Top Witness for the S.E.C. Turns Testy on the Stand

Paolo Pellegrini has been lauded as an architect of one of the biggest hedge fund victories in recent memory: Paulson & Company’s audacious bet against subprime home loans in 2007.

But in a Manhattan federal courtroom on Tuesday, Mr. Pellegrini professed not to know what one of the basic acronyms of the industry meant.

During questioning by a government lawyer, Mr. Pellegrini said that he was not sure what “C.D.O.” â€" the type of security, which the hedge fund stalwart helped construct, that is at the heart of the government’s civil lawsuit against a former Goldman Sachs employee â€" stood for. After several minutes of verbal sparring, he conceded that it might stand for “collateralized debt obligation.”

Over around two hours of testimony, Mr. Pellegrini, a tall, imposing investment executive, repeatedly paused and claimed he could not remember what he previously said. At one point, he complained that his questioner, Matthew T. Martens of the Securities and Exchange Commission, was being too imprecise in his queries, making them hard to answer. “It’s a bit of a trick question, but I’ll try to answer it,” he said.

The S.E.C. had hoped that Mr. Pellegrini would be one of the top witnesses of the trial. His employer at the time, Paulson & Company, profited handsomely from the investment product that Goldman had created, yielding about $1 billion.

Mr. Pellegrini at one point spent about 10 minutes bickering with Mr. Martens over the definition of a “custom C.D.O.”

Later, Mr. Pellegrini sighed, “I am upset about this conversation.”

The testimony represented some of the liveliest moments yet in the trial of Fabrice P. Tourre, 34, whom the government has accused of defrauding investors as part of Goldman’s mortgage desk in 2006 and 2007. The S.E.C.’s lawsuit over Mr. Tourre’s role in the construction of a complex mortgage investment that ultimately failed has made him a prominent face of the government’s investigation into the financial crisis.

Much of Mr. Martens’s questioning sought to show that the financial firms responsible for constructing the mortgage securities were wary of working with hedge funds like Paulson & Company that wanted to bet virtually exclusively against the investments’ success.

In 2010, Goldman agreed to settle an S.E.C. lawsuit by paying a $550 million penalty while admitting that it made a “mistake” in not disclosing that “that Paulson’s economic interests were adverse to C.D.O. investors.”

Both Mr. Pellegrini and Sihan Shu, a managing director at Paulson, testified that the firm was interested only in wagering that home loans would falter, wiping out the value of debt instruments built from those mortgages. Mr. Pellegrini acknowledged that the firm raised two funds to carry out its bet against home loans. Mr. Pellegrini is expected to be just the first in a series of prominent witnesses. His cross-examination by Mr. Tourre’s lawyers is scheduled for Wednesday. It will be followed by testimony from two of Mr. Tourre’s former bosses at Goldman.

Jurors sometimes appeared to struggle with the discussions on Tuesday, which were often laden with financial jargon. Lawyers for Mr. Tourre made it a point of explaining some terms at the beginning of the day’s proceedings, including “Q.I.B.’s,” which stands for “qualified institutional buyers,” and “single-tranche C.D.O.’s.” Still other arcana, like “WARF scores” and “Libor,” received minimal explanation.

Though some jurors scribbled diligently in their notepads, others appeared to nod off from time to time.

The presiding judge, Katherine B. Forrest, took an active role in both ensuring that jurors were aware of the various legal proceedings and in keeping the trial on its three-week schedule.

She was also quick to mediate disputes between the government and Mr. Tourre’s lawyers, sometimes rephrasing objected questions to witnesses to speed things along.

Worried About Defeat for Dell Offer, Board and Bidders Prepare Maneuvers

A high-stakes game of poker is now being played over the fate of Dell Inc., less than 36 hours before shareholders are scheduled to vote on the computer company’s proposed $24.4 billion sale to its founder.

A special committee of Dell’s board is poised to adjourn the vote on Thursday morning because it is concerned that the offer may be defeated by shareholders, people briefed on the matter said on Tuesday. The directors have signaled for days that they would rather postpone the shareholder meeting, giving them time to either elicit a higher bid from Michael S. Dell and his partner, the investment firm Silver Lake â€" or get the buyers to declare their current offer of $13.65 best and final.

Meanwhile, Mr. Dell and Silver Lake are working behind the scenes to convince shareholders that they will not raise their current offer and are prepared to walk away.

The jockeying comes amid more signs that the deal faces stiff investor opposition. BlackRock, which owns a nearly 4.5 percent stake, has voted no, according to one of the people briefed on the matter. And the mutual fund manager T. Rowe Price, which owns a 4 percent stake, said publicly on Monday that it remained opposed to the deal.

The primary opponents to the leveraged buyout, the billionaire activist Carl C. Icahn and the asset management firm Southeastern Asset Management, have pressed their argument that the proposed sale would shortchange investors. They contend that their plan, in which the company would buy back 1.1 billion shares for $14 apiece, would deliver more to fellow shareholders while letting them participate in any revival of the computer company.

In a letter to investors sent on Tuesday, the Dell special committee again sought to rebut Mr. Icahn’s claims, arguing that a so-called leveraged recapitalization would leave shareholders owning stakes in a more indebted company. Moreover, Mr. Icahn’s offer requires investors completely replacing Dell’s board with the activist’s own slate of candidates.

Still, the directors remain pessimistic because of the tough threshold for approval of Mr. Dell’s deal. More than 42 percent of the company’s shares must be voted in favor of the transaction. More than 21 percent of Dell’s shares â€" including the roughly 13 percent stake held by Mr. Icahn and Southeastern â€" is currently arrayed against the proposal, this person said.

By briefly opening the shareholder meeting and then adjourning, the special committee buys more time to twist arms. The maneuver will let the company maintain the current record date of June 3, the day by which investors must have owned shares to participate in the vote. (That said, Dell directors may be ultimately fine with moving the date.)

Both the special committee and the buyer group believe that many of Dell’s shareholders are wagering that Mr. Dell and Silver Lake will blink and raise their offer. By some estimates, nearly one-quarter of Dell shares held as of June 3 are now in the hands of arbitrageurs, who bet on the outcome of mergers.

But people close to the would-be buyers argue that there is less incentive than ever for the consortium to increase their bid, pointing to the company’s declining earnings; increasingly negative analyst outlooks on sales of personal computers; and the rising cost of debt borrowing.

As recently as last week, the research firm Gartner estimated that worldwide PC shipments had fallen from the year-ago period by roughly 11 percent, to 76 million units. That is the fifth consecutive quarter of falling sales.

Meanwhile, raising the offer above $13.65 a share could prove expensive. A 25-cent increase of the bid would require an additional $1 billion in new equity, hurting the potential return of Mr. Dell and Silver Lake.

Any bump in price would need the approval of both partners, even as many shareholders are hoping that the company founder would succumb to pressure and make additional concessions to allow a rise in price.

Shares in Dell closed on Tuesday at $13.02, down almost 1 percent.

An Architect of the Tourre Case to Depart S.E.C.

Kenneth R. Lench oversaw the Securities and Exchange Commission’s case against Goldman Sachs and Fabrice Tourre, a trader at the bank.

On Tuesday, a day after Mr. Tourre’s trial began, the S.E.C. announced that Mr. Lench’s 23-year career at the agency was ending. Mr. Lench, the agency said, will join a private law firm after he departs at the end of July.

Mr. Lench played a significant role in the S.E.C.’s response to the financial crisis. When the agency created the “structured and new products unit” in early 2010 to investigate mortgage securities and other complex financial instruments at the center of the crisis, it chose Mr. Lench to lead the 45-person team.

Under his control, this group filed civil enforcement actions against some of the biggest names on Wall Street, including JPMorgan and Citigroup. The most prominent case came against Goldman and Mr. Tourre, which it accused of misleading investors about a mortgage security that ultimately failed.

Goldman chose to settle the case, paying a $550 million penalty without admitting or denying guilt. Mr. Tourre fought the charges.

His civil trial continued on Tuesday in a federal courtroom in lower Manhattan. His lawyers, who have portrayed Mr. Tourre as a fall guy for a deal that was approved at higher rungs of Goldman, are expected to argue that investors were well aware of the mortgage security’s contents.

While Mr. Lench oversaw the investigation of the case, he was not involved in the trial.

Mr. Lench, who joined the S.E.C.’s enforcement unit in 1990, also led the S.E.C.’s auction rates securities settlements with several banks like UBS and Bank of America. He also investigated accounting fraud.

“It has been a privilege to lead such a talented and dedicated team of professionals committed to uncovering wrongdoing in our securities markets, Mr. Lench said in a statement. “I am fortunate to have had the opportunity to work on significant and challenging cases on behalf of our nation’s investors.”

When an Executive Turns Buyout Adviser, Alarm Bells Go Off

Here’s one way to gain an edge in deal-making: Hire the former chief executive of the company you want to buy to advise you.

What may seem to be a real advantage, however, can turn out to be a problem, as demonstrated in recent litigation arising from the $3.7 billion buyout of the industrial machinery maker Gardner Denver.

In that deal, the private equity firm Kohlberg Kravis Roberts & Company had hired the company’s former chief executive, Barry Pennypacker, within months of his resignation, to advise the firm. The use of a former top executive raises many of the same questions that occur when a management-led buyout is on the table. Does a former insider’s special knowledge and relationships give the bidder an unfair advantage to the detriment of other potential bidders â€" and to shareholders?

The question is whether K.K.R. and Mr. Pennypacker crossed the line.

After some five years as chief executive of Gardner Denver, Mr. Pennypacker resigned in July 2012. His reasons are still unclear, but it appears that the resignation came over management of the company and disputes with the board. Mr. Pennypacker was replaced on an interim basis by Gardner’s chief financial officer, Michael M. Larsen. Mr. Pennypacker’s departure was clearly a blow to the company. Gardner’s shares fell 8.6 percent the next day.

To would-be acquirers, his exit was also blood in the water. Within two weeks, SPX, a competitor of Gardner’s, submitted a preliminary proposal to acquire the company. Only a few days later, ValueAct Capital, the holder of about 5 percent of Gardner, sent a letter to the company agitating for a sale. Shortly thereafter, another company also reported interest in an acquisition. Mr. Larsen, who became the permanent leader, and the Gardner board, working with Goldman Sachs, then vigorously explored a possible sale.

But the swirl of activity also attracted Mr. Pennypacker, who saw his own opportunity. He enlisted the aid of UBS and began shopping his expertise to private equity firms.

Kohlberg Kravis and its industrials team bit and hired Mr. Pennypacker.

This is a common practice on Wall Street these days. Private equity firms hire industry veterans to advise them not just on operating the companies in their portfolios, but on potential acquisitions. Deals also remain scarce, which means that the potential for these advisers to nudge private equity buyers toward their own former companies increases. Blackstone’s new technology team, for example, is headed up by a former executive of Dell. Not surprising, Blackstone initially took a big interest in possibly bidding for the PC maker, though it eventually decided against a bid.

In the case of Gardner Denver, nearly all of private equity firms that participated in the bidding had hired former employees of Gardner or a competitor to advise them, according to a person close to the deal.

And while former chief executives have been known to bid for their companies, most recently in the case of Best Buy, this appears to be one of the few cases where a private equity firm hired a former chief so soon after his resignation.

The practice may not be rare, but hiring former executives raises alarm bells at target companies. In some ways, hiring a former executive to advise on a takeover bid is a form of a management buyout, with all the potential conflicts and dangers that entails, including the potential misuse of confidential information.

All told, the hiring of former executives has the potential for real problems as the information these managers have can give a big advantage to a bidder, all at the expense of shareholders of the target company.

But like management-led buyouts, there are procedures in place that bidders and targets try to use to wall off the conflicts of interest.

As you would expect from a well-lawyered place like Kohlberg Kravis, the private equity firm did appear to adopt these procedures. As part of its relationship with Mr. Pennypacker, the firm demanded that he sign an agreement to ensure that he did not divulge confidential information about Gardner.

It’s here where the trouble started. In October, according to court filings, Mr. Pennypacker’s counsel inadvertently sent a draft of this agreement to Mr. Pennypacker’s old e-mail address at Gardner Denver. Oops. Alerted of his involvement, the company jumped in to make sure that Mr. Pennypacker did not share any confidential information.

What happened next is the subject of dispute. As is almost always the case in a buyout these days, there was shareholder class-action litigation brought in a Delaware court to challenge the acquisition. At first, this suit appeared to be a run-of-the-mill case that would quickly settle. But when the plaintiffs’ lawyers began discovery, they uncovered details of Mr. Pennypacker’s involvement. In court filings, the plaintiffs claimed that despite safeguards, Mr. Pennypacker still provided confidential information to the private equity firm.

Kohlberg Kravis had a number of defenses. First, while a mistakenly sent e-mail was probably not the best way to alert Gardner, Gardner eventually signed off on the relationship between the private equity firm and its former chief executive. And Kohlberg Kravis had its own procedures in place that were intended to prevent Mr. Pennypacker from disclosing inside information.

The private equity firm strongly denies that any confidential information was shared, stating in a filing with the court that “Mr. Pennypacker repeatedly made clear that he was aware of his confidentiality obligation, that he honored it, and that he based his conversations with K.K.R. on public information.” According to a person close to the firm, Mr. Pennypacker will also not be Gardner’s chief executive once it goes private.

(On Tuesday, some 97 percent of the shares voted approved the merger.)

Possible conflicts of interest were also raised by lawyers representing Gardner’s shareholders in a related motion before the Delaware Chancery Court. The parties settled part of the litigation, resulting in the disclosure to shareholders of Mr. Pennypacker’s involvement. But the plaintiffs may decide to amend their complaint to pursue a claim related to Mr. Pennypacker’s relationship with Gardner’s suitor.

If the plaintiffs do actually pursue these claims, the facts of what actually happened between Mr. Pennypacker and his new employer will be sorted out. However, the plaintiffs’ lawyers do point to many conversations in their court briefs, but they haven’t pinpointed any smoking gun, namely specific confidential information that Mr. Pennypacker provided to Kohlberg Kravis.

Still, even if Kohlberg Kravis and Mr. Pennypacker did nothing legally wrong, you can’t help feeling squeamish in a way similar to when someone from government immediately cashes in on a big, lucrative private sector job. Even though almost every private equity firm does it and it can be legal, you can’t help but wonder whether something is off. The reason is that it is hard to see how confidential information held by the former executive cannot taint the process.

Despite these misgivings, given the viciously competitive market for deals, this practice is likely to continue to be common.

For boards of target companies, this is all a warning to be careful. It may behoove them to ask who is advising their buyer. It may well be a familiar face.

Despite Bond Market Fears, Wall Street Earnings Are Holding Up Well

There may be less reason to fear the big, bad bond market.

With $38 trillion of bonds outstanding, any large and negative moves in bond prices have the potential to damage the wider financial system.

This occurred during the financial crisis of 2008, when mortgage-backed bonds plunged in value. It also happened during the European debt crisis, when losses piled up on sovereign bonds. Banks that held large amounts of such bonds suffered huge hits to their balance sheets, and bailouts became necessary.

So how is the financial system faring after the turbulence that swept through the bond market? Pretty well, judging by the latest financial results from Wall Street banks.

In the last few days, the three big American bond-trading firms â€" JPMorgan Chase, Citigroup and Goldman Sachs â€" all reported second-quarter financial results that were helped by healthy bond trading revenue.

That’s somewhat remarkable considering the amount of pain in the bond market during the quarter. The selling started in early May, and became particularly intense after Ben S. Bernanke, the Federal Reserve chairman, said the central bank might pare back the enormous bond-buying programs it has undertaken to support the economy.

This turning point in the markets barely dented the banks. In the second quarter, Citigroup reported revenue of $3.4 billion in its fixed-income division, which trades bonds, currencies and commodities, as well as derivatives linked to those assets. Citi’s revenue was 18 percent up on the same quarter in the previous year. Over the same period, JPMorgan’s fixed-income revenue rose by 17 percent, and Goldman’s climbed 12 percent.

One reason the banks fared relatively well is that, despite the sharp fall in bond prices, their customers didn’t withdraw en masse from the market. That occurred in the second quarter of last year during a swoon in European markets. Wall Street firms posted weak fixed-income results for that period.

Regulation may have helped in shielding the wider system from bond market stress. Banks hold large stockpiles of bonds, partly to service client demand and partly to generate trading income. However, since the financial crisis, new rules have made it less comfortable for banks to hold huge inventories, causing them to shrink drastically.

Currently, Wall Street dealers hold nearly $60 billion of corporate bonds, mortgage-backed bonds and short-term debt called commercial paper, according to data from the Federal Reserve Bank of New York. In 2007, those inventories peaked at $235 billion.

Put bluntly, banks have less stuff to take losses on these days. When the market value of the bonds in these inventories decline, Wall Street entities have to book losses to reflect that the holdings are worth less. This tends to be the source of the most punishing losses during bond market shakeouts. But with smaller inventories, banks stand to suffer far less pain.

Skeptics of the new rules say that one danger of shrinking bond inventories is that banks have less capacity to acquire bonds from sellers when bond markets are weak. In turn, they say, this can contribute to violent price swings when investors turn against bonds. The steep declines in bond prices in the last month may have something to do with this.

But it appears that prices moved lower in a relatively orderly fashion. This can be seen in a measure of the bid-offer spread, which is the difference between the price at which banks buy bonds and then sell them to investors.

The bid-offer spread typically increases substantially in times of stress. But during the latest upheaval, the increase was slight. The spread right now is 0.11 of a percentage point on highly rated corporate bonds, according to an index from MarketAxess, a firm that runs a bond-trading platform and conducts bond market research.

That’s wider than the recent low of 0.075 of a percentage point. But it is still well below the 0.35 of percentage point at the end of 2008. In other words, the market held together even though banks had historically low bond inventories.

But it might be a mistake to assume all is well. First, while regulations appear to have shielded Wall Street from crippling bond losses in recent weeks, they have shown up elsewhere in the system, like the investment funds that hold bonds. Those losses create real financial pain for real people. However, such losses are less likely to be destabilizing to the system.

Mutual funds and similar investment vehicles aren’t acquiring their bonds using large amounts of borrowed money, or leverage, to boost returns. That’s an important distinction. In the past, it’s been leverage that has magnified bond losses and made them crippling to the system.

Wall Street firms do, however, use large amounts of leverage. And that is why regulators introduced new rules to make their fixed-income businesses safer.

Things could still go wrong, though.Some analysts believe that the most recent downturn shouldn’t be seen as the decisive test for the post-crisis bond market. When the Federal Reserve actually does stop buying bonds, the convulsions could be far greater than those seen in the last month.

“When tapering kicks in, the market will look very different to this,” Will Rhode, a principal of Tabb Group, a firm that analyzes market infrastructure, said. “You ain’t seen nothing yet.”

Goldman’s Not the Leader of the Wall Street Pack

Goldman Sachs isn’t yet the envy of Wall Street again. The investment bank generated $1.9 billion of profit in the second quarter, twice the figure of a year ago and beating the estimates of analysts by a third. Though it sounds like a return to Goldman’s good old days, it hasn’t managed to solidly outpace rivals.

For starters, some of the bottom line was helped by a lower tax rate. In the three months to June, Goldman handed over 27 percent of its pretax profit to governments around the world. That’s about 6 percentage points lower than it has been paying of late. It was the benefit, finance chief Harvey Schwartz told investors on Tuesday, of permanently reinvesting in the business money made outside the United States.

The reduced levies brought in an extra $159 million for shareholders, without which Goldman’s annualized return on equity for the quarter would have dipped from 10.5 percent to 9.6 percent, or just below the rule-of-thumb estimate for a big bank’s cost of capital.

Investing and lending also contributed a decent slug of revenue. At $1.4 billion, the sum was 32 percent below that of the first quarter, but still seven times what it was a year ago. That’s great - for now. It may be tough to duplicate, though, and not just because investments in debt and private equity are lumpy. The Volcker Rule will prohibit banks from devoting more than 3 percent of capital to such pursuits.

Goldman’s efforts elsewhere were mostly decent enough. Asset management revenue was flat at $1.3 billion, but it isn’t the firm’s strongest division. Sales of stocks and bonds were solid, with underwriting fees jumping 45 percent from a year ago. And traders of fixed income, currencies and commodities reaped $2.5 billion of revenue, mostly avoiding the macroeconomic and central-banker induced effects that stung smaller rival Jefferies.

None of it, however, was markedly better than the performance of the folks at Citigroup and JPMorgan Chase. In some areas, the competitors even held up stronger. Goldman is accustomed to being far ahead of the pack. For now, though, it is only distinctly better than it had been, not the best.

Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Estimating Ackman’s Odds of Success at His Next Target

As the activist investor William A. Ackman hunts for his next target, a favorite guessing game on Wall Street is to see what company he will pick next to agitate for change.

According to news reports, Mr. Ackman has been raising a new $1 billion fund in recent weeks and will soon announce where he is placing his bet. The latest speculation has centered on ADT Corporation, the alarm company, and the shipping giant FedEx.

Mr. Ackman and his hedge fund, Pershing Square Capital Management, have never shied away from a good fight. He successfully pushed for leadership change at Canadian Pacific Railway in 2012 and hasn’t been afraid to take on giants like Procter & Gamble.

Despite notable successes over the years, he encountered obstacles in a recent run at Herbalife, which he calls a pyramid scheme. He has also been stymied in his efforts to rehabilitate J.C. Penney.

Mr. Ackman, however, would have to deploy very different strategies to pursue ADT or FedEx, according to Rotary Gallop, a firm that analyzes shareholder ownership and influence.

According to Rotary Gallop, ADT presents the better opportunity to swoop in and take control, take the company private or force changes on its management. The firm estimates that an activist investor would be about 1.5 times as likely to succeed in forcing change at ADT than at FedEx.

For that reason, analysts have already discounted the likelihood that FedEx is Mr. Ackman’s target.

On the face of it, a $1 billion investment appears significant. Leverage could stretch those funds even further. But dig deeper, and it’s clear that even a stake that large doesn’t amount to equal influence at every company.

One big reason is that some companies are dominated by a few big shareholders, while others are owned by a multitude of small investors. In an extreme case, one shareholder might own 50 percent or more of a company’s shares, giving him or her essentially complete control. Even minority shareholders can dominate, if they are allied with others or with management.

But in a company that has a lot of smaller investors, an activist investor has a much better chance of pushing an agenda.

Rotary Gallop analyzed what would happen if a shareholder bought a significant stake in a company - say, 14 percent or $2 billion worth â€" a large enough investment to create critical mass at many firms.

To get 14 percent of ADT, an investor would need to buy about $1.3 billion worth of shares. Since FedEx is a substantially larger company, Rotary Gallop assumed a $2 billion investment, or 6 percent stake, would be large enough to create critical mass.

Rotary Gallop then ran thousands of computer simulations, evaluating how often that investor would win a proxy contest given the various possible voting outcomes by each company’s investors.

In the case of ADT, an activist investor would cast the swing vote about 89 percent of the time, which represents significant influence in any proxy contest.

At FedEx, a $2 billion stake would be decisive just 50 percent of the time â€" long odds for such a big sâ€"ke in the world of investing. If Mr. Ackman really wanted to ensure influence, it would take a lot more capital (about $4.6 billion for a 14 percent investment, at recent prices).

Moreover, insiders - who are likely to oppose a bid by an activist investor â€" control more of FedEx’s shares, compared with ADT’s.

There are more skewed comparisons. For example, an activist investor would have essentially zero chance of prevailing at Wal-Mart Stores without the Walton family’s cooperation. At a company like Apple, where $2 billion does not buy much and insiders also are hugely influential, an activist’s odds would be quite small.

The Rotary Gallop analysis of Mr. Ackman’s potential targets is purely statistical. Shareholder votes could easily be swayed by other factors, like the popularity of current management or alliances among big shareholders.

Mr. Ackman could certainly choose a Standard & Poor’s 500 company other than ADT or FedEx to target. His odds of success in forcing change elsewhere are likely to be better than at FedEx but not as good as at ADT, depending on factors like insider influence and the size of large shareholder stakes.

Possibly Unfair, but Not Necessarily Fraudulent

When someone has access to a service that is not equally available to others, the immediate response is often to say, “That’s not fair!” And when the securities markets are involved, the first thought seems to be that any informational advantage is not only unfair but potentially fraudulent.

Of course, there are advantages everywhere. Airlines sell access to early boarding, and you can buy a pass at Universal Studios to skip the lines. Few seem troubled that someone who bundled millions of dollars in donations receives an invitation to an inaugural ball while common contributors might receive a token souvenir.

While we are accustomed to paying extra for things that were once free, like checked baggage on airlines, when it comes to the public markets for stocks, bonds and commodities, the reaction to those buying preferential access is to cry foul.

That became clear last week when New York’s attorney general, Eric T. Schneiderman, announced an agreement with Thomson Reuters concerning a closely watched economic indicator. Thomson Reuters agreed that it would no longer sell access to the University of Michigan’s consumer confidence index to high-frequency trading firms two seconds before other subscribers. Mr. Schneiderman described this as a step toward creating a “level playing field” in the markets by ending an “unfair business practice.”

His office is investigating whether other firms are violating the law, particularly with regard to New York’s broad Martin Act, in how they sell data to subscribers who can trade in advance of its public release. And Mr. Schneiderman is not the only one looking at disclosures of this type of information.

Senator Charles E. Grassley sent a letter to the University of Michigan asking questions about its arrangement “to allow preferential access” to the information. DealBook reported that the Securities and Exchange Commission was also investigating how Thomson Reuters released manufacturing data milliseconds before its public disclosure, giving high-frequency trading firms an opportunity to profit on it.

Although it is natural to think that having access to information that influences the markets before others is always wrong, the laws on fraud do not go that far. Instead, they focus on whether someone has been deceived, either through a misstatement or by a failure to disclose information.

The Martin Act, adopted in 1921, is considered one of the broadest antifraud laws available to police the securities markets. It does not require proof of intentional misconduct, and there is even a possibility that a misdemeanor violation could be proved without showing any intent â€" known as strict liability. That gives Mr. Schneiderman a powerful tool to go after companies like Thomson Reuters for disclosures that affect the market.

But the core of any violation is still about proving fraud, which includes not just false statements but also any “deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale” of securities. A 1926 decision by the New York Court of Appeals on the scope of the Martin Act stated that the law reaches acts “which do by their tendency to deceive or mislead the purchasing public.”

Is selling access to proprietary information to those willing to pay a premium a species of fraud when it allows traders to reap profits at the expense of those unwilling to pay the premium?

Thomson Reuters and others who selectively disclose information to subscribers are not hiding what they do. Indeed, it is the exact opposite â€" they tell the world that only those willing to pay will get the advantage of an early peek at the information.

There is a tiny universe of potential customers who would want access to financial data two seconds ahead of others. No individual would ever be able to take advantage of that time period, but high-frequency traders certainly can. As James B. Stewart reported, dropping the two-second advantage last week resulted in a steep drop in the amount of trading in the milliseconds before the broader release of the index.

Some informational advantages are fraudulent, as the recent spate of insider trading cases shows. Unlike companies that sell an informational advantage, however, the key to insider trading is keeping the information confidential and not letting anyone know you are using it to profit. It is the failure to publicly disclose the information before using it that brings about the violation, not just the fact that the information is confidential.

Still, it appears anomalous that someone at Thomson Reuters who used its confidential market information without permission to trade profitably would be guilty of insider trading, but the company can sell that same advantage to a select few willing to pay for it without violating the law. The difference is that insider trading requires proof of a breach of fiduciary duty, so that the proprietor of the information can do whatever it wishes so long as it does not deceive the investing public.

In a famous case in the 1980s, Carpenter v. United States, the Supreme Court upheld the conviction of a former Wall Street Journal reporter for trading on confidential information about companies before it was published. While the reporter breached his fiduciary duty, the court noted that The Journal had a proprietary interest in the information its reporters gathered, and could do with it as it saw fit.

Consumers of the information sold by media companies would not be subject to any claim of fraud because they are not trading on it in breach of a duty. When a company obtains the information through legitimate means, like the agreement Thomson Reuters has with the University of Michigan to distribute its index, then there is no violation of any duty by selling advance access to the data.

The S.E.C. does have a rule in place, Regulation FD, which requires public companies to disclose information to everyone at once and not just to select recipients. But this rule applies only to internal corporate information and not to the type of research data about the economy that is sold by companies.

The issue then is whether Mr. Schneiderman or the S.E.C. can police these types of arrangements by companies that sell information they obtain legally. It is notable that, even though the two-second advantage has stopped, Thomson Reuters continues to sell the information five minutes before its release to the general public, undermining the idea that any early disclosure is somehow fraudulent.

There is no broad mandate for the government to ensure that the markets are “fair” or that they offer a “level playing field” without any informational disparities, at least under the fraud laws. While fraudulent transactions are certainly unfair, simply asserting that buying access to information in advance of others is somehow unfair does not necessarily make it illegal.

The issue may be more about how high-frequency trading firms can take advantage of information in just a few milliseconds to garner profits far beyond what might have been possible before computerized trading. If that is the case, then the focus should be on policing how these firms trade rather than cracking down on the sale of information to those willing to pay. Otherwise, perhaps the airlines should not be allowed to let so many people board ahead of me.

Ex-Broker Charged in Libor Case Responds

LONDON - Terry J. Farr, the former broker who was charged on Monday as part of an investigation into manipulation of global benchmark interest rates, was “a minnow in a very large pond,” his lawyer said on Tuesday.

Katie Wheatley, a partner at the law firm Bindmans, which represents Mr. Farr, said it was “regrettable” that the Serious Fraud Office had decided to charge Mr. Farr in the continuing investigation into the rigging of the London interbank offered rate, or Libor.

“Of all the very many organizations and individuals who may have contributed to the failings of Libor-setting, the S.F.O. has chosen to charge Mr. Farr, an unqualified interbank broker who had no responsibility whatsoever for setting Libor rates, a minnow in a very large pond, for doing what he believed to be his job,” Ms. Wheatley said in a statement.

“Mr. Farr will place his trust in the court to determine a just outcome,” Ms. Wheatley said, according to the statement.

The Serious Fraud Office on Monday charged Mr. Farr with two counts of conspiracy to defraud and James A. Gilmour with one count. Both worked at RP Martin Holdings, a London-based brokerage firm. They were both arrested and freed on bail in December together with Tom A.W. Hayes, a former UBS and Citigroup trader who was charged with eight counts of fraud last month.

Bally Technologies to Buy Casino Games Maker for $1.3 Billion

Bally Technologies has agreed to acquire SHFL Entertainment, a casino games maker, for nearly $1.3 billion in cash.

Formerly known as Shuffle Master, SHFL makes products like automatic card shufflers and roulette chip sorters, as well as proprietary table games and electronic gaming machines. Founded in 1983, the Las Vegas-based company went public in 1992. In its most recent quarter, some 45 percent of its revenue came from Australia and Asia.

Bally is paying $23.25 a share, which represents a premium of 24 percent over SHFL’s closing price on Monday and a premium of 37 percent over the average closing price of its common stock for the 90 days ended Monday. For Bally, also based in Las Vegas, the deal would be its biggest acquisition to date, according to Standard & Poor’s Capital IQ data.

“Like SHFL, Bally focuses on creating both entertaining player experiences through high-performing content and state-of-the-art technological solutions to increase productivity on the casino floor,” Gavin Isaacs, SHFL’s chief executive, said in a statement. “United, we become a larger, stronger organization that we believe will best position the company for future growth.”

Macquarie Capital and the law firm Skadden, Arps, Slate, Meagher & Flom advised SHFL.

Goldman Sachs and Groton Partners were financial advisers to Bally. Gibson, Dunn & Crutcherserved as the legal adviser.

Bally has obtained committed financing to complete the acquisition from Wells Fargo, JPMorgan Chase, Bank of America Merrill Lynch, Union Bank and Goldman.

Morning Agenda: Strength at Goldman

Goldman Sachs posted second-quarter profit on Tuesday that was twice what the bank reported in the period a year earlier. The profit of $1.93 billion, or $3.70 a share, was well ahead of analysts’ expectations of $2.83 a share, according to Thomson Reuters. Revenue rose to $8.6 billion from $6.6 billion in the year-ago period. “The firm’s performance was solid, especially in the context of mixed economic sentiment during the quarter,” Goldman’s chairman and chief executive, Lloyd C. Blankfein, said in a statement. A conference call to discuss the results is being held at 9:30 a.m.

LEGAL FIREPOWER IN TOURRE TRIAL  |  The lawyer Sean Coffey was known five years ago as Wall Street’s Public Enemy No. 1, having extracted billions from big banks in the wake of WorldCom’s collapse. Today, his role is reversed. Mr. Coffey is defending a former Goldman Sachs trader, Fabrice Tourre, in a trial that puts a spotlight on a tightknit network of legal players, Ben Protess, Susanne Craig and Michael J. de la Merced report in DealBook. The Securities and Exchange Commission’s civil case against Mr. Tourre went to trial on Monday in a federal courthouse in Lower Manhattan.

DealBook writes: “Mr. Coffey’s co-counsel is Pamela Chepiga, a former federal prosecutor who once played basketball with another diminutive lawyer, Mary Jo White, now the chairwoman of the S.E.C. The defense team is facing off against the head of the S.E.C.’s trial unit, Matthew T. Martens, who typically supervises cases but has never before led a jury trial at the S.E.C. (He is a friend of Mr. Coffey from private practice, though Mr. Martens temporarily unfriended Mr. Coffey on Facebook as a precautionary measure during the trial.) Rounding out the roster, the two sides will argue before Judge Katherine B. Forrest, a longtime corporate lawyer and relative newcomer to the bench who will face her biggest securities trial yet.”

“The convergence of such prominent lawyers exemplifies the insular world of the securities bar â€" and the revolving door its members often pass through on their way back and forth between government and private practice. It also underscores the importance of a trial in which Mr. Tourre is fighting a possible ban from the securities industry, and the S.E.C. is seeking a defining victory in its uneven campaign to punish those at the center of the crisis.”

Lawyers on both sides were asked to keep the legal and financial jargon to a minimum. “Mere mortals don’t know what a trading desk is,” the judge said. But as the trial opened, both sides dove into descriptions of residential mortgage-backed securities and credit-default swaps.

WALL STREET’S CULTURE OF GREED  |  A new report on Wall Street insiders about ethical conduct, to be released on Tuesday, suggests that big banks’ high-minded words about ethics and integrity may largely be lip service, Andrew Ross Sorkin writes in the DealBook column. Of 250 industry insiders from dozens of financial companies who responded to questions, 23 percent said “they had observed or had firsthand knowledge of wrongdoing in the workplace.” In addition, 24 percent said they would “engage in insider trading to make $10 million if they could get away with it.”

Mr. Sorkin writes: “As we approach the fifth anniversary of the onset of the financial crisis this September, it appears memories are shorter than ever. If the report is accurate, the insidious culture of greed is back â€" or maybe it never left.”

ON THE AGENDA  |  Johnson & Johnson and Coca-Cola report earnings on Tuesday morning. Yahoo reports earnings after the market closes. The Consumer Price Index for June is out at 8:30 a.m. Data on industrial production in June appears at 9:15 a.m. Mohamed El-Erian, chief executive of Pimco, is on CNBC at 8:30 a.m.

HERBERT ALLISON DIES AT 69  | 
Herbert M. Allison Jr., a former president of Merrill Lynch and chief executive of Fannie Mae who later ran the United States government’s bank bailout program, died on Sunday at his home in Westport, Conn., The New York Times reports. He was 69. His son Andrew said the cause was possibly a heart attack.

“I would say that he was an independent and pragmatic thinker,” Andrew Allison said. “He worked with people from different parts of the political spectrum because he was interested in first and foremost serving the nation and its interests.” Mr. Allison, who served in a number of roles in the private and public sector and as a political appointee under both Presidents Obama and George W. Bush, began his financial services career at Merrill, working his way up during his 28 years there. While at Merrill, he helped coordinate the group of banks that bailed out the hedge fund Long-Term Capital Management in 1998.

Mergers & Acquisitions »

T. Rowe Price Reiterates Opposition to Dell Buyout  |  A major investor in Dell, T. Rowe Price, said ahead of a shareholder vote on Thursday that it believed “the proposed buyout does not reflect the value of Dell,” Bloomberg News reports. BLOOMBERG NEWS

Baidu to Pay $1.9 Billion for Chinese App Store Operator  |  Baidu, China’s largest search engine company, said on Tuesday that it had reached a preliminary deal to acquire 91 Wireless, a leading mobile app developer and app store operator in China. DealBook »

VMware Sells Zimbra Amid Shift in Strategy  |  VMware is selling Zimbra, a provider of corporate e-mail and collaboration software, to Telligent, which makes social software for businesses. DealBook »

AT&T’s Defensive Play  |  AT&T’s deal for Leap Wireless “may be more of a jab at T-Mobile than a boost to AT&T,” The Wall Street Journal’s Heard on the Street column writes. WALL STREET JOURNAL

Tokyo Exchange Completes Merger With Osaka Rival  | 
BLOOMBERG NEWS

INVESTMENT BANKING »

Barclays Hires a JPMorgan Executive as Its Next C.F.O.  |  Tushar Morzaria, the chief financial officer of corporate and investment banking at JPMorgan Chase, will join Barclays in the autumn. DealBook »

Strauss-Kahn Re-emerges in Finance, in Russia  |  Dominique Strauss-Kahn, a former chief of the International Monetary Fund whose career unraveled in a series of sex scandals, was named a board member of a banking subsidiary of Rosneft. DealBook »

Growth in Emerging Markets Lifts Citigroup’s Profit by 42%, Topping Expectations  |  Citigroup’s earnings swelled 42 percent in the second quarter, handily beating expectations, as the sprawling bank worked to cut costs and expand its international lending operations. DealBook »

R.B.S. Said to Seek Buyer for Education Unit  |  The Royal Bank of Scotland “is studying the sale of a unit that manages 11 Australian schools, said a person with knowledge of the matter,” Bloomberg News reports. BLOOMBERG NEWS

PRIVATE EQUITY »

Billabong Secures $364 Million in Financing  |  After failing to strike a takeover deal with private equity firms last month, the Australian surfing apparel company said on Tuesday that some of those same firms would help it arrange short-term financing to pay down debts and finance its working capital needs. DealBook »

First Data to Suspend 401(k) Contributions  |  The credit card processing company First Data, which is owned by the private equity firm K.K.R., plans to suspend 401(k) contributions for employees and replace cash bonuses with stock, The Wall Street Journal reports. The company, which is trying to return to profitability, recently hired the longtime JPMorgan executive Frank Bisignano to be chief executive. WALL STREET JOURNAL

Generali Said to Be Selling Private Equity Fund Stakes to Lexington  |  The holdings in the funds were valued at almost 500 million euros ($648 million), Bloomberg News reports. BLOOMBERG NEWS

HEDGE FUNDS »

Hong Kong Brings Civil Case Against Tiger Asia  |  The Financial Times reports: “Hong Kong’s market regulator has abandoned the chance to pursue a criminal case against U.S.-based hedge fund Tiger Asia Management by launching formal civil proceedings on market abuse allegations from almost four years ago.” FINANCIAL TIMES

I.P.O./OFFERINGS »

After Pork Deal, Plans for a Hong Kong I.P.O.  |  Reuters reports: “China’s Shuanghui International Holdings, which has agreed to buy the U.S. pork producer Smithfield Foods Inc. for $4.7 billion, plans to list the combined company in Hong Kong after completing the takeover, people with knowledge of the matter told Reuters.” REUTERS

Third Point Reinsurance Files for I.P.O.  |  Third Point Reinsurance, a reinsurer based in Bermuda that was founded by the hedge fund manager Daniel S. Loeb, has filed to go public. It plans to list its shares on the New York Stock Exchange under the ticker symbol TPRE. DealBook »

VENTURE CAPITAL »

Airbnb Said to Shift Strategy Abroad  |  The start-up Airbnb, which helps people rent out their rooms, “has recently slowed down hiring in its international operation, according to several people with direct knowledge of the matter,” The Wall Street Journal reports. WALL STREET JOURNAL

LEGAL/REGULATORY »

China Says Glaxo Used Travel Firms for Bribery  |  Authorities in China said they had uncovered a conspiracy involving tens of millions of dollars, directed by senior executives at the British drug giant GlaxoSmithKline, The New York Times reports. NEW YORK TIMES

Insider Traders Should Be Ready to Do Hard Time  |  Two recent decisions by appeals courts have upheld the discretion of judges to mete out long sentences for insider trading, even if this was not the common practice in similar cases, Peter J. Henning writes in the White Collar Watch column. DealBook »

Public-Private Partnerships Could Be a Lifeline for Cities  |  Municipalities can gain much needed cash and operating efficiency by contracting with private equity investors to run a public service or utility, writes Kent Rowey, a partner at Allen & Overy in New York. The investors make a large upfront payment and receive a concession to operate the service. DealBook »

Looking Past G.D.P. to the Changes in China Ahead  |  It is now difficult for even the most bullish of China analysts to argue that the economy is not in very difficult straits, Bill Bishop writes in the China Insider column. DealBook »

Report Finds Flaws in S.E.C.’s Vetting of Contractors  |  The Securities and Exchange Commission “failed to properly investigate the possible criminal backgrounds of up to 70 contractors, including one who later assaulted his girlfriend, the agency’s watchdog found in a previously unreleased investigative report,” Reuters reports. REUTERS

Britain Charges 2 Former Brokers in Libor Inquiry  |  Two former brokers at RP Martin Holdings, Terry J. Farr and James A. Gilmour, were charged with conspiracy to defraud related to an investigation into the manipulation of benchmark interest rates. DealBook »

Banks Dodge a Bullet With Deal on Swaps  |  Global banks will now have the choice of trading and clearing trans-Atlantic swaps in either Europe or the United States, Dominic Elliott and George Hay of Reuters Breakingviews write. REUTERS BREAKINGVIEWS

Quarterly Profit Doubles at Goldman Sachs

Goldman Sachs reported on Tuesday that its second-quarter profit doubled compared with results in the period a year earlier.

Net income was $1.93 billion, or $3.70 a share, compared with $962 million, or $1.78 a share, in the period a year earlier. It was also well ahead of analysts’ expectations of $2.83 a share, according to Thomson Reuters.

The firm made this profit on revenue of $8.6 million, compared with $6.6 billion a year ago.

“The firm’s performance was solid, especially in the context of mixed economic sentiment during the quarter,” Goldman’s chairman and chief executive, Lloyd C. Blankfein, said in a press release.

The quarter was dominated by a sudden - and sharp - rise in interest rates after the Federal Reserve indicated that it may wind down its big bond purchase program that has helped the economy recovery from the financial crisis. Goldman is not a big player in originating mortgages like rival JPMorgan Chase, but it does trade mortgage products.

The rates move was felt most in Goldman’s fixed-income, or bond, department. Net revenue in the unit was $2.46 billion, up 12 percent compared with results in the period a year earlier, reflecting what the company said was significantly higher net revenues in currencies, credit products and commodities. Still, these increases were offset in part by significantly lower revenue in mortgages and interest rate products, the company said.

Quarterly Profit Doubles at Goldman Sachs

Goldman Sachs reported on Tuesday that its second-quarter profit doubled compared with results in the period a year earlier.

Net income was $1.93 billion, or $3.70 a share, compared with $962 million, or $1.78 a share, in the period a year earlier. It was also well ahead of analysts’ expectations of $2.83 a share, according to Thomson Reuters.

The firm made this profit on revenue of $8.6 million, compared with $6.6 billion a year ago.

“The firm’s performance was solid, especially in the context of mixed economic sentiment during the quarter,” Goldman’s chairman and chief executive, Lloyd C. Blankfein, said in a press release.

The quarter was dominated by a sudden - and sharp - rise in interest rates after the Federal Reserve indicated that it may wind down its big bond purchase program that has helped the economy recovery from the financial crisis. Goldman is not a big player in originating mortgages like rival JPMorgan Chase, but it does trade mortgage products.

The rates move was felt most in Goldman’s fixed-income, or bond, department. Net revenue in the unit was $2.46 billion, up 12 percent compared with results in the period a year earlier, reflecting what the company said was significantly higher net revenues in currencies, credit products and commodities. Still, these increases were offset in part by significantly lower revenue in mortgages and interest rate products, the company said.

Billabong Secures $364 Million in Financing

HONG KONGâ€"Billabong International appears to have avoided a wipeout.

On Tuesday, the troubled Australian surf apparel company said it would replace its chief executive and had secured a financing package from private equity investors worth 395 million Australian dollars, or about $364 million, to help fund its working capital needs and pay down debt.

Billabong is getting a boost from Altamont Capital Partners â€" one of the two private equity companies that last month decided not to proceed with a joint takeover bid that had valued Billabong at about 290 million dollars.

Instead, Billabong said Tuesday it would secure bridge financing of 325 million dollars at a 12 percent annual interest rate, to be arranged by Altamont and GSO Capital Partners, the credit arm of Blackstone Group. In addition, the Billabong company will sell DaKine, its backpack and outerwear brand, to Altamont for 70 million dollars.

As part of the deal, Billabong will issue share options to Altamont and GSO representing a 15 percent stake. That stake may be increased to as much as 40 percent in the future as part of a long- term financing package that would include a convertible note and also a revolving credit line issued by GE Capital.

Billabong said it would replace its chief executive, Launa Inman, who has been in the job for about a year, with Scott Olivet, a former chief executive of Oakley, the sunglasses maker.

‘‘The changes being announced today provide the company with a stable platform and the necessary working capital to continue to address the challenges it faces,’’ Billabong’s chairman, Ian Pollard, said in a news release Tuesday. ‘‘We had highlighted the company’s debt issues previously and it was imperative to deliver a refinancing that retained an opportunity for shareholders to participate in the future of the company.’’

Founded in 1973 by Gordon Merchant, a surfer who started out making board shorts in the kitchen of his home on the Australian Gold Coast, Billabong has found itself swimming against the current in recent years as sales plunged and its market value shrank.

Only 16 months ago, Mr. Merchant snubbed a takeover offer from TPG Capital that valued Billabong at 851.4 million dollars, or about 3.30 dollars per share, saying then that even an offer of 4 dollars per share ‘‘would still represent a discount on the true value of Billabong.’’

Billabong’s shares have fallen 76 percent in the past year and last changed hands at 25 Australian cents apiece. They were suspended from trading on Tuesday pending the financing announcement.

Barclays Hires a JPMorgan Executive as Its Next C.F.O.

LONDON - Barclays said on Tuesday that it had named Tushar Morzaria, a JPMorgan Chase executive, as chief financial officer. He succeeds Christopher G. Lucas, who announced his plan to retire earlier this year.

Mr. Morzaria, 44, is the chief financial officer of corporate and investment banking at JPMorgan and will join Barclays in the autumn. He will become a member of the bank’s executive board at the beginning of next year and will formally take over from Mr. Lucas on Feb. 28.

Mr. Morzaria is joining Barclays at a time when its chief executive, Antony P. Jenkins, is seeking to restore the bank’s reputation and change its culture after some missteps that included a role in the rigging of a benchmark rate and mistakes in selling certain insurance products. Mr. Jenkins also pledged to improve the bank’s profitability by scaling back certain operations and cutting costs.

Mr. Jenkins said Mr. Morzaria “is an accomplished professional with first-class strategic financial management experience built up over 20 years, including the last four as a key leader in JPMorgan Chase’s corporate and investment bank.”

Mr. Morzaria was born in Uganda and moved to Britain as a child in 1971. He has a British passport and is to move to London from New York to join Barclays, the bank said. Apart from JPMorgan, where he worked a total of 15 years, he also worked at Credit Suisse and SG Warburg.

“I am excited at the opportunity to be part of the leadership team which will deliver on the promised change in performance and culture,” Mr. Morzaria said in a statement.

Barclays plans to pay Mr. Morzaria an annual salary of £800,000 ($1.2 million), Barclays said. He will also be eligible for an annual bonus of no more than 250 percent of his salary and a long-term incentive plan of up to 400 percent of the salary.