S.E.C. Tries to Use Trader’s Colleague at Goldman to Bolster Case

Jonathan Egol and Fabrice Tourre were close colleagues on Wall Street, a team of traders who worked side by side on a Goldman Sachs mortgage desk in the lead-up to the financial crisis.

On Thursday, that relationship came under the spotlight as Mr. Egol took the witness stand in the civil trial of Mr. Tourre, a 34-year-old Frenchman accused of misleading investors about a mortgage security that ultimately failed.

The case, one of the most prominent actions stemming from the 2008 crisis, centers on the claim that Mr. Tourre and Goldman failed to warn investors that a hedge fund run by the billionaire John A. Paulson helped construct the mortgage security and then bet against it. Mr. Tourre’s lawyers argue that the investors were sophisticated and helped structure the deal.

The Securities and Exchange Commission, which brought the charges in 2010, used Mr. Egol’s appearance as an opportunity to introduce a series of e-mails and documents that could damage Mr. Tourre’s defense. The e-mails, many of which were dispatches between the traders, show that Mr. Tourre told colleagues at Goldman that the mortgage security was “selected by ACA/Paulson,” referring to Mr. Paulson’s hedge fund and ACA Management, the independent company Goldman hired to choose the mortgages in the deal.

Matthew T. Martens, who is leading the S.E.C.’s case, noted that Goldman produced reams of disclosures to investors, all of which emphasized ACA’s role and omitted Mr. Paulson’s. “There’s no disclosure?” Mr. Martens queried, his voice rising.

“I am not aware of any,” Mr. Egol, who was senior to Mr. Tourre at the time and is now a managing director at Goldman, conceded.

The revelations, partly rebutted when Mr. Tourre’s lawyers cross-examined Mr. Egol, steadied the S.E.C.’s case after a crucial government witness did his best to unravel it. The witness, Paolo Pellegrini, an executive at Mr. Paulson’s hedge fund, suddenly retracted his earlier statements that investors were unaware the hedge fund was betting against the deal. He said on the witness stand that he had been “scared” and pressured by S.E.C. officials.

While it is unclear whether the jury will find Mr. Pellegrini believable, his change of heart is potentially damaging to the S.E.C. Hours after his testimony, the agency shuffled the order of its witness list to move up the testimony of Gail Kreitman, a former Goldman employee, who could cause problems for the defense. Ms. Kreitman may take the stand as soon as Friday, though Mr. Egol’s testimony is not yet done.

Outside the presence of the jury, Sean Coffey, a lawyer for Mr. Tourre, briefly sparred with Mr. Martens. “I assume they’re doing it based on what happened in court yesterday,” Mr. Coffey said of the change in the witness lineup. Later, in response to another barb, Mr. Martens said: “I don’t think the sarcasm is necessary.”

When Mr. Egol took the stand, his gentle demeanor presented a contrast to Mr. Pellegrini, an imposing figure with an acerbic tongue.

Yet, when the S.E.C. first pursued the case involving the soured mortgage deal, the agency warned that it might charge Mr. Egol. It reversed course to sue only Goldman and Mr. Tourre. Goldman ultimately settled the case, paying what was then a record $550 million penalty without admitting or denying guilt.

Mr. Egol, whose honey-brown hair and beard project an avuncular presence, spent much of his testimony explaining the minutiae of mortgage securities to the jury. Still, the jurors struggled to stay awake at times, and at least three nodded off during an exchange between Mr. Egol and Mr. Coffey that involved terms like “intermediation,” “counterparty risk” and “monoline insurers.”

For its part, the S.E.C. tried to use Mr. Egol to bolster its case. In one e-mail the S.E.C. presented to the jury, Mr. Tourre referred to Mr. Paulson’s hedge fund as the “sponsor” of the mortgage security, a label that might imply Mr. Paulson was betting for the deal, not against it. Mr. Paulson’s fund made $1 billion betting against the security.

“That’s not how I would customarily have used the term,” Mr. Egol said, supporting the S.E.C.’s argument.

Mr. Martens also walked Mr. Egol through Goldman’s disclosures to investors. In all of the documents â€" including a term sheet and a 66-page marketing book â€" Goldman said the portfolio was “selected by ACA,” without reference to Paulson.

But under cross-examination, Mr. Egol suggested that it was not industry practice to disclose Mr. Paulson’s involvement to investors, and there was no “regulatory” requirement to do so.

Mr. Egol also testified on cross-examination that the German bank IKB Deutsche Industriebank, a main investor in the transaction, knew the contents of the deal and had a say in what went into it, a victory for Mr. Tourre’s defense.

During cross-examination, Mr. Coffey sought to clarify what Mr. Tourre said in an e-mail when he called the mortgage security “infamous.” Mr. Egol testified that his desk lost about $90 million in 2007 because of its position in the trade with Mr. Paulson, offering an alternate theory to the jury of why Mr. Tourre used the word.

If found liable, Mr. Tourre faces fines and could be barred from the securities industry.

As for his relationship with Mr. Egol, the two had not seen each other since 2011. It was then, Mr. Egol said, that they “happened” to bump into each other at a restaurant in New York.

Big banks, Flooded in Profits, Fear Flurry of New Safeguards

The nation’s six largest banks reported $23 billion in profits in the second quarter, but they could end up victims of their own success.

In recent weeks, the Treasury Department, senior regulators and members of Congress have stepped up efforts intended to make the largest banks safer. The banks have warned that more regulation could undermine their ability to compete and curtail the amount of money they have to lend, but the strong earnings that came out over the last week could undercut their argument.

The most pressing concern for banks is a relatively tough new rule that regulators proposed last week that could force banks to build up more capital, the financial buffer they maintain to absorb losses. But the banks did not demonstrate any difficulty in meeting the proposed rules, and the banks now appear to have fewer allies in Washington than at any time since the financial crisis.

This was highlighted on Wednesday when the Treasury secretary, Jacob J. Lew, effectively issued an ultimatum to Wall Street, calling for the swift adoption of rules introduced through the Dodd-Frank financial overhaul law, which Congress passed in 2010. Mr. Lew also said that he might be open to stricter measures if enough had not been done to remove the threat that big banks can pose to the wider economy.

“If we get to the end of this year, and cannot, with an honest, straight face, say that we’ve ended ‘too big to fail,’ we’re going to have to look at other options because the policy of Dodd-Frank and the policy of the administration is to end ‘too big to fail,’ ” Mr. Lew said.

“This is maybe the strongest admission I’ve heard from the administration that we must act further to end ‘too big to fail,’ ” Senator David Vitter, Republican of Louisiana, said in a statement. Along with Senator Sherrod Brown, Democrat of Ohio, Senator Vitter introduced a bill earlier this year that would sharply increase capital levels at the biggest banks. In Congress on Thursday, Ben S. Bernanke, the Federal Reserve chairman, echoed Mr. Lewâ™s remarks. He said that if the measures already planned did not remove the risks posed by large banks, “additional steps would be appropriate.”

Still, some analysts remain skeptical that the Fed and the Treasury would really lend their weight to the sort of aggressive measures some lawmakers are contemplating. The recent comments may be an attempt to gain some political benefit from looking tough on the banks. And the remarks may be aimed at reducing any momentum that the more draconian pieces of bank legislation are gaining in the Senate.

“I wonder how much of this is a serious policy change and how much is positioning by the administration to take on a more populist mode going into 2014,” Nolan McCarty, a professor of politics and public affairs at Princeton University, said. “It’s a little bit surprising that, three years after Dodd-Frank and five years after the financial crisis, people are concerned not enough has been done.”

Still, the stronger words from government officials could shift the balance of power away from the banking industry.

“I sense a sea change in this,” Sheila C. Bair, a former chairwoman of the Federal Deposit Insurance Corporation, a primary bank regulator, said. “It’s not moving with the banks, it’s moving against them.”

The resurgence in bank profits appears to have been an important factor in persuading regulators to do more. The earnings revival did not take place just at the banks that emerged from the crisis in a position of relative strength, like JPMorgan Chase and Wells Fargo. This week, both Bank of America and Citigroup, which faltered badly after the financial crisis, reported healthy proits. The stocks of both banks have nearly doubled over the last 12 months, highlighting that investors’ faith in the behemoths is also returning.

“The regulators are doing this because they can,” Michael Mayo, a banking analyst at CLSA, said. “And they can at this time of relative stability.”

The six largest banks now dominate the industry, accounting for more than half the sector’s assets. Since the crisis, this has helped them make profit from mortgages and credit card loans, as well as Wall Street activities, like trading securities and underwriting deals. Their second-quarter profits were up 40 percent compared with those in the period a year earlier. Over the last 12 months, their combined profits were more than $70 billion. Over that period, Morgan Stanley, Goldman Sachs and JPMorgan’s investment bank, all big presences on Wall Street, paid compensation of $41 billion.

Regulations planned or put in place in the crisis may also have helped banks by making them more resilient to shocks. The banks have assets on their balance sheets that helped them through the recent rout in the bond market without big losses.

“You had major dislocations in currencies, commodities and interest rates and so far the industry has passed with flying colors,” Mr. Mayo said.

Still, Mr. Mayo and others question how healthy the banks are. While profits are up, and trading profits are buoyant, the pace of lending is not picking up. “Loans are down year to date. That’s the issue at the moment,” he said. “This is not the stuff robust recoveries are made of.”

The industry contends that, with economic growth still relatively weak, more regulation of banks would be wrong.

“You have to be cautious about what layering on additional things can do to our prospects for economic growth, job creation and credit availability, in light of this economic fragility,” said Robert S. Nichols, president of the Financial Services Forum, an industry group that represents large banks. “We have to have more robust growth to get Americans back to work.”

While banks have made big profits under stiffer rules since the crisis, some analysts warn that adding more to the overhaul could really start to hurt.

“We’ve reached a point now where we have a balance,” John R. Dearie, who oversees policy at the Financial Services Forum, said. “We have a fortress balance sheet banking system. Our concern is that we don’t overdo it.”

Still, some banking experts think the banks are bluffing when they say more regulation could hamper lending. “They can’t see that it is in their long-term interests to have a credible regulatory process,” Ms. Bair said.

JPMorgan Executive May Escape Penalty

Even as the nation’s top energy regulator is poised to extract a record settlement from JPMorgan Chase over accusations that it manipulated power markets, the agency is expected to spare a top bank lieutenant who federal investigators initially contended made “false and misleading statements under oath,” according to people briefed on the matter.

Blythe Masters, a seminal Wall Street figure who is known for developing exotic financial instruments, emerged this spring at the center of an investigation by the Federal Energy Regulatory Commission into accusations of illegal trading in the California and Michigan electricity markets.

The regulator found that JPMorgan designed trading “schemes” that converted “money-losing power plants into powerful profit centers,” a commission document said.

While the commission and JPMorgan are negotiating a settlement for about $500 million, the people briefed on the matter said, Ms. Masters is not expected to face a separate action. The move signals a pivot for the agency, which has been increasingly flexing its enforcement muscle, according to the people briefed on the matter, who spoke on the condition they not be named.

Months earlier, investigators planned to recommend that the regulator find Ms. Masters, who holds a powerful position within JPMorgan as the head of its commodities business, “individually liable.” But as the investigation progressed, these people said, top energy regulatory officials have been leaning toward not pursuing any civil charges against Ms. Masters.

The decision â€" which could change, according to the people briefed on the matter â€" would mean that Ms. Masters would escape the agency’s sweeping crackdown against big banks. After gaining enforcement authority because of a change in 2005 that allowed it to impose fines of $1 million a day for each violation, the energy regulator has taken a tougher stance with Wall Street.

Still, the regulator’s claims against JPMorgan, which came to light this spring in a confidential commission document reviewed by The New York Times, have turned a harsh spotlight on Ms. Masters. In the 70-page document, sent to JPMorgan in March, the regulator’s enforcement staff said it intended to recommend that the commission pursue a civil case against JPMorgan in connection with the trading in California and Michigan. Since the regulator’s findings surfaced, JPMorgan has defended Ms. Masters and the traders, disputing that “Blythe Masters or any employee lied or acted inappropriately in this matter.”

As JPMorgan began to negotiate a settlement with the regulator in recent weeks, Ms. Masters, too, vociferously defended the trading activity, asserting that the bank did nothing wrong, according to three people briefed on the matter. That position, the people said, has been echoed throughout JPMorgan.

Within Wall Street, Ms. Masters is widely considered a pioneer for her use of credit derivatives, the complex financial products that played a central role in the 2008 financial crisis. Rising through the ranks of JPMorgan â€" she was the youngest managing director at 28 â€" Ms. Masters became one of the most powerful executives on Wall Street, propelled by a vision that the products could radically remake the banking industry.

Ms. Masters formed close ties with Jamie Dimon, the bank’s chief executive, who has moved to shore up support for her, according to people close to the bank. The two were bound by their belief that the commodities business was critical to JPMorgan’s growth.

In her role as commodities chief, according to the March document, Ms. Masters oversaw traders in Houston who were in a vexing position: selling electricity from power plants in California and Michigan was a losing endeavor. The rights to sell the energy, which JPMorgan inherited after its 2008 takeover of Bear Stearns, relied on “inefficient,” antiquated technology. Simply put, the document said, it was an “unprofitable asset.” Particularly troubling, the document said, was a string of Southern California power plants that were built in the 1950s and 1960s, ultimately making them “less efficient than most of their competitors” because they siphoned more fuel for the energy they produced.

Known for her “highly detail-oriented” style, Ms. Masters “kept close tabs on the California and Michigan power plants,” asking that she be directly briefed by her employees about “many of the bidding schemes under investigation,” agency investigators found in the March document. From September 2010 to June 2011, those traders devised eight separate “schemes” to sell energy at prices “calculated to falsely appear attractive” to state energy authorities.

As the bidding was under way, the investigators found, Ms. Masters received regular PowerPoint presentations and e-mails that referred to the strategies. In one January 2011 PowerPoint reviewed by Ms. Masters, the strategy, which promised to transform the plants losing money into profitable operations, appeared 51 times, according to the March regulatory document.

JPMorgan has argued that its trading was legal. In an earlier statement, a bank spokeswoman said the “bidding strategies were in full compliance with applicable rules.”

But the energy investigators disagreed, the document shows. Duped by the manipulation, the investigators said, authorities in California and Michigan gave roughly $83 million in “excessive” payments to JPMorgan.

When JPMorgan traders worked to systemically “cover up” the strategy, investigators initially found, Ms. Masters aided the obfuscation. Ms. Masters “personally participated in JPMorgan’s efforts to block” the state authorities “from understanding the reasons behind JPMorgan’s bidding schemes,” the document said.

After California authorities began to raise objections to the bank’s trading strategy, the investigators found, JPMorgan worked to cloak the trading from authorities by excluding critical profit and loss statements.

In April 2011, Ms. Masters initiated a conference call with top JPMorgan executives to brief them on “a reputational risk we are running in California,” according to the document.

The investigators also cited an April 2011 e-mail in which Ms. Masters, overriding the bank’s compliance department, ordered a “rewrite” of an internal document that questioned whether JPMorgan ran afoul of the law. The revised wording, referring to the commission, said that “JPMorgan does not believe that it violated FERC’s policies.”

One of the central disputes between the regulator and Ms. Masters was the extent to which she knew about the bidding strategies. Initially, the regulators took aim at Ms. Masters, whom they described as highly intelligent. While Ms. Masters “saw many presentations” about the strategies, she “falsely testified that she did not understand how the scheme made money, beyond a generic understanding that it was designed to maximize all sources of revenue,” investigators found.

JPMorgan’s response to the March document, which exceeded 100 pages, could ultimately modulate the regulator’s decision.

Apache to Sell Gulf of Mexico Shelf Unit for $3.75 Billion

The Apache Corporation agreed to sell its business in the Gulf of Mexico’s shelf to a portfolio company owned by the private equity firm Riverstone Energy for about $3.75 billion.

The buyer, Riverstone’s Fieldwood Energy, is buying a business with 239 millions of barrel equivalent in reserves at the end of last year, more than half of which is oil and 75 percent of which is already developed.

The deal is the biggest sale on record by Apache, which has spent $15 billion in acquisitions over the past three years alone, according to Standard & Poor’s Capital IQ. In a statement, the company said that the deal is meant to help rebalance its portfolio, though it will also offload about $1.5 billion worth of asset retirement obligations.

Apache will retain a 50 percent stake in all exploration blocks in the assets, and it will work with the buyer, Fieldwood Energy, in developing deep-water sites in the holdings.

“At the end of this process, we expect Apache to have the right mix of assets to generate strong returns, drive more predictable production growth, and create shareholder value,” G. Steven Farris, Apache’s chairman and chief executive, said in a statement.

The deal is one of the biggest takeovers associated with Riverstone alone, according to Capital IQ, although the firm has partnered with others on some of the biggest energy-related private equity firms in history.

“We have had a long-standing and strong relationship with Apache’s executive management and have been great admirers of their entire organization and their Gulf of Mexico operations for many years,” Pierre Lapeyre and David Leuschen, Riverstone’s co-founders, said in a statement.

Apache was advised by Goldman Sachs and the law firm Bracewell & Giuliani.

Fieldwood is receiving financing from Citigroup, JPMorgan Chase, Deutsche Bank, Bank of America Merrill Lynch and Goldman. It received legal counsel from Vinson & Elkins and Simpson Thacher & Bartlett.

Jury Largely Sides With Bank in Madoff-Related Case

Westport National Bank and its parent company, Connecticut Community Bank, were not liable for the losses of investors in Bernard Madoff’s vast Ponzi scheme in its role as a custodial bank, a jury found on Wednesday.

After 14 hours of deliberation, the jury said that the bank was not a fiduciary, and thus owed no fiduciary duty to two elderly Florida investors, Audrey Short and Faye Albert.

The jury had finished hearing eight days of evidence last month in a case before Judge Vanessa L. Bryant of the United States District Court for the District of Connecticut. The case had consolidated three similar lawsuits against the bank. Two of those cases settled before the jury began its deliberations.
The jury, however, did evaluate the bank’s custodial duties in a case brought by the two Florida investors, but sent a mixed message.

The jury ruled that the bank breached its custodian agreements when it calculated its fees based on the Madoff firm’s reports instead of on the actual assets it held. It also said that the plaintiffs had proved that the bank breached its agreements when it failed to issue accurate annual statements and failed to audit or verify the existence and value of the assets.

But the six jurors determined that neither plaintiff had proved that she suffered any economic loss as a result of the actions.

“They found we failed to maintain accurate records, but they found that nothing the bank did caused any harm,” Tracy A. Miner, one of the bank’s lawyers, said in a telephone interview.

Steve Gard, a lawyer for Mrs. Short and Mrs. Albert, said that he planned to file a motion within two weeks asking for a judgment in the investors’ favor because the jurors findings “are inconsistent.”

Mr. Gard said that the jurors determined that his clients had not suffered a loss as a result of the bank’s inadequate recordkeeping before getting a chance to hear all the evidence.

During the trial, the bank stressed that its contracts with the plaintiffs only obligated it to perform ministerial duties. Lawyers for the bank also made much of the fact that financial regulators, including the Securities and Exchange Commission, had not been able to catch Mr. Madoff, so it would be unrealistic to expect a small Connecticut bank to be able to do so.

For their part, the plaintiffs emphasized that there were cautious investors who stayed away from Mr. Madoff’s firm because of the lack of transparency in his operation.

The case had been watched for its implications on the duties of custodial banks. Investors sometimes assume that a custodian actually takes custody of their assets, but the bank’s obligations can vary widely depending upon how its contract is worded.

Custodial relationships become problematic “when there is ambiguity about the bank’s duties and the customer expects more than the bank thought it had agreed to” said Kathy Bazoian Phelps, a Los Angeles-based lawyer and co-author of “The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.”

The interpretation of contractual obligations was “exactly where the trouble lies” in the Connecticut Community Bank case, she said.

Disputes over the obligations of custodians will only get more frequent and more heated, said Edward Siedle, a former S.E.C. lawyer who investigates pension fund abuses.

Investors are increasingly setting up so-called self-directed I.R.A.’s that invest in hedge funds and real estate, Mr. Siedle said. Each of those accounts must be kept with a custodian, which may have no obligation to do more than keep records that it never verifies.

“The risks are getting greater than ever,” he said.

Pressure Is on Pepsi to Respond to Peltz’s Overtures

The investor Nelson Peltz just put an end to PepsiCo’s delay game. He went public on Wednesday with a $60 billion-plus plan to join together Pepsi’s salty nibbles with the sweet treats of Mondelez International, or alternatively, to carve up Pepsi, a $130 billion company.

Both ideas are Activism 101. Mr. Peltz, however, makes a sensible enough case that it puts the onus on Pepsi’s chief, Indra Nooyi, to make a strong defense.

The pressure has been building at Pepsi. Analysts have been arguing the merits of a breakup for a while. Earlier this year, Mr. Peltz, who leads Trian Fund Management, disclosed his stakes in both companies, which led to speculation he might try to push them together like when he urged Kraft’s takeover of Cadbury. Pepsi meekly dismissed the idea and plodded ahead with its “Power of One” campaign showcasing the synergies of soda and chips.

While the health merits of combining Pepsi’s Doritos and Mondelez’s Oreos may be indefensible, the financial logic is compelling. Mr. Peltz first takes aim at Pepsi’s lagging shareholder returns under Ms. Nooyi against rivals including Coca-Cola and Hershey, and its comparatively low investment in advertising as a percentage of sales. Buying Mondelez and then spinning off Pepsi’s beverages, he argues, would be the best way to turn things around.

Even ignoring Mr. Peltz’s case for $3 billion in revenue synergies, if 8 percent of the target’s sales could be hacked out in the form of cost savings it would amount to some $3 billion a year alone.

Citigroup analysts in March saw great value in a Pepsi-Mondelez deal assuming no synergies at all. Mr. Peltz also imagines an all-stock transaction with a 16 percent premium, giving shareholders of both companies the ability to share in any upside.

Other less-ambitious ideas would forget Mondelez and simply spin out all or parts of Pepsi’s drinks arm. These would be weaker options to Mr. Peltz’s mind but would still create at least twice as much value for Pepsi investors as sitting still. Though the analysis may resemble a Wall Street pitch book, Mr. Peltz also brings with him a calling card of success upending the food industry - including Wendy’s, Heinz and Kraft.

Pepsi has said it will provide a review of its North American beverages business next year. At this stage, it’ll have to serve up heartier fare.

Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Finra Scrutinizes High-Speed Trading Firms

Regulators are taking a closer look at whether high-frequency trading firms might represent a threat to the stability of financial markets.

The Financial Industry Regulatory Authority, an industry-financed regulator, sent out letters to 10 high-speed trading firms this week, asking them for more information about their trading programs and the steps they have in place to avert “market disruptions.”

The letter comes as regulators around the world are grappling with the role that high-speed trading firms have come to play over the last decade as they have grown to account for a majority of all trading in American stocks. These firms, which use high computers and infrastructure to take advantage of small discrepancies in trading prices, have also taken an increasing role in trading in other markets.

The letter sent out this week is focused primarily on the steps the firms take to test their programs, or algorithms, before they begin trading with them and the preparations they take to deal with unexpected trading problems. Regulators have been focused on these issues since one trading firm, Knight Capital, lost nearly $500 million, and nearly went bankrupt, after its trading programs went haywire last August.

The letter also asks about efforts to monitor market “manipulation.” Earlier this year, Finra said in an annual report that it concerned about high speed trading strategies that are “used for manipulative purposes.”

Finra Scrutinizes High-Speed Trading Firms

Regulators are taking a closer look at whether high-frequency trading firms might represent a threat to the stability of financial markets.

The Financial Industry Regulatory Authority, an industry-financed regulator, sent out letters to 10 high-speed trading firms this week, asking them for more information about their trading programs and the steps they have in place to avert “market disruptions.”

The letter comes as regulators around the world are grappling with the role that high-speed trading firms have come to play over the last decade as they have grown to account for a majority of all trading in American stocks. These firms, which use high computers and infrastructure to take advantage of small discrepancies in trading prices, have also taken an increasing role in trading in other markets.

The letter sent out this week is focused primarily on the steps the firms take to test their programs, or algorithms, before they begin trading with them and the preparations they take to deal with unexpected trading problems. Regulators have been focused on these issues since one trading firm, Knight Capital, lost nearly $500 million, and nearly went bankrupt, after its trading programs went haywire last August.

The letter also asks about efforts to monitor market “manipulation.” Earlier this year, Finra said in an annual report that it concerned about high speed trading strategies that are “used for manipulative purposes.”

How to Make Poison Pills Palatable

Eric Posner and Glen Weyl are professors at the University of Chicago, Mr. Posner in the law school and Mr. Weyl in the department of economics.

Last month, Rupert Murdoch's News Corporation divided into two entities and inserted shareholder rights plans, or “poison pills,” in their charters to shield them from hostile takeovers.

Shareholder activists are up in arms. The poison pill “is one more tool to entrench management,” one activist told The Financial Times when News Corp. first announced its plan. The problem, however, is not the existence of poison pills but their design: a more carefully designed poison pill would address activists' concerns while preventing abusive takeovers.

A poison pill deters takeovers typically by giving existing shareholders (including management) the right to buy and vote additional shares at reduced price when a takeover is initiated. It was invented in the 1980s in reaction to a wave of corporate takeovers. Managers disliked takeovers because they frequently lost their jobs in the resulting reorganization, and argued that takeovers disrupted a firm's operations, caused layoffs, and destroyed shareholder value. Shareholder activists replied that managers used poison pills to entrench their positions at shareholders' expense.

Because of widespread fears of “barbarians at the gates,” managers ultimately had their way. But given that both sides have advanced reasonable arguments, reform should aim not to eliminate poison pills but to redesign them to address both sets of concerns.

We propose a device that will advance just this goal. In our academic work, we have argued that a voting procedure called “quadratic vote buying” should be used to improve corporate governance. Under this procedure, shareholders pay for their votes, and can cast as many votes as they want at a price equal to the square of the number of votes they cast. The proposal is fairly radical and may take some time to implement. But a more modest version could be applied just to poison pills.

Under our approach, the corporate charter of a firm would provide that when an outside shareholder starts a takeover attempt, existing shareholders would have the right to buy votes for or against the takeover. The price that shareholders must pay is the square of the number of votes they cast, so one vote costs $1, two votes cost $4, and so on. Votes would be aggregated and then resolved by majority rule.

For example, if one shareholder buys four votes in favor of a takeover at cost of $16, and another buys five votes against the takeover at cost of $25, the takeover would be voted down (5-4). The funds would be paid into the corporate treasury, and hence ultimately distributed back to the shareholders albeit on a per-share basis, so if the shareholders each own one share, they receive $20.50 each.

Quadratic vote buying, or Q.V.B., aggregates shareholders' independent judgments as to the advisability of the merger, taking into account the level of intensity with which they care about the outcome. As a result, the takeover can take place only if it maximizes shareholder value.

Why does this work so well? The answer, as one of us (Glen) has proven in an academic paper, is that Q.V.B. forces the voter to pay a price per vote equal to the number of votes she buys, and therefore gives her an incentive to buy votes in proportion to her marginal benefit from influencing the takeover decision. This is economics jargon but the underlying intuition is easy to understand. Q.V.B., unlike ordinary voting, forces people to pay a lot if they care a lot about the takeover decision, and a little if they care only a little. This enables people with strong views to exert more influence on the outcome than people with weak views, but only if they compensate others at an increasingly high price that is commensurate with their greater influence over the outcome of the vote.

By contrast, if a takeover is put to a regular vote, outsiders can exploit the passivity of most shareholders to obtain a controlling stake and thereby to transfer resources from remaining shareholders to themselves.

Q.V.B. differs in detail rather than in kind from standard poison pills. Under News Corp.'s poison pill, when someone buys 15 percent of the company's voting shares, existing shareholders have the right to buy stock at half its existing price. Beyond the obvious arbitrariness of a 15 rather than 10 or 20 percent threshold, and half rather than a quarter or two-thirds price, this system has the unfortunate side effect of allowing existing managers to buy shares, and thus votes, more cheaply than the acquirers, and thereby block a takeover that benefits most shareholders.

This is why shareholder activists oppose poison pills. Under Q.V.B., such exploitation would be impossible because the managers would be forced to pay the same quadratic price as anyone else. And yet in the context of poison pills, where voting rules are already adjusted according to the corporate charter in order to fend off takeovers, Q.V.B. seems like a difference in degree rather than kind, and thus ought to be taken seriously by corporate boards.

An even simpler version of could also be used. Under what we have called “square root voting,” or S.R.V., every shareholder may cast a number of votes equal to the square root of the number of shares she owns. S.R.V. is functionally nearly identical to Q.V.B., but avoids the need to redistribute funds, and so is a less radical departure from ordinary corporate governance norms.

Q.V.B. and S.R.V. remove the toxins in poison pills without giving immunity to incompetent management. If management is good for the company, takeovers will be voted down. If not, takeovers will be approved. These devices would be an antidote to many of the woes of corporate governance.

Activist Peltz Urges Merger of PepsiCo and Mondelez

The activist investor Nelson Peltz said on Wednesday that he would seek a merger of PepsiCo and Mondelez International, going public with his plans after months of speculation.

Mr. Peltz, whose Trian Fund Management has quietly amassed a stake of more than $2.7 billion in the two companies, urged Pepsi to merge with Mondelez and then spin off its beverage business, creating a new snack food giant that would combine the Frito-Lay brands with Cadbury, Oreo and Nabisco.

Investors appeared receptive to the plan, which Mr. Peltz announced on Wednesday at the Delivering Alpha conference in Manhattan, sponsored by CNBC and Institutional Investor. Pepsi's stock was up about 0.5 percent in afternoon trading to above $84 a share, while shares of Mondelez, the snack business spun off by Kraft last year, rose more than 2.5 percent to above $30.

Mr. Peltz, who said he had been in discussions with Pepsi's management, proposed that Pepsi acquire Mondelez in an all-stock transaction worth $35 to $38 a share. Then, he said, he would like to see the company pay a dividend worth 20 percent of the market value before spinning off the beverage business.

“Pepsi is at a crossroads at this point in time,” Mr. Peltz said. “They've got a cash business, and they've got a growth business.”

A spokesman for Pepsi said in a statement, “We have a strong growth strategy and structure in place, and our results to date and returns to our shareholders prove that we are a high-performing company and our strategy is working.”

“We are confident in our ability to deliver long-term shareholder value as an integrated food and beverage company,” he added.

The proposed merger is among the most prominent activist campaigns waged by Mr. Peltz, an investor with years of experience in the food and beverage industry. His firm disclosed in April that it owned stakes in Pepsi and Mondelez, fueling speculation about Mr. Peltz's intentions.

A combined Pepsi-Mondelez would likely be the largest snack food company in the world, a sweet and salty empire with significant reach in emerging markets. Pepsi had a market value of $129.9 billion as of Tuesday's close; Mondelez was valued at $53.3 billion.

A merger would present a fresh opportunity for Mondelez, whose shares have languished since the separation from Kraft in October. The company, which is based in Deerfield, Ill., has failed to meet its own target for revenue growth.

In a statement, Mondelez said it “regularly engages in meaningful conversations with its shareholders and looks forward to meeting with Trian to learn about their perspectives in more detail.”

For Pepsi, which is based in Purchase, N.Y., and derives most of its sales from North America, a deal would offer increased access to emerging markets. But spinning off the beverage business would eliminate an element of diversification that is a hallmark of the company.

Mr. Peltz argued on Wednesday that the beverage business, though “wonderful,” was a laggard.

“The carbonated soft drink business is just not growing,” Mr. Peltz said on Wednesday. “Tastes change, people change.”

Mr. Peltz acknowledged that the salty snack business was similarly vulnerable to changing tastes. But he said the combined company would include certain products, like dark chocolate, that were perceived as healthier and could have an offsetting effect.

Any combination would likely be complicated, given the two companies' range of products and differing distribution models, analysts have said. In addition, a merger agreement could potentially raise antitrust concerns.

For Mr. Peltz, this is familiar turf. The investor began in 2007 a campaign to improve Kraft, gaining representation on the board. He later supported Kraft's breakup into grocery and snack food companies.

The talk surrounding Mondelez has attracted other prominent investors. The hedge fund manager William A. Ackman, who runs Pershing Square Capital Management, recently disclosed a stake in the snack food company, as did Ralph V. Whitworth of Relational Investors.

One casualty of a merger might be the name Mondelez, which Kraft invented last year after receiving submissions from more than 1,000 employees around the world. The name combines “monde,” the Latin word for “world,” and “delez,” a made-up word meant to suggest “delicious.”

To Mr. Peltz, it suggests nothing of the kind.

“The name Mondelez I hate,” he said. “It sounds like a disease.”

A version of this article appeared in print on 07/18/2013, on page B7 of the NewYork edition with the headline: Merger Push.

A Lifeline to a Brazilian Billionaire Would Be Risky

A bailout of billionaire Eike Batista would look bad for Brazil. Whiffs of cronyism hang over reports that state development bank BNDES has eased debt terms for the once high-flying tycoon. Taxpayers already have up to $4.7 billion wagered on his collapsing empire. If Brasilia risks more to save a pampered tycoon, it had better be prepared for another round of street protests.

The flamboyant billionaire once called BNDES “the best bank in the world.” Now he may have even more reason to think so. Daily newspaper O Estado de S. Paulo reported that the bank is voluntarily softening the loan conditions for his heavily indebted group of companies. BNDES, Mr. Batista's largest creditor, has denied any favoritism. Still, it would not be the first time the government has come to the entrepreneur's aid.

As recently as April, when Mr. Batista's financial woes were already clear, BNDES agreed to a generous $464 million loan to his mining company which was free of interest or principal payments for 12 months. Even Petrobras, the state-controlled rival of Mr. Batista's oil explorer OGX, was deployed to lend a helping hand by offering contracts to the EBX group.

It is not hard to see why Brasilia would want Mr. Batista to thrive. His projects dovetailed perfectly with national priorities. For instance, his OGX explorer promised to help turn Brazil into a big oil exporter. One Batista company, OSX, fit with the government's goal of rebuilding Brazil's once powerful shipbuilding industry. Yet another, LLX, was to give the nation a modern port â€" another government goal. And there would be plenty of new jobs in the bargain.

Of course, Mr. Batista's fall wouldn't take BNDES down. Exposure to the EBX Group accounts for less than 6 percent of the bank's regulatory capital, according to a July report from Bank of America. Since much of the bank's loans are backed by Mr. Batista's assets, any loss will likely be manageable â€" perhaps as little as $222 million, which is the uncollateralized portion of the debt, according to a report in newspaper Folha de S. Paulo.

Even so, President Dilma Rousseff can't afford to create an impression of throwing good money after bad to help a still-wealthy industrialist. Government waste and corruption were at the heart of June's massive street demonstrations. With Brazilians complaining over rising bus fares and sub-standard public services, few will want to throw the weight of the state behind an already pampered billionaire.

( Guillermo Parra-Bernal contributed reporting.)

Christopher Swann is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

In Tourre Trial, S.E.C. Wages Battle Against Its Own Witness

10:06 a.m. | Updated

The Securities and Exchange Commission had hoped to use Paolo Pellegrini, a chief architect of one of the most lucrative hedge fund bets in history, to support its case against Fabrice P. Tourre, a former Goldman Sachs trader charged with defrauding investors in a complex mortgage security.

Instead, Mr. Pellegrini did his best on Wednesday to destroy the government's case.

Mr. Pellegrini spent hours sparring with Matthew T. Martens, the S.E.C.'s lead lawyer, who had called him to the witness stand, over apparent contradictions to what he had previously told the S.E.C. Mr. Pellegrini, who is tall and cuts an imposing figure, seemed willing to go the distance with Mr. Martens. The two men had trouble hiding their contempt for each other.

“You are tricking me into saying so many things,” Mr. Pellegrini declared on the witness stand in the civil trial in Federal District Court in Manhattan.

He tried to explain away the contradictions, saying he had been “scared” and pressured by the S.E.C. officials who had previously questioned him about the deal.

Mr. Pellegrini's testimony could confuse the jury, which is weighing whether Mr. Tourre was part of a conspiracy to mislead investors when selling them a mortgage security that ultimately failed.

Some investors in the deal lost money, but Mr. Pelligrini's former employer and Goldman client, Paulson & Company, made more than $1 billion, jurors heard on Wednesday. Mr. Pellegrini made $20 million for his work in building the security, the jury heard.

Mr. Pellegrini's role in helping Paulson & Company bet against home loans through an investment assembled in part by Mr. Tourre made him an ideal witness for the government. The S.E.C. had hoped to use Mr. Pellegrini to show that Mr. Tourre, 34, had not told investors in the security that the hedge fund Paulson & Company was actually betting against them.

That plan was thrown into disarray during several hours of combative testimony, as Mr. Pellegrini - who had been testy on Tuesday - repeatedly accused the agency of intimidating him. In a striking moment, Mr. Pellegrini asserted that he had informed an executive at the bond insurer ACA Financial Guaranty Corporation, one of the parties the S.E.C. contends was victim of the failed investment, that his employer at the time did in fact intend on betting against the mortgage deal.

That led to one several battles between Mr. Pellegrini and Mr. Martens. Mr. Martens, his voice tight and arms crossed over his chest, repeatedly read back Mr. Pellegrini's previous statement in a deposition in the case that he could not recall whether he had told ACA of Paulson & Company's intentions.

Mr. Pellegrini, fixing an unblinking stare at his questioner, instead contended that he used those words “under pressure” from the S.E.C. and its “hostile questions.” He subsequently explained that he intentionally took a more careful and vague approach during the deposition because he was concerned that the agency was trying to deceive him.

During cross-examination by Pamela Chepiga, a lawyer representing Mr. Tourre, he said without hesitation that ACA was informed in its first meeting that Paulson & Company was betting the housing market would crash. “That was the purpose of the meeting,” he said.

“Now, five and half years later, sitting in this courtroom, with prompting from Ms. Chepiga, you remember?” a frustrated Mr. Martens asked.

“Yes,” Mr. Pellegrini replied.

The change of heart is potentially damaging to the S.E.C. because a core assertion of its case is that Mr. Tourre had not told ACA and another investor that the mortgage security in the center of the case was constructed in large part by Paulson & Company.

In 2010, Goldman settled the same case with the S.E.C., paying a $550 million penalty without admitting or denying guilt. A number of e-mails presented in court on Wednesday suggested that Mr. Pellegrini's boss, the hedge fund billionaire John A. Paulson, was aware of the troubles that publicizing the bet against mortgages would pose. Mr. Tourre's counsel later said it was well known that Mr. Paulson was betting that the housing market would stumble, presenting several newspaper articles from the time that stated he had a dire view.

Still, an executive at ACA told the S.E.C. previously that executives at Goldman and at Paulson had not made the true nature of the hedge fund's interest known.

The question is whether the jury will believe Mr. Pellegrini, who not only gave seemingly contradictory testimony under oath, but did his best to be obstinate with Mr. Martens. When the S.E.C. lawyer asked the witness to find a particular section of a document, Mr. Pellegrini leaned back in his chair, casually sipped from a cup of water and dryly asked, “Do you mind locating it for me?”

During a break in proceedings, Mr. Martens told District Court Judge Katherine B. Forrest, who is presiding over the trial, that he thought the hedge fund executive's claims to have been pressured by his office were “garbage.”

ACA, in addition to being an investor in the security that failed, was also hired by Goldman to select the mortgages that would be placed into the security. Mr. Martens presented e-mails showing that Goldman and Mr. Tourre were interested in hiring a company that would give Goldman and Paulson leeway in picking what went into the security.

“They will never agree to the type of names Paulson wants to use,” Mr. Tourre wrote in an e-mail in late 2006 about a rival company of ACA.

If found liable, Mr. Tourre faces fines and could be barred from the securities industry.

On Wednesday the S.E.C. also called Jonathan Egol, one of Mr. Tourre's bosses at Goldman, to testify. He will continue his testimony on Thursday, and other Goldman executives who worked with Mr. Tourre are also scheduled to be called.

This post has been revised to reflect the following correction:

Correction: July 18, 2013

An earlier version of this article used incorrect terminology in referring to a possible outcome of the trial. Because it is a civil trial, Fabrice Tourre faces fines and sanctions; it is not the case that he could be convicted of criminal wrongdoing.

A version of this article appeared in print on 07/18/2013, on page B1 of the NewYork edition with the headline: At Trial, S.E.C. Battles Against Its Own Witness.

JPMorgan in Talks to Settle Energy Manipulation Case for $500 Million

9:05 p.m. | Updated

JPMorgan Chase, the Wall Street giant whose reputation in Washington has eroded in a matter of months, is now moving to avert a showdown over accusations that it manipulated energy prices.

The nation's largest bank, which has previously clashed with its regulators, is seeking to settle with the federal agency that oversees the energy markets, according to people briefed on the matter. The regulator, the Federal Energy Regulatory Commission, found that JPMorgan devised “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” a commission document said.

The potential deal, the people said, is expected to cost the bank about $500 million, a record for the commission, which has adopted a harder line with Wall Street over the last year. For JPMorgan, which reported a record $6.5 billion quarterly profit last week, the fine will hardly dent the bottom line.

The accusations against JPMorgan surfaced this spring in the confidential commission document, reviewed by The New York Times, that outlined a pattern of illegal trading in the California and Michigan electric markets. The document, a warning that investigators would recommend that the agency pursue civil charges, also claimed that a senior JPMorgan executive, Blythe Masters, gave “false and misleading statements” under oath.

It is unclear whether Ms. Masters would be included in the potential settlement, but people close to her said that the regulator was unlikely to file a separate action against her. Initially, investigators planned to recommend that the agency hold Ms. Masters and three of her employees “individually liable,” a move that would have cast a shadow over her long career on Wall Street, where she is known for developing complex financial instruments.

JPMorgan's Trading Loss

While the bank still disputes the accusations, the recent settlement talks signal a shift in strategy for JPMorgan, which previously declared its intention “to vigorously defend” itself. Other banks, including Barclays, are fighting the commission in similar cases, casting the agency as overly aggressive. A settlement with JPMorgan could undermine Wall Street's counterattacks and pave the way for more settlements.

With the recent overture, JPMorgan appears to have taken a more conciliatory approach to Washington broadly, as it works to mend relationships with regulatory agencies. Its new tack, advocated by top JPMorgan lawyers, underscores the bank's realization that it was swiftly losing credibility in Washington.

Within regulatory circles, JPMorgan had become known as something of a bully, a bank quick to strike a combative tone with regulators. In a Congressional report examining a $6 billion trading loss the bank sustained last year, investigators faulted it for briefly withholding documents from regulators. The energy markets regulator also accused the bank of stonewalling investigators.

A settlement with the commission would enable JPMorgan to resolve the embarrassing accusations without fighting a lengthy legal battle. It also would allow the bank to focus on its other legal woes as it remains caught in the cross hairs of at least eight other federal offices. In addition to inquiries stemming from the trading loss, banking regulators are weighing enforcement actions against the bank for the way it collected credit card debt.

Jamie Dimon, JPMorgan's chief executive who was once known as Washington's favorite banker, acknowledged in his annual letter to shareholders that “unfortunately, we expect we will have more” enforcement actions in “the coming months.” He apologized for letting “our regulators down” and vowed to “do all the work necessary to complete the needed improvements.”

To reinforce the conciliatory approach, the bank has more readily dispatched executives to Washington. It also committed resources to bolster internal controls, a measure that could appease regulators.

The people briefed on the matter, who spoke on the condition that they not be named, cautioned that JPMorgan and the energy regulator were still negotiating a potential fine. The terms are subject to change. Any action recommended by investigators - settlement or otherwise - requires approval by a majority of the five-member energy commission.

The prospect of a deal with JPMorgan Chase was reported earlier by The Wall Street Journal.

A spokeswoman for the bank declined to comment. The commission also declined to comment.

JPMorgan's run-in with the energy regulator escalated in March, when investigators sent the document outlining the findings of their inquiry. In response, the bank issued a lengthy response to the accusations in mid-May, the people briefed on the matter said, ultimately spurring settlement talks in recent weeks.

For the energy regulator, a settlement would be the latest in a string of actions against big banks. On Tuesday, the commission ordered Barclays to pay a $470 million penalty for suspected manipulation of energy markets in California and other Western states by some of its traders. The bank is fighting the charges.

Like Barclays, JPMorgan faces accusations stemming from its rights to sell electricity from power plants. The rights come from assets the bank accumulated in the 2008 takeover of Bear Stearns.

But soon after the acquisition, the plants became a losing business that relied on “inefficient” and outdated technology. Under “pressure to generate large profits,” investigators said in the March document, traders in Houston devised a solution. Adopting eight different “schemes” between September 2010 and June 2011, the traders offered the energy at prices “calculated to falsely appear attractive” to state energy authorities. The effort prompted authorities in California and Michigan to pay about $83 million in “excessive” payments to JPMorgan, the investigators said.

In a 2012 filing in federal court, the energy regulator took aim at JPMorgan for attempting to thwart the investigation. The bank, the regulator said, refused to comply with a subpoena seeking e-mails that JPMorgan claimed were confidential because they contained private conversations between the bank and its lawyers.

In the March document, the investigators elaborated on the bank's pushback. The 70-page document said that the bank “planned and executed a systematic cover-up” of documents that exposed the trading strategy, including profit and loss statements.

The investigators also traced some of the obfuscating to Ms. Masters. After California authorities began to object to the bank's trading strategy, Ms. Masters “personally participated in JPMorgan's efforts to block” the state authorities “from understanding the reasons behind JPMorgan's bidding schemes,” the regulator, known as FERC, said.

The investigators also cited an April 2011 e-mail in which Ms. Masters ordered a “rewrite” of an internal document that questioned whether the bank had skirted the law. The new wording: “JPMorgan does not believe that it violated FERC's policies.”

A version of this article appeared in print on 07/18/2013, on page A1 of the NewYork edition with the headline: A Fresh Tactic By JPMorgan: A Push to Settle.

What Icahn Has to Say

Carl C. Icahn is not only one of the busiest investors on Wall Street, he is also one of the most quotable.

Mr. Icahn's wit was on display on Wednesday at the Delivering Alpha conference hosted by CNBC and Institutional Investor in Manhattan. The 77-year-old investor, with a close-shorn beard, discussed his fight over Dell, his brawl over Herbalife and even his domestic life. At one point, he tried out an English accent.

The only time Mr. Icahn restrained this blizzard of language was to alter the phrase “pile of …” to end with “absurdity” rather than a word that cannot be spoken on live television (though that hasn't stopped him in the past).

Here are some of Mr. Icahn's memorable lines from Wednesday's session, by topic:

Dell

Shareholders of Dell are scheduled to vote on Thursday on a $24.4 billion buyout offer from Michael S. Dell, the company's founder, and the investment firm Silver Lake. Mr. Icahn, a major shareholder, has been vocal in his opposition.

Dell's board, which supports the buyout, has argued that the company's business is deteriorating.

“I've been through a lot of these fights. I'm a cynic about corporate democracy and boards. I think most of these boards are completely dysfunctional,” Mr. Icahn said. “But I've never seen one as bad as this. I really mean it - where they actually go out and scare their own shareholders.”

“We definitely do” have a candidate in mind to be chief executive of Dell, Mr. Icahn said. “We're going to do whatever it takes to get someone.”

“There is no corporate democracy in this country,” he continued. Dell is “a sad, sad commentary on it.”

“I believe this will go to a proxy fight, and I believe I can win a proxy fight,” he said.

His Rivals

Mr. Icahn had choice words for the prominent short-seller James S. Chanos, who also spoke at the conference.

“With all honesty, I think I have a much better record than he has,” Mr. Icahn said.

Ultimately, the point was less about Mr. Chanos than it was about Mr. Icahn's professed distaste for selling companies short.

“Here's what Chanos misses,” Mr. Icahn said. “These companies can be turned around if you put the right management in and the right board in.”

Mr. Icahn also took aim at the hedge fund manager William A. Ackman, who runs Pershing Square Capital Management. Mr. Ackman has made a large bet against the nutritional supplements company Herbalife, and Mr. Icahn is on the other side of that bet. The grudge between the two goes back many years.

The interviewer at the conference, Scott Wapner of CNBC, said Mr. Ackman had sent in a statement, which referred to his investment in Canadian Pacific Railway.

“I wanted to be here today, but I'm at a board meeting in Canada,” Mr. Ackman said, according to Mr. Wapner. “I have a railroad to run.”

Mr. Icahn had a riposte: “Well, if he runs the railroad I wouldn't want to be on it.”

Later, Mr. Ackman delivered a counterattack in another statement read by Mr. Wapner: “Please tell Mr. Icahn that his specially equipped Canadian Pacific railcar is waiting outside for him.”

Herbalife

Mr. Icahn said he had not “sold a share” of Herbalife. “In fact, we bought more.”

The stock has climbed since Mr. Icahn built his position earlier this year. That has been a negative development for Mr. Ackman, who announced his bold bet in December.

“I like Ackman,” Mr. Icahn said. “I'll tell you why I like him. Anyone that makes me a quarter of a billion I like.”

But is the stock the “mother of all short squeezes,” as Mr. Icahn once declared, referring to a situation in which short-sellers are forced out of their positions?

“I think it's the daughter of all short squeezes already,” Mr. Icahn said.

Domestic Bliss

You are not about to see Mr. Icahn relaxing on a golf course. He is as active as ever. “What else do I have to do?” he said on Wednesday.

“My wife watches me like a hawk,” he said of Gail Golden, explaining that she is a minor investor in his fund.

“At night, she looks over the numbers, and she's like, ‘How come you went down today?'” Mr. Icahn said.

“Then, she starts mumbling about shareholders' rights,” he said. “She's forcing me to do this.”

Hear That? It\'s Your Financial Adviser Tweeting.

Judging by his Facebook page, it would seem that Jeffrey E. Blum experienced a surge of patriotic inspiration around July 4. Mr. Blum, a financial adviser, posted no fewer than 12 updates with good wishes and trivia about the holiday.

But the messages - “The 4th of July wasn't declared a national holiday until 1941,” for example - were not written by him. Mr. Blum, 53, who is based in Westlake Village, Calif., was testing a social media program that his firm, Raymond James Financial, views as a potential source of new business.

Raymond James plans to announce on Thursday that it will use software from Hearsay Social, a start-up company based in San Francisco, to help its thousands of financial advisers use Facebook, LinkedIn and Twitter. The effort is among the more extensive efforts by a financial firm to mine the benefits of social media.

The Hearsay software will be available to Raymond James's more than 5,400 financial advisers in the United States. It will let them post from a library of prewritten material, as well as compose their own messages, which will be vetted before publication. The program also includes a feature to let advisers “listen” to activity on their social networks.

This is the second major foray into social media for Raymond James, which initiated a similar program in 2011. That effort covered about 2,000 financial advisers and used software from Actiance, a Hearsay rival based in Belmont, Calif., which continues to have a relationship with Raymond James.

“The way advisers communicate with their clients has really transformed,” said Mike White, the chief marketing officer of Raymond James, which is based in St. Petersburg, Fla. “While the core of their business is not dependent on social media, their clients are increasingly expecting everyone they do business with to communicate that way.”

For financial firms, the promises, and perils, of social media have presented challenges. Regulations require firms like Raymond James to monitor and archive their employees' postings, making a spontaneous social media experience all but out of the question. Some firms have banned certain platforms like Facebook altogether in the workplace.

Hearsay and its rivals have found a niche in helping highly regulated corporations navigate this fast-paced world. Financial advisers with Morgan Stanley Wealth Management, for instance, use software from Socialware, a start-up based in Austin, Tex., to post preapproved messages to Twitter and find prospects on LinkedIn.

Such regulated postings - with their tendency to appear stiff and impersonal - have drawn mockery online. Even in the new Raymond James program, the corporate scaffolding was easily identifiable when a second financial adviser, David W. Adams, who is based in Nashville, posted some of the same holiday messages as Mr. Blum.

Joshua M. Brown, a financial adviser with Fusion Analytics who is active on Twitter and on his blog, said social media policies using preapproved messages were not worth the trouble.

“The firms that get it are the firms that allow their brokers to be human,” Mr. Brown said.

Still, Raymond James and Hearsay say their system is relatively flexible and easy to use. Financial advisers using the software can post from their mobile devices and personal computers, in addition to their computers at work.

Clara Shih, the chief executive of Hearsay, says her software has advantages that rivals' lack.

“The canned responses from corporate miss the mark on social media,” Ms. Shih said. “This is really the first time that a major broker-dealer is coming out and saying compliance is not enough.”

Financial advisers say social media helps, but only up to a point. Mr. Blum of Raymond James, who manages about $70 million, said LinkedIn and Facebook could deepen client relationships and help him stay visible.

Having a library of ready content, he said, is useful, whether it's about the Fourth of July or retirement planning.

“I don't necessarily see it as a way to actually bring me direct business,” Mr. Blum said. “I see it as a way to broaden my reach.”

Support Weakens for Dell Founder\'s Offer

A special committee of Dell's directors is likely to put off a vote on the computer company's proposed $24.4 billion sale to its founder that is scheduled for Thursday morning, amid stronger signs of rejection by shareholders.

Shareholders representing roughly 30 percent of Dell shares were arrayed against the leveraged buyout as of Wednesday evening, a person briefed on the matter said. They include money management firms like BlackRock, the State Street Corporation and the Vanguard Group.

Investors still have about 12 hours to vote, meaning that number could rise even higher. The deal faces a high hurdle to succeed: more than 42 percent of shares must be cast in favor of the deal, with abstentions counting as no votes.

The list of dissident investors extends far beyond Carl C. Icahn and the asset management firm Southeastern Asset Management, who together own about 12.7 percent of Dell stock.

That level of opposition makes it likely that the Dell board committee will postpone the vote by several days, people briefed on the matter said. Other related matters, including the record date by which shareholders must have owned shares to participate in the vote, have not yet been settled, one of these people said.

Even the deal's endorsement by prominent shareholder advisory companies, like Institutional Shareholder Services, appears to have had less effect than the buyers and the board expected.

An adjournment is likely to prolong the gamesmanship that has taken hold over the fate of the computer maker, which agreed to sell itself to Michael S. Dell and the investment firm Silver Lake for $13.65 a share. By giving itself a few extra days, the committee is hoping to either persuade Mr. Dell and Silver Lake to raise their offer or declare that the current bid is best and final.

Since the transaction was announced, many investors have criticized the price as too cheap. That opposition eventually drew the support of Mr. Icahn, who has loudly decried the proposed bid and the ability of Mr. Dell to turn the company around.

Mr. Icahn and Southeastern have offered many alternatives, the most recent of which would have the company buy back 1.1 billion shares for $14 each and offer shareholders the right to buy stock at $20 each. That values Dell at $15.50 to $18 a share.

On Wednesday, Mr. Icahn needled the Dell directors who refused to endorse his proposal.

“I think most of these boards are completely dysfunctional,” he said. “But I've never seen one as bad as this. I really mean it - where they actually go out and scare their own shareholders.”

Advisers to both the Dell committee and would-be buyers believe that many investors are betting that additional pressure will force Mr. Dell to raise his group's bid. He caved once before, agreeing to concessions that raised the leveraged buyout offer to $13.65 a share from $13.60.

But people close to the buyers' group say no similar bump is likely. They note Dell's declining earnings, an increasingly dire outlook from analysts on the personal computer industry and the rising cost of debt financing.

By some calculations, a 25-cent increase in the offer could require about $400 million in new equity.

The Dell committee has sounded an alarm about what might happen to the company's shares if the buyout fails. Calculations by its investors estimate that Dell's shares could fall below $9 if the deal disappeared.

Dell's shares closed on Wednesday at $12.88, down more than 1 percent.

A version of this article appeared in print on 07/18/2013, on page B2 of the NewYork edition with the headline: Support Weakens for Dell Founder's Offer.

Gupta Pays $13.9 Million Fine

Rajat K. Gupta, the former Goldman Sachs board member convicted of insider trading, agreed to pay $13.9 million to settle a related civil case brought by the Securities and Exchange Commission. He is also permanently barred from serving as an officer or director of a public company.

Morgan Stanley Posts 42% Rise in Profit and Sets Stock Buyback

Morgan Stanley shares rose sharply Thursday morning on news that the company planned to buy back a chunk of its own stock.

News of the buyback came as Morgan Stanley reported adjusted second-quarter earnings that slightly beat analysts' estimates, driven by a strong performance from its wealth management unit and equity sales and trading.

Including charges, the firm reported that second-quarter profit applicable to Morgan Stanley common shareholders rose 42 percent, to $802 million, or 41 cents a share, from $564 million, or 29 cents a share, in the period a year earlier. Overall net income was $980 million, compared with $591 million in the period a year earlier.

The results, however, were affected by two big charges, one related to Morgan Stanley's credit spreads and the other to its recent purchase of the remaining stake of its wealth management business. Excluding those charges, the firm had a profit of $872 million, or 45 cents a share. That beat the estimates of analysts polled by Thomson Reuters, which had projected a profit of 43 cents a share.

Morgan Stanley's adjusted revenue rose to $8.3 billion in the second quarter from $6.6 billion in the period a year earlier.

The stock surged more than 4 when the market opened on the back of an announcement in the firm's earnings release that it was buying back $500 million of its shares. Morgan Stanley shares were trading above $27 on Thursday.

Morgan Stanley's chief executive, James P. Gorman, said in a statement that he was looking forward to the full benefits of the recently completed Wealth Management acquisition, which the bank took full control of in the quarter.

That unit, with 16,321 financial advisers, posted net revenue of $3.53 billion, up more than 10 percent. Its pretax profit margin, a widely watched figure on Wall Street, came in at 18.5 percent. That margin, which previously had been running around 17 percent, is ahead of where the company had hoped it would be at this time.

The second quarter was a particularly important one for Morgan Stanley, which received approval from regulators last month to buy the remaining stake in its wealth management division, a joint venture it formed with Citigroup in the depths of the financial crisis. Since the crisis, Morgan Stanley has tried to diversify its earnings, moving away from riskier business like trading, and into wealth management, which offers steady, albeit lower returns. Its ability to purchase all of that division gave it full control over the operation and the full share of the profits.

Institutional securities, which houses Morgan Stanley's banking and trading operations, posted net revenue, excluding the debt charge, of about $4.2 billion, up almost 40 percent from figures in the period a year earlier.

The firm experienced a solid increase in revenue from various segments in this department, including debt and equity underwriting, investment banking, and currency and commodities trading.

The fixed-income sales and trading unit reported that adjusted revenue rose to $1.2 billion from $771 million in the period a year earlier. This year's performance was slightly below what analysts were hoping for.

Morgan Stanley is the last big bank to report second-quarter earnings, and results have been generally strong as lenders seem to be benefiting from a pickup in the United States economy. Goldman Sachs, for instance, reported that its net income doubled, beating analyst expectations handily.

Morgan Stanley Beats Estimates

Morgan Stanley reported adjusted second-quarter earnings on Thursday that narrowly beat analysts' estimates, driven by strength in its wealth management unit and equity sales and trading. Including charges, profit rose to $802 million, or 41 cents a share, from $564 million, or 29 cents a share, in the period a year earlier. But the results were affected by two big charges, one related to credit spreads and the other to Morgan Stanley's recent purchase of the remaining stake of its wealth management business. Excluding those charges, the profit was $872 million, or 45 cents a share. That beat the 43-cents-a-share average estimate of analysts polled by Thomson Reuters. A conference call to discuss the results is scheduled at 10 a.m.

SUPPORT WEAKENS FOR DELL FOUNDER'S OFFER  |  A special committee of Dell's directors is likely to delay a vote on the computer company's proposed $24.4 billion sale to its founder, which is scheduled for Thursday morning, amid stronger signs of rejection by shareholders, DealBook's Michael J. de la Merced reports. “Shareholders representing roughly 30 percent of Dell shares were arrayed against the leveraged buyout as of Wednesday evening, a person briefed on the matter said. They include money management firms like BlackRock, the State Street Corporation and the Vanguard Group.” That number could rise even higher. To succeed, the deal must receive support from 42 percent of shares.

The dissent extends far beyond Carl C. Icahn and the asset management firm Southeastern Asset Management, which together own about 12.7 percent of Dell's shares, Mr. de la Merced says. “That level of opposition makes it likely that the Dell board committee will postpone the vote by several days, people briefed on the matter said. Other related matters, including the record date by which shareholders must have owned shares to participate in the vote, have not yet been settled, one of these people said.”

On Wednesday, Mr. Icahn criticized the Dell directors who refused to endorse his proposal. “I think most of these boards are completely dysfunctional,” he said at the Delivering Alpha conference sponsored by CNBC and Institutional Investor in Manhattan. “But I've never seen one as bad as this. I really mean it - where they actually go out and scare their own shareholders.”

JPMORGAN SEEKS TO SETTLE ENERGY CASE FOR $500 MILLION  |  JPMorgan Chase is trying to avoid a showdown over accusations that it manipulated energy prices, Ben Protess and Jessica Silver-Greenberg report in DealBook. The bank is seeking to settle with the Federal Energy Regulatory Commission, the agency that oversees the energy markets, according to people briefed on the matter. The regulator found that JPMorgan devised “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” a commission document said.

The potential deal is expected to cost the bank about $500 million, DealBook reports. That would be a record for the agency, which has adopted a harder line with Wall Street. But for JPMorgan, the fine would barely dent its bottom line. The accusations against the bank surfaced in a confidential document reviewed by The New York Times that also claimed a senior JPMorgan executive, Blythe Masters, gave “false and misleading statements” under oath. “It is unclear whether Ms. Masters would be included in the potential settlement, but people close to her said that the regulator was unlikely to file a separate action against her,” DealBook reports. The bank still disputes the accusations.

ON THE AGENDA  |  The Blackstone Group and BlackRock report earnings this morning. Microsoft, Google and Chipotle Mexican Grill report results after the market closes. Ben S. Bernanke, the Federal Reserve chairman, testifies before the Senate Banking Committee in Washington. James P. Gorman, the chief of Morgan Stanley, is on Bloomberg TV at 11:30 a.m. Laurence D. Fink of BlackRock is on CNBC at 4:10 p.m.

PELTZ URGES MERGER OF PEPSICO AND MONDELEZ  |  The activist investor Nelson Peltz said on Wednesday that he would seek a merger of PepsiCo and Mondelez International, going public with his plans after months of speculation. Mr. Peltz, whose Trian Fund Management has quietly amassed a stake of more than $2.7 billion in the two companies, urged Pepsi to merge with Mondelez and then spin off its beverage business, creating a new snack food giant that would combine the Frito-Lay brands with Cadbury, Oreo and Nabisco. Investors appeared receptive to the plan, which Mr. Peltz announced on Wednesday at the Delivering Alpha conference in Manhattan. “Pepsi is at a crossroads at this point in time,” Mr. Peltz said. “They've got a cash business, and they've got a growth business.”

The conference on Wednesday also included appearances by the short-seller James S. Chanos, who announced a bet against Caterpillar, and Preet Bharara, the United States attorney for the Southern District of New York, who reminded those in attendance that the statute of limitations for securities fraud cases had been extended.

 

Mergers & Acquisitions '

How to Make Poison Pills Palatable  |  Under a method proposed by professors Eric Posner and Glen Weyl of the University of Chicago, when an outside shareholder starts a takeover attempt, existing shareholders would have the right to buy votes for or against the takeover. DealBook '

J.C. Flowers Said to Be in Talks for Northern Rock Loans  |  The private equity firm J.C. Flowers is in advanced talks to buy £450 million ($684.8 million) of Northern Rock loans from the British government, the Times reported in London. THE TIMES

A Lifeline to a Brazilian Billionaire Would Be Risky  |  Christopher Swann of Reuters Breakingviews asks: Is the state development bank throwing good money after bad in reportedly easing debt terms for Eike Batista? REUTERS BREAKINGVIEWS

Shoemaker Allen Edmonds Said to Consider Sale  | 
REUTERS

INVESTMENT BANKING '

Gupta Barred From Serving on Public Company Boards  |  Rajat K. Gupta, the former Goldman Sachs director convicted of passing secret information to a trader, was ordered to pay $13.9 million to settle a regulatory lawsuit and has been permanently barred from being an officer or director of a public company, the Securities and Exchange Commission said. BLOOMBERG NEWS

Hear That? It's Your Financial Adviser Tweeting.  |  Raymond James plans to announce an extensive effort to help its thousands of financial advisers harness social media when contacting clients. DealBook '

Entertaining Clients at the Gym  |  Bloomberg News writes: “Wall Street's salesmen and deal makers, whose expense accounts help fill downtown chophouses and box seats at ballparks, are now treating clients to a different kind of entertainment: high-end workouts.” BLOOMBERG NEWS

Bank of America Reports 63% Gain in Net Income  |  In the bank's second-quarter financial report, net income rose 63 percent and while revenue rose, it received a lift from much lower expenses. DealBook '

PRIVATE EQUITY '

Billabong Creditors Revise Refinancing Proposal  |  The creditors, Centerbridge Partners and Oaktree Capital Management, are trying to persuade Billabong to abandon a rival refinancing agreement with a group including Altamont Capital Partners, The Wall Street Journal reports. WALL STREET JOURNAL

HEDGE FUNDS '

Hedge Funds Commit to Bets on a Weaker Yen  |  Despite volatility in the yen, many hedge funds focused on foreign exchange continue to bet that the Bank of Japan will succeed in weakening the yen over time, Reuters writes. REUTERS

Former Soros Employee Starts Firm in Hong Kong  | 
BLOOMBERG NEWS

I.P.O./OFFERINGS '

London Stock Exchange Reports Gain in Revenue  |  The results, which beat analysts' forecasts, were helped by an increase in companies being listed, Reuters reports. REUTERS

Alibaba Builds Momentum for a Possible I.P.O.  | 
BLOOMBERG NEWS

VENTURE CAPITAL '

SoftBank Forms Fuel-Cell Venture With Start-Up  |  SoftBank of Japan is setting up a joint venture with a Silicon Valley start-up, Bloom Energy, to bring what it calls “energy servers” to Japan, helping the start-up break into its first overseas market, The New York Times reports. NEW YORK TIMES

New Venture Capital Perk: Image Buffing  |  Several former journalists have recently joined venture capital firms, and each is “expected to spend part of their time helping their firm's entrepreneurs be viewed as thought leaders,” Fortune's Dan Primack writes. FORTUNE

LEGAL/REGULATORY '

In Tourre Trial, S.E.C. Wages Battle Against Its Own Witness  |  The S.E.C.'s plan in its lawsuit against a former Goldman Sachs trader was thrown into disarray in several hours of combative testimony on Wednesday. DealBook '

In Audience at Tourre Trial, a Familiar Face  |  Brian Stoker, a former midlevel Citigroup executive who beat a government fraud case, has joined the spectators at the trial of Fabrice Tourre. DealBook '

Judge Rejects S.&P.'s Defense in Civil Case  |  A judge, allowing the Justice Department's lawsuit against Standard & Poor's Ratings Services to proceed, said the company's defense that its statements were “puffery” was “deeply and unavoidably troubling,” The Wall Street Journal reports. WALL STREET JOURNAL

Setback for Google in Europe  |  The European Commission said on Wednesday for the first time that Google's proposal for addressing antitrust concerns did not go far enough, The New York Times reports. NEW YORK TIMES

Bernanke Reaffirms Fervor for Stimulus  |  The chairman of the Federal Reserve, Ben S. Bernanke, said on Wednesday that the central bank remained committed to supporting the economy. NEW YORK TIMES

Barclays Vows to Fight Energy Trading Fine  |  United States regulators have demanded that Barclays pay a record $470 million penalty for suspected manipulation by some traders of energy markets in California and other Western states. DealBook '

Heartening Moves Toward Real Progress in Bank Regulation  |  From Jesse Eisinger of ProPublica, a look at promising proposals to strengthen capital ratios and regulate the derivatives market. The Trade '

China Bars Glaxo Executive From Leaving During Bribery Inquiry  |  The New York Times reports: “Chinese authorities have barred a British finance executive at the pharmaceutical giant GlaxoSmithKline from leaving the country while they carry out an investigation into bribery and corruption at the British company, the company confirmed on Wednesday.” NEW YORK TIMES