Insurers Inflating Books, New York Regulator Says

New York State regulators are calling for a nationwide moratorium on transactions that life insurers are using to alter their books by billions of dollars, saying that the deals put policyholders at risk and could lead to another taxpayer bailout.

Insurers’ use of the secretive transactions has become widespread, nearly doubling over the last five years. The deals now affect life insurance policies worth trillions of dollars, according to an analysis done for The New York Times by SNL Financial, a research and data firm.

These complex private deals allow the companies to describe themselves as richer and stronger than they otherwise could in their communications with regulators, stockholders, the ratings agencies and customers, who often rely on ratings to buy insurance.

Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance,” according to an investigation conducted by his department. He plans to issue a report about the investigation on Wednesday.

The transactions are so opaque that Mr. Lawsky said it took his team of investigators nearly a year to follow the paper trail, even though they had the power to subpoena documents.

Insurance is regulated by the states, and Mr. Lawsky said his investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators.

Insurance regulation is based squarely on the concept of solvency â€" the idea that future claims can be predicted fairly accurately and that each insurer should track them and keep enough reserves on hand to pay all of them. The states have detailed rules for what types of assets reserves can be invested in. Companies are also expected to keep a little more than they really expect to need â€" called their surplus â€" as a buffer against unexpected events. State regulators monitor the reserves and surpluses of companies and make sure none fall short.

Mr. Lawsky said that because the transactions made companies look richer than they otherwise would, some were diverting reserves to other uses, like executive compensation or stockholder dividends.

The most frequent use, he said, was to artificially increase companies’ risk-based capital ratios, an important measurement of solvency that was instituted after a series of life-insurance failures and near misses in the 1980s.

Mr. Lawsky said he was struck by similarities between what the life insurers were doing now and the issuing of structured mortgage securities in the run-up to the financial crisis of 2008.

“Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices,” Mr. Lawsky said. “And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multitrillion-dollar taxpayer bailout.”

The transactions at issue are modeled after reinsurance, a business in which an insurance company pays another company, a reinsurer, to take over some of its obligations to pay claims. Reinsurance is widely used and is considered beneficial because it allows insurers to spread their risks and remain stable as they grow. Conventional reinsurance deals are negotiated at arm’s length by independent companies; both sides understand the risk and can agree on a fair price for covering it. The obligations drop off the original insurer’s books because the reinsurer has picked them up.

Mr. Lawsky’s investigators found, though, that life insurance groups, including some of the best known, were creating their own shell companies in other states or countries â€" outside the regulators’ view â€" and saying that these so-called captives were selling them reinsurance. The value of policies reinsured through all affiliates, including captives, rose to $5.46 trillion in 2012, from $2.82 trillion in 2007.

The chief problem with captive reinsurance, Mr. Lawsky said, is that the risk is not being transferred to an independent reinsurer. Also, the deal is not at arm’s length. And confidentiality rules make it difficult to see what secures the obligations.

The New York State investigators subpoenaed this information and discovered that some states were approving deals backed by assets that would not be allowed in New York; Mr. Lawsky referred to “hollow assets,” “naked parental guarantees” and “conditional letters of credit.”

“Weaker collateral requirements mean the policyholders are at greater risk,” he said.

Insurers, unlike banks, have no prepaid fund like the Federal Deposit Insurance Corporation to make customers whole in the event of a collapse. That’s why Mr. Lawsky said he feared that taxpayers might have to be called to the rescue again.

Because New York has standing to investigate only life insurers based in the state, the administration of Gov. Andrew M. Cuomo is calling for other states, or the federal government, to “conduct similar investigations, to document a more complete picture of the full extent of shadow insurance written nationwide.”

Until then, Mr. Lawsky said, the deals should not be permitted. New York State has already stopped approving them, but other states have not.

The National Association of Insurance Commissioners has been examining the same type of transactions, but its members are sharply divided about their potential risk and what, if anything, to do about it. The group’s proposals must be adopted by 42 state legislatures to become effective. That seems unlikely; many states have recently passed laws allowing the formation of captives. Gov. Rick Perry made Texas the latest contender for the business when he signed such a law this month.

A new federal entity created under the Dodd-Frank financial reform law, the Federal Insurance Office, has also been monitoring the trend and is scheduled to discuss possible federal responses at an advisory committee meeting on Wednesday. Any federal action would be fought hard by the states, which have regulated insurance for more than 150 years.

New York’s investigators could not disclose which companies are the biggest users of reinsurance through captives because of the secrecy laws of other states. Their report did describe some of the transactions in detail, but with the names of the companies removed.

The separate analysis by SNL Financial, by contrast, was based on public regulatory filings. It did identify the life insurance companies that are the biggest users of the transactions, both in and out of New York. They include Transamerica, MetLife, Prudential, Hartford, Genworth, John Hancock, ReliaStar and Lincoln National, among others. Another insurer, Allstate, turned up in the sample even though its primary business is property and casualty, because it owns some life insurers.

The big users generally appear to be publicly traded companies, which have to meet Wall Street’s expectations for earnings growth and returns on capital. Life insurers that are owned by their policyholders, called mutual companies, do not have that pressure, and some, like State Farm, Guardian and New York Life, appear not to be reinsuring through captives at all.

MetLife said in a statement Tuesday that it “holds more than sufficient reserves to pay claims on its policies” and added that it used reinsurance subsidiaries “as a cost-effective way of addressing overly conservative reserving requirements” for certain insurance products. If it had to set aside that level of reserves more conventionally, it said, it would either have to borrow â€" putting its credit rating at risk â€" or raise the money by selling stock, dragging its returns below the level its stockholders require.

“Access to reinsurance subsidiaries significantly reduces costs to policyholders and in some cases is necessary to enable insurers to continue to offer certain coverage,” MetLife said.

Prudential said in a statement, “Our captives are capitalized to a level consistent with ‘AA’ financial strength rating targets of our issuing insurance entities.” It said that many of its captive reinsurance transactions were done in Prudential’s own home state, New Jersey, so the same regulators could see both ends of the deals.

In other cases, Prudential said it reinsured obligations through a captive entity in Arizona, Pruco Re, whose reserves were “subject to asset adequacy testing by our actuaries.” The company said these practices were disclosed to investors.

Other companies using this type of reinsurance said their transactions had been reviewed and approved by regulators, and helped them use capital efficiently. They also said the practice allowed them to charge lower prices, and in some cases made it possible to keep selling types of insurance that would otherwise have been discontinued. They also said it was appropriate to support their captives with contingent letters of credit in cases where the likelihood of big payouts was remote.

The Hartford said that it had sold its life insurance business to Prudential, and was no longer in the business of writing new life policies and reinsuring them.

Allstate said that captives and special-purpose vehicles were “a minor part of Allstate’s reinsurance business.”

SNL Financial’s data also made it possible to see which states are courting the transactions most eagerly â€" Vermont, South Carolina, Arizona, Hawaii, Iowa and Missouri.

“If we let our guard down and ignore this regulatory race to the bottom, taxpayers and insurance policyholders are the ones who could get left holding the bag,” Mr. Lawsky said in his report.

In a Shift, Interest Rates Are Rising

It has been a reliable fact of life for investors, corporations and ordinary borrowers: interest rates, for the most part, keep heading lower.

But all of that may be about to change. For prospective homeowners, the cost of mortgages has been going up in recent weeks. Governments are also facing the prospect of higher borrowing costs down the road, and they are projecting increases to their debt burdens. Savers with money in bank accounts, on the other hand, have the prospect of finally earning more than a pittance on their deposits.

The interest rate charged by lenders, often cited as the single most important factor behind economic decisions, has been steadily going down for most of the time since the early 1980s, and has fallen to historical lows since the financial crisis. Over the last few months, though, investors and banks have been demanding higher payments for their loans, pushing up interest rates and bond yields.

The first tremors have been felt most sharply on investment products that were reliant on low rates, like bonds issued by American companies. But the movement is quickly spreading out into the real economy.

“I think you all should be ready, because rates are going to go up,” Jamie Dimon, the chief executive of JPMorgan Chase, told a financial industry conference at the Waldorf-Astoria Hotel in Manhattan on Tuesday.

As investors brace themselves for a new era of higher interest rates, global markets in bonds, currencies and stocks have experienced spasms of turmoil. On Tuesday, the catalyst for the market’s volatility was disappointment over the Bank of Japan’s decision not to take new steps to address rising bond yields. That heightened worries that other central banks â€" the Federal Reserve in particular â€" will soon pull back on pumping money into the financial system.

Since the financial crisis of 2008, the Fed has taken unprecedented steps to reduce rates, in an effort to stimulate borrowing and economic growth and bring down the unemployment rate. Recently, though, Ben S. Bernanke, the Fed chairman, signaled that the central bank could scale back its efforts in coming months if the economy improved. But there is much debate on Wall Street over what Mr. Bernanke is planning and when it might take shape.

Several prominent money managers say they believe that the economic recovery is weakening, which will make it impossible for Mr. Bernanke to pare the central bank’s intervention and could lead to falling rates again. Interest rates have experienced temporary spikes a number of times in recent decades before heading back down.

But recent economic reports, including last Friday’s job report, suggest that the economy is slowly recovering.

In anticipation of what the Fed may do, many on Wall Street have been preparing their portfolios for a future in which interest rates do not remain at the low levels of the last few years. In a survey of 500 large investors, 43 percent said they were planning to cut back on their exposure to bonds this year, while only 16 percent are planning to increase it, according to the asset manager Natixis.

The recent efforts to adjust to higher bond yields have already been messy. Investors have been piling out of supposedly safe bond funds that have been a source of reliable returns in recent years, creating unexpected volatility in the markets.

Big American asset managers who borrowed money to buy foreign stocks and bonds have recently been selling those holdings, hurting markets around the world. That has been worsened by data suggesting that economic growth may be slowing outside the United States.

The realignment in the markets was evident on Tuesday as Asian and European stock markets fell. In the United States, stocks swung widely, with the benchmark Standard & Poor’s 500-stock index closing down 1.02 percent. Treasury prices fell, pushing the yield on the benchmark 10-year Treasury note as high as 2.29 percent â€" its highest level since April 2012 â€" before settling at 2.19 percent. The Japanese yen strengthened 2.8 percent against the dollar.

Many market specialists say they think that a transition could go more smoothly in the long run if interest rates continue to rise as the United States economy grows. Still, even in that optimistic situation, a wide array of market participants will have to shift their operating procedures and assumptions from a world where declining interest rates were a given.

“When past performance has been so consistent, the risk that investors underestimate the risk, I think has consistently been an issue,” said Richard Ketchum, the president of the Financial Industry Regulatory Authority, which oversees brokers.

The recent market volatility highlights the connection between Wall Street investors and consumers. Banks set mortgage rates in line with the yields on mortgage-backed bonds, for example. So as a sell-off has hit the market for such bonds, causing their yields to rise, ordinary borrowers end up paying more.

The rising cost of a new mortgage has already pushed down the number of people refinancing old mortgages, putting a crimp on a recent source of extra income for many households.

The looming question now is whether higher mortgage rates could stall the rally in home prices that has been taking place across the country.

Many real estate analysts say that homes are so affordable that even a considerable rise in interest rates would not do much to undermine the housing recovery, especially if the economy is growing at a healthy rate.

“There’s no strong correlation between interest rates and home prices,” said Douglas Duncan, chief economist at Fannie Mae.

But Joshua Rosner, a managing director at the research company Graham Fisher & Company, said many Americans were still so heavily indebted that even a small rise in mortgage rates would hit the housing market. “Affordability is already a problem, and rising rates won’t help that,” he said.

For governments around the world, a rise in rates will eventually push up their borrowing costs at a time when they may still be grappling with fiscal deficits. Some countries will probably be able to take a steady increase in their stride. But a jarring wave of selling has recently hit certain bond markets in Latin America and Europe, pushing up borrowing costs for governments there.

Recent market moves have also been an unpleasant jolt for ordinary savers who have come to view bonds as a stable anchor for any retirement account. The Vanguard total bond market mutual fund fell 2.7 percent last month after returning a steady 5.4 percent a year since 2008. Funds holding junk bonds, which were one of the hottest investments in recent years, have suffered even more.

Some managers argue that the important thing is to shift between different types of bonds, de-emphasizing longer-term, government-issued bonds. But whatever the mix, it is likely that bonds will present a risk to investors that they have not in recent history.

“There’s no doubt we’re living through the end of a generational bull market in bonds,” said Scott Minerd, the chief investment officer at Guggenheim Partners.

A Year Later, the Missed Opportunity of the JOBS Act

More than a year ago, Congress passed legislation that its supporters said would help revive new company offerings. Now, the market for initial public offerings is starting to heati up, but the law, the Jump-Start Our Business Startups Act, or the JOBS Act, has had little to do with it.

You need only to look at the recent I.P.O. of the upscale grocer Fairway Group Holding Corporation. It’s an illustration of the forces that drive the market for offerings and why the JOBS Act was a missed opportunity to truly spur more I.P.O.’s.

Founded in the 1930s, Fairway caters to Manhattanites â€" and those who want to be like them â€" offering lots of olives, cheese and other fine foods and produce. Sterling Investment Partners acquired control of the company in 2007 and invested hundreds of millions of dollars in the concept. Today, Fairway has 12 stores and wide eyes for a nationwide expansion.

These plans were seeded with a successful I.P.O. in April that raised $158.8 million. More eye-popping than its expansion plans was the stratospheric valuation the stock market has given the chain. Fairway’s stock price is up more than 60 percent since its I.P.O., giving the company a market capitalization of around $825 million.

If you do the math, each Fairway store is now valued at about $71 million. That’s a lot of cheese and olives.

Fairway is classified as an emerging growth company and therefore arguably benefited from the relief offered by the JOBS Act. But the question is, did its I.P.O. success have anything to do with the legislation?

Probably not. In fact, the law may have even harmed investors in this case.

To understand why, let’s walk through what the JOBS Act did for Fairway.

The first thing is that the company was able to obtain confidential review of its I.P.O. documents with the Securities and Exchange Commission. In the first year of the JOBS Act, this was one of the more attractive provisions of the legislation. A study by Ernst & Young found that 63 percent of emerging growth companies elected confidential review.

Companies like this provision because their numbers are reviewed and revised by the S.E.C. without the public’s knowing the agency’s focus. But this also puts investors in the dark about possible problems. We saw the value of this review in the offerings of Zynga and Groupon, when aggressive accounting tactics exposed by an S.E.C. review alerted investors to problems at both companies.

Another significant advantage provided to Fairway by the JOBS Act was the ability to avoid for up to five years making extensive disclosure on its executive compensation or holding a “say on pay” vote. Not surprisingly, this is popular among emerging growth companies. Ernst & Young counted that 82 percent of them took advantage of this provision.

Fairway also took advantage of the law to avoid disclosing the full compensation of its executives, but it did disclose its full financial information. The JOBS Act allows companies to disclose only two years of financial information instead of three.

Here, Fairway was again in the majority, as some 66 percent of the companies in the Ernst & Young study chose the same route.

Fairway’s selective use of the JOBS Act shows that it is being used to avoid disclosure of information that may cause embarrassment to the company or alert investors of problems. But at the same time, it shows that the law may have allowed companies to get away with not disclosing financial information that investors value.

None of this has anything to do with whether Fairway would have gone public. Investors bought the offering because they viewed it as the next Whole Foods and not the next Pets.com. The fantastic pricing is a bet that the company will continue to expand. The JOBS Act had nothing to do with this.

The lack of an impact of the legislation is seen in the number of I.P.O.’s before and after its passage. Dealogic recorded an average of 33 I.P.O.’s per quarter in the year before the JOBS Act versus 31 I.P.O.’s per quarter in the year after.

The act was intended to help spur a moribund market in small I.P.O.’s. But for offerings that raised less than $100 million, there were actually fewer after the JOBS Act. According to Dealogic, there were an average of 15 such I.P.O.’s per quarter in the year before the new law versus an average of 13 per quarter the year after.

So what does spur I.P.O.’s? Advantages that the Fairway offering had, like a robust stock market and a reviving economy in addition to a growth story that investors wanted to buy. Investors want to minimize risk and invest in the new thing, with economic factors dominating. This is why the United States I.P.O. market is down only 12 percent in the last 12 months, compared with a decline of 41 percent in the rest of the world, according to Dealogic.

None of this is a surprise to critics of the JOBS Act. The act was passed hastily, viewed as a cheap way for a Congress to be seen as doing something â€" anything! â€" on the economy. But the act’s critics, including the S.E.C., opposed the legislation as deregulating public companies and perhaps encouraging fraud without doing much to spur I.P.O.’s.

Judging by the companies that have used the act to hide things that might have raised uncomfortable questions, the critics have a point. The JOBs Act does make it easier for companies to go public in some ways, relaxing the prohibitions on analysts covering companies after an I.P.O., for example, but the law so far does not appear to be having its intended effect: creating jobs by spurring I.P.O.’s. This is not to say that the changes established by the law will not be of some use, because they got rid of needless regulation, but they aren’t going to do much for the I.P.O. market.

This is a shame because small I.P.O.’s have virtually disappeared. In 1997, 477 companies raised $100 million or less in an offering, for a total of $15.8 billion, according to Dealogic. In the year after the JOBS Act, only 53 small companies went public, raising $3.3 billion.

We aren’t even sure what caused the death of the small I.P.O. Some say it was decimalization, when share prices were no longer priced in fractions and brokers lost profits; others point to overregulation in the form of the Sarbanes-Oxley Act. But neither argument seems compelling, because offerings fell off the cliff in 1997, before either of those events happened.

It may instead be a result of larger structural shifts in the market and investors who are no longer willing to take the risk on smaller I.P.O.’s.

Congress would have done better to have taken time to look at the market to see what was actually wrong. It may well be that in today’s economy, this market cannot be revived. Or perhaps Congress should have allowed for the creation of a true small-issuer market like the Alternative Investment Market in London.

This will not happen now. The passage of the JOBS Act sucked any remaining will out of Congress to legislate innovatively. The S.E.C. is engaged in a rear-guard action to minimize the harm from provisions in the act that it opposed, like crowdsourcing. As for Fairway, it would have gone public regardless, but did so without disclosing information that investors might value. It’s too bad that Congress wasted a good crisis.

Investor Group Ends Bid for British Water Utility

An effort by an investment consortium to buy the British water utility Severn Trent fell apart on Tuesday as the two sides failed to enter into talks before a deadline.

The investor group, including the sovereign wealth fund Kuwait Investment Authority and the Canadian fund Borealis Infrastructure, did not come forward with an acceptable offer after earlier bids were spurned, Severn Trent said in a statement. Under British takeover rules, the investor group had until Tuesday to outline an official offer.

Severn Trent had rejected a revised offer of £22, or $34.15, a share, which valued the utility at about $8.2 billion, saying it failed to reflect the utility’s long-term value or future potential.

“We have consistently made clear to the consortium our belief that Severn Trent has a value to our shareholders above the level it indicated it was willing to pay,” Andrew Duff, the chairman of Severn Trent, said in a statement. “This difference in value has been at the heart of this process and the consortium has either not been able, or willing, to bridge that value gap.”

The investor group had said on Monday that it would walk away from the offer unless Severn Trent entered into discussions. The utility, however, said it would be open to talks if the firms increased their offer.

Shares of Severn Trent fell nearly 4.4 percent in after-hours trading in London on Tuesday, after falling 1 percent during the day.

The investor consortium, known as LongRiver, had made three approaches to Severn Trent, with the latest coming on Friday.

Sprint and SoftBank Shore Up Defenses Against a Dish Counterbid

In raising its bid for Sprint Nextel, SoftBank of Japan is doing its best to make sure Dish Network will have a harder time fighting back.

Announced late on Monday, SoftBank’s new offer will give shareholders additional cash, bumping up the effective value of the deal to about $7.48 a share from $6.30 a share. That’s now significantly above the $7 a share that Dish had proposed.

In exchange for that higher price, however, SoftBank requested and received a number of tougher protections. Chief among them is a new stipulation that any superior counterproposal have fully committed financing, which would force Dish to sign papers with its lenders.

While the satellite television company has said that it has the money â€" it has assembled some $9.3 billion in debt from a group of banks â€" it hasn’t provided formal commitment letters to its would-be merger partner.

Sprint has also put into effect a shareholder rights plan, commonly known as a poison pill, that effectively limits any one investor outside of SoftBank from owning more than 17 percent of the cellphone service provider. That helps prevent Dish from trying to make an end run around the board by making a tender offer directly to Sprint shareholders, much as it is doing at the wireless network operator Clearwire, of which Sprint is seeking full control.

Both are meant to try and box in Dish and its chairman, Charles W. Ergen, who have confounded Sprint and SoftBank with assaults on a number of fronts. Beyond bidding for Sprint itself, Dish also topped the company’s bid for Clearwire shortly before a shareholder vote on Sprint’s offer.

In some ways, Dish has already forced SoftBank into a more uncomfortable position. The Japanese telecommunications concern shifted about $3 billion worth of cash from a planned infusion into Sprint itself to payouts to the company’s shareholders. While that won over skeptics like Paulson & Company, Sprint’s second-biggest shareholder, it will take away from a planned transfusion of money meant to strengthen the cellphone service provider and finance an overhaul of its data network.

It will also leave Sprint carrying more debt, though less than with the proposed Dish offer.

And thanks to Dish’s $4.40-a-share bid for Clearwire, the smaller telecommunications company’s stock is trading well above the $3.40 a share that Sprint is offering, just days before a shareholder vote on the latter proposal. Sprint and SoftBank haven’t announced any plans to raise their bid yet, though SoftBank has said that it would be fine with owning 65 percent of Clearwire instead of the entire company.

On the other hand, Dish’s coy approach appears to have cost it ground as well. Among the points of contention between the satellite TV operator and Sprint was the size of the break-up fee in any deal between the two companies, according to a person briefed on the matter. While Dish had offered a payout of about $1 billion if a merger fell apart because of regulatory concerns, Sprint wanted about $3 billion to provide extra comfort.

It’s unclear what Dish will do next. The company’s current bid already envisions adding a significant amount of debt onto Sprint’s balance sheet, and some analysts have questioned whether any cost savings from a merger of the two could support ladling on more.

For now, Dish has said that it’s evaluating the new SoftBank offer as it considers its options.

From U.S. Prosecutor’s Office to Hedge Fund P.R.

Tue Jun 11, 2013 11:27am EDT

(Corrects last paragraph 7 to make clear this is not the first time Sard has hired someone from the government)

By Emily Flitter

(Reuters) - The top public affairs officer for U.S. federal prosecutors in Manhattan is leaving to join public relations group Sard Verbinnen & Co, which represents many high-profile financial firms, including Steven A. Cohen's SAC Capital Advisors, according to the firm's co-founder George Sard.

Ellen Davis, who has spent just less than three years as the chief public information officer for prosecutors in the U.S. District Court in the Southern District of New York, will leave her position at the end of the month and join Sard in September.

For nearly a decade, Sard partner Jonathan Gasthalter has represented Cohen's $15 billion fund SAC Capital, including during the U.S. government's six-year-long insider trading investigation into the firm.

Gasthalter declined to comment to Reuters.

So far, nine people from SAC have been charged or implicated in insider trading cases brought by prosecutors from the Southern District of New York. The investigation is ongoing.

Davis will not work on any SAC-related issues, according to the firm, to avoid any conflict of interest.

Sard, a 100-person firm, is based in New York and has offices in Chicago, San Francisco and Los Angeles. This is not the first time Sard has hired someone from the government.

(Additional reporting by Nate Raymond; Editing by Maureen Bavdek)

Sprint’s Increased Bid Is No Knockout Blow

SoftBank’s raised bid for Sprint Nextel is no knockout blow.

The Japanese group has tweaked its offer for a controlling stake in the American telecommunications company to give the target’s shareholders more value. But Sprint shareholders would retain a stake in a Sprint that has more debt than first envisaged. That erodes SoftBank’s advantage as it seeks to combat a rival bid from Dish Network.

On the face of it, SoftBank’s improved bid looks hard for Sprint shareholders to resist. The Japanese group had originally offered to spend $12.1 billion to buy existing Sprint shares at $7.30 a share. Now, it is proposing to spend $16.6 billion, raising its offer to $7.65 a share.

That offer looks tempting for Sprint shareholders who sell, but it’s less attractive for those left behind. That’s because SoftBank’s plan also requires it to inject fresh capital into Sprint. But with more money going to Sprint’s existing shareholders, the amount of SoftBank cash going into the company itself is falling from $8 billion to $5 billion. Sprint shareholders get more cash, but are left with a 22 percent stake in a more indebted company than under the original plan, which left them with 30 percent stake of a less risky entity.

That matters to the dynamics of the auction. SoftBank has made lower leverage one of the main virtues of its bid. It has argued that a SoftBank-owned Sprint will have the financial capacity to make extra investments in its network. By contrast, a full merger with Dish would create a company with limited financial flexibility. Though Sprint is still less leveraged under SoftBank’s revised deal than under Dish’s plan, the difference is no longer quite as clear.

The revised plan makes sense for SoftBank, which is raising its overall offer by just $1.5 billion, or about 7 percent. Sprint shareholders, meanwhile, may decide the certainty of the extra cash outweighs the residual risks. Paulson & Company, which is Sprint’s second-largest shareholder, has switched its support from Dish to SoftBank. If others follow the hedge fund’s lead, SoftBank’s decision to cede the moral high ground on leverage will have been worthwhile.

Peter Thal Larsen is Asia editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

S.E.C. Fines Options Exchange for Lax Oversight

The Securities and Exchange Commission fined the Chicago Board Options Exchange and an affiliate $6 million on Tuesday for what it called breakdowns in regulatory oversight, including a failure to enforce rules to prevent abusive short-selling.

The agency said the financial penalty against the exchange and its affiliate, C2 Options Exchange, was the first action related to an exchange’s responsibility to self-police its market.

The case stemmed in part from oversight of OptionsXpress, a firm now owned by Charles Schwab, which was accused by the S.E.C. of engaging in an abusive naked short-selling scheme, or selling shares before borrowing them first. An S.E.C. judge on Friday ordered OptionsXpress, its former chief financial officer and a customer to pay $4.8 million in fines and to return $4.2 million.

In a statement, the S.E.C. said: “Self-regulatory organizations must enforce the federal securities laws as well as their own rules to regulate trading on their exchanges by their member firms. In doing so, they must sufficiently manage an inherent conflict that exists between self-regulatory obligations and the business interests of an S.R.O. and its members. An S.E.C. investigation found that C.B.O.E. failed to adequately police and control this conflict for a member firm that later became the subject of an S.E.C. enforcement action. C.B.O.E. put the interests of the firm ahead of its regulatory obligations by failing to properly investigate the firm’s compliance” with the regulation against abusive short-selling and then interfered with the S.E.C. investigation into the firm.

The S.E.C. added that the exchange had an ineffective surveillance program that failed to detect wrongdoing despite numerous red flags that its members were engaged in abusive short-selling and also did not live up to its regulatory and compliance responsibilities in several other areas over four years.

“This settlement marks a significant step in putting the S.E.C. matter behind us, but our commitment to maintaining the very highest standards in regulation and compliance will be carried forward throughout our organization,” the exchange said in a statement.

“In addition to working proactively with the S.E.C. throughout its investigation, we voluntarily launched our own exhaustive, internal assessment of regulatory and compliance practices across our entire organization, assisted by third-party consultants and independent outside counsel. All actions either required or recommended by the S.E.C., as well as those resulting from our rigorous self-review, have been or are now being implemented,” it said.

Taking Dole Food Private Again Is Latest Challenge for 90-Year-Old Billionaire

David H. Murdock once took Dole Food private. Now the self-made billionaire is betting he can do it again.

On Tuesday, Mr. Murdock, the chairman and chief executive, offered to buy the 60 percent of Dole he did not already own for about $645 million, valuing the company at nearly $1.1 billion. It is the latest audacious move by the nonagenarian in a life full of them.

Mr. Murdock is credited with building Dole into a fruit behemoth, beginning with his 1985 deal to buy troubled Castle & Cooke, once one of Hawaii’s agricultural giants. It was the company that brought Hawaiian pineapples to the United States while also running one of the state’s biggest sugar cane operations.

Under his leadership, the company became an enormous real estate developer, with properties throughout the country. And its Dole arm, named for one of the state’s leading families, became one of the world’s biggest sellers of fresh fruits and vegetables.

Dole separated from its historical parent in 1996, and seven years later Mr. Murdock agreed to buy it for $2.3 billion. The company went public again in 2009, in an offering that valued Dole at $1.1 billion.

But Dole has sought to shake up its business in recent years, including by selling its packaged goods and Asian fresh produce arms to Itochu of Japan for $1.7 billion to focus on other parts of the world.

The business has proved volatile, however, subject to unexpected bouts of bad weather that have weighed on earnings. Last year, it lost $144.5 million, while sales declined 11 percent, to $4.2 billion.

Mr. Murdock may view Dole’s current slump as only one more obstacle for him to overcome. His life reads like a Horatio Alger story, from a modest childhood in which he dropped out of school at 14, to his period of homelessness after leaving the Army. A chance encounter with a loan company employee gave him $1,200 in loans to buy a local diner, which he sold within a year and a half for $1,900.

Mr. Murdock then turned to real estate development in the Southwest, building affordable housing, before turning to investments.

It also inspired a hard-charging entrepreneurial streak in him.

“I never had a boss in my whole life,” he told The New York Times Magazine in 2011. “I’ve totally destroyed anybody’s ability to tell me what to do.”

Mr. Murdock has parlayed that career into great wealth. Forbes estimated his fortune at about $2.4 billion as of March, ranking him No. 613 on its billionaires list.

Those riches have underpinned his other great preocuppation of late, health. He was instrumental in the construction of a 5.8-million-square-foot nutrition research facility dedicated to the proposition that a largely plant-based diet is the key to longevity.

His devotion to nutrition perhaps reflects the same tough-mindedness that he may bring to his efforts to take Dole private. From The Times Magazine article:

I experienced this during a visit in early February to his California ranch, where I joined him for lunch: a six-fruit smoothie; a mixed-leaf salad with toasted walnuts, fennel and blood orange; a soup with more than eight vegetables and beans; a sliver of grilled Dover sole on a bed of baby carrots, broccoli and brown rice.

“How did you like your soup?” he asked me after one of his household staff members removed it. I said it was just fine.

“Did you eat all your juice?” he added, referring to the broth. I said I had left perhaps an inch of it.

He shot me a stern look. “You got a little bit of it,” he said. “I get a lot â€" every bit I can.” He shrugged his shoulders. “That’s O.K. You’ll go before me.”

Private Equity Capitalizes on Chinese Firms’ Depressed Shares

HONG KONG - If you can’t buy them, bankrupt them.

Three months ago, Ambow Education Holding, a troubled operator of tutoring centers in China that was listed on the New York Stock Exchange, was the target of a $108 million privatization bid by Baring Private Equity Asia.

On Monday, Baring emerged as one of several big shareholders that had succeeded in pushing Ambow into provisional liquidation by a court in the Cayman Islands, where the company is registered, after a dispute with management over an investigation into possible financial misconduct.

Rapid downfalls have not been uncommon among Chinese companies listed in the United States in recent years, after a wave of accounting scandals led to a broad sell-off of such stocks. At the same time, a growing number of private equity firms have sought to capitalize on depressed share prices of Chinese companies by making buyout offers.

But Ambow’s situation stands out.

“Perhaps no company ever transited as quickly from a private equity firm’s sought-after takeover target to being liquidated,” said Peter Fuhrman, chairman of China First Capital, an investment bank and advisory firm based in Shenzhen, China.

Ambow was taken public in 2010 in a $107 million deal led by JPMorgan Chase and Goldman Sachs. Its market value rose to more than $1 billion that year but came under pressure throughout 2011, along with many other Chinese stocks.

Then in July 2102, Ambow disclosed in stock exchange filings that a former employee had come forward claiming “financial impropriety and wrongful conduct” related to the company’s purchase of a training school in China in 2008.

Ambow said it had hired outside lawyers to help its audit committee carry out an internal investigation of the matter and that it would not comment further. Its shares promptly dropped by half, from more than $4 apiece to just over $2, then continued to slide until early this year.

Baring, a firm based in Hong Kong that used to be part of the Dutch financial services company ING, began its privatization bid for Ambow on March 15 at $1.46 per American depositary share. It was a 45 percent premium to the share price at the time.

Then things got messy. On March 18, three of Ambow’s four independent directors resigned. On March 22, the law firm Fenwick & West resigned after nine months of leading the investigation into possible financial misconduct. That same day, the Chinese affiliate of PricewaterhouseCoopers, also known as PwC, resigned as Ambow’s auditor.

“In its letter, PwC stated it was resigning as a result of its concerns that the investigation may not be given the necessary resources and time, and the presence of existing management may make conducting an investigation of the scope that PwC believes is warranted unlikely,” Ambow said in a filing. The New York Stock Exchange suspended trading in the shares.

Baring withdrew its privatization bid on March 25, 10 days after it was made, citing the resignations and the trading suspension. It said in a letter that “as a result of these unexpected events, we have concluded that it is not possible for us to proceed.”

The petition to the Cayman court to liquidate Ambow was filed in April by a fund run by the Asian unit of the Avenue Capital Group, a New York investor in distressed stocks and bonds that owns 21.6 percent of Ambow’s shares.

According to filings on Monday to the United States Securities and Exchange Commission announcing the success of the petition, the move was supported by Baring, which has a 10 percent stake in Ambow, and an investment unit of the Australian bank Macquarie, which holds an 11.6 percent stake.

The petition accused Ambow’s chief executive, Jin Huang, of abusing her power in relation to the investigation into possible financial misconduct and of “obstructionist tactics designed to entrench her control of Ambow.”

In a statement last month, Ambow firmly rejected the accusations, saying there was “no basis” for any of the claims and that “the filing of the petition and the relief it seeks are wholly inappropriate.”

In its ruling on Friday, the Cayman court appointed the auditing firm KPMG as provisional liquidator for Ambow. KPMG will also take control of the investigation into possible financial misconduct.

The situation is complicated because Ambow’s operating business â€" like many Chinese companies listed in the United States â€" is based in China but controlled by the offshore-registered listed company through a series of complex holding structures called variable interest entities, or V.I.E.’s.

One such foreign control structure was recently ruled invalid by China’s highest court.

“Right now our control over the operating assets in China has been quite limited,” Tiffany Wong, a partner at KPMG China and herself one of the court-appointed liquidators, said on Tuesday. “We haven’t got access to the books and records of company at the moment.”

Monday, Tuesday and Wednesday are public holidays in mainland China, and Ms. Wong plans to meet with Ambow management in Beijing later this week. “We will be seeking to stabilize the company,” she said.

SoftBank Raises Bid for Sprint

SoftBank of Japan has raised its takeover bid for Sprint Nextel to $21.6 billion, seeking to block a rival bid from Dish Network, Michael J. de la Merced reports in DealBook. Under the revised terms, SoftBank is shifting about $1.5 billion originally intended for Sprint itself to the company’s shareholders; investors can now sell shares at $7.65 each, an increase of nearly 5 percent from the original offer. The revised offer is valued at about $7.48 a share, up nearly 19 percent from the earlier bid, Mr. de la Merced reports. SoftBank would own about 78 percent of Sprint if the deal is approved.

Sprint said it had ended sale talks with Dish, which in April had offered $25.5 billion, or about $7 a share, for all of Sprint. Dish has failed to put forward an acceptable formal bid, Sprint said in a statement. “The new proposal by SoftBank, cobbled together largely over the weekend, is aimed at preserving SoftBank’s biggest gamble: buying control of Sprint to challenge the existing titans of the American cellphone market, AT&T and Verizon Wireless,” Mr. de la Merced writes.

The new offer, which has been approved by a special committee of Sprint’s board, may sway some skeptical investors. Paulson & Company, the hedge fund that is Sprint’s second-largest shareholder, said it would support the new offer. Still, the revised offer would saddle Sprint with more debt, Peter Thal Larsen of Reuters Breakingviews writes. “That matters to the dynamics of the auction. SoftBank has made lower leverage one of the main virtues of its bid.”

TREADING LIGHTLY IN STATEMENTS ON U.S. SPYING  |  After revelations that the National Security Agency is engaged in a surveillance program of Internet users through a system called Prism, the biggest technology companies have responded by denying involvement in the spying apparatus. “Of course, the news â€" as well as the responses â€" raises doubts about who is telling the truth and about how extensive the spying program really may be,” Andrew Ross Sorkin writes in the DealBook column. “But perhaps just as important, the episode also raises questions about how publicly traded companies with hundreds of millions of consumers â€" companies that are regulated by the Securities and Exchange Commission and the Federal Trade Commission â€" can, and should, react to news when pressed about involvement in confidential government programs.â€

“Senior executives I spoke with at many of the technology companies cited in the Prism documents said they routinely provided the government with requested data, in some cases months’ worth of e-mail traffic for a certain address,” Mr. Sorkin writes. “So while the nation’s biggest technology companies may not be a part of systematic large-scale spying program, it is clear that they are legally required to play a significant role in funneling data to the government. That leaves them on a tightrope balancing what they can say to their customers and investors while complying with their obligations to keep the government’s secrets.”

WHEN BROKERS REQUEST A CLEAN SLATE  |  As investors increasingly rely on BrokerCheck, the online database of the Financial Industry Regulatory Authority, to vet financial professionals, brokers and executives “are pursuing every means possible to remove negative information from their records,” Susan Antilla reports in DealBook.

If an investor, for example, “checked the securities industry’s official regulatory database of complaints against brokers for the name of Michele Kief, a Wells Fargo broker in Naples, Fla., it would reveal nine client disputes â€" enough red flags to give a customer pause. But on May 24, a panel of arbitrators for the Financial Industry Regulatory Authority granted a request to polish Ms. Kief’s record a bit.”

ON THE AGENDA  |  The Morgan Stanley Financials Conference gets going at the Waldorf-Astoria Hotel in New York. The N.F.I.B. small business optimism index for May is out at 7:30 a.m. Data on wholesale inventories in April is out at 10 a.m. Michael B. Mukasey, a former United States attorney general who is now a partner at Debevoise & Plimpton, is on Bloomberg TV at 10:10 a.m. Philippe P. Dauman, the chief executive of Viacom, is on CNBC at 1:20 p.m.

GREEK BANKER REACHES THE TOP  |  As Europe prepares to close the books on a cash injection of about 50 billion euros into the four largest banks in Greece, bank governance has become a critical issue, Landon Thomas Jr. writes in The New York Times. “Still, Greece’s overseers from the European Union and the International Monetary Fund may well find that even with increased oversight, changing the freewheeling business culture that long defined the Greek financial system will be easier said than done.” The rapid â€" and, some say, problematic â€" rise of one banker, Michalis G. Sallas, the chairman of Piraeus Bank, exemplifies that culture.

Mergers & Acquisitions »

Dole Food Gets Unsolicited Takeover Offer From C.E.O.  |  The chief executive of Dole Food, David H. Murdock, made an unsolicited offer on Tuesday to buy the company in a deal that values Dole at almost $1.1 billion. DealBook »

Mobile Companies Crave Dynamic Maps  |  Maps that adapt to current conditions have become highly desirable to mobile-oriented companies, helping explain “why Google is deep in negotiations to buy Waze, a social mapping service used by millions of drivers around the world, for more than $1 billion,” Vindu Goel reports in The New York Times. NEW YORK TIMES

Timken Hires Goldman to Evaluate a Split  |  After a successful shareholder proposal to split the company’s businesses, Timken has set up a board committee to consider separating its steel business from its other manufacturing operations, The Street reports. THE STREET

Lululemon Chief to Step Down  |  The clothing company Lululemon said on Monday that Christine M. Day would step down as chief executive once a successor was named. The stock fell in after-hours trading after the news was announced. ASSOCIATED PRESS

JBS of Brazil in $2.7 Billion Deal  |  JBS, already the world’s biggest beef producer, says the acquisition will make it the largest poultry company in the world. DealBook »

Deloitte Buys Assets of a Boutique Bank  |  Deloitte says the deal for McColl Partners, an advisory-focused investment bank founded by Hugh L. McColl Jr., will bolster its position as a leading adviser to middle-market transactions. DealBook »

B&G Foods Buys Maker of Pirate’s Booty  | 
WALL STREET JOURNAL

INVESTMENT BANKING »

When Fraud Against Seniors Is Routed Through Banks  |  Jessica Silver-Greenberg reports in The New York Times that banks can “profit handsomely by collecting fees while ignoring warnings of potential fraud and, in some instances, enabling dubious merchants to prey on consumers.” Two banks in particular, Zions Bank of Salt Lake City and First Bank of Delaware, have come under scrutiny. NEW YORK TIMES

Nomura Adds 6 Bankers to Its Americas Arm  |  Nomura of Japan said on Monday that it had hired several senior bankers to take various posts at its investment bank as the firm continued to expand its presence in the Americas. DealBook »

Lunch With Buffett Sells for $1 Million  |  With the $1 million proceeds going to charity, a lunch with Warren E. Buffett sold for less this year than last year, when it raised $3.5 million, The Wall Street Journal reports. WALL STREET JOURNAL

Banks Would Increase Salaries to Offset European Bonus Caps, Survey Finds  | 
BLOOMBERG NEWS

Accepting Fine Wine as Collateral  |  Goldman Sachs accepted almost 15,000 bottles of fine wine as loan collateral from a former executive, Bloomberg News reports. BLOOMBERG NEWS

PRIVATE EQUITY »

HGGC Strikes Deal for MyWebGrocer  |  HGGC, a middle-market private equity firm formerly known as Huntsman Gay Global Capital, has taken control of MyWebGrocer, a 14-year-old company that provides Web and digital marketing services for brick-and-mortar grocers like Kroger and Ralphs. DealBook »

Booz Allen’s Role in N.S.A. Case Puts Spotlight on Carlyle  |  The controversy over Edward J. Snowden and his leaks about confidential surveillance programs at the National Security Agency, where he worked on assignment, has brought some attention to Booz Allen Hamilton’s majority owner, the Carlyle Group. DealBook »

Booz Allen Exemplifies Washington’s Economic Boom  |  Few government contractors are as successful as Booz Allen Hamilton, Catherine Rampell writes on the Economix blog. NEW YORK TIMES

HEDGE FUNDS »

Scaramucci Looks to Open a Hangout for the Finance Set  |  Anthony Scaramucci of SkyBridge Capital, along with two business partners, is looking to “open a Manhattan eatery catering to hedge fund and private equity professionals,” Bloomberg News reports. BLOOMBERG NEWS

Hedge Funds Build Positions in Severn Trent  |  Reuters reports: “Two U.S. hedge fund giants have placed bold bets to profit from an attempted takeover of British water company Severn Trent that now hangs in the balance with a consortium threatening to walk away after three spurned bids.” REUTERS

I.P.O./OFFERINGS »

Coty Prepares to Go Public  |  Coty is set to hold its initial public offering on Wednesday, with shares trading on Thursday. “Demand for the $1 billion initial public offering is expected to be strong, bankers said, with investors eager for a big consumer deal,” Reuters reports. REUTERS

VENTURE CAPITAL »

SageCloud, a Data Storage Company, Raises $10 Million  |  SageCloud, a start-up that offers “cold storage” technology for data that is accessed infrequently, raised a $10 million financing round led by Braemar Energy Ventures, the company plans to announce on Tuesday. Matrix Partners, an existing investor, joined in the latest round. SAGECLOUD

An Abbreviated Profile of Dorsey  |  Jack Dorsey, the entrepreneur behind Twitter and Square, is fascinated “by his inventions’ unanticipated uses,” Vanity Fair reports. “Square, Dorsey has discovered, has become popular with doctors who make house calls.” VANITY FAIR

LEGAL/REGULATORY »

Obama Names Aide as Chief Economic Adviser  |  The New York Times reports: “The Council of Economic Advisers will have a prominent voice in White House discussions after President Obama named his longtime adviser Jason Furman as chairman of the panel on Monday.” NEW YORK TIMES

German Court to Weigh E.C.B.’s Bond Buying  |  “Two longtime friends will appear before Germany’s highest court on Tuesday to argue opposite sides of a fateful question: What if the promise that holds the euro zone together is unconstitutional?” Jack Ewing writes in The New York Times. NEW YORK TIMES

Consumer Agency Finds a Mixed Record on Overdraft Charges  |  The Washington Post reports: “Americans are encountering a wide variation of overdraft charges on debit card purchases and ATM withdrawals because of a patchwork of policies at the nation’s biggest banks, the Consumer Financial Protection Bureau said in a report to be released Tuesday.” WASHINGTON POST

Want to Commit Insider Trading? Here’s How Not to Do It  |  A person in Thailand, who has been accused of insider trading related to Smithfield Foods, used quite a few techniques that were bound to attract the attention of regulators, Peter J. Henning writes in the White Collar Watch column. DealBook »

Bank of America Executive Raises Possibility of a Countrywide Bankruptcy  |  “One of the options that was available to us and continues to be available to us was to put Countrywide into bankruptcy,” Terrence Laughlin, the chief risk officer of Bank of America, said at a hearing on Monday. REUTERS

Exide, a Big Maker of Car Batteries, Files for Bankruptcy  |  The battery maker will seek to repair its finances amid rising costs for materials and the shutdown of an important operation. DealBook »

Lawsuit by Saab’s Parent Against G.M. Is Dismissed  | 
REUTERS

Dole Food Gets Unsolicited Takeover Offer From C.E.O.

The chief executive of Dole Food, David H. Murdock, made an unsolicited offer on Tuesday to buy the company in a deal that values the company at almost $1.1 billion.

Mr. Murdock said he had offered $12 for each of the shares of Dole that he does not own. The offer represents 18 percent premium on the company’s closing share price on Monday.

The offer from Dole’s chief executive values the 60 percent that he does not currently own at around $645 million. If successful, Mr. Murdock also will take over the company’s debt obligations. Mr. Murdock had taken the company private once before in 2003.

In statement, Dole’s board said that it would meet to review Mr. Murdock’s unsolicited offer and that no decision had yet been made about the bid. The company’s chief executive said he hoped to secure an agreement by the end of July.

Dole, which reported revenues of $4.2 billion last year, re-entered the public markets through an initial public offering in 2009 that valued the company at around $1.1 billion.

Dole markets a wide variety of packaged and frozen foods.

Deutsche Bank is advising Mr. Murdoch on the deal.

HGGC Strikes Deal for MyWebGrocer

As giants like Amazon.com move into the online grocery business, an investment firm is betting that a technology company can help traditional retailers fight back.

HGGC, a middle-market private equity firm formerly known as Huntsman Gay Global Capital, has taken control of MyWebGrocer, a 14-year-old company that provides Web and digital marketing services for brick-and-mortar grocers.

Terms of the deal were not disclosed. But people briefed on the matter said the size of HGGC’s investment was on the higher end of its deal range of $25 million to $100 million.

HGGC is buying control of the company from the Stripes Group, an investment firm focused on technology and consumer products companies.

With the transaction, HGGC is hoping that MyWebGrocer can help clients ranging from Kroger and Ralphs to smaller grocers fend off incursions by nontraditional rivals. The company claims over 140 national retailers as customers, providing them with e-commerce services, Web sites and digital circulars.

MyWebGrocer, which is already profitable, is expected to report over $50 million in revenue in its current fiscal year, according to Richard Tarrant, MyWebGrocer’s founder and chief executive. It posted a revenue gain of nearly 60 percent in 2012 from the year earlier.

“We’ve become the digital arm of the brick-and-mortar grocery chain,” Mr. Tarrant told DealBook.

It is a space that Amazon.com and Wal-Mart Stores are clearly eyeing. On Monday, Amazon expanded its groceries program to Los Angeles for members of its Prime service, and the company plans to move into about two dozen other markets through next year.

“The bigger picture is that the industry is driving this direction,” Richard F. Lawson, a managing partner of HGGC, told DealBook. “It’s not just about delivering groceries. It’s about Amazon.”

But he added that unlike Amazon, MyWebGrocer did not need to build out refrigerated warehouse space. Instead, it will draw upon existing stores that the company links together with its software.

Just as interesting to HGGC is the company’s digital marketing business, including advertising on social media that product makers can use to better target customers. Mr. Lawson cited the high valuations placed on e-marketing companies like ExactTarget, which Salesforce.com bought last week for $2.5 billion.

HGGC is hoping that its latest deal will turn out to be as successful as its investment in Hybris Software, an e-commerce services provider for corporations. Last week, SAP agreed to buy that company in a deal reportedly worth over $1 billion.