from what the federal sentencing guidelin! es provide.

Mr. Peppel’s sentence also seems to buck the trend of recent cases in which white-collar defendants convicted of committing fraud had received long prison terms, far greater than what has been meted out in the past.

The appeals court decision reflects an underlying tension in white-collar cases involving defendants who present no real threat of physical harm to society and continue to lead productive lives after committing a crime. When there is little likelihood that the defendants convicted of fraud will ever be trusted enough to commit a similar violation, is it in society’s best interest to send them to prison for a significant period of time

At one time, the federal sentencing guidelines were applied quite rigidly, and such a minimal sentence would have been almost impossible unless the defendant provided extraordinary assistance to the government. Mr. Peppel did not orce the government to go to trial by pleading guilty, but it does not appear that he provided any significant help in the investigation, largely because he was its main target.

The Supreme Court restored much of the judge’s discretion in determining the appropriate sentence to district court judges in 2005 in United States v. Booker, when it ruled that the sentencing guidelines were only advisory.

The punishment must still be reasonable and the judge is required to explain the reason for a variance from the recommended sentence. But there is now much greater flexibility to take into consideration the specific factors in a case, including the defendant’s personal background and the impact of the crime.
One method frequently used in white-collar cases involves letter-writing campaigns to point out the many positive attributes of the defendants. The emphasis is usually on charitable contributions and close family t! ies to sh! ow that a reduced punishment reflects the sentencing factor to “provide just punishment for the offense.”

Letters in some recent high-profile insider trading cases appear to have had at least some effect on the sentence. More than 200 letters were sent on behalf of Raj Rajaratnam, who received an 11-year term that was well below the government’s recommendation of more than 24 years in prison.

Rajat Gupta, convicted of tipping off Mr. Rajaratnam, had more than 400 letters sent on his behalf, including ones from Bill Gates, the Microsoft billionaire and philanthropist, and Kofi Annan, the former United Nations secretary-general. Mr. Gupta received a two-year prison term rather than the eight to 10 years sought by prosecutors.

In contrast, Bernard L. Madoff received not a single letter of support when he received a 150-year prison term.

In Mr. Peppel’s case, the district judge noted that more than 100 letters had been sent attesting to his “hu! mble begi! nnings and his many community and charitable activities both before and after the charges in this case.” Among the reasons for giving a short sentence was evidence of his strong community and family involvement, and business expertise that included starting a new company achieving growing success.

The appeals court rejected those grounds as insufficient for such a significant departure from the recommended guidelines. It was troubled by the district judge’s reference to his work as a reason for giving a lighter sentence, rejecting the position that a defendant “should be sentenced lightly on the asserted ground that they offer more to society than those who do not possess such knowledge and skill.”

There is no simple answer to what is the appropriate sentence for any defendant, and especially for those who commit business crimes. The impact of white-collar offenses is far broader than most street crimes, but also much more diffuse - it is unlikely the many investors in MCSi had a harde time rebuilding their lives than victims of murder or assault.

The judge’s sentence implied that a senior executive is somehow not as bad as an “ordinary” criminal, and perhaps more valuable to society living outside prison. The fact that there are significant collateral consequences from a conviction may just reflect that white-collar defendants have more to lose, and have a greater concern about their reputation and future employment prospects than others.

But a long prison sentence imposes significant costs on the public. According to the Bureau of Justice Statistics, the average annual cost to house a convicted felon in a state prison is approximately $28,000 a year. That amount does not take into account what a white-collar defendant could generate by being gainfully employed instead of working on the prison laundry.

Mr. Peppel’s case has been sent back to the same judge to reconsider the appropriate sent! ence. I ! expect he will receive more than the seven days imposed the first time he appeared, but given his background and strong support from family and friends it is unlikely that he will get anywhere near the eight to 10 years recommended by the sentencing guidelines.

After the First 100 Days of Xi Jinping

Xi Jinping has been general secretary of the Communist Party of China for just over 100 days. Last week, official media praised Mr. Xi’s first 100 days in office and his focus on the “Chinese Dream” as well as people’s livelihood issues like health, education, property prices and corruption.

Three important political meetings will occur in the next two weeks. First, the Central Committee of the 18th Party Congress will hold the Second Plenum for three days starting Feb. 26. The National People’s Congress, China’s legislature, and the Chinese People’s Political Consultative Conference, the top advisory body for the Chinese government, begin to go into session for about two weeks of what is known as the “two meetings.”

At the N.P.C. meeting, Mr. Xi will formally replace Hu Jintao as president and Li Keqiang will take over for Wen Jiabao as premier. The legislature will approve a streamlining of certain government ministries, and we should learn the official duties for senior politicians Wang Yang and Li Yuanchao.

The environment is likely to be on the N.P.C. agenda. Smog continues to plague much of China, and there are increasingly dire reports about water pollution, food pollution and soil pollution. For the first time, the government officially admitted the existence of a large number of “cancer villages” caused by pollution.

In addition to allowing much more open reporting on the environmental degradation, Beijing is also taking steps to address what increasingly appears to be one of the biggest risks to the Community Party’s rule and China’s future development. Examples of policy responses include a plan to invest hundreds of billions of dollars on water projects over the next 0 years, a new environmental tax, much stricter fuel emission standards for new cars in Beijing and a requirement that companies in heavy pollution industries buy environmental damage insurance.

While there are signs of regulatory progress, a recent article from Caixin, a leading Chinese business magazine, highlights the bureaucratic and special-interest challenges of reaching a consensus on new rules for cleaning up China’s relatively dirty gasoline, cited as one of the causes of the recent “smog sieges” across China.

THE ENVIRONMENTAL DEGRADATION can no longer be covered up and Beijing has ! given the! media more room to report on the problems. Now, the government must make aggressive, concrete progress or it is potentially setting itself up for a significant popular backlash.

Last week’s column noted that new measures to repress property prices were expected. Those measures were announced on Feb. 20 and the news contributed to the Shanghai stock market’s worst weekly loss in 20 months. The government has had policies in place for nearly three years to cool the real estate market but prices and transactions both began increasing again in the second half of 2012, even though housing is barely affordable to much of China’s middle class.

Jing Ulrich, managing director and chairman of global markets in China at JPMorgan Chase, usually has bullish things to say about China. But on Monday, she told a group of journalists that “property prices are a reflection of overall liquidity in the system” and China may be near the peak of its latest property cycle.

One of the providers of the liquidity in the system is the People’s Bank of China. Its chief, Zhou Xiaochuan, is reportedly staying on. The central bank is seen by some as one of ! the leadi! ng forces in China’s economic reform push.

The hacking accusations discussed last week continue, and The New York Times reported on Monday on the “new cold war” in cyberspace between the United States and China. The Obama administration’s public responses have more muted than some had expected, perhaps because:

“We were told that directly embarrassing the Chinese would backfire,” one intelligence official said. “It would only make them more defensive, and more nationalistic.”

Regardless of the response from Washington, it is unrealistic to expect cyber espionage and cyber theft to stop completely. American companies need to be much more effective at securing their data. Can you imagine a bank securing its doors with simple combination lock while leaving its the cash scattered around its offices That is effectively how many organizations protect their data.

The Academy Awards were popular in China even though the awards program was not broadcast live on television. China is now the second-largest film market after the United States and has grown over 30 percent a year for the last nine years. The movie channel of CCTV streamed the show online and on Sina Weibo, akin to Twitter, the Oscars were the top trending topic for several hours.

The size and explosive growth of the Chinese box office has forced Hollywood to acq! uiesce to! censorship demands and led some to charge it with “kowtowing” to China. Hollywood’s China dealings have also raised an Securities and Exchange Commission inquiry.

A Chinese production has so far not won for best picture. Ang Lee’s award for directing was widely praised but also “bittersweet for Chinese film fans.”

Pynchon Takes On Silicon Alley

New York’s technology scene is getting the Thomas Pynchon treatment.

Mr. Pynchon, the secretive and widely followed author, is set to publish a new book titled “Bleeding Edge” that has Manhattan’s Silicon Alley as its setting, the publisher, Penguin Press, announced on Monday. The release date is Sept. 17.

The novel, set in 2001, takes place in “the lull between the collapse of the dot-com boom and the terrible events of September 11,” Penguin said in a release announcing its 2012 results.

Mr. Pynchon, whose novel “Gravity’s Rainbow” won the National Book Award for Fiction in 1974, often combines history and popular culture in complex, darkly comic narratives. Penguin had announced in January that a new book from the author was forthcoming.

While the new book is set in the recent past, it will no doubt resonate with the current fascination with tech start-ups in popular ulture. A recent reality TV show from Bravo called “Start-Ups: Silicon Valley” had a splashy debut, then garnered disappointing ratings.

A tip of the hat to Sarah Weinman of Publishers Marketplace for spotting the news.

What Barnes & Noble’s Retail Arm Might Be Worth

Though Leonard S. Riggio has sought to push Barnes & Noble into the future by supporting its Nook e-reader business, the bookseller’s chairman has long held a soft spot for the retailer’s brick-and-mortar outlets.

Now that he is planning to bid for those stores, how much will he pay According to some analysts, maybe not all that much.

Shares of Barnes & Noble rose on Monday after Mr. Riggio formally disclosed his plans, rising 8.9 percent by midmorning, to $14.80. That values the overall company at about $863 million. Its total enterprise value is neary $1.3 billion, according to Standard & Poor’s Capital IQ.

But by some measures, that means the physical stores and BarnesandNoble.com are worth virtually nothing. Microsoft and Pearson collectively bought a stake of roughly 23 percent in the Nook division last year, valuing it at close to $1.8 billion.

Clearly, Barnes & Noble’s board is not going to part with the company’s 689 outlets, 674 college bookstores and online merchant operations for nothing.

David Schick, an analyst with Stifel, estimated in a research note on Monday that the retail operations were worth about $484.5 million. That is based on a multiple of 0.1 times trailing 12 months’ revenue, the same used in an attempted buyout of the smaller competitor Books-A-Million last year.

Mr. Schick added that he believed his estimate to be a conservative figure.

But James McQuivey, an analyst at Forrester Research, argued that Barnes & Noble had little ability to command a top-drawer price for its legacy businesses. The physical stores will continue to face the challenges bedeviling a vast array of retailers, with the Barnes & Noble name carrying weight for a declining number of people.

“Making a bet on bookstores now, when we don’t know what the ultimate footprint of those stores will be, will require getting a really great price,” Mr. McQuivey told DealBook in an interview.

Barnes & Noble Chairman to Bid for Bookstore’s Retail Business

Correction Appended

The chairman of Barnes & Noble plans to bid for the retail business of the bookstore chain he started 40 years ago, as the company struggles with a changing competitive landscape.

On Monday, Leonard Riggio told the company’s board that he would make an offer for Barnes & Noble Booksellers, barnesandnoble.com and other retail assets. The proposal would not include the e-book division, Nook Media.

Like many retailers, Barnes & Nobles is confronted by waning profit in its core business, as online retailers and other competitors gain market share. The company recently warned that earnings would be weak in the latest quarter, with losses rising in its Nook Media division.

Conceived as a serious competitor to Amazon.com’s Kindle, the Nook has instead become an also-ran in the race for digital book supremacy. The Kindle remains the top-sellin dedicated e-reader, while the iPad consistently leads the competition among tablets. Amazon’s Kindle app has also maintained a huge lead in popularity, limiting Barnes & Noble’s reach across the broader digital bookselling landscape.

It is the boldest move yet by Mr. Riggio, the company’s largest shareholder who owns nearly 30 percent of Barnes & Noble, to try and save the company.

After building a small chain of college bookstores, Mr. Riggio in the 1970s bought the Barnes & Noble name and the flagship location in Manhattan, which had run into trouble. Over the next several decades, he built the company into the nation’s biggest brick-and-mortar bookseller.

In recent years, Mr. Riggio has fended off challenges from the likes of the billionaire Ronald W. Burkle. As part of that effort, Mr. Riggio argued, in large part, that the company was well-positioned in the future by betting on the Nook and digital books.

Others believed in the promise of the e-reader as well.

Microsoft paid $300 million in April for a 17.6 percent stake in the Nook business, valuing it then at $1.7 billion. Microsoft also secured Barnes & Noble’s commitment to produce an e-reader app for its Windows 8 operating system. And in December, the British publisher Pearson agreed to buy a 5 percent stake for $89.5 million.

Mr. Riggio, plans to negotiate the price with the board, according to a regulatory filing. The proposal is expected to be mainly in cash. The retailer’s board had already been weighing whether to spin off its Nook unit.

Barnes & Noble said in a statement that it had formed a special board committee of three directors - David G. Golden, David A. Wilson and Patricia L. Higgins - to consider Mr. Riggio’s proposal. The committee will be advised by Evercore Partners and the lawfirm Paul, Weiss, Rifkind, Wharton & Garrison.

Correction: February 25, 2013

An earlier version of this article referred imprecisely to the role of its largest shareholder, Leonard Riggio, in the company’s history. While Mr. Riggio founded the modern company that acquired the name in the 1970s, William Barnes and G. Clifford Noble opened the original Barnes & Noble bookstore, in 1917.

Japan to Sell $10 Billion Stake in Cigarette Firm

TOKYO - The Japanese government is set to loosen its grip on the world’s third-largest tobacco company by selling a third of its stake in Japan Tobacco, a sale that will net the country about $10 billion.

Japan’s Ministry of Finance, which owns just over 50 percent of the former state monopoly, will sell 333 million of its shares in the cigarette manufacturer, according to a company statement issued on Monday.

The deal will be priced next month, from March 11 to 13, the statement said. In the run-up to the sale, Japan Tobacco will buy back up to 250 billion yen ($2.7 billion) of its shares.

Under laws passed in 2011 after Japan’s devastating earthquake and tsunami crisis, proceeds of the sale of Japan Tobacco sales will go toward rebuilding the country’s battered northeast coast. The reconstruction costs have threatened to weigh on Japan’s public finances at a time when public debt is twice he size of its economy.

It is an opportune time for the Japanese government to sell. Japan’s stock market has rallied since mid-November, and Japan Tobacco’s shares have tracked the market’s ascent, climbing 20 percent in the last three months.

Shares in Japan Tobacco closed 1.43 percent higher on Monday, at 2,901 yen, before the planned sale was announced. At that price, the government’s share sale would be valued at roughly 967 billion yen.

Japan has already been reducing its stake and involvement in the cigarette maker, which traces its origins to a Finance Ministry bureau set up in 1898 to create a national tobacco monopoly that lasted until 1985.

Even after the company went public, the Finance Ministry held two-thirds of its shares until 2004, when it reduced its stake to 50.1 percent, or roughly one billion shares. Other investors in Japan Tobacco include Mizuho Trust & Banking, Goldman Sachs and the Children’s Investment Fund Management.

The position in Japan Tobacco has put the government in a controversial position.

The government has squeezed more funds from its smokers, raising the price of a pack of cigarettes about 40 percent in 2010, its single largest increase in tobacco taxes. Still, cigarettes remain relatively cheap in Japan, at about $4.30 a pack.

But antismoking advocates have blamed the Japanese government’s continued ownership of Japan Tobacco - whose brands include Camel, Winston and Mild Seven - for the country’s delay in passing laws to protect nonsmokers from cigarette smoke, for example, and more stringently regulating of tobacco-related marketing.

In a 2012 report, the Washington-based Global Business Group on Health said Japan’s ownership of Japan Tobacco shares “leads to a national conflict of interest, in which the government treats smoking as a behavoral issue rather than a health concern.”

Though smoking rates have started to decline in recent years, the Japanese remain heavy smokers, consuming about 1,841 cigarettes a person, according to data compiled last year by the World Lung Foundation and American Cancer Society. That compared with about 1,000 cigarettes a person in the United States.

To make up for declining cigarette consumption at home, Japan Tobacco has aggressively expanded overseas, acquiring Britain’s Gallaher Group in 2007 for $15 billion, and adding the Silk Cut and Benson & Hedges brands to its portfolio. The company has also made a push into packaged foods and soft drinks, as well as pharmaceuticals.

The government’s sale of Japan Tobacco shares is part of a wider effort to raise money to finance reconstr! uction fr! om the country’s natural and nuclear disasters in 2011. The government also plans to sell shares of Japan Post Holdings, which runs the country’s postal system and also acts as its biggest bank.

Royalty Pharma Proposes to Buy Elan for $6.6 Billion

LONDON - RP Management on Monday proposed to buy the Elan Corporation of Ireland for $6.6 billion, in an attempt to scuttle the stand-alone strategy outlined by the drug maker.

Under a preliminary offer, RP Management, or Royalty Pharma, disclosed an $11-a-share bid for Elan. The proposal represents a 6.3 percent premium to Elan’s closing price on Feb. 15, just before Royalty Pharma initially reached out to company’s management about a deal.

Royalty Pharma, which invests in royalties of pharmaceutical products, is taking aim at Elan’s new deal-making plan.

Earlier this month, Elan sold its stake in the blockbuster multiple sclerosis drug Tysabri for $3.25 billion. Elan’s management said it planned to use part of the proceeds for acquisitions.

But Royalty Pharma contends that a takeover would be more beneficial to shareholders, given Elan’s limited record with “acquisitions or in-licensed products,” the firm said in a regulatory filing. The industry, Royalty Pharma claims, is highly competitive, which could make it difficult for Elan to successfully navigate.

‘‘Royalty Pharma believes that good assets in the pharmaceutical industry are in short supply, that there will therefore be significant competition for these assets, and that this competition is likely to result in acquirers being required to pay significant premiums to acquire these assets,’’ the company said.

Royalty Pharma said it first contacted the chairman of Elan on Feb. 18, making a preliminary offer two days later. The company said Elan had not formally responded to the proposal and more recent efforts to discuss the bid h! ad been unsuccessful.

‘‘Royalty Pharma remains committed to working towards a recommended transaction,’’ the company said. Royalty Pharma suggested paying $11 for every Elan share, which it said represented ‘‘the full value of Elan today.’’

Royalty Pharma plans to finance the bid with cash and debt. The company, which currently has access to $1 billion in cash, is working with JPMorgan Chase and Bank of America Merrill Lynch to arrange the necessary financing.

Elan did notimmediately respond to a request for a comment.

Barnes & Noble Founder to Bid for Bookstore’s Retail Business

The founder of Barnes & Noble plans to bid for the retail business of the bookstore chain he started 40 years ago, as the company struggles to deal with the changing competitive landscape.

On Monday, Leonard Riggio told the company’s board that he will make an offer for Barnes & Noble Booksellers, barnesandnoble.com and other retail assets. The proposal would not include the e-book division, Nook Media.

Like many retailers, Barnes & Nobles is dealing with waning profit in its core business, as online players and other competitors gain marketshare. The company recently warned that earnings in the latest quarter would be weak, with losses rising in its Nook Media division.

Mr. Riggio, who owns nearly 30 percent of Barnes & Noble, plans to negotiate the price with the board, according to a regulatory filing. The proposal is expected to be mainly in cash.

Cadwalader Attracts a Top Deal Maker

James C. Woolery, the co-head of North American mergers and acquisitions at JPMorgan Chase, said on Sunday that he was leaving the bank after two years to become deputy chairman of Cadwalader, Wickersham & Taft. In his new job, Mr. Woolery, who joined JPMorgan following 17 years at Cravath, Swaine & Moore, is a potential successor to the current chairman of Cadwalader, W. Christopher White, DealBook’s Michael J. de la Merced reports. His departure from JPMorgan leaves Chris Ventresca as sole head of the North American mergers division.

Mr. Woolery said he became convinced that Cadwalader “really had a desire to go in a direction I’d wanted to go.” After laying off scores of lawyers as its practice of advising on complex debt offerings dried up, the 221-year-old Cadwalader is looking to move further into the top rank of advisers on corporate and regulatory matters, rather than try to compete with firms that offer a “supermarket” model. In his career as an investment banker, Mr. Woolery worked on AT&T’s attempted takeover of T-Mobile USA and the $24.4 billion proposed buyout of Dell.

“Mr. Woolery’s decision to try his hand at banking marked him as one of a handful of top deal lawyers to do so,” Mr. de la Merced writes.

MINDFUL OF BUBBLES AS DEAL-MAKING REVIVES  |  The recent spate of deals has come as the stock market hits record levels. That would seem to contradict the investing adage of “buy low and sell high,” James B. Stewart writes in his column for The New York Times. “You always see a lot of M.&A. activity when the market is overvalued,” said Matthew Rhodes-Kr! opf, an associate professor at Harvard Business School. “Of course, you only know a market peak with benefit of hindsight. But when you look back, you’ll see a lot of M.&A. activity.”

The safest deals may come at the start of a boom. Early in the merger cycle, “You typically buy companies that are in the same industry or where there’s a fit,” said Stephen A. Schwarzman, chairman and chief executive of the Blackstone Group. “As you get further along in an economic expansion, confidence gets higher and higher, and people start buying almost anything that they think has prospects.”

So what is behind the enthusiasm “The simple answer may be that chief executives and corporate boards don’t seem to be any better at detecting market peaks than anyone else,” Mr. Stewart writes. “They also experience the same psychological factors that afflict nearly all investors caught up in a bubble.”

WARBY PARKER ADDS PROINENT INVESTORS  |  Millard S. Drexler, the chief executive of J. Crew, and American Express joined the latest round of financing for the eyeglass seller Warby Parker, which closed at $41.5 million last month, Mr. de la Merced reports. The new investors underscore the growing popularity of the three-year-old Warby Parker, whose backers include General Catalyst Partners, Spark Capital, Tiger Global Management, Thrive Capital and Menlo Ventures. “We’ve tried to be very deliberate in getting people with specific expertise,” Neil Blumenthal, one of Warby Parker’s founders, said in an interview. “Nobody knows retail like Mickey. And within financial services, nobody knows a brand more prominent than American Express.”

ON THE AGENDA  |  Georg! e Osborne, Britain’s chancellor of the Exchequer, is questioned by the Parliamentary Banking Standards Commission at 10:45 a.m. Lowe’s reports earnings before the market opens, while Stifel Financial reports earnings on Monday evening. Roger Altman, chairman of Evercore Partners, is on CNBC at 7:30 a.m. The Dallas Fed manufacturing survey is out at 10:30 a.m.

FALL OF THE BANKING HOUSE OF SIENA  |  Over its 541-year history, the bank Monte dei Paschi di Siena has been a mainstay of the city where it is based, backing charities and civic works. But the bank, known as “Babbo Monte,” “has been brought to its knees by 21st-century finance,” The New York Times’s Jack Ewing and Gaia Pianigiani report.

The chairman, Alssandro Profumo, a prominent banking executive who once led UniCredit, said Monte dei Paschi was undone in part by its dealings with large international banks like JPMorgan Chase. “Clearly, many investment banks made a lot of money on Monte dei Paschi,” he said. “I would say too much money.” The bank’s troubles have political ramifications, becoming an issue in the Italian elections held on Sunday and Monday.

Mergers & Acquisitions Â'

Knight Capital Said to Be Selling Unit to Stifel Financial  |  The Knight Capital Group, which agreed to be purchased by Getco, “plans to sell its credit-brokerage unit to Stifel Fi! nancial C! orp., according to six people with knowledge of the matter,” Bloomberg News reports. BLOOMBERG NEWS

Royalty Pharma Proposes to Buy Elan for $6.6 Billion  |  Reuters reports: “Investment firm Royalty Pharma has made a $6.6 billion bid approach to Elan, seeking to scupper the Irish drug maker’s plan to spend most of the proceeds from a major drug sale on deals and instead give the money to shareholders.” REUTERS

Barnes & Noble Founder Said to Offer to Buy Bookstore Unit  |  Leonard Riggio, the founder and chairman of Barnes & Noble, “told the bookstore chain he is interested in buying its consumer business and spinning out the unit that makes the Nook tablet, a person familiar with the matter said,” Bloomberg News reports. BLOOMBERG NEWS

Barnes & Noble Takes a Hard Look at E-Reader Business  |  “A person familiar with Barnes & Nobles’s strategy acknowledged that this quarter, which includes holiday sales, has caused executives to realize the company must move away from its program to engineer and build its own devices and focus more on licensing its content to other device makers,” The New York Times reports. NEW YORK TIMES

Chief of Pearson Says Financial Times Is Not for Sale  | 
REUTERS

After Heinz Deal, Other Food Companies Could Be Takeover Targets  |  Many big food companies have strong profitability and staying power, so mergers could offer good values for the right merger candidate, Quentin Webb of Reuters Breakingviews writes. DealBook Â'

INVESTMENT BANKIG Â'

Banks’ Relationship With Payday Lenders Under Scrutiny  |  With major banks allowing Internet-based payday lenders to withdraw payments automatically from borrowers’ accounts, the “Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter,” The New York Times reports. NEW YORK TIMES

American Banks Turn to Europe’s Commercial Property Market  |  Banks including Citigroup, Morgan Stanley, Bank of America and Wells Fargo “are looking to capitalize on a dearth of financing for Europe’s commercial property market thatâ€! ™s driven! lending margins to five times the level prior to the 2008 crisis,” Bloomberg News reports. BLOOMBERG NEWS

Citigroup Pay Plan Raises the Bar Just a Bit  |  Under the new plan, the bank’s target for return on assets is still being set too low, Antony Currie of Reuters Breakingviews writes. DealBook Â'

Goldman Looking to Reduce Office Space in Tokyo  | 
BLOOMBERG NEWS

BlackRock Wins Approval for Fund Backed by Copper  | 
BLOOMBERG NEWS

PRIVATE EQUITY Â'

Tax Treatment of Carried Interest in the Spotlight  |  “Eliminating the carried-interest tax rate should be an easy sell. It should play to Republicans’ supposed hatred of government handouts and to Democrats’ commitment to social justice,” Lynn Forester de Rothschild, the chief executive of E.L. Rothschild, writes in an Op-Ed essay in The New York Times. NEW YORK TIMES

In Dell’s Waning Cash Flows, Signs of Concern  |  Going private may allow the company to slash costs, which preserves cash. But management may also feel liberated to spend more on initiatives, which could deplete cash initially. DealBook Â'

Is the Dell Buyout Proposal Too Cheap  |  “Some investors wonder” if Michael S. Dell “might have a hot new product on the drawing board that has the potential to make the company a highflier again,” Gretchen Morgenson writes in The New York Times. NEW YORK TIMES

K.K.R. Founders Get Pay Raises  | 
WALL STREET JOURNAL

HEDGE FUNDS Â'

Judge Sides With Einhorn and Halts an Apple Shareholder Vote  |  A federal judge ordered Apple to halt collecting shareholder votes on a proposal to change some of its corporate charter, handing a victory to the hedge fund manager David Einhorn. DealBook Â'

What Went Wrong at J.C. Penney  |  Ron Johnson, the chief executive of J.C. Penney, who had a track record of innovation at Apple, “ignored conventional industry wisdom and moved too abruptly to impose practices inspired by his time at Apple â€" a very different type of retail animal,” The Wall Street Journal writes, citing unidentified people close to the company. WALL STREET JOURNAL

New Allocations to Hedge Funds Expected to Triple in 2013  | 
BLOOMBERG NEWS

I.P.O./OFFERINGS Â'

R.B.S. Said to Plan I.P.O. of U.S. Unit  |  Royal Bank of Scotland is set to announce this week that “it plans a partial sale of its U.S. bank Citizens this year or next, a source close to the matter said,” Reuters reports. BLOOMBERG NEWS

UMW of Malaysia Said to Hire Bankers for I.P.O. of Unit  | 
WALL STREET JOURNAL

VENTURE CAPITAL Â'

AirWatch, Device Management Company, Attracts $200 Million  |  Insight Venture Partners led a $200 million financing round in AirWatch, an enterprise business that helps companies manage the various mobile devices their employees use. TECHCRUNCH

LEGAL/REGULATORY Â'

New Leader to Be Named for Bank of Japan  |  “A financial policy expert and harsh critic of the Bank of Japan’s efforts to combat deflation is set to be the government’s choice to take over the nation’s central bank,” The New York Times reports. “The official, Haruhiko Kuroda, a veteran of global financial circles and current head of the Asian Development Bank, will be nominated as the bank’s governor to take over next month, according to a ruling party lawmaker with knowledge of those plans.” NEW YORK TIMES

Judge Upholds S.E.C. Freeze on Account Tied to Suspicious Heinz Trades  |  The hearing did nothing to illuminate the identity of the suspect trader, a mystery confounding regulators and complicating the case. No one appeared in court on Friday to represent or! defend th! e traders. DealBook Â'

In Push for Transparency, Law Firm Releases Financial Results  |  In a groundbreaking move, K&L Gates, one of the country’s largest law firms, disclosed its financial results online, as clients are asking more questions about the financial state of the firms they employ. DealBook Â'

Political Risks Seen in Wind-Down of Fed’s Stimulus  |  When the Fed eventually wraps up its economic stimulus program, the possibility of losses on assets combined with payments to the banking industry “sounds like a ecipe for political problems,” said James Bullard, president of the Federal Reserve Bank of St. Louis, The New York Times reports. NEW YORK TIMES

Consumer Complaints May Offer Insight Into Pyramid Schemes  |  Regulators have given no indication of what they think about Herbalife’s business practices. But complaints against the company may offer some insight into the government’s assessment. DealBook Â'

A Disappointing Mortgage Settlement  |  After striking a deal a year ago over foreclosure abuses, “banks are structur! ing the d! ebt relief in ways designed to tidy up their balance sheets, rather than to keep as many people from losing their homes as possible,” The New York Times editorial board writes. NEW YORK TIMES