After KPMG, Audit Firms Reconsider Procedures

Accounting firms are being forced to take a fresh look at their practices in the wake of an insider-trading scandal involving one of KPMG’s top auditors, as new rules requiring more transparency by the firms are already being considered.

The heightened scrutiny comes after news that a senior partner at KPMG revealed confidential information about two clients, Herbalife and Skechers, a move that led the firm to resign as the auditor of those companies.

The partner, Scott I. London, who was in charge of KPMG’s audit practice in Southern California, was fired by the accounting firm this week. Though he has not been charged, Mr. London admitted to wrongdoing in a statement issued through his lawyer on Tuesday. Mr. London said that he was “embarrassed” and that he regretted his “actions in leaking nonpublic data to a third party regarding the clients I served for KPMG.”

James D. Cox, a securities lawyer at Duke University, called the case a “bombshell that has the industry circling the wagons on training.” The profession, he said, “suffers from an acute case of schizophrenia. They drink the tea about being professionals, but the other side is that they identify all too closely with their clients.”

The case has been a jolt to the industry, particularly as insider trading is more commonly associated with investment firms than with auditing firms. All the so-called Big Four accounting firms are now re-examining their internal training, monitoring and compliance programs to identify loopholes that might allow an accountant to skirt securities regulations or internal policies, industry officials say.

The sector has already been under scrutiny, particularly after the accounting scandals of the last decade. A proposal by the Public Company Accounting Oversight Board, which regulates the profession, would require accounting firms to disclose an engagement partner’s name on a client’s audit reports and other papers. After the KPMG case, that could gain new support.

The accounting oversight board would take up the matter “within the next three to six months,” said a board spokeswoman, Colleen Brennan.

“I can envision that the KPMG case will be used to promote a listing of the names,” said Charles D. Niemeier, a former board member now in private practice at the law firm Williams & Connolly.

Only PricewaterhouseCoopers has strongly publicly backed the accounting board proposal, and only the part requiring identification of audit partners in annual forms, known Form 2, that accounting firms file to the regulator.

No accounting firm publicly backs the section requiring partners to sign audit reports that get filed to the Securities and Exchange Commission, as the industry fears auditors could be personally sued and that investors might develop a “star system” to rank auditors.

But the accounting industry wants to remain cohesive before the accounting board. Therefore, the KPMG case “is going to put additional pressure on the board to move forward with this,” said Joseph Carcello, an accounting professor at the University of Tennessee and a former KPMG employee, and an adviser to the accounting oversight board.

Still, at least one expert said the proposal to have partners personally sign audits could make the reviews riskier, not safer.

“You will chase away people who are unwilling to take the legal and reputational risk of making an honest mistake,” said Anthony Catanach, a professor at Villanova University’s business school . “You may unwittingly attract more risk takers instead, and get riskier audits.”

The latest news is also a setback for KPMG, which had settled various cases involving accounting scandals, including those at Rite Aid and Oxford Health Plans. In 2005, the firm narrowly averted indictment by agreeing to pay a $456 million penalty to the government for its role in the marketing of fraudulent tax shelters. Several tax partners in KPMG’s Los Angeles unit â€" the same as Mr. London’s â€" were indicted.

But in contrast to its mass-market tax shelter business, the latest episode appears to be a one-time case. KPMG “has a state of the art system, but this guy took it outside the system and did it in a way that had no trace,” said a senior person briefed on the matter who declined to be identified. “He had the right tone from the top, and he still did this. It could happen anywhere.”

Tim Connolly, a KPMG spokesman, did not return calls requesting comment.

Former KPMG Executive Admits Trading Insider Tips for Cash and Gifts

Federal agents secretly photographed a former senior KPMG executive accepting a cash payment in exchange for secret information about the companies he audited, according to a person with direct knowledge of the case.

The sting operation, executed by the F.B.I. a few weeks ago at a Starbucks in the San Fernando Valley, outside of Los Angeles, led KPMG to fire the former executive, Scott I. London.

Though he has yet to be charged by the government, Mr. London admitted to leaking the confidential data about two of his clients â€" the nutrition supplement maker Herbalife and the footwear manufacturer Skechers. As a result, KPMG resigned as auditor for the two companies.

“What I have done was wrong and against everything that I had believed in,” Mr. London said in a statement. “I spent nearly 30 years at KPMG and I dedicated my entire life to that firm.”

Mr. London passed the information to a longtime friend and frequent golf partner, who has yet to be identified.

The government acted after receiving reports of suspicious trading in the brokerage accounts of Mr. London’s friend. The friend then turned against Mr. London, according to the person with direct knowledge of the case.

After the Starbucks sting, F.B.I. agents showed up at Mr. London’s home and confronted him with the evidence.

Mr. London, who was the partner in charge of the audit practice for KPMG in Southern California and a prominent figure in Los Angeles business circles, said in a statement that the leaks started several years ago “in an effort to help out someone whose business was struggling.”

But Mr. London did not provide the tips solely out of kindness. He also accepted about $25,000 in cash and other gifts, including a Rolex watch, the person briefed on the case said.

“I have no idea what I was thinking,” said Mr. London, in an interview with The Los Angeles Times, which had reported on the sting operation. “I don’t know why there was a lapse of judgment, but there was.”

Mr. London could not be reached on Wednesday.

The United States attorney’s office in Los Angeles and the Securities and Exchange Commission there are both investigating the case. Government lawyers have interviewed Mr. London, who is cooperating with the government, and are weighing charges against him, according to the person briefed on the case.

The episode has been a major headache for both Herbalife and Skechers. KPMG withdrew its certification of the companies’ financial statements for the last few years, explaining that Mr. London’s actions had compromised the audits. But the auditor also emphasized that it had no reason to think that the reports were erroneous. In any case, the companies have to find a new auditor and have their financials redone.

Mr. London said in his statement that his tips did not involve divulging any confidential company documents but was instead “in the form of a suggestion.” The friend, Mr. London said, would ask how his clients were doing and he would give him his thoughts on whether the companies’ stocks were a buy or a sell.

Appearing on CNBC Wednesday afternoon, Harland Braun, Mr. London’s lawyer, said that his client knew that he was violating the law.

“But he just can’t understand why he did it, and it’s hard to understand why he did it,” Mr. Braun said. “It makes no sense. He’s looking back on the years that he did it. It made no sense from a dollar-and-cents point of view; it made no sense in terms of his ethics. He’s not trying to justify it in the slightest.”

Mr. Braun painted a dire picture of his client’s prospects.

“It’s pretty grim,” the lawyer told CNBC. “His life is ruined. He’s 50 years old, he’s lost his career, he’ll probably lose his license, he’s been disgraced, and he may have to do some jail time. That’s the best-case scenario. It’s a very grim reminder of the consequences for anyone who wants to leak any insider information.”

Former KPMG Executive Admits Trading Insider Tips for Cash and Gifts

Federal agents secretly photographed a former senior KPMG executive accepting a cash payment in exchange for secret information about the companies he audited, according to a person with direct knowledge of the case.

The sting operation, executed by the F.B.I. a few weeks ago at a Starbucks in the San Fernando Valley, outside of Los Angeles, led KPMG to fire the former executive, Scott I. London.

Though he has yet to be charged by the government, Mr. London admitted to leaking the confidential data about two of his clients â€" the nutrition supplement maker Herbalife and the footwear manufacturer Skechers. As a result, KPMG resigned as auditor for the two companies.

“What I have done was wrong and against everything that I had believed in,” Mr. London said in a statement. “I spent nearly 30 years at KPMG and I dedicated my entire life to that firm.”

Mr. London passed the information to a longtime friend and frequent golf partner, who has yet to be identified.

The government acted after receiving reports of suspicious trading in the brokerage accounts of Mr. London’s friend. The friend then turned against Mr. London, according to the person with direct knowledge of the case.

After the Starbucks sting, F.B.I. agents showed up at Mr. London’s home and confronted him with the evidence.

Mr. London, who was the partner in charge of the audit practice for KPMG in Southern California and a prominent figure in Los Angeles business circles, said in a statement that the leaks started several years ago “in an effort to help out someone whose business was struggling.”

But Mr. London did not provide the tips solely out of kindness. He also accepted about $25,000 in cash and other gifts, including a Rolex watch, the person briefed on the case said.

“I have no idea what I was thinking,” said Mr. London, in an interview with The Los Angeles Times, which had reported on the sting operation. “I don’t know why there was a lapse of judgment, but there was.”

Mr. London could not be reached on Wednesday.

The United States attorney’s office in Los Angeles and the Securities and Exchange Commission there are both investigating the case. Government lawyers have interviewed Mr. London, who is cooperating with the government, and are weighing charges against him, according to the person briefed on the case.

The episode has been a major headache for both Herbalife and Skechers. KPMG withdrew its certification of the companies’ financial statements for the last few years, explaining that Mr. London’s actions had compromised the audits. But the auditor also emphasized that it had no reason to think that the reports were erroneous. In any case, the companies have to find a new auditor and have their financials redone.

Mr. London said in his statement that his tips did not involve divulging any confidential company documents but was instead “in the form of a suggestion.” The friend, Mr. London said, would ask how his clients were doing and he would give him his thoughts on whether the companies’ stocks were a buy or a sell.

Appearing on CNBC Wednesday afternoon, Harland Braun, Mr. London’s lawyer, said that his client knew that he was violating the law.

“But he just can’t understand why he did it, and it’s hard to understand why he did it,” Mr. Braun said. “It makes no sense. He’s looking back on the years that he did it. It made no sense from a dollar-and-cents point of view; it made no sense in terms of his ethics. He’s not trying to justify it in the slightest.”

Mr. Braun painted a dire picture of his client’s prospects.

“It’s pretty grim,” the lawyer told CNBC. “His life is ruined. He’s 50 years old, he’s lost his career, he’ll probably lose his license, he’s been disgraced, and he may have to do some jail time. That’s the best-case scenario. It’s a very grim reminder of the consequences for anyone who wants to leak any insider information.”

Former KPMG Executive Admits Trading Insider Tips for Cash and Gifts

Federal agents secretly photographed a former senior KPMG executive accepting a cash payment in exchange for secret information about the companies he audited, according to a person with direct knowledge of the case.

The sting operation, executed by the F.B.I. a few weeks ago at a Starbucks in the San Fernando Valley, outside of Los Angeles, led KPMG to fire the former executive, Scott I. London.

Though he has yet to be charged by the government, Mr. London admitted to leaking the confidential data about two of his clients â€" the nutrition supplement maker Herbalife and the footwear manufacturer Skechers. As a result, KPMG resigned as auditor for the two companies.

“What I have done was wrong and against everything that I had believed in,” Mr. London said in a statement. “I spent nearly 30 years at KPMG and I dedicated my entire life to that firm.”

Mr. London passed the information to a longtime friend and frequent golf partner, who has yet to be identified.

The government acted after receiving reports of suspicious trading in the brokerage accounts of Mr. London’s friend. The friend then turned against Mr. London, according to the person with direct knowledge of the case.

After the Starbucks sting, F.B.I. agents showed up at Mr. London’s home and confronted him with the evidence.

Mr. London, who was the partner in charge of the audit practice for KPMG in Southern California and a prominent figure in Los Angeles business circles, said in a statement that the leaks started several years ago “in an effort to help out someone whose business was struggling.”

But Mr. London did not provide the tips solely out of kindness. He also accepted about $25,000 in cash and other gifts, including a Rolex watch, the person briefed on the case said.

“I have no idea what I was thinking,” said Mr. London, in an interview with The Los Angeles Times, which had reported on the sting operation. “I don’t know why there was a lapse of judgment, but there was.”

Mr. London could not be reached on Wednesday.

The United States attorney’s office in Los Angeles and the Securities and Exchange Commission there are both investigating the case. Government lawyers have interviewed Mr. London, who is cooperating with the government, and are weighing charges against him, according to the person briefed on the case.

The episode has been a major headache for both Herbalife and Skechers. KPMG withdrew its certification of the companies’ financial statements for the last few years, explaining that Mr. London’s actions had compromised the audits. But the auditor also emphasized that it had no reason to think that the reports were erroneous. In any case, the companies have to find a new auditor and have their financials redone.

Mr. London said in his statement that his tips did not involve divulging any confidential company documents but was instead “in the form of a suggestion.” The friend, Mr. London said, would ask how his clients were doing and he would give him his thoughts on whether the companies’ stocks were a buy or a sell.

Appearing on CNBC Wednesday afternoon, Harland Braun, Mr. London’s lawyer, said that his client knew that he was violating the law.

“But he just can’t understand why he did it, and it’s hard to understand why he did it,” Mr. Braun said. “It makes no sense. He’s looking back on the years that he did it. It made no sense from a dollar-and-cents point of view; it made no sense in terms of his ethics. He’s not trying to justify it in the slightest.”

Mr. Braun painted a dire picture of his client’s prospects.

“It’s pretty grim,” the lawyer told CNBC. “His life is ruined. He’s 50 years old, he’s lost his career, he’ll probably lose his license, he’s been disgraced, and he may have to do some jail time. That’s the best-case scenario. It’s a very grim reminder of the consequences for anyone who wants to leak any insider information.”

Seeking Relief, Banks Shift Risk to Murkier Corners

Banks have been shedding risky assets to show regulators that they are not as vulnerable as they were during the financial crisis. In some cases, however, the assets don’t actually move â€" the bank just shifts the risk to another institution.

This trading sleight of hand has been around Wall Street for a while. But as regulators press for banks to be safer, demand for these maneuvers â€" known as capital relief trades or regulatory capital trades â€" has been growing, especially in Europe.

Citigroup, Credit Suisse and UBS have recently completed such trades. Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.

The loans then look less worrisome â€" at least to the bank and its regulator. As a result, the bank does not need to hold as much capital, potentially improving profitability.

“I think we are going to see more of these type of trades in the U.S. given the demands by regulators to hold more capital,” said Kevin White, a former executive at Lehman Brothers who founded Spring Hill Capital Partners, which is working with banks to structure regulatory capital trades.

Citigroup, Credit Suisse and UBS declined to comment on their trades. Privately, however, bankers acknowledge that while these trades may be pushing risk into a less regulated corner of Wall Street, they also point out that the risk is being moved into a less systemic part of the financial industry than the big banks.

The rule-writing going on as part of the Dodd-Frank financial regulatory overhaul may prevent some of these trades, but bankers say this will simply force them to structure the trades differently.

Some regulators say they are concerned that in some instances these transactions are not actually taking risk off bank balance sheets. For instance, a financial institution may end up lending money to clients so they can invest in one of these trades, a move that could leave a bank with even more risk on its books.

Critics point to other reasons to worry. Most of these trades are structured as credit-default swaps, a derivative that resembles insurance. These kinds of swaps pushed the insurance giant American International Group to the brink of collapse in September 2008. Another red flag is that banks often use special-purpose vehicles located abroad, frequently in the Cayman Islands, to structure these trades.

“These trades allow the banks to go to regulators and say the risk is gone,” said Anat R. Admati, a professor of finance at Stanford University. “But it’s not gone at all; it’s just been pushed into a murky corner of the market.”

The trades can take many forms, but typically a bank will buy a credit-default swap on some of its loans from a special-purpose vehicle, which is financed by outside investors. If all goes well, the investors receive an annual fee for taking on this risk. But in the worst case, where the loans in the portfolio default, the insurance that the bank has bought kicks in and covers its losses. The investors on the other side are wiped out.

A number of American investment firms like Spring Hill Capital Partners have been trying to find investors for these deals. Glenn Blasius, another Lehman alumni, said he was raising money for the Ovid Regulatory Capital Relief Fund, which will invest in these trades.

The Orchard Global Capital Group has raised a fund to invest in regulatory capital trades, and the New Mexico Educational Retirement Board is among its investors.

In December 2011, Allan Martin, a representative with an investment consultant firm that advises pension funds, met with the New Mexican pension fund over investing through Orchard in a regulatory capital trade, according to the minutes of a board meeting.

Mr. Martin explained to the retirement board that these transactions had been created to allow the banks “to continue to hold the assets on their balance sheet” while selling some of the risk.

At the meeting, Jan Goodwin, executive director of the New Mexico Educational Retirement Board, asked about the use of credit-default swaps, which got A.I.G. into trouble. Mr. Martin admitted that the Orchard deal “has a little flavor of that” but said Orchard had done “a great deal” of due diligence on the underlying collateral, something he said A.I.G. often didn’t do.

In an interview, Mr. Martin said that “a lot of clients ask how this is different than A.I.G.,” and he said it was because Orchard had a better understanding of the risks involved in the assets it was dealing with.

An executive with Orchard did not respond to requests for comment.

Many major banks have structured these trades. In March, Credit Suisse completed a transaction named Lucerne, after the Swiss lake, in which it bought insurance on a 5 billion Swiss franc portfolio of small and medium-size Swiss business loans, according to people who were briefed on the matter but not authorized to speak on the record because they had signed confidentiality agreements.

Credit Suisse agreed to take a small percentage of the losses, and it lined up American and European investors willing, for an annual fee of roughly 10 percent, to assume the rest of the risk, these people say.

Citigroup cut a deal at the end of last year with the private equity firm Blackstone Group, which insured the big bank against a portion of the losses on a roughly $1 billion pool of shipping loans. The bank used a special-purpose vehicle in Ireland called Cloverie to facilitate the trade, according to people briefed on the matter but not authorized to speak on the record.

For its part, Blackstone put up about $100 million, or 12 percent of the value of the shipping portfolio, to cover any possible losses. If things go well, Blackstone will receive a return of about 15 percent, these people say. If the shipping loans go sour, Citigroup gets Blackstone’s money and the private equity firm loses its cash.

Credit Suisse received capital relief on the Lucerne deal, although the exact amount is not known. Citigroup was able to reduce by roughly 90 percent the amount of capital it needed to set aside to cover losses on the shipping portfolio.

One Citigroup executive with knowledge of this trade but not authorized to speak on the record said it was structured to reduce Citigroup’s exposure to shipping loans. The fact that it reduced the amount of capital the bank had to hold was “an added bonus.”

UBS also recently completed a regulatory capital trade, selling a piece of the risk on a portfolio of roughly 100 corporate loans, according to people who reviewed the transaction but who declined to speak publicly because they had signed confidentiality agreements.

And Citigroup is marketing a second risk capital trade involving shipping loans, according to people briefed on the matter.

“These trades are a good thing,” said Richard Robb, a New York money manager whose firm, Christofferson, Robb & Company, has been structuring regulatory capital trades for more than a decade. “The best way to protect the banks against this risk is to move it outside the banking system to wealthy institutions. No one will be coming to bail out our company or our investors if these trades backfire.”

The HTC One Deserves Its Place in the Spotlight

Remember HTC For a long time, this Taiwanese phone maker seemed to be on a roll. Its Android phones kept making gadget headlines.

Then, all of a sudden, Samsung came along, all technological and marketing guns blazing, and that was that. It became an Apple-versus-Samsung world. Everyone sort of forgot about HTC.

Its latest phone, arriving at Sprint and AT&T next week, and T-Mobile shortly thereafter, will give HTC at least a few more weeks in the spotlight. The phone will cost $200 with a two-year contract for the model with 32 gigabytes of memory, $300 for 64 gigs.

It’s an Android phone â€" the most beautiful one you’ve ever seen. Seriously. It makes you feel happy and calm just holding this thing in your hands. There’s a picture of the HTC One next to “gorgeous” in the dictionary.

It’s sculptured from a thin, solid block of aluminum, with a gently curved back that adds to that soothing, worry-stone effect. The aluminum grille, above and below the black, black screen, houses the unbelievably powerful, crisp stereo speakers.

The screen is like nothing you’ve ever seen; with 468 pixels crammed into every inch, it’s the sharpest screen ever set into a phone. It’s a bit unnecessary â€" you stopped being able to detect individual pixels back on the iPhone 4S â€" but at least you can sleep well at night, satisfied that nobody’s screen is sharper. We’re talking 1080 resolution, the highest HD video there is.

This screen is bright, vivid and huge â€" 4.7 inches diagonal. A screen that size makes the One much bigger than, say, the iPhone, but not as unwieldy as some Android jumbophones. It weighs a satisfying 5.1 ounces.

The camera is something special. Technically, the resulting photos have 4 megapixels, but HTC correctly points out that megapixel count isn’t everything. The company claims that these are big pixels that soak in more light â€" and indeed, the low-light pictures from this camera put other phones to shame.

There are some disappointments, though. There’s no memory-card slot, so the built-in storage is all you get. You can’t pop out the battery, either. Battery life is typical 4G LTE Android; you’ll get one day of use on a charge. The usual set of three buttons on an Android phone â€" Back, Home and Menu â€" are down to two; HTC has eliminated the Menu button. These buttons are supposed to light up, but they don’t always.

Weirdest of all, HTC once again insists on replacing the mature, polished Android software design, the year-old “Jelly Bean” version, with an interface of its own. This software places, on the first of your Home screens, a series of tiles showing photos and headlines from news sources of your choosing, much like the popular Flipboard app. It’s great, although optional. But in many other areas, HTC didn’t improve Google’s original design.

The phone’s power button doubles, intriguingly enough, as an infrared lens for controlling your TV, but the accompanying app is fairly inelegant. The camera app is not only full-fledged, it may be overly fledged; it offers Still mode, Video mode, and Zoe mode (three-second clips, whose purpose escape me). There’s no physical shutter button.

A crying shame that Verizon is the only carrier holdout; this thing would wipe the floor with its rivals if it had that kind of ubiquitous, superfast LTE network behind it.

Otherwise â€" wow, is this phone packed. It’s ridiculously fast. Its camera, screen and speakers take first place in smartphones. And hey â€" did I mention how beautiful it is

HTC has put all of its 2013 eggs into the One basket, and in general, that was a good call. You could quibble with the software overlays, but it would be hard to imagine a more impressive piece of phone hardware.

What’s Wrong With the ‘Chapter 14’ Proposal

On Thursday, I am speaking at New York University’s Stern School of Business on a panel on Dodd-Frank’s orderly liquidation authority. It seemed like an appropriate time to discuss why, although I’m no huge fan of the authority, I also have my doubts about its leading alternative.

I refer to the “Chapter 14″ proposal put forth by the Hoover Institute group at Stanford.

First, the Chapter 14 proposal throws away most of the benefits of using the existing bankruptcy system by calling for cases to be heard by Federal District Court judges.

Our current bankruptcy court structure plainly has its problems, to put it mildly, but one of the main reasons that Chapter 11 works as well as it does has to do with the experienced bankruptcy judges, particularly in New York and Delaware.

Next, and most important, the Chapter 14 proposal has what can only be called a ridiculous funding mechanism I have previously noted the dubious assumption in Chapter 14 that private debtor-in-possession financing will be available in times of financial distress, especially in the size a large financial institution would need.

But the even bigger problem with Chapter 14, which has gotten very little coverage, is its attempt to penalize the provider of DIP financing if the new funding is used to “overpay” creditors.

For example, if a counterparty received a 50 percent upfront recovery made possible by the DIP financing, and unsecured creditors latter received only 35 percent in the Chapter 14 case, the proposal would subordinate the DIP lenders’ claim by that extra 15 percent.

That pretty much kills off any chance of private DIP funding, and even raises some serious doubts about future government DIP funding too. What lucky Treasury employee gets the job of estimating all of these variables, and then facing the consequences if he or she estimates wrongly

Moreover, it provides exactly the wrong incentives upon the failure of a big financial institution. One of the key reasons to have something like DIP financing is to stabilize the debtor’s business upon failure. In the case of a financial institution, such stability has added systemic benefits too.

But if the lender gets penalized for providing too much stability, there is every incentive to be stingy with the DIP funding. I may be a mere bankruptcy lawyer, but as I understand it, that’s the exact opposite of what commentators going back to Bagehot have argued should be done during a banking crisis.

A lot of this discussion seemed to be based on the faulty notion that Chapter 11 DIP financing goes only to pay ongoing operations, while the new Chapter 14 funding would be needed for paying pre-bankruptcy claim. That reflects a basic misunderstanding of how Chapter 11 actually works. After all, when a corporate debtor uses DIP financing to pay “critical trade creditors,” or to cure past defaults before assuming an executor contract, it’s not really so much about paying for ongoing operations.

If I had to guess, General Motors and Chrysler are looming behind this funding mess in Chapter 14. Those two automakers provide us with the best example of what government-provided DIP financing might look like, and the Hoover people are clearly no big fans of that.

But the basic reality is that the lender who provides the big bucks to keep a debtor alive gets lots of power in return, whether they be bank or U.S. Treasury. Chapter 14 is fighting against that reality.

And somewhat strangely, Chapter 14 as proposed does very little to address the key issue of speed. Lehman Brothers likely represented the outer edge of what can be done with regard to conducting a quick 363 sale: the sale happened a week after filing. But even that was only enabled by keeping Lehman’s broker-dealer out of bankruptcy (more precisely, SIPA) for that week and propped up by the Fed. Not clear that the Fed can do that anymore.

Our next best example is the automotive cases, but even a few weeks in Chapter 11 might well be fatal for a financial institution. But again, the Chapter 14 people don’t want to go there.

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

Despite Pressure to Police Consultants, Regulators Face Obstacles

Federal regulators are facing pressure on Capitol Hill to rein in a multi-billion dollar consulting industry after the firms stumbled during a recent review of foreclosure abuses. But the efforts could be stymied, given regulators’ cozy ties to consultants and limited legal authority to penalize them.

The early signs are discouraging, lawmakers say. After concerns surfaced that one consulting firm was bungling the broad review of foreclosures, regulators sent the firm a letter complaining about the conduct but stopped short of firing the consultant, according to Congressional officials with knowledge of the matter.

The use of consultants, which are paid by the same banks they are expected to help reform, will come under the microscope at a Senate Banking Committee hearing on Thursday. Senator Sherrod Brown, the Ohio Democrat leading the hearing, is examining whether regulators inappropriately “outsource” oversight to consultants like Deloitte & Touche and Promontory Financial Group, concerns that stem from the recent review of home loans.

Since the review was scuttled earlier this year, some government officials have been exploring new ways to constrain the use of the firms and penalize them when they err, according to prepared testimony for the Senate hearing.

“While the use of independent consultants can be an effective supervisory tool, there are certainly lessons to be learned from our experience, and we believe we can improve the process going forward,” Daniel P. Stipano, a senior official at Office of the Comptroller of the Currency, said in the testimony. He added that the agency plans to “enhance our oversight of the consultants when they are utilized.”

But challenges remain.

Mr. Stipano is expected to cite legal limitations that undercut the regulator’s authority over consultants. That constraint stems from 2006 when the Comptroller’s office levied a $300,000 against Grant Thornton, a firm that audited the books of First National Bank of Keystone, which collapsed in 1999. Grant Thornton, the Comptroller found, ignored “unequivocal, written evidence” that showed the bank didn’t account for much of its assets, a major discrepancy that the consultant didn’t flag.

When the firm challenged the fine, a federal appeals court in Washington overruled the Comptroller. The court said that the regulator had “exceeded his statutory authority.”

At the hearing on Thursday, Mr. Stipano is expected to petition lawmakers for greater authority. In the prepared testimony, he said the Comptroller’s office “would welcome a legislative change in this area that would facilitate our ability to take enforcement actions directly against independent contractors that engage in wrongdoing.”

Even if regulators gain new powers to curb the use of consultants, their relationships with the firms may prove difficult to disentangle. Since the financial crisis, the Comptroller has ordered banks to hire consultants in more than 130 enforcement actions, or roughly 15 percent of the cases, an analysis of government records shows.

Further complicating the relationships, consultants like Promontory have forged close ties to the regulators, routinely poaching from the government ranks. Promontory was founded by Eugene A. Ludwig, a former Comptroller of the Currency. Last week, the consultant announced the hire of Mary L. Schapiro, who led the Securities and Exchange Commission until late last year.

Alongside Deloitte and PricewaterhouseCoopers employees, a Promontory executive, Konrad Alt, will testify at the Senate hearing on Thursday. Mr. Stipano, of the Comptroller, will be joined by Richard Ashton, a top official at the Federal Reserve.

The hearing comes a week after the Government Accountability Office issued a scathing report faulting regulators for the flawed foreclosure review. The regulators, the report found, failed to properly coordinate a review of foreclosed loans and potentially allowed some errors to go undetected.

Adding to the scrutiny, Senator Elizabeth Warren, Democrat of Massachusetts, and Representative Elijah Cummings, Democrat of Maryland, are pushing regulators to explain what went wrong with the foreclosure review. Regulators halted the review in January after consultants scrutinized only 114,000 of the more than 800,000 troubled loans they were expected to review, according to the lawmakers.

But when the lawmakers pressed for greater detail on the problems, regulators balked. The regulators, for example, refused to provide the name of the consultant that was admonished â€" but not expelled â€" for shoddy work.

In a letter to the regulators on Wednesday, the lawmakers slammed the Fed and the Comptroller’s office for the resistance. “Your staff would not elaborate” even after finding the consultant’s work was “so poor that you issued a letter faulting the company and directing it to cure its deficiencies,” according to a copy of the letter reviewed by The New York Times.

The letter also took aim at the regulators for shielding the banks. When asked to detail the number of illegal foreclosures at each bank, the regulators declined, arguing that the information amounted to “trade secrets.”

Lawmakers excoriated the argument, declaring in their letter that “breaking the law is not a corporate trade secret.”

The dispute, officials note, came about because regulators are hesitant to provide granular information derived from their supervision of banks. Such documents are typically confidential.

The Comptroller’s office and the Fed declined to comment.

Representative Maxine Waters, Democrat of California, is also taking aim at the regulators’ reliance on consultants. While regulators must grapple with finite resources, forcing them to hire outsiders for certain responsibilities, Ms. Waters argues that federal authorities should adopt stricter oversight measures. On Wednesday, Ms. Waters is expected to introduce legislation that would impose a range of conditions on the use of consultants, including regular progress reports and detailed estimates of costs.

“The situation clearly requires a legislative remedy,” Ms. Waters said on Wednesday. “This is not independence - it is work for hire.”

Ex-SAC Trader Gets Court Permission for African Honeymoon

Donald Longueuil, a former employee of the hedge fund SAC Capital Advisors, has big for plans when he gets out of prison.

In a letter made public on Tuesday in Federal District Court for the Southern District of New York, Mr. Longueuil, a former New Yorker, said that on his release this December, he was relocating to Florida, getting married in January and taking a three-week honeymoon to Africa.

“Without a doubt, the highlight of my arriving in Florida will be celebrating our wedding on January 25, 2014,” Mr. Longueuil wrote. “I am writing to request permission to take my wife on a honeymoon to the Seychelles and Tanzania from January 27th - February 18th, 2014.”

Although Mr. Longueuil’s prison sentence will be over by then, he will be on supervised released under the jurisdiction of the Florida probation office.

In the letter to Judge Jed S. Rakoff, Mr. Longueuil said he had been an exemplary prisoner, explaining that he had been a leader on the grounds crew and in the Christian community.

“I am a changed person because of this experience,” Mr. Longueuil said, “and I am eager to embark on my new life.”

Judge Rakoff, who presided over Mr. Longueuil’s case, approved the request.

Mr. Longueuil is one of the four former SAC employees who pleaded guilty to insider trading while at the firm, but is the only one in prison, serving two and a half years in a facility in Otisville, N.Y. Mr. Longueuil’s case was among the more colorful to emerge from the long-running insider trading investigation of SAC.

A former competitive speed skater, Mr. Longueuil joined SAC and worked closely with Noah Freeman, a longtime friend. Mr. Longueuil served as the best man at Mr. Freeman’s 2009 wedding, and Mr. Freeman was planning to be a groomsman in Mr. Longueuil’s wedding in February 2011 to P. Mackenzie Mudgett, a former rower at Princeton University.

But Mr. Longueuil’s wedding never happened. Nineteen days before his nuptials, federal agents charged him, Mr. Freeman, and two others with trading on secret information about technology companies that he obtained from so-called expert-network firms that connected him to inside sources at the companies.

Unbeknown to Mr. Longueuil, Mr. Freeman was a government informant. Mr. Freeman secretly recorded his friend describing a brazen coverup that involved Mr. Longueuil destroying computer hard drives with pliers and dumping them into random garbage trucks in Manhattan in the middle of the night. Mr. Longueuil was also charged with obstruction of justice, but that count was dropped as part of his plea deal.

SAC, which had fired Mr. Longueuil in 2010 for poor performance, denounced his conduct. Mr. Freeman pleaded guilty but has yet to be sentenced.

Longueuil Letter

Ex-SAC Trader Gets Court Permission for African Honeymoon

Donald Longueuil, a former employee of the hedge fund SAC Capital Advisors, has big for plans when he gets out of prison.

In a letter made public on Tuesday in Federal District Court for the Southern District of New York, Mr. Longueuil, a former New Yorker, said that on his release this December, he was relocating to Florida, getting married in January and taking a three-week honeymoon to Africa.

“Without a doubt, the highlight of my arriving in Florida will be celebrating our wedding on January 25, 2014,” Mr. Longueuil wrote. “I am writing to request permission to take my wife on a honeymoon to the Seychelles and Tanzania from January 27th - February 18th, 2014.”

Although Mr. Longueuil’s prison sentence will be over by then, he will be on supervised released under the jurisdiction of the Florida probation office.

In the letter to Judge Jed S. Rakoff, Mr. Longueuil said he had been an exemplary prisoner, explaining that he had been a leader on the grounds crew and in the Christian community.

“I am a changed person because of this experience,” Mr. Longueuil said, “and I am eager to embark on my new life.”

Judge Rakoff, who presided over Mr. Longueuil’s case, approved the request.

Mr. Longueuil is one of the four former SAC employees who pleaded guilty to insider trading while at the firm, but is the only one in prison, serving two and a half years in a facility in Otisville, N.Y. Mr. Longueuil’s case was among the more colorful to emerge from the long-running insider trading investigation of SAC.

A former competitive speed skater, Mr. Longueuil joined SAC and worked closely with Noah Freeman, a longtime friend. Mr. Longueuil served as the best man at Mr. Freeman’s 2009 wedding, and Mr. Freeman was planning to be a groomsman in Mr. Longueuil’s wedding in February 2011 to P. Mackenzie Mudgett, a former rower at Princeton University.

But Mr. Longueuil’s wedding never happened. Nineteen days before his nuptials, federal agents charged him, Mr. Freeman, and two others with trading on secret information about technology companies that he obtained from so-called expert-network firms that connected him to inside sources at the companies.

Unbeknown to Mr. Longueuil, Mr. Freeman was a government informant. Mr. Freeman secretly recorded his friend describing a brazen coverup that involved Mr. Longueuil destroying computer hard drives with pliers and dumping them into random garbage trucks in Manhattan in the middle of the night. Mr. Longueuil was also charged with obstruction of justice, but that count was dropped as part of his plea deal.

SAC, which had fired Mr. Longueuil in 2010 for poor performance, denounced his conduct. Mr. Freeman pleaded guilty but has yet to be sentenced.

Longueuil Letter

2 Investors Give $35 Million to Brown

Brown University has some well-placed friends in Silicon Valley.

Two technology investors have given a combined $35 million to Brown to help expand its School of Engineering, the university announced on Wednesday.

The donors, Theresia Gouw, a managing partner of the venture capital firm Accel Partners, and Charles H. Giancarlo, a managing director of the private equity firm Silver Lake, both received undergraduate engineering degrees from Brown. Their gifts, part of a new $44 million pool of donations, kick off a $160 million fund-raising effort for the engineering school.

The money will help Brown build a new facility for the school, which was established in 1847. It will also go toward setting up a “center for entrepreneurship” in the school.

The two investors are not the only financiers to have supported Brown. Brian T. Moynihan, the chief executive of Bank of America, is a trustee of the university. Steven A. Cohen, the hedge fund manager dealing with a government investigation into suspicious trading, is also a trustee.

Ms. Gouw, who graduated in 1990 from Brown and is on the board of fellows, is among the few high-ranking female investors in Silicon Valley. She said her gift honored Barrett Hazeltine, a longtime engineering professor at Brown.

“I feel very fortunate to have gone from a first-generation immigrant on financial aid to being in a position to support the school that has been so significant in shaping my life and career,” Ms. Gouw said in a statement released by the university.

Mr. Giancarlo, a trustee of Brown who graduated in 1979, was an executive at Cisco Systems before joining Silver Lake in 2007. He made the gift with his wife, Dianne.

Silver Lake, which focuses on technology, has made headlines recently with a controversial offer to buy Dell.

Brown enjoys support in financial circles, but much Silicon Valley money has flowed to Stanford, which is near the headquarters of many technology firms. Last year, Stanford became the first university to raise more than $1 billion in a single year, according to a fund-raising survey.

A significant number of Brown students dream of striking it rich in the business world, according to a recent article in The Brown Daily Herald.

Economics was the most popular concentration in 2012, the article said, citing data from the university’s Office of Institutional Research. That’s due in part to “genuine intellectual interest,” Louis Putterman, director of undergraduate studies in the economics department, told the newspaper.

But he also said students were intrigued by “stories of large fortunes being made on Wall Street.”

2 Investors Give $35 Million to Brown

Brown University has some well-placed friends in Silicon Valley.

Two technology investors have given a combined $35 million to Brown to help expand its School of Engineering, the university announced on Wednesday.

The donors, Theresia Gouw, a managing partner of the venture capital firm Accel Partners, and Charles H. Giancarlo, a managing director of the private equity firm Silver Lake, both received undergraduate engineering degrees from Brown. Their gifts, part of a new $44 million pool of donations, kick off a $160 million fund-raising effort for the engineering school.

The money will help Brown build a new facility for the school, which was established in 1847. It will also go toward setting up a “center for entrepreneurship” in the school.

The two investors are not the only financiers to have supported Brown. Brian T. Moynihan, the chief executive of Bank of America, is a trustee of the university. Steven A. Cohen, the hedge fund manager dealing with a government investigation into suspicious trading, is also a trustee.

Ms. Gouw, who graduated in 1990 from Brown and is on the board of fellows, is among the few high-ranking female investors in Silicon Valley. She said her gift honored Barrett Hazeltine, a longtime engineering professor at Brown.

“I feel very fortunate to have gone from a first-generation immigrant on financial aid to being in a position to support the school that has been so significant in shaping my life and career,” Ms. Gouw said in a statement released by the university.

Mr. Giancarlo, a trustee of Brown who graduated in 1979, was an executive at Cisco Systems before joining Silver Lake in 2007. He made the gift with his wife, Dianne.

Silver Lake, which focuses on technology, has made headlines recently with a controversial offer to buy Dell.

Brown enjoys support in financial circles, but much Silicon Valley money has flowed to Stanford, which is near the headquarters of many technology firms. Last year, Stanford became the first university to raise more than $1 billion in a single year, according to a fund-raising survey.

A significant number of Brown students dream of striking it rich in the business world, according to a recent article in The Brown Daily Herald.

Economics was the most popular concentration in 2012, the article said, citing data from the university’s Office of Institutional Research. That’s due in part to “genuine intellectual interest,” Louis Putterman, director of undergraduate studies in the economics department, told the newspaper.

But he also said students were intrigued by “stories of large fortunes being made on Wall Street.”

Goldman Reaches Deal to Let C.E.O. Be Chairman

Lloyd C. Blankfein, the chief executive and chairman of Goldman Sachs, is keeping both of those roles.

Goldman reached a deal with the CtW Investment Group, an organization that advises union pension funds, to halt a vote on a proposal to split the roles of chairman and chief executive. The proposal, which was sent to Goldman in January, is being withdrawn.

Under the agreement, Goldman is enhancing the powers of James J. Schiro, the lead director. Mr. Schiro will set the agenda for the board, instead of merely approving it, and he will write his own letter to shareholders in the proxy statement, according to Dieter Waizenegger, the executive director of the shareholder advisory group.

In addition, Goldman’s board will increase to four from two the number of annual meetings of the independent directors, who are not employed by the company, Mr. Waizenegger said. Those meetings would exclude Mr. Blankfein; Gary D. Cohn, Goldman’s president and chief operating officer; and David A Viniar, the former chief financial officer, according to Mr. Waizenegger.

“We’ve had a constructive engagement with our shareholders, and believe that the enhancements we have made further solidify the independence of the board,” a spokesman for Goldman, David Wells, said in an e-mailed statement.

Mr. Schiro, the former chief executive of Zurich Financial Services and PricewaterhouseCoopers, was named lead director last year, not long after Goldman created the role in response to a shareholder proposal.

The question of whether a chief executive should also be chairman has generated discussion among shareholders of big banks. Morgan Stanley and JPMorgan Chase have chief executives who serve as chairmen, but those roles are separate at Bank of America and Citigroup â€" banks that were propped up during the financial crisis.

At JPMorgan, the board favors the dual role for Jamie Dimon and is working to shore up support among shareholders.

Goldman’s agreement came after the Securities and Exchange Commission denied a request by the firm to remove the proposal from its proxy statement. Mr. Schiro then negotiated with the CtW Investment Group, which advises shareholders and owns a small stake itself, Mr. Waizenegger said.

“At this point, shareholders should feel good about Schiro being a strong counterweight to Blankfein,” Mr. Waizenegger said. “We will have more discussions with the company next month” at the annual meeting.

Reuters reported the move earlier on Wednesday.

Goldman Reaches Deal to Let C.E.O. Be Chairman

Lloyd C. Blankfein, the chief executive and chairman of Goldman Sachs, is keeping both of those roles.

Goldman reached a deal with the CtW Investment Group, an organization that advises union pension funds, to halt a vote on a proposal to split the roles of chairman and chief executive. The proposal, which was sent to Goldman in January, is being withdrawn.

Under the agreement, Goldman is enhancing the powers of James J. Schiro, the lead director. Mr. Schiro will set the agenda for the board, instead of merely approving it, and he will write his own letter to shareholders in the proxy statement, according to Dieter Waizenegger, the executive director of the shareholder advisory group.

In addition, Goldman’s board will increase to four from two the number of annual meetings of the independent directors, who are not employed by the company, Mr. Waizenegger said. Those meetings would exclude Mr. Blankfein; Gary D. Cohn, Goldman’s president and chief operating officer; and David A Viniar, the former chief financial officer, according to Mr. Waizenegger.

“We’ve had a constructive engagement with our shareholders, and believe that the enhancements we have made further solidify the independence of the board,” a spokesman for Goldman, David Wells, said in an e-mailed statement.

Mr. Schiro, the former chief executive of Zurich Financial Services and PricewaterhouseCoopers, was named lead director last year, not long after Goldman created the role in response to a shareholder proposal.

The question of whether a chief executive should also be chairman has generated discussion among shareholders of big banks. Morgan Stanley and JPMorgan Chase have chief executives who serve as chairmen, but those roles are separate at Bank of America and Citigroup â€" banks that were propped up during the financial crisis.

At JPMorgan, the board favors the dual role for Jamie Dimon and is working to shore up support among shareholders.

Goldman’s agreement came after the Securities and Exchange Commission denied a request by the firm to remove the proposal from its proxy statement. Mr. Schiro then negotiated with the CtW Investment Group, which advises shareholders and owns a small stake itself, Mr. Waizenegger said.

“At this point, shareholders should feel good about Schiro being a strong counterweight to Blankfein,” Mr. Waizenegger said. “We will have more discussions with the company next month” at the annual meeting.

Reuters reported the move earlier on Wednesday.

Deutsche Telekom Said Ready to Sweeten T-Mobile Bid for MetroPCS

Deutsche Telekom is preparing to sweeten a bid by its T-Mobile USA unit for MetroPCS, after running into fierce resistance from shareholders of the target company, a person briefed on the matter said on Wednesday.

The German telecommunications firm is likely to offer to cut the amount of debt that the combined company will bear, as well as reduce the interest rate of those borrowings, this person said. The move will essentially improve the overall value of the merged entity’s equity.

An announcement could come as soon as Wednesday evening, this person added. The newer offer is likely to delay a vote on a deal, which had been scheduled for Friday, by at least a week.

Deutsche Telekom is expected to label the new offer as best and final, in what is likely to be viewed as a challenge to MetroPCS shareholders who have called the current deal inadequate.

Under the present terms of the offer, MetroPCS shareholders would be paid about $4.09 a share and receive a 26 percent stake in the combined company.

But investors like the hedge funds Paulson & Company and P. Schoenfeld Asset Management appeared to have gained the upper hand in the fight thus far. Shares in MetroPCS risen steadily this year, as shareholders expected an improved offer to come, and people involved in the merger have said that the current offer is likely to fail if put to a vote.

Paulson & Company and P. Schoenfeld have argued that the T-Mobile bid as it stands would add too much debt and at too high a price. They have called on Deutsche Telekom to reduce the amount of leverage on the combined American telecom.

Proxy advisory firms like Institutional Shareholder Services have largely sided with the hedge funds, putting additional pressure on Deutsche Telekom to consider raising its offer.

News of Deutsche Telekom’s deliberations was reported earlier by Dow Jones.

Deutsche Telekom Said Ready to Sweeten T-Mobile Bid for MetroPCS

Deutsche Telekom is preparing to sweeten a bid by its T-Mobile USA unit for MetroPCS, after running into fierce resistance from shareholders of the target company, a person briefed on the matter said on Wednesday.

The German telecommunications firm is likely to offer to cut the amount of debt that the combined company will bear, as well as reduce the interest rate of those borrowings, this person said. The move will essentially improve the overall value of the merged entity’s equity.

An announcement could come as soon as Wednesday evening, this person added. The newer offer is likely to delay a vote on a deal, which had been scheduled for Friday, by at least a week.

Deutsche Telekom is expected to label the new offer as best and final, in what is likely to be viewed as a challenge to MetroPCS shareholders who have called the current deal inadequate.

Under the present terms of the offer, MetroPCS shareholders would be paid about $4.09 a share and receive a 26 percent stake in the combined company.

But investors like the hedge funds Paulson & Company and P. Schoenfeld Asset Management appeared to have gained the upper hand in the fight thus far. Shares in MetroPCS risen steadily this year, as shareholders expected an improved offer to come, and people involved in the merger have said that the current offer is likely to fail if put to a vote.

Paulson & Company and P. Schoenfeld have argued that the T-Mobile bid as it stands would add too much debt and at too high a price. They have called on Deutsche Telekom to reduce the amount of leverage on the combined American telecom.

Proxy advisory firms like Institutional Shareholder Services have largely sided with the hedge funds, putting additional pressure on Deutsche Telekom to consider raising its offer.

News of Deutsche Telekom’s deliberations was reported earlier by Dow Jones.

Banking’s Crocodile Tears

The story is told of a young heir whose family fell upon hard enough times that he could no longer afford to keep his polo ponies. He still had a big house and enough trust fund income to make a paid career optional, but it was hard to look his polo-playing friends in the face. The shame was almost unbearable.

Anyone who fails to sneer at this ersatz tragedy may think that James Crosby, the former chief executive of the failed British bank HBOS, has made a substantial show of contrition. He has “decided to forgo” 30 percent of his gross pension entitlement, and return his knighthood, after a critical report on his leadership from a British parliamentary commission.

Most right-thinking people will be unimpressed with the sacrifice. Mr. Crosby’s annual pension payment will still be over 400,000 pounds, 23 times more than the 17,700 pound average income of retired households in Britain. The title, given to honor his banking expertise, was surely unmerited in the first place.

How much financial remorse would persuade ordinary observers that Mr. Crosby was seriously sorry, and seriously willing to pay a fitting price How much for any head of a FTSE-100 company, whose average pay in 2011 was 4.8 million pounds, according to the High Pay Commission How much for the 320 big U.S. bosses who Forbes magazine calculates made more than $5 million in 2011

The number is debatable, but with fortunes that large, the sacrifice wouldn’t be less than 10 million pounds or $15 million. True remorse might require retirement incomes reduced to no more than the national average.

For Mr. Crosby, that would require a 97 percent pension cut, plus the return of all the proceeds of his HBOS shares, which were sold while the bank was still flying high.

Actually, even a 97 percent rule - the disgraced keep only 3 percent of ill-gotten gains - might be no more than a start in cases such as Mr. Crosby’s. To be really persuasive, corporate miscreants would give it all back, and then dedicate their remaining years to lowly paid public service.

Edward Hadas is economics editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Court Expresses Antipathy for S.E.C. in Handling of Madoff Case

A federal appeals court ruled on Wednesday that Bernard L. Madoff‘s investors cannot sue the Securities and Exchange Commission for not uncovering his fraud, but at the same time blasted the agency for its failings.

“Despite our sympathy for plaintiffs’ predicament (and our antipathy for the S.E.C.’s conduct),” the investors claims are barred because of a federal law that protects government agencies from lawsuits related to their discretionary use of investigatory powers, the United States Appeals Court for the Second Circuit said.

Notwithstanding the S.E.C.’s “regrettable inaction,” the court added, the commission is shielded from a negligence suit. The ruling upheld the 2011 dismissal of the case by the trial court judge in 2011.

The S.E.C. and other government agencies are protected by an exception to a law â€" the Federal Tort Claims Act â€" that allows citizens to sue the United States. The exception, in fact, is an “exception to an exception,” because the act is an exception to sovereign immunity law that typically immunizes the United States from suit.

A group of Madoff investors blamed the S.E.C. for its grossly negligent oversight of Madoff’s investment business. Relying on the damning report by the S.E.C.’s inspector general on the case, the investors cited the S.E.C.’s failure on multiple occasions to respond to questions raised about the Madoff business. In recapping the plaintiffs’ allegation, the three-judge appeals panel highlighted the agency’s deficiencies in handling the Madoff case.

“Plaintiffs allege in detail approximately eight separate complaints the S.E.C. received regarding Madoff and the S.E.C.’s inadequate and often incompetent response to each,” the court wrote. “As a result of the S.E.C.’s repeated failure to alert other branch offices of ongoing investigations, properly review complaints and staff subsequent inquiries, and follow up on disputed facts elicited in interviews, the S.E.C. missed many opportunities to uncover Madoff’s multibillion-dollar fraud.”

Mr. Madoff, 74, is serving an 150-year sentence in a federal prison in North Carolina after admitting in 2009 to orchestrating the largest Ponzi scheme in history.

KPMG and the Pain That Comes of Breached Trust

Trust can be breached - even on the golf course.

The disclosure by the global accounting firm KPMG that one of its partners, Scott I. London, revealed confidential information about its clients Herbalife and Skechers that was used by a friend to trade their shares shows how much we rely on trust to prevent violations - and how easily it can be violated.

The case is noteworthy not so much for the amounts involved, which may turn out to be fairly modest. Rather, it is the apparent casualness with which Mr. London revealed important information to a golfing buddy. One can almost imagine them at the club trading lines from “Caddyshack” while sharing tidbits about corporate clients.

As DealBook reported, the Securities and Exchange Commission and Justice Department are investigating trading based on information Mr. London provided to an unidentified associate.

According to The Wall Street Journal, the friend provided Mr. London with a discount on a watch, a few dinners and occasional cash payments of $1,000 to $2,000 in return for the confidential information. Those trivial amounts will end an accounting career of nearly 30 years and could result in significant costs to KPMG.

Mr. London said his heart sank when he realized his friend was trading on the information. He added: “We had discussions this wasn’t right â€" I knew it was wrong â€" but it just happened.” In what sounds like an attempt to mitigate his own culpability, Mr. London explained that he disclosed “no real significant information.”

No cases have been filed yet providing details about any profits from the trading. That will be the best indicator of the significance of the information in Mr. London’s disclosures. But even if his revelations only played a small role in the investment decisions, they still violated federal securities laws. Illegal insider trading does not require proof of gains.

The penalties that will be imposed on Mr. London will be far greater than any gifts he received from his friend. There is a good chance that criminal charges will be filed because of Mr. London’s prominent position as KPMG’s lead audit partner for Herbalife and Skechers. Prosecutors will want to send a message that any improper disclosure of client information will be punished.

The potential sentence from a criminal prosecution will depend in large part on the amount of any gains or losses avoided by the friend. Mr. London’s cooperation will certainly be helpful, and may allow him to avoid prison if the trading resulted in only small gains. But if the benefits were worth more than $200,000, then federal sentencing guidelines would recommend a prison term of about a year, and higher as the dollar figure grows.

The S.E.C. can be expected to file civil charges, and the usual price for a settlement is a penalty equal to the benefits derived from the trading activity, plus disgorgement of any profits or benefits received. Even though Mr. London does not appear to have traded for his own benefit, under the law, he is responsible for any profits of his tippee and will have to pay the price.

In addition, the S.E.C. will probably pursue an administrative action against Mr. London to bar him from acting as an auditor for any publicly traded company in the future. That would effectively prevent him from working as an accountant because no firm would dare hire him.

KPMG can also expect to pay significant costs as a result of Mr. London’s conduct, even though the firm withdrew its opinions on the financial statements of Herbalife and Skechers. The two companies will now have to retain new auditors, and they may ask KPMG to bear those costs because the firm breached its fiduciary obligation to maintain the secrecy of client information.

It is unlikely that KPMG wants to get into a public fight with Herbalife and Skechers, which would only add to its present embarrassment, so the firm is likely to do whatever is necessary to put this incident behind it.

The case could also prove to be especially problematic for Herbalife because of claims by the hedge fund investor William A. Ackman that the company was “inherently fraudulent.” Its new auditor will want to tread carefully in reviewing the company’s financial statements and internal controls, meaning that the costs for its audits could be significantly higher.

KPMG may also face additional scrutiny from the S.E.C. and the Public Company Accounting Oversight Board, the primary regulator of accountants. While it appears that Mr. London acted on his own by divulging confidential client information, questions may be raised about the type of training and controls KPMG has in place to prevent this type of disclosure.

It may well turn out that Mr. London’s tipping was an aberration. One of the obligations of outside accountants is to assess a client’s internal controls, including measures to prevent and detect misconduct by employees. As anyone who deals with corporate compliance will tell you, there is no perfect system and that it is ultimately a matter of trusting your people to comply with the rules.

As the lead audit partner for public companies, Mr. London knew the requirements for maintaining confidential information as well as anyone, yet he appears to have simply decided to ignore the prohibition on insider trading.

This was no momentary lapse in judgment either, but appears to have been systematic, notwithstanding his attempt to justify it as something that was not really wrong because the information was insignificant - at least in his mind.

Mr. London is likely to become well-known in university accounting programs for what not to do as an auditor, a lesson in how anyone can commit a crime when they betray a trust.

KPMG and the Pain That Comes of Breached Trust

Trust can be breached - even on the golf course.

The disclosure by the global accounting firm KPMG that one of its partners, Scott I. London, revealed confidential information about its clients Herbalife and Skechers that was used by a friend to trade their shares shows how much we rely on trust to prevent violations - and how easily it can be violated.

The case is noteworthy not so much for the amounts involved, which may turn out to be fairly modest. Rather, it is the apparent casualness with which Mr. London revealed important information to a golfing buddy. One can almost imagine them at the club trading lines from “Caddyshack” while sharing tidbits about corporate clients.

As DealBook reported, the Securities and Exchange Commission and Justice Department are investigating trading based on information Mr. London provided to an unidentified associate.

According to The Wall Street Journal, the friend provided Mr. London with a discount on a watch, a few dinners and occasional cash payments of $1,000 to $2,000 in return for the confidential information. Those trivial amounts will end an accounting career of nearly 30 years and could result in significant costs to KPMG.

Mr. London said his heart sank when he realized his friend was trading on the information. He added: “We had discussions this wasn’t right â€" I knew it was wrong â€" but it just happened.” In what sounds like an attempt to mitigate his own culpability, Mr. London explained that he disclosed “no real significant information.”

No cases have been filed yet providing details about any profits from the trading. That will be the best indicator of the significance of the information in Mr. London’s disclosures. But even if his revelations only played a small role in the investment decisions, they still violated federal securities laws. Illegal insider trading does not require proof of gains.

The penalties that will be imposed on Mr. London will be far greater than any gifts he received from his friend. There is a good chance that criminal charges will be filed because of Mr. London’s prominent position as KPMG’s lead audit partner for Herbalife and Skechers. Prosecutors will want to send a message that any improper disclosure of client information will be punished.

The potential sentence from a criminal prosecution will depend in large part on the amount of any gains or losses avoided by the friend. Mr. London’s cooperation will certainly be helpful, and may allow him to avoid prison if the trading resulted in only small gains. But if the benefits were worth more than $200,000, then federal sentencing guidelines would recommend a prison term of about a year, and higher as the dollar figure grows.

The S.E.C. can be expected to file civil charges, and the usual price for a settlement is a penalty equal to the benefits derived from the trading activity, plus disgorgement of any profits or benefits received. Even though Mr. London does not appear to have traded for his own benefit, under the law, he is responsible for any profits of his tippee and will have to pay the price.

In addition, the S.E.C. will probably pursue an administrative action against Mr. London to bar him from acting as an auditor for any publicly traded company in the future. That would effectively prevent him from working as an accountant because no firm would dare hire him.

KPMG can also expect to pay significant costs as a result of Mr. London’s conduct, even though the firm withdrew its opinions on the financial statements of Herbalife and Skechers. The two companies will now have to retain new auditors, and they may ask KPMG to bear those costs because the firm breached its fiduciary obligation to maintain the secrecy of client information.

It is unlikely that KPMG wants to get into a public fight with Herbalife and Skechers, which would only add to its present embarrassment, so the firm is likely to do whatever is necessary to put this incident behind it.

The case could also prove to be especially problematic for Herbalife because of claims by the hedge fund investor William A. Ackman that the company was “inherently fraudulent.” Its new auditor will want to tread carefully in reviewing the company’s financial statements and internal controls, meaning that the costs for its audits could be significantly higher.

KPMG may also face additional scrutiny from the S.E.C. and the Public Company Accounting Oversight Board, the primary regulator of accountants. While it appears that Mr. London acted on his own by divulging confidential client information, questions may be raised about the type of training and controls KPMG has in place to prevent this type of disclosure.

It may well turn out that Mr. London’s tipping was an aberration. One of the obligations of outside accountants is to assess a client’s internal controls, including measures to prevent and detect misconduct by employees. As anyone who deals with corporate compliance will tell you, there is no perfect system and that it is ultimately a matter of trusting your people to comply with the rules.

As the lead audit partner for public companies, Mr. London knew the requirements for maintaining confidential information as well as anyone, yet he appears to have simply decided to ignore the prohibition on insider trading.

This was no momentary lapse in judgment either, but appears to have been systematic, notwithstanding his attempt to justify it as something that was not really wrong because the information was insignificant - at least in his mind.

Mr. London is likely to become well-known in university accounting programs for what not to do as an auditor, a lesson in how anyone can commit a crime when they betray a trust.

Gleacher in Deal Talks Again

Will the second time be the charm for Gleacher & Company

The embattled boutique bank said on Wednesday that it was in “preliminary discussions” with an unnamed third party about a possible business combination, months after the firm ended merger talks with Stifel Financial.

That new dance partner is Sterne Agee, another midsized investment bank, according to Bloomberg News. A spokesman for Gleacher declined to comment. A spokesman for Sterne Agee wasn’t immediately available for comment.

Gleacher has been struggling for several years, as the firm cut costs and laid off staff in a bid to turn itself around. Wednesday’s announcement was prefaced by news that the firm planned to close its mortgage-backed securities, rates and credit products business, which will affect up to 160 employees.

But until Wednesday, Gleacher’s board appeared reluctant to pursue a sale of the firm, despite having retained Credit Suisse last year to explore potential deal options. It broke off talks with Stifel last fall, believing the offered price was too low.

Earlier this year, Eric Gleacher, the veteran mergers specialist who founded the firm and was a proponent of a sale, left. Several weeks later, the firm announced that while it would sell its mortgage-lending arm to Ocwen Financial, it had concluded its strategic review process and found its options wanting.

Shadow Regulator Under Scrutiny

Mary L. Schapiro, who ran the Securities and Exchange Commission until last year, is only the latest former political insider to join the Promontory Financial Group, which has such a star-studded roster of former bureaucrats that it has become known as Wall Street’s shadow regulator. With these connections, the firm “has emerged as a major power broker in Washington, helping Wall Street navigate an onslaught of new rules and regulatory scrutiny,” Ben Protess and Jessica Silver-Greenberg write in DealBook.

But Promontory is now facing its own scrutiny in Congress. The Senate Banking Committee is set to hold a hearing on Thursday to look at whether regulators inappropriately “outsource” oversight to consultants, who are paid by the banks. “This process raises troubling questions,” said Senator Sherrod Brown, the Ohio Democrat leading the Senate hearing. Promontory has “secured lucrative deals to clean up bank misdeeds like foreclosure abuses and money laundering, according to public records and interviews with regulators and executives,” DealBook writes. “Behind the scenes, the firm acts as an advocate for banks, helping draft letters that challenge crucial rules and discussing reforms with regulators.”

Banks, too, have concerns with Promontory and its fees that can total as much as $1,500 an hour, people with knowledge of the matter said. “Bank executives, who were not authorized to speak publicly, said they sometimes hired Promontory to appease regulators, who think highly of the firm’s expertise.”

Promontory rejects the notion that it is beholden to Wall Street, arguing that it answers to boards rather than management. Peter Bass, a former State Department official who is now a managing director at Promontory, said he was “in the business of telling inconvenient truths.” The firm also says it has helped turn around dozens of troubled banks.

HERBALIFE’S LATEST CONTROVERSY  |  The nutritional supplements company Herbalife has found itself in the middle of an insider trading scandal. “Federal authorities in Los Angeles are investigating a former senior executive at the accounting firm KPMG on suspicion of leaking secret information to a stock trader about Herbalife and the footwear company Skechers USA, according to people with direct knowledge of the inquiry,” Peter Lattman and Michael J. de la Merced report in DealBook.

KPMG fired Scott I. London, the partner in charge of the audit practice in Southern California. Mr. London has not been charged or entered a plea, but he admitted to wrongdoing in a statement through his lawyer on Tuesday, saying he was “embarrassed” and that he regretted “my actions in leaking nonpublic data to a third party regarding the clients I served for KPMG.” He said the leaks began “to help out someone whose business was struggling.”

Herbalife, which announced that KPMG had resigned as its auditor, has recently been battling accusations from the hedge fund manager William A. Ackman that its business is fraudulent. In its announcement on Tuesday, Herbalife said it believed its financial accounts for its last three years remained accurate. “It is unclear when Herbalife will hire a new auditor, though any such firm would probably take a fresh look at the company’s financial records,” DealBook writes.

RIVALS VIE FOR LIFE TECHNOLOGIES  |  The biotechnology company Life Technologies appears poised to be at the center of a bidding contest. Three private equity giants, the Blackstone Group, the Carlyle Group and K.K.R., along with Temasek Holdings of Singapore, were in talks over making a joint bid of about $11 billion, or $62 a share, for the company, The Wall Street Journal reported on Tuesday evening, citing unidentified people familiar with the matter. Meanwhile, Thermo Fisher Scientific has made a binding offer for Life Technologies, according to Reuters, which cites unidentified people familiar with the matter. “Thermo Fisher is bidding more than $65 per each Life Tech share, two of the people said.” A bidding deadline was on Tuday, but Life Technologies “would likely accept an offer past the bid deadline to keep the process competitive, the people added,” Reuters says.

A BILLION-DOLLAR GIFT FOR THE MET  |  The philanthropist and cosmetics tycoon Leonard A. Lauder has promised his collection of 78 Cubist paintings, drawings and sculptures to the Metropolitan Museum of Art, a trove of works valued at more than $1 billion. “In one fell swoop this puts the Met at the forefront of early 20th-century art,” Thomas P. Campbell, the Met’s director, said. “It is an unreproducible collection, something museum directors only dream about.”

TEXTING WITH EUROPE’S ANTITRUST CHIEF  |  “When the European competition commissioner needs to communicate with the chairman of Google, he doesn’t have to send an emissary or even pick up the phone,” The New York Times reports. “Joaquín Almunia sometimes sends Eric E. Schmidt a text.”

ON THE AGENDA  |  President Obama proposes a 2014 budget, which is said to include an increase in the tax rate for carried interest. Christine Lagarde of the International Monetary Fund speaks to the Economic Club of New York at 12:15 p.m. The Federal Reserve’s policy-making committee releases minutes from its recent meeting at 2 p.m. Constellation Brands reports earnings before the market opens, and Bed Bath & Beyond announces results in the evening. Michael Novogratz of the Fortress Investment Group is on Bloomberg TV at 11 a.m. Sam Zell is on CNBC at 4 p.m.

ZOMBIE STOCKS SHOW LIFE  |  Fannie Mae and Freddie Mac, the mortgage finance giants that were taken over by the government in the financial crisis, “continue to astound â€" and not in a very encouraging way,” Steven M. Davidoff writes in the Deal Professor column. “The share price of each company has tripled in the last few months, pointing to the foolishness of Wall Street, this time with an assist from the federal government. When zombie stocks show signs of life, you know you are in trouble.” Mr. Davidoff continues: “The weird half-life of the mortgage finance giants is a result of the hoops the government went through during the financial crisis to avoid having the $5 trillion in debt being held by or guaranteed by the companies added to the actual federal debt.”

Mergers & Acquisitions »

Report Identifies Companies Vulnerable to Activist Takeovers  |  Fifth Third Bancorp, Ameren and ConAgra Foods are among the companies that would be the most vulnerable to takeover by activist investors, a new study by a research firm finds. DealBook »

A Solution for Penney May Be to Sell Itself, or Some of Its Assets  |  With Ron Johnson’s ouster this week, J.C. Penney, a 111-year-old retail chain, is scrambling to ensure that it has a future at all. And the solution may be a sale of some or all of the company. DealBook »

Inside the Clash in J.C. Penney’s Top Ranks  |  Ron Johnson, the J.C. Penney chief executive who was ousted on Monday, arrived at the company a star who had helped build Apple Stores. “But his Silicon Valley ways â€" evident from a showy party in early 2012 that he threw to celebrate himself and his plans, replete with a light show, fake snow and flowing liquor â€" jangled from the start,” The New York Times writes. NEW YORK TIMES

J.C. Penney Shows How the Market Overvalues the C.E.O.  |  Even if Ron Johnson’s ideas had been the right ones, big organizations with entrenched people and cultures are hard to turn around, Richard Beales of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS

Blackstone Said to Seek Partners for Dell Bid  |  The Blackstone Group “is talking to several technology companies about potentially joining its bid” to buy Dell, The Wall Street Journal reports, citing unidentified people familiar with the matter. WALL STREET JOURNAL

Big Dell Shareholder Prefers 2 Rival Bids  |  Southeastern Asset management says that proposals from the Blackstone Group and Carl C. Icahn are superior to the $13.65-a-share offer from Michael S. Dell and the private equity firm Silver Lake. DealBook »

INVESTMENT BANKING »

Bank of America Hires Goldman M.&A. Executive  |  Bank of America Merrill Lynch has hired Luigi Rizzo from Goldman Sachs to become head of mergers and acquisitions for Europe, the Middle East and Africa. DealBook »

Goldman Lowers Forecast for Gold  |  Goldman Sachs reduced its predictions for the future price of gold, saying a long rally was turning, Bloomberg News reports. BLOOMBERG NEWS

A Look at Goldman’s ‘Investing and Lending’ Segment  |  An earnings segment known as investing and lending helps show what Goldman Sachs makes from investing its own money, “but it still confounds analysts and investors because the bank does not provide details on the performance of individual assets,” Reuters writes. REUTERS

In Asia, a Field Where Women Are Ahead  |  Among private bankers in Asia, who manage money for wealthy clients, women outnumber men three to two, according to an executive recruiting firm, Bloomberg News reports. BLOOMBERG NEWS

UBS to Expand Corporate Advisory Team in Asia  |  The Swiss bank plans to increase its corporate advisory and capital markets group in Asia by 10 percent over three years, according to Bloomberg News. BLOOMBERG NEWS

Former British Bank Chief to Give Up Knighthood  |  James Crosby, a former chief executive of HBOS, says he will ask authorities to remove his knighthood in light of a damning report published last week that blamed him in part for the mortgage lender’s 2008 collapse. DealBook »

Occupy Wall St. Reaches Settlement Over Library at Park  |  The New York Times reports: “The City of New York and Brookfield Properties agreed to pay more than $230,000 to settle a lawsuit filed last year in Federal District Court asserting that books and other property had been damaged or destroyed when the police and sanitation workers cleared an encampment from Zuccotti Park in 2011.” NEW YORK TIMES

PRIVATE EQUITY »

K.K.R. Hires New Chief of Japanese Unit  |  A new chief executive for the private equity company’s Japanese unit is the latest in a series of senior appointments for K.K.R. in Asia, as it seeks to close a new $6 billion Asian fund and expand regionally beyond the traditional buyout business. DealBook »

K.K.R. Buys Shopping Mall in Albany  | 
NEWS RELEASE

HEDGE FUNDS »

Aurelius Offers $80 Million in Financing to Clearwire  |  “The move by Aurelius, which typically invests in distressed debt, is the latest twist surrounding Sprint’s controversial proposal to buy the roughly 49 percent of Clearwire it does not own,” Reuters writes. REUTERS

Former Icahn Deputy to Start Fund Focused on Health Care  |  Alex Denner, a former executive for Carl C. Icahn in health care investing, “is starting an activist hedge fund firm called Sarissa Capital Management, according to three people familiar with the matter,” Bloomberg News reports. BLOOMBERG NEWS

I.P.O./OFFERINGS »

After Split, G.M. Returns to Facebook for a Test  |  “General Motors, which made headlines in May 2012 when it stopped running paid advertising on Facebook, said on Tuesday that it had begun a test program of paid ads on facebook.com aimed at consumers who check Facebook on their mobile devices,” the Media Decoder blog reports. NEW YORK TIMES MEDIA DECODER

VENTURE CAPITAL »

Broadcasters Do Battle With TV Streaming Upstart  |  Major television stations “are determined to shut down” Aereo, which deprives them of retransmission fees by streaming their signals online, The New York Times writes. NEW YORK TIMES

Arming Cable Companies for the Internet Age  |  Technology companies are offering cable companies “ways to offer the personal choice of mobile, while justifying the goodies that come to someone who pays for a subscription,” the Bits blog writes. NEW YORK TIMES BITS

LEGAL/REGULATORY »

First Checks to Be Issued in Mortgage Settlement  |  Months after brokering a settlement with banks over mortgage foreclosure abuses, the Federal Reserve and the Office of the Comptroller of the Currency are set to dole out roughly $1.2 billion in cash relief. DealBook »

Banks Used Aid to Repay Bailout, Watchdog Says  |  The Wall Street Journal writes: “A number of small banks used $2.1 billion in government cash intended to boost small-business lending to repay bailout funds from the financial crisis, a government watchdog said Tuesday in a report that also concluded the banks lent less money than firms that didn’t take bailout aid.” WALL STREET JOURNAL

Lew’s European Visit Highlights Gulf Over Economic Policy  | 
NEW YORK TIMES

A Step Backward on Regulating Derivatives  |  Bills that will be the focus of a hearing in the House Financial Services Committee “must be stopped if the world is to be made safe from reckless risk-taking by banks,” The New York Times editorial board writes. NEW YORK TIMES

Bird Flu Concerns and North Korean Jitters  |  Beijing has allowed remarkable transparency in the coverage of the bird flu outbreak. Bill Bishop writes in the China Insider column that he has to hope the transparency is real. DealBook »