Private Equity Firms Fail in Effort to Dismiss Antitrust Case

A federal judge has dealt a blow to the private equity industry, refusing to dismiss a lawsuit that accused firms of colluding to drive down the prices of corporate takeovers during the buyout boom, setting the stage for a possible trial in the five-year-old case.

But at the same time, the judge, Edward F. Harrington of Federal District Court in Boston, narrowed the lawsuit, suggesting in a ruling on Wednesday that the plaintiffs’ case was overly broad and had serious flaws.

The lawsuit was brought against 11 of the world’s largest private equity firms, claiming that they had participated in a plot to rig the market for more than two dozen multibillion-dollar takeovers of publicly traded companies and deprived the companies’ shareholders of billions of dollars. Shareholders filed the civil antitrust complaint in 2007 after the Justice Department began investigating possible price-fixing by the firms. The department has not brought any charges.

The case has been a cloud over the priate equity industry, and an expensive distraction, with many of the country’s most prominent buyout executives, including David Bonderman of TPG and Richard A. Friedman of Goldman Sachs, being required to sit for depositions. But with the ruling reducing the scope of the accusations, the firms could have leverage in any potential settlement talks with the plaintiffs.

“We are pleased the court has decided that there is no evidence of the overarching conspiracy plaintiffs have pursued for five years,” said Kristi Huller, a spokeswoman for Kohlberg Kravis Roberts, one of the firms named in the lawsuit. “We believe the remaining claim is without merit, and w! e will continue to contest it.”

Lawyers for the plaintiffs, which include a Detroit pension fund and a pair of doctors, also claimed victory.

“The plaintiffs are very gratified that the court has found that there is clear evidence of the overarching conspiracy to rig the going-private transactions the plaintiffs have identified,” said K. Craig Wildfang, a lawyer for the plaintiffs, who are former shareholders of the businesses acquired by the firms. “We look forward to putting this evidence to a jury.”

At the center of the case are “club deals,” which were popular during the leveraged buyout mania of the last decade. As the private equity takeovers grew to record sizes, the biggest firms pooled their money and began buying companies together. Companies that fell into private hands included the Spanish language broadcaster Univision, the retailer Toys “R” Us and the lodging giant Hilton Worldwide.

The plaintiffs call this period “the conspiratorial era.” They argue that behind the acquisitions were stealth agreements among the private equity firms to divvy up the big deals among themselves to artificially â€" and illegally â€" tamp down their prices. Essentially, the plaintiffs contend, there was a secret quid pro quo arrangement: If you don’t bid on my deal, I won’t bid on yours.

Private equity firms insist that there was spirited competition for these deals and others.

The judge essentially agreed with the thrust of their argument, concluding that there was no grand conspiracy across all the megadeals.

“Even where the evidence suggests misconduct related to a single transaction, there is largely no indication that all the transactions were, in turn, connected to a market-wide agreement,” Judge Harrington wrote. “Rather, the evidence shows a kaleidoscope of inter! actions a! mong an ever-rotating, overlapping cast of defendants as they reacted to the spontaneous events of the market.”

The judge also expressed frustration with the plaintiffs for refusing to reduce the scope of their claims, which accused the firms of colluding on 27 deals. He said the expansiveness of the lawsuit “nearly warranted its dismissal.” He dismissed the case against one of the defendants, JPMorgan Chase, ruling that the evidence did not establish that it was in the business of takeovers.

Yet Judge Harrington decided that there was enough evidence to survive the private equity firms’ motion to throw out the lawsuit. He highlighted what he said were several important pieces of evidenc that demonstrated problematic behavior among the firms. Among them were comments from unnamed executives at Goldman Sachs and TPG in reference to the $17.6 billion takeover of Freescale Semiconductor by a consortium led by the Blackstone Group and the Carlyle Group.

The Goldman executive said that no one sought to outbid the winning group because “club etiquette” prevailed. And the TPG official said, “No one in private equity ever jumps an announced deal.”

“The term ‘club etiquette’ denotes an ac! cepted co! de of conduct between the defendants,” the judge wrote. “The court holds that this evidence tends to exclude the possibility of independent action.”

Judge Harrington also singled out the $32.1 billion buyout of the hospital chain HCA by K.K.R. and others â€" a deal that has proved to be hugely lucrative â€" as particularly problematic. K.K.R. expressly asked its competitors to “step down on HCA” and not bid on the company, according to an e-mail in the case that was written by Daniel Akerson, then a partner at Carlyle and now the chief executive of General Motors.

The judge also pointed to an e-mail sent by Hamilton E. James, the president of Blackstone, to his colleagues just after the Freescale deal was announced about Henry R. Kravis, the co-founder of K.K.R. and a frequent rival to Blackstone when competing for deals.

“Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.

Mr. James has been among the most vocal critics of the shareholder action, scoffing at the idea that Blackstone was secretly in cahoots with its rival firms to suppress deal prices. “This lawsuit is a complete fabrication and a bunch of malarkey,” Mr. James said during an investor call last fall.

The plaintiffs must cross several hurdles before a case could go to trial. The judge still must certify the plaintiff shareholders as a class, a ruling that would largely determine the scope of potent! ial damag! es. Plaintiffs are seeking billions of dollars in compensation.

Private Equity Squeezes Out Cash Long After Its Exit

When the Berry Plastics Group, a container and packaging company, went public last October, it generated up to $350 million in tax savings. But the company won’t collect the bulk of the benefits. Rather, Berry Plastics will hand over 85 percent of the savings, in cash, to its former private equity owners.

The obscure tax strategy is the latest technique that private equity firms are using to extract money from their companies, in this case long after the initial public offering.

In a typical buyout, the owners make money by sprucing up the operations and selling the business to another company or public investors. Private equity firms have also found ways to profit before the so-called exit with special one-time dividends and annual management fees.

Now, uyout specialists are increasingly collecting continuing payouts from their former portfolio companies. The strategy, known as an income tax receivable agreement, has been quietly employed in dozens of recent private equity-backed offerings, including those involving PBF Energy, Vantiv and Dynavox.

While relatively rare, the strategy, referred to as a supercharged I.P.O., has proved to be controversial. To some tax experts, the technique amounts to financial engineering, depriving the companies of cash. Berry Plastics, for example, has to make payments to its one-time private equity owners, Apollo Global Management and Graham Partners, through 2016.

“It drains money out of the company that could be used for purposes that benefit all the shareholders,” said Robert Willens, a corporate tax and accounting expert in New York who coined the term “supercharged I.P.O.”

Eva Schmitz, a spokeswoman for Berry Plastics, declined to comment, as did Charles Zehren, a spokesman for Apollo.! Graham Partners did not return multiple calls for comment.

A form of the strategy, known as a tax-sharing agreement, has been around for decades. Through such deals, a parent company and its subsidiary agree to share any losses that could lower their tax bills.

Private equity firms started to take notice of the technique in 2007 after the $3.7 billion I.P.O. of the Blackstone Group. Before the offering, the private equity firm used complex partnership structures to create large deductions for good will, a type of intangible asset. Blackstone’s partners then got to keep 85 percent of the deductions, or $864 million, securities filings show.

Private equity firms are now applying the strategy to their own investments. Income tax receivable agreements account for only about one in 50 private equity-backed I.P.O.’s, according to some esimates, but industry experts say they are on the rise. “The investment banks are spending a lot of time on models for these deals,” said Eric Sloan, a principal in merger-and-acquisition services at the accounting firm Deloitte. “We are going to see more of these deals,” he said, adding that “it brings new value to the table.”

Under the typical agreement, the private equity-owned company transfers partnership interests to a newly formed entity. The transfers bolster the market value of certain items, like tax credits, operating losses, good will, amortization and property depreciation. In doing so, the related entity captures the tax savings on those items.

“It’s meant to extricate cash value from taxes,” said Warren P. Kean, a tax lawyer focused on partnerships at K&L Gates in Charlotte, N.C. “Private equity firms have realized that there’s a benefit here in unlocking the tax value associated with portfolio companies.”

Private equity firms view the deals as ! the “pe! arl in the oyster shell,” because the strategy generates valuable tax assets that did not exist or were not usable and converts them into cash.

As part of the deal, companies sign a long-term contract with the private equity owners to hand over 85 percent of their current and future tax savings. The newly public companies keep the remaining 15 percent, providing it with deductions that they otherwise would not have had.

It’s lucrative for the private equity firms. The payments, which can last as long as 15 years, create a tidy income stream, typically taxed at the lower capital gains rate. The Graham Packaging Company, a maker of plastic containers, expects to pay its former owners $200 million, according to securities filings; Emdeon, a billing company, $151 million; and National CineMedia, a cinema advertiser, more than $196 million

But some tax experts take issue with the strategy.

“They involve millions, often billions, of dollars in cash transfers from newly public companies to a small group of pre-I.P.O. owners,” Victor Fleischer, a tax professor at the University of Colorado, and Nancy Staudt, a public policy professor at the University of Southern California, wrote in a 2013 study. The study said the primary reason for the deals was tax arbitrage.

Another potential issue is that sophisticated investors do not necessarily understand the deals, either. The agreements typically warrant just a few paragraphs in a company’s I.P.O. filings.

And the companies are generally on the hook for the cash payments, even if their profits deteriorate. Berry Plastics lost $10 million in the last quarter and already carries a costly debt load of $4.6 billion. In its I.P.O. filing, the company cautioned that the tax deal could affect its liquidity.

SandRidge Settles Fight With Activist Investor

SandRidge Energy announced on Wednesday that it had settled with a hedge fund that had been calling for the removal of the oil driller’s chairman and chief executive, Tom Ward.

SandRidge said that it would expand its board by four seats, giving the new positions to the activist investor, TPG-Axon Capital. The company also said that it also would decide by June 30 whether to remove Mr. Ward from his position.

If SandRidge doesn’t fire Mr. Ward, three of its existing directors will step down, and TPG-Axon will name an additional board member. That would give the hedge fund majority representation on the company’s board.

The oil driller also agreed to review its strategic plans, and said that it would reduce its directors’ pay to $250,000 a year, from $375,000.

Wednesday’s announcements represent a striking victory for TP-Axon, which had questioned a series of land deals that SandRidge had struck with Mr. Ward and his family. The hedge fund had also criticized SandRidge for a series of strategic mistakes, leading to a nearly 29 percent decline in the company’s stock price over the last 12 months.

A vote on TPG-Axon’s effort to win board seats had been scheduled for Friday.

“We believe the actions taken by the board address our concerns, and are a promising start to a bright future for SandRidge,” Dinakar Singh, TPG-Axon’s founder, said in a statement. “We all believe that SandRidge has tremendous asset value, and we expect that the company will relentlessly focus on growing and realizing that value through a particular focus on execution and efficiency.”

Separately, SandRidge said that its chief operating officer, Matthew K. Grubb, would resign.

Witness List Set for Senate Hearing on JPMorgan Trading Loss

Congressional investigators have summoned current and former top executives of JPMorgan Chase, along with three regulators, to testify at a hearing Friday on the bank’s multi-billion trading loss.

Jamie Dimon, the bank’s powerful chief executive, has not been called to testify, however.

The Senate Permanent Subcommittee on Investigations, led by Senator Carl Levin, will release a report detailing its findings into the trading blunder before the hearing.

Doug Braunstein, who was the bank’s chief financial officer at the time of the losses, will appear. The committee has also called Ashley Bacon, the bank’s acting chief risk officer, Michael Cvanagh, co-head of the corporate and investment bank, and Peter Weiland, who was in charge of risk management for the chief investment office, the unit at the center of flawed trade.

Ina Drew, who had led the chief investment office, will also testify at the hearing. Ms. Drew, the most notable casualty of the trading losses, resigned from the bank last May.

Both Mr. Dimon and Ms. Drew have been previously interviewed by members of the subcommittee.

The report and the hearing will swing another spotlight on the troubled trading bet at a time when the bank is trying to move beyond it. Since first revealing the losses in May, the bank has clawed back millions in compensation from the traders at the heart of the losses. Mr. Dimon appeared before Congress twice to account for the failed bets. And in January, JPMorgan’s board also cut Mr. Dimon’s annual compensation by 50 percent.

The subcommittee, which has been examining potential problems with how the bank alerted investors! and regulators about the trading losses, also asked several bank regulators to testify.

Thomas Curry, the comptroller of the currency, will testify. Michael Sullivan, deputy comptroller for risk analysis at the comptroller’s office and Scott Waterhouse, who is the comptroller’s examiner-in-charge at JPMorgan, are also scheduled to appear.

Beyond the immediate investigation into the losses, the hearing is expected to augment support for regulations like the Volcker Rule that restrict risky trading.

Mr. Levin, a Democrat from Michigan, has been as a fierce advocate for reining in the trades banks make with their own money.

The subcommittee’s investigation follows the bank’s own examination, led by Mr. Cavanagh. In its inquiry, the bank combed through thousands of e-ails and phone calls betwen traders. Ultimately, the bank concluded that executives within the chief investment office were ill-equipped to deal with the increasingly complex trades as the unit took on more risk.

The unit, which had offices in London and New York, evolved from a sleepy operation to a rich vein of profits for the bank.

Regulators haven’t escaped scrutiny for the trading losses. In some instances, the subcommittee has found, some bank employees resisted initial requests from regulators who were trying to get a more detailed picture of how the risk modeling at the chief investment office, according to several people briefed on the matter.

Former Pimco Executive Files, and Then Withdraws, Lawsuit Alleging Misconduct

A former executive at the Pacific Investment Management Company, the money management giant known as Pimco, has said that he was fired last year after reporting an array of misconduct at the firm to federal law enforcement officials.

In a lawsuit filed on March 5 in state court in California, Jason Williams, a former high-yield bond portfolio manager at Pimco, alleged that senior Pimco executives engaged in a variety of misdeeds, including insider trading and fudging the ratings and values of certain bond holdings to the detriment of its clients.

Mr. Williams withdrew the lawsuit three days after filing it, and his lawyers and Pimco representatives are engaged in talks related to resolving the dispute, according to two people with direct knowledge of the matter.

A spokesman for Pimco did not immediately return a request for comment.

Philip M. Aidikoff, a lawyer for Mr. Williams, declined to comment. The lawsuit was first reported by Ignites, a mutual-fund industry trade publicationowned by The Financial Times.

The wrongful-termination complaint had sought compensation for the damage done to Mr. Williams’s professional reputation. It also sought punitive damages.

From its headquarters in Newport Beach, Calif., Pimco manages about $2 trillion in assets, making it one of the world’s largest money management firms. The firm is perhaps best known for its founder, William H. Gross, and his heir apparent, Mohamed A. El-Erian, both of whom make frequent television appearances prognosticating on the global financial markets.

Mr. Williams, who worked at Pimco from 2000 to 2012, claimed that he had witnessed multiple instances of wrongdoing by the firm’s senior management between late 2008 and early 2009. He then reported the actions to compliance officials, and also told his supervisor! , Chris Dialnyas, who, according to the Pimco Web site, is a managing director and member of the firm’s investment committee.

But after lodging his complaints, his pay was reduced and he was subjected to verbal abuse, according to the legal filing. Mr. Williams said that he then reported the conduct to federal agents in the Treasury Department. His complaint suggests that the agents, who worked for the special inspector general for the Treasury Asset Relief Program, or TARP, opened up an investigation.

He said that in March 2012, three weeks after he informed Pimco’s human resources department that he had taken his gripes to the federal government, the firm fired him. Pimco told him that he was fired for “performance reasons,” the complaint said, but Mr. Williams maintains that he was fied because of his cooperation in an investigation into the activities inside the firm.

A spokesman for the special inspector general, Troy Gravitt, declined to comment.

The accusations leveled by Mr. Williams, 36, all took place during the depths of the financial crisis. The lawsuit makes a slew of accusations against Pimco executives. Mr. Williams, who held the title of vice president, said that in December 2008, a senior manager direct him to “arbitrarily elevate” the rating that a Pimco analyst had assigned to a bond in order to place the bond in funds that had a higher rating requirement.

Around that same time, Mr. Williams said, senior Pimco manager “attempted unlawful trading on inside information involving stock in El Paso Corporation.”

In another claim, he said that during the financial crisis, senior management directed the transfer of certain illiquid securities that a Pimco hedge fund had “arbitrarily overvalued” to other Pimco funds. The move, according! to the c! omplaint, hurt the owners of the funds that were on the receiving end of the transfer.

The Case for Shaking Up Hewlett’s Board

A breakup of Hewlett-Packard is both desirable and inevitable. But it requires new blood on the board.

Investors now have an opportunity to hold the $41 billion technology conglomerate’s directors more accountable. The company lost nearly half its value in 2012 as dysfunction and misguided M.&A. caught up to H.P. Moving the chairman, Raymond J. Lane, and others out at the upcoming annual meeting makes a breakup easier to push forward.

H.P.’s stock today trades at a discount to the potential sum of its many component parts. Breakingviews estimated the company’s PC business, I.T. services and other divisions were worth more than $50 billion in late December, based on valuations of rival firms. Indeed, breakup speculation - and H.P.’s disclosure that it was examining disposals - has led to the stock’s value nearly doubling from is November low.

Yet the board has been reluctant to dismember the storied Silicon Valley giant. That would be a mistake - turning around big technology companies is extremely difficult. With multiple businesses in decline, H.P. does not have the luxury of time. Dallying could send the stock down once again.

Replacing several directors responsible for its past missteps would bring some accountability to the board and ensure an uncomfortable breakup is not pushed aside.

Shareholders should start at the top, with Mr. Lane. As acting chairman during the $10 billion Autonomy acquisition in 2011, he should have, and did not, act as a cautionary force. The then chief executive, Léo Apotheker, hastily agreed to buy the British software company at a hefty 64 percent premium. H.P. wrote down a majority of the purchase price in 2012. For this, Mr. Lane deserves to go.

Likewise, directors John Hammergren and G. Kennedy Thompson do not deserve re-election. Both served on the committee in ! charge of vetting acquisitions, including the Autonomy deal. Moreover, they are the longest-serving directors, and bear some responsibility for H.P.’s deep-seated ills.

Last, there is Marc Andreessen, the well-known, busy venture capitalist. He was among the leading proponents for the Autonomy deal among directors, according to people familiar with the deliberations. He also played a crucial part in the disastrous hiring of Mr. Apotheker. He deserves the boot.

Voting out these four directors would not erase H.P.’s mistakes. It could, however, raise the odds of the company doing the right thing in 2013 - breaking into pieces.

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

Outdoor Channel Agrees to Higher Bid From Kroenke

Outdoor Channel Holdings said on Wednesday that it had accepted a $220.7 million takeover bid from Kroenke Sports and Entertainment, turning down an earlier offer from the media investor Leo Hindery Jr.

Under the terms of the bid, Kroenke will pay $8.75 a share in cash. That’s 15.9 percent higher than Outdoor Channel’s stock price on March 1, the last day before Kroenke publicly disclosed its interest in bidding.

It’s also higher than the $8 a share offered by Mr. Hindery’s firm, InterMedia.

Kroenke appeared as a bidder after controversy emerged over the earlier bid by Mr. Hindery. A major Democratic fund-raiser, Mr. Hindery had drawn scrutiny for his bid for the Outdoor Channel, known for its hunting and fishing programming.

The merger proposal by Mr. Hindery’s InterMedia Outdoors vehicle has won the donor no favors among fellow Democrats who support tighter gun-control laws. But it has also generated criticism among conservatives like Andrew Franklin, an Outdoor Channel shareholder who has publicly wondered whether Mr. Hindery would alter the tone of the television channel’s programming if he faces political pressure.

By going with Kroenke, which is run by E. Stanley Kroenke, the owner of the St. Louis Rams and the Denver Nuggets â€" and a staunch Republican â€" Outdoor Channel’s board appears set to avoid that controversy.

“Our board of directors has unanimously determined that the proposed all-cash merger with KSE offers superior value for our stockholders,” Tom Hornish, Outdoor Channel’s ch! ief executive, said in a statement. “We are pleased that Kroenke Sports & Entertainment has agreed to purchase Outdoor Channel.”

The deal with Kroenke is expected to close in the second quarter, pending approval by regulators and shareholders.

Outdoor Channel was advised by Lazard and the law firm Wilson Sonsini Goodrich & Rosati. Kroenke was advised by Allen & Company and the law firm Wachtell, Lipton, Rosen & Katz.

Vodafone Should Seek Sale of Company, Fund Manager Says

I read with a sort of resigned alarm that Vodafone is considering selling its stake in Verizon Wireless. This is absurd - and if it happens it will mark an important part of the British business establishment (and the entire Vodafone board) as both venal and incompetent. Vodafone is our third biggest position at Bronte: this matters to us.

Background

Vodafone has - for the last decade or so - been a collection of modest success and abject failures - made good by one spectacular success. The spectacular success is that they own 45 percent of Verizon Wireless - the best performed wireless carrier in the US.

The failures range from grotesquely overpaying for spectrum in the tech bubble (and hence crippling the balance sheet for a decade) to incompetently stuffing up the most America-like (hence desirable) market out there(my home market of Australia).

The Australian melt-down of Vodafail has been well documented on this blog - but 18 months after the video below - and 18 months after they declared the problem fixed - Vodafone is still the butt of television jokes in Australia:

Vodafone has had some modest successes - eg Turkey - but even their home market has been so unprofitable that Vodafail has been questioned for paying no domestic corporate tax. Of course they should not pay tax if they are not required to do so - but as a shareholder I would prefer them be highly profitable and with big tax bills.

India - which should have been OK - has also been difficult for tax reasons - caused it seems in part by inept management.

There has however been one success - a marvelous success. They own - but d! o not control Verizon Wireless. It has been a good - no a fantastic asset - and their stake is now worth more than the entirety of Vodafone.

Pointedly this one great success is the one asset they do not manage.

This record has a consequence. Almost all long-term shareholders of Vodafone are not showing substantial gains - and selling their stake would result in only a modest capital gains tax bill - if any bill at all.

However because Verizon Wireless has been so successful selling Verizon Wireless would result in a massive tax bill.

This makes it far more tax efficient for Verizon to buy Vodafone in its entirety than to buy Verizon Wireless. Tens of billions of dollars more efficient.

Any deal where Vodafone sells its Verizon Wireless stake rather than selling itself starts with a tens-of-billions of dollars disadvantage in post-tax shareholder value. It would be insane.

The only justification for such a deal is that shareholders trust Vodafone management to be tns of billions of dollars better with the shareholder money than the shareholders would be themselves.

And sorry - Vodafone management has not earned and does not deserve that sort of trust.

Bluntly, if Vodafone management pursue any deal to resolve the Verizon Wireless issue then the entire Vodafone board should be sacked for venal and costly incompetence.

The best outcome would be the sale of the whole of Vodafone at a good price. (I would be happy with a combination of cash and Verizon stock.) The next best outcome is no deal at all. At least the good asset is well managed by Verizon.

But with the demonstrated record of failure of Vodafone over the past decade Vodafone has surrendered its right to make a deal - any deal - which leaves management to squander the proceeds from the best asset they have - the only asset they did not manage.

John

Dallas Fed Chief Urges 100-Year Bond

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Richard Fisher, president and chief executive of the Federal Reserve Bank of Dallas,  has said in recent speeches that cheap credit hasn’t translated to expanding payrolls as the Federal Open Market  Committee had hoped. In fact, look back over several Fed board meetings and you’ll notice that Fisher is among a pretty vocal minority of Fed officials who voted against additional rounds of quantitative easing, a fancy economics phrase for really cheap credit.               

 But he does see a bright spot for Texas - if the state, like a smart shopper, takes advantage of the low rates to invest in its future.  If you look at the car market, for example, you’ll see that lots of buyers who had put off auto purchases for years are now taking advantage of low interest rates to get more car for the dollar and paying for it over time. At today’s interest rates spreading low rate interest payments out over time doesn’t take the same bite from the pocketbook that  it would if interest rates were higher.

 And that’s where Fisher’s idea comes in. Now, he says is time for Texas to invest in its future, especially its infrastructure. His suggestion: the Texas Century bond, in essence a 100 year bond  that takes advantage of the low rates to finance highways,  water projects, universities and just about anything the state needs to serve a growing population and economy. With a good credit rating  and a history of strong economic performance, Texas should be a winner, he says. As to too big to fail, watch the video for Fisher’s insights.     

 Thoughts anyone  Should Texas take advantage of record low interest rates and finance infrastructure debt over 100 years

Commerzbank to Raise More Capital and Repay Taxpayer Money

FRANKFURT â€" Commerzbank said Wednesday that it would repay a taxpayer bailout and ask shareholders for more capital, moves that would reduce the German government influence over the bank but would also dilute current shareholders.

Commerzbank, Germany’s second-largest bank after Deutsche Bank, said it would raise 2.5 billion euros ($3.3 billion) by selling new shares to existing shareholders. The issuance of new shares will reduce the German government’s stake in the bank to less than 20 percent, from 25 percent. As a result, the government would no longer have the right to veto management decisions.

The bank said it would use the money raised to bolster its capital reserves. Martin Blessing, the chief executive of Commerzbank, said the transaction “marks the beginning of the end of the Federal Republic’s engagement in Commerzbank.”He said Commerzbank would save on interest by repaying its government loans earlier, and would be able to resume paying shareholder dividends sooner than expected.

Shareholders were disappointed, however, because the new shares will dilute the value of existing equity. Commerzbank shares fell more than 9 percent in Frankfurt trading on a day when German stock prices were otherwise flat.

The transaction is the latest efforts by Commerzbank, and European banks in general, to move back to a semblance of normality after the turmoil of the last five years. While Germany has a reputation as an industrial powerhouse aloof from the financial crisis, almost all of its large banks are struggling and many would be bankrupt without public support. Moody’s rates the German banking sector “negative.”

German and European banks still have! a long way to go before the financial system can be considered healthy. Many banks remain dependent on the European Central Bank for cash, and credit remains scarce in much of the euro zone. Many banks are barely profitable or not at all. Commerzbank reported a loss of 716 million euros in the fourth quarter of 2012, compared to a profit of 316 million euros a year earlier.

Commerzbank said Wednesday that it would pay back the remaining 1.6 billion euros of the 16.4 billion-euro government bailout it received in 2008 and 2009. That sum does not include another 3.7 billion euros in aid that the German government provided to the bank by buying its shares.

Commerzbank will also repay 750 million euros to the German insurer Allianz. The loan, a so-called silent participation, grew out of Commerzbank’s cquisition of Dresdner Bank from Allianz in 2008.

The bank said it would determine the number of new shares to be issued and the price in mid-May. Before that, Commerzbank will also consolidate existing shares, with one new share equaling 10 old shares. Deutsche Bank, Citigroup and HSBC will serve as underwriters.

Shareholders must approve the capital increase at the annual meeting, which is being held on April 19, about a month earlier than planned.

Commerzbank will use the cash raised to meet new regulations, known as Basel III, that require banks to increase the amount of capital they hold in reserve. Although the rules do not take full effect until 2019, bank are already under marke! t pressur! e to comply.

Happy Birthday, Jamie Dimon

DealBook readers, take note. Wednesday is birthday No. 57 for Jamie Dimon.

And unlike five birthdays ago, one can presume that Mr. Dimon, chairman and chief executive of JPMorgan Chase, will not need to ponder buying a major rival on the verge of bankruptcy.

In what is now Wall Street lore, Mr. Dimon was celebrating his 52nd birthday at a Greek restaurant in Midtown Manhattan on March 13, 2008, surrounded by his wife, his parents and one of his three daughters. But his dinner was interrupted by a call on his cellphone, which was normally used by his children.

As it turns out, the caller was Gary Parr, a senior deal maker at Lazard - who was working on behalf o Bear Stearns.

From Kate Kelly’s “Street Fighters,” with addenda in brackets:

“Jamie,” Parr began, “I’m sorry to bother you. But I wouldn’t call if it wasn’t important.”

Dimon wasn’t thrilled. Even when it wasn’t a special occasion, he hated being interrupted on his cellphone, which was reserved largely for his kids’ use. This, he figured, must be a real emergency.

“I’m calling about Bear Stearns,” Parr said. “We have a real issue here and we need to be talking to you and your team. They’re in desperate shape. They need a lot of money.” He asked if there was any chance Dimon cou! ld make Bear a big loan that night.

Dimon’s mind whirled. He couldn’t fathom making a purchase of Bear’s size in just 12 hours. Still, there could be some possibilities there. He asked if Bear had been in touch with Hank Paulson [then the Treasury secretary] or Ben Bernanke, the Fed chairman.

Parr said yes. Bear executives had been in touch with those parties all day, he said, and would continue to post them that vening as things progressed. He pressed Dimon. Though it would be tough to do an overnight deal, was he willing to explore some options Would Dimon take a direct call from Alan Schwartz [then Bear's chief executive]

“I’d be happy to talk to Alan, and I can get a team on it right away,” Dimon replied. By now he had walked out of the restaurant and onto East Forty-Eighth Street, where he could speak more privately. He hung up and began dialing his deputies.

The rest is history. Mr. Dimon ultimately agreed to buy Bear for the bargain-basement price of $2 a share, which was later raised to $10 a share, with support from the Federal Reserve Bank of New York. JPMorgan emerged from the financial crisis stronger than most of its rivals, making its chief one of t! he most p! owerful banking leaders around.

JPMorgan has taken a number of hits, including the enormous trading loss incurred by a powerful internal unit. That is the subject of a hearing scheduled in Washington on Friday.

Over all, the firm remains near the top of many banking league tables and still regularly turns a profit.

But Mr. Dimon may very well be hoping that this year, he will not be interrupted by a phone call.

After Financial Crisis, Prosecutors Navigate Tricky Waters

The question of whether large financial institutions can ever be held fully responsible for criminal conduct has again become a political controversy.

Attorney General Eric H. Holder Jr. responded to a question at a Senate Judiciary Committee hearing last week about the failure to prosecute multinational banks for various transgressions by saying, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute - if we do bring a criminal charge - it will have a negative impact on the national economy, perhaps even the world economy.”

Mr. Holder’s frank adission that the Justice Department’s hands are sometimes tied in responding to corporate wrongdoing was offered in the context of a larger discussion about how companies that are considered “too big to fail” have become effectively insulated from facing criminal charges. But the attorney general shifted the focus back to Congress when he went on to say, “I think that’s something that we â€" you all â€" need to consider.”

Despite the finger-pointing, the fact remains that few executives have been held responsible when their company engages in misconduct.

Various officials have their own explanation for the lack of action. At another Senate hearing last week, Jerome H. Powell, a member of the Board of Governors of the Federal Reserve, said that the decision to not file criminal charges against HSBC over money laundering was not attributable to the regulators, who can only pursue civil remedies. Instead, he pointedly said that “the Justice Department has total authority” on deciding “who gets prosecuted for what.”

Others have attributed the lack of prosecutions to the so-called Arthur Andersen effect, named because of the demise of the accounting firm after it was convicted of obstruction of justice related to its auditing work at Enron. After the firm was found guilty and was forced out of business, thousands of jobs were lost, sending a chilling message to prosecutors that they needed to tread carefully when pursuing criminal charges against a company in a highly regulated industry.

Despite the fear of charging a large bank with a crime, the Justice Departent has tried to show its mettle recently in cases involving manipulation of the London interbank offered rate, or Libor. Its solution to the problem has involved having foreign subsidiaries of global banks plead guilty to a charge, rather than the whole entity.

As I noted in a previous post about how banks would have to settle these cases, this type of resolution is intended to limit the impact on the parent bank because the entity admitting guilt has no operations in the United States, so there a few collateral consequences from the conviction.

But the fear of putting a large company out business - even if a legitimate concern in some instances - does not mean that individuals should also! avoid pr! osecution for their role in corporate misconduct. At the Senate Banking committee hearing, David S. Cohen, the Treasury undersecretary, acknowledged that regulators had not aggressively pursued individuals “who are responsible for the conduct that has resulted in fines and penalties against the institution itself.”

Although a few lower-level traders have been charged, the settlements involving large banks over manipulation of Libor have not involved any real costs to senior executives. And HSBC’s money laundering case involved neither a corporate guilty plea nor any direct action against individuals responsible for long-running practices.

Of course, pursuing cases against individuals is often easier said than done. For a criminal charge to stick, the government must prove the requisite ntent beyond a reasonable doubt, which allows for defenses like ignorance or good faith to be used. The government has won some convictions in banking cases, like one against the former mortgage executive Lee B. Farkas, who received a 30-year prison sentence. But those cases have been few, with none filed recently.

Trying to assess civil penalties against individuals involved in money laundering cases like HSBC’s would not necessarily be easy, either. The statute authorizing the sanctions requires proof that the bank official acted “willfully.” In Ratzlaf v. United States, the Supreme Court interpreted that term in a case involving currency reporting to require proof that the defendant intended to violate a known legal duty, a very high standa! rd.

The banking law also authorizes civil penalties for negligent violations, a much lower threshold of proof, but those can only be sought from a financial institution, not individuals. The amount of any assessment is limited to $500 for a violation, or $50,000 for a pattern, which is not much of a deterrent against a multinational bank.

The government has also stumbled in its handling of other civil cases. For instance, the Securities and Exchange Commission lost its case against a midlevel executive at Citigroup for his role in the sale of a collateralized debt obligation tied to subprime mortgages, even though the agency only needed to prove negligence.

S.E.C. charges against mutual fund executives for making misleading statements about the stability of a money market fund during the height of the financial crisis resulted in a finding against only one individual, and then just for negligence and not intentional fraud. The agency is appealing that verdict, but winning the case will be difficult.

Mr. Holder is certainly right when he said that the impact of a prosecution needs to be considered before charges are filed, and a repeat of the demise of a firm like Arthur Andersen is not something to be taken lightly. But the real frustration is the lack of individual prosecutions, which strengthens the impression that the company will take the hit by paying a large fine to protect executives.

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Whethe! r a bank is “too big to jail” is not relevant to determining how to hold individuals accountable for corporate misconduct. Congress may want to consider measures to authorize regulators to hold corporate executives responsible when the company engages in misconduct if it wants to foster greater accountability.

More Companies Holding Annual Board Elections, Group Reports

When it comes to one of the oldest corporate takeover defenses around, more and more companies are saying no.

Forty-six companies in the Standard & Poor’s 500-stock index have agreed to re-elect all their directors annually after prompting by shareholders, a corporate governance initiative run out of Harvard Law School said on Wednesday.

The initiative, known as the Shareholder Rights Project, said that the 46 companies agreed to the move after receiving investor proposals this year. The group petitioned 74 companies this year.

Since the Shareholder Rights Project began submitting investor proposals last year, about 91 companies have agreed to forgo the practice.

“Eliminating board declassification on such a broad scale is likely to have a major positive impact on the governance landscape of large publicly traded firms,” Lucian Bebchuk, the Harvard Law professor who runs the initiative, told DealBook.

By putting up directors for election each year, these companies have emoved what are known as “staggered” or “classified” boards, a practice that some corporate governance experts have criticized. Making only a portion of directors up for election every year, the argument goes, means that corporate boards are less accountable to shareholders. The practice is a frequent target of activist investors seeking to gain seats on a board, as well as companies pursuing a hostile takeover.

Professor Bebchuk has been among the most vociferous critics of the practice. He has long focused on research contending that staggered boards ultimately hurt the value that companies create for shareholders.

Such moves have drawn criticism from some corporate law practitioners, notably Martin Lipton, the veteran deal maker who invented the “poison pill” takeover provision. Defenders of staggered board! s say that they insulate companies from investors thinking only of short-term profits, at the expense of generating value longer term.

But Professor Bebchuk disagreed, arguing that becoming more responsive to shareholders is good for companies in the long run.

He has garnered a number of institutional investors who agree, including the Illinois State Board of Investment and the Ohio Public Employees Retirement System, which submitted shareholder proposals on the group’s behalf.

Challenges Facing Next S.E.C. Chief

Mary Jo White got a friendly reception during testimony before the Senate Banking Committee on Tuesday, moving closer to becoming the next leader of the Securities and Exchange Commission. But even her supporters on Capitol Hill highlighted the significant challenges that would await her in that role, DealBook’s Ben Protess writes.

Striking a confident tone, Ms. White pledged to tackle enforcement actions and unfinished regulation, though she offered little detail. “She did, however, signal a flexible approach to reforming money market funds, an approach that could draw scrutiny from investor advocates and liberal lawmakers.” While the agency’s former leader, Mary L. Schapiro, had been tasked with restoring legitimacy to the S.E.C., now “lawmakers say that Ms. White must elevate the agenda to take on topics outside herpredecessor’s regime. Ms. White, for example, vowed to examine the growing world of high-frequency trading, an issue that continues to confound the agency.”

Lawmakers also pressed Ms. White to explain how she would navigate potential conflicts of interest. Ms. White, who represented financial clients after her tenure as a federal prosecutor, said her work for Wall Street “does not change me as a person. It doesn’t mean I embrace the policy thoughts of any of my clients.” Going forward, she said, “The American public will be my client, and I will work as zealously as is possible on behalf of them.”

TWINKIES BRAND LIVES TO FIGHT ANOTHER DAY  |  Hostess Brands struck a $410 million deal to sell a collection of snacks â€" Twinkies, Ding Dongs, Ho Hos, Sno Balls and Dolly Madison Zingers â€" to Apollo Global Management and Metropoulos & Company, two firms with experience in corp! orate turnarounds. “The sale will mean that Twinkies, born more than 83 years ago in an Illinois industrial kitchen, will live on, having survived wars, recessions and the South Beach and Dukan diets,” DealBook’s Michael J. de la Merced and Peter Lattman write. C. Dean Metropoulos, leader of the firm that bears his name, is expected to become chief executive of the snack business.

“We saw a real opportunity to revitalize these brands, just with some T.L.C.,” Daren Metropoulos, one of Mr. Metropoulos’s sons and an executive at the family firm, told DealBook. That effort may include marketing efforts that resemble those for Pabst Blue Ribbon, which Metropoulos & Company owns. Social media may play a role, and comedians like Zach Galifianakis may be brought on as spokesmen. The deal includes five Hostess factories, and the new company will probably feature the Hostess name.

The ield of potential buyers once seemed crowded, but by the deadline on Monday, the only qualified offer came from Apollo and Metropoulos. “It’s not that we lacked interest,” Gregory F. Rayburn, the Hostess chief executive, said in an interview. “Other bidders felt that they could not top the price.”

WHEN SPINOFFS ARE A DUMPING GROUND  |  “A spinoff is a product of Wall Street math that says one plus one can equal three. Yet as shareholders of Time Warner may be about to find out, it can also be all about subtraction, as a company ditches an unwanted business, in this case, magazines,” Steven M. Davidoff writes in the Deal Professor column.

As deals by General Motors and Ford Motor show, it can be tempting to attach liabilities to the company being spun off. “This i! s often m! anagement’s best opportunity to burnish its own company at another’s expense. It’s hard to resist.” Mr. Davidoff continues: “The reason a spinoff is a preferred way to get rid of businesses a company no longer wants is that shareholders have no choice in the matter. The decision is simply made by the board.”

ON THE AGENDA  |  Gary Gensler, chairman of the Commodity Futures Trading Commission, speaks at the Futures Industry Association conference in Boca Raton, Fla., at 8 a.m. A House Financial Services subcommittee conducts a hearing about mortgage insurance at 10 a.m. Data on retail sales in February is out at 8:30 a.m. Hot Topic, which recently agreed o sell itself to Sycamore Partners, reports earnings after the market closes. Martha Stewart is on CNBC at 2 p.m.

CARLYLE LOWERS BARRIER TO ENTRY  |  The Carlyle Group is lowering the bar for investors to participate in its private equity buyouts. Trying to reach a broader base of customers, Carlyle is preparing a new fund with a minimum investment of $50,000, compared with minimums of between $5 million and $20 million previously, The Wall Street Journal reports. (The opportunity will be available to “accredited” investors.) The move comes after other private equity giants have begun offering products for individual investors, but “in moving down-market to attract new funds, Carlyle and other firms could face questions from some institutional and ultrarich clients drawn! to such ! firms partly for their exclusivity,” The Journal writes.

Mergers & Acquisitions »

British Chain Asda Said to Consider Bidding for HMV  |  “Asda, Britain’s second-largest supermarket group, is considering a rescue bid for entertainment retailer HMV,” and is “understood to have held talks with Deloitte, the administrators to HMV, about a deal,” according to The Telegraph. TELEGRAPH

National Financial Partners Said to Weigh a Sale  |  National Financial Partners, “the New York-based wealth managemet company headed by Sandy Weill’s daughter Jessica Bibliowicz, is exploring a potential sale, according to three people familiar with the matter,” Reuters reports. REUTERS

MetroPCS Urges Shareholders to Back Merger With T-Mobile  |  MetroPCS urged shareholders on Tuesday to approve its merger with T-Mobile USA, in the face of opposition from two major hedge funds. DealBook »

Fiat and Chrysler Continue to Discuss a Merger  | 
REUTERS !

INVESTMENT BANKING »

Goldman to Increase Disclosure on Illiquid Assets  |  The Securities and Exchange Commission had “pressured” Goldman Sachs to disclose more information about how it valued illiquid assets, Reuters writes. REUTERS

Credit Suisse Plans to Cut 94 Jobs in New York  | 
BLOOMBERG NEWS

Wells Fargo Chief Gets $1 Million in Restricted Stock
WALL STREET JOURNAL

John Byrne, Insurance Legend, Dies at 80  |  The New York Times writes: “John J. Byrne, who became an insurance industry legend by saving Geico from the brink of bankruptcy in the 1970s and averting widespread financial damage, died on Thursday at his home in Etna, N.H. He was 80. The cause was cancer, his family said.”

“Mr. Byrne’s stature only grew in 1985, when he took Fireman’s Fund public in what was then the biggest initial stock offering in history. Warren E. Buffett, who made some of his billions investing in Geico at the time Mr. Byrne was hired to reverse its downward spiral, called Mr. Byrne ‘the Babe Ruth of insurance.’” NEW YORK TIMES

PRIVATE EQUITY »

TPG Said to Plan Fund for Real Estate  |  The private equity firm TPG Capital is planning its first real estate fund, expecting to start raising money in the second half of this year, with a goal of at least $1 billion, The Wall Street Journal reports, citing unidentified people familiar with the firm’s plans. WALL STREET JOURNAL

A Real Estate Fund for K.K.R.  |  The buyout firm K.K.R. “is preparing to market ts first fund dedicated to real estate investments with an initial $500 million committed to the pool, according to two people with knowledge of the matter,” Bloomberg News reports. BLOOMBERG NEWS

HEDGE FUNDS »

Former FrontPoint Manager Said to Plan New Fund  |  Thomas Monaco, formerly a manager at FrontPoint Partners, “is seeking to start a hedge fund focused on Asian financial stocks, said four people with knowledge of the matter,” Bloomberg News reports. BLOOMBERG NEWS

Contemplating a Breaking Point in Bonds  |  Jay Feuerstein, chief executive of 2100 Xenon, predicts possible outcomes in the event that bond prices stop rising. BUSINESS INSIDER

I.P.O./OFFERINGS »

Formula One May Revive I.P.O. This Year  |  “Last year I thought that the markets were not ready, but now it is getting more likely that there is an opportunity,” Bernie Ecclestone of Formula One said, according to Reuters. REUTERS

Silver Spring Raise $81 Million in I.P.O.  |  Silver Spring Networks, which makes equipment for smart electricity grids, priced its offering at the middle of an expected range, Bloomberg News reports. BLOOMBERG NEWS

VENTURE CAPITAL »

Sexual Discrimination Is Again an Issue in Silicon Valley  |  “Three female employees have sued CMEA Capital, a venture capital firm based in San Francisco, claiming sexual harassment and retaliation,” the Bits blog writes. NEW YORK TIMES BITS

India the Target of Technology Trade Group  |  The Financial Times reports: “A lobby group representing U.S. technology companies is set to attack India for its domestic procurement policies at a Congressional hearing on Wednesday, in a sign of growing concern among multinationals about market access in the South Asian nation.” FINANCIAL TIMES

LEGAL/REGULATORY »

Google Acknowledges Breach of Privacy  |  In agreeing to settle a case over its Street View mapping project, Google admitted to state officials that it had violated people’s privacy as it gathered personal information from unsuspecting omputer users, The New York Times reports. NEW YORK TIMES

Greenberg Forges Ahead With Lawsuit Over A.I.G. Bailout  |  The American International Group’s former chief executive, Maurice R. Greenberg, is moving ahead with a lawsuit against the federal government over its $182 billion rescue of the insurer â€" even without the backing of the company itself. DealBook »

Putin Names Loyalist to Lead Russian Central Bank  |  The New York Times reports: “Asserting further personal control over the Russian economy, President Vla! dimir V. ! Putin nominated on Tuesday a close political ally, who is now serving as his chief economic adviser, to become the new chief of the Russian central bank.” NEW YORK TIMES

Former Prosecutor Starts Litigation Finance Firm  |  Andrew Stolper, a former federal prosecutor, is working with a former F.B.I. agent to start a firm specializing in litigation finance, Reuters reports. REUTERS

One Possible Hitch to an Autonomy Investigation  |  The Serious Fraud Office of Britan cautioned that it first needed to make sure that its use of an Autonomy product did not pose a conflict of interest for an investigation into its sale to Hewlett-Packard. DealBook »

Intrade Sheds Light on How Gray Markets Can Go Dark  |  While Intrade’s predictive record was good, it did not foresee the rising controversy over under-regulated speculation, Robert Cyran of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS