JPMorgan Reveals It Faces Civil and Criminal Inquiries

JPMorgan Chase disclosed on Wednesday that it faced a criminal and civil investigation into whether it sold shoddy mortgage securities to investors in the run-up to the financial crisis, the latest legal threat to the nation’s biggest bank.

JPMorgan acknowledged for the first time the existence of the investigation â€" one of several mortgage-related problems looming for the bank â€" in a quarterly regulatory filing. It said that the civil division of the United States attorney’s office for the Eastern District of California, which covers a stretch of land that includes Sacramento and Yosemite, has “preliminarily concluded” that JPMorgan flouted federal laws with its sale of subprime mortgage securities from 2005 to 2007. The parallel criminal inquiry, according to one person briefed on the matter, is in a more preliminary stage.

Adding to scrutiny of the bank, federal prosecutors in Philadelphia are examining whether JPMorgan duped investors into buying troubled mortgage securities that later imploded, according to people briefed on the matter, who spoke on the condition of anonymity. The prosecutors are investigating whether JPMorgan churned out the mortgage-backed securities without ensuring that the investments met underwriting standards, the people said.

Representatives for the bank and the federal prosecutors declined to comment.

Once a darling in regulatory circles, JPMorgan has become a magnet for scrutiny in recent years, drawing attention from at least eight federal agencies, a state regulator and two European nations. The authorities are investigating the bank in connection with its financial crisis-era mortgage business and a $6 billion trading loss in London last year, among other issues.

As the investigations drag on, the bank is racking up significant legal costs. To help cushion against potentially hefty payouts to the authorities, JPMorgan recorded a $678 million expense for additional litigation reserves in the second quarter, up from $323 million in the same period a year ago, according to the filing on Wednesday.

The bank also estimated it could incur up to $6.8 billion in losses beyond its reserves, nearly $1 billion more than the first quarter of the year.

JPMorgan is hardly the only Wall Street firm taking heat in Washington. The investigations into the bank are playing out as prosecutors increasingly take action against Wall Street firms that bundled mortgages into complex investments in the heady days of the housing boom.

On Tuesday, Bank of America found itself in the government’s cross hairs when the Justice Department and the Securities and Exchange Commission accused the bank of defrauding investors by greatly overstating the quality of mortgages backing roughly $850 million in securities. The bank contested the accusations.

The lawsuit was the latest volley from President Obama’s federal mortgage task force, which has vowed to hold financial firms accountable for their role in the mortgage boom and bust that threatened to topple the American economy.

The working group’s first action came last October, when the New York attorney general, Eric T. Schneiderman, took aim at Bear Stearns, the firm that JPMorgan acquired during the depths of the financial crisis. The firm, Mr. Schneiderman said in a lawsuit, sold securities between 2005 and 2007 that caused roughly $22.5 billion in losses for investors.

Investors were assured, the lawsuit said, that the firm scoured the loans packaged into the investments to assure their quality. In fact, the prosecutor contended, there was little vetting.
JPMorgan is fighting the lawsuit.

A month later, however, JPMorgan agreed to a $296.9 million pact with the S.E.C. to resolve unrelated claims that Bear Stearns duped mortgage investors by failing to disclose some delinquent loans. JPMorgan did not admit or deny wrongdoing.

JPMorgan is also one of 18 banks that a federal regulator accused of selling troubled loans to Fannie Mae and Freddie Mac â€" the government-controlled mortgage finance giants â€" without fully disclosing the potential risks. The regulator, the Federal Housing Finance Agency, recently rejected a settlement offer from JPMorgan, the people briefed on the matter said, raising the prospect of a drawn-out legal battle.

In the latest investigations out of California and Philadelphia, federal prosecutors are examining whether

JPMorgan ignored evidence of broad flaws among the loans that were ultimately pooled and sold to investors, the people briefed on the matter said. The California investigation is aimed at the mortgage business that

JPMorgan inherited after its purchase of Washington Mutual, the people said. It is unclear what prompted the inquiry in Philadelphia.

Facing the onslaught of unwanted attention, JPMorgan has moved to settle some cases. The bank recently struck a $410 million settlement with the nation’s top energy regulator, which had accused the bank of devising “manipulative schemes” to transform “money-losing power plants into powerful profit centers.”

Hilton Is Said to Prepare for an I.P.O.

As private equity firms rush to cash in on their investments, the Blackstone Group is moving to sell one of the biggest companies to go private in recent years.

Hilton Worldwide, the hotel giant that Blackstone bought six years ago, has begun preparations for an initial public offering, people briefed on the matter said Wednesday. That includes hiring four banks â€" Deutsche Bank, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley â€" to start the process.

An offering for Hilton, whose 550 properties range from Hampton Hotels to the Waldorf-Astoria in Midtown Manhattan, would probably be held in the first half of next year, one of these people said.

A Hilton spokesman declined to comment.

Private equity firms have been eager to sell their companies, either outright or through an initial offering, to take advantage of booming stock markets and generate realized profits for themselves and their limited partners.

That has served to bolster the financials of the alternative investment giants. Last month, Blackstone reported a tripling of its second-quarter profit thanks in part to cashing out of its investments. And on Wednesday, the Carlyle Group said that its quarterly profit jumped nearly fourfold, and distributable earnings rose 41 percent, again partly due to sales of its portfolio companies.

The markets have pushed up the value of assets so high, in fact, that some alternative investment firms have slowed down their core business of buying up companies to focus on selling their existing holdings.

Generating real profits from portfolio companies has also aided in private equity firms’ fund-raising efforts, with successful exits serving as helpful talking points with new and existing investors.

Blackstone has been among the more active sellers within the industry. In the second quarter alone, the investment firm held an I.P.O. for SeaWorld Entertainment, the home of Shamu the killer whale, and sold additional shares in companies like Nielsen Holdings, the media measurement giant. It is also working on a potential initial offering of a smaller hotel chain, La Quinta, a person briefed on that process said.

Still, Hilton will be one of the biggest divestitures by a private equity firm in the last several years. The company is now among Blackstone’s single biggest investments.

The hotel chain’s sale in the summer of 2007 for $26 billion was the last of the giant leveraged buyouts struck during the credit boom that ended later that year. It was also the biggest-ever takeover of a hotel company.

But the hotelier soon began to struggle amid the crashing markets for debt and commercial real estate. Business and leisure travel also dropped in 2008 and 2009. Blackstone soon began protracted negotiations with Hilton’s creditors. The buyout firm eventually reached a deal to cut its portfolio company’s debt by several billion dollars.

Hilton has since flourished, as the economy has rebounded and consumers have begun traveling again. Such is Hilton’s rebound that Blackstone’s chief executive, Stephen A. Schwarzman, spoke of the company’s 17 percent rise in pro forma earnings for the first half of the year during the private equity firm’s second-quarter earnings call.

Publicly traded hotel companies have also been performing well. Shares in both Starwood Hotels & Resorts Worldwide and in Hyatt Hotels have risen by more than 15 percent so far this year.

Blackstone executives said that more cash-out opportunities abounded for portfolio companies. The firm’s president, Hamilton E. James, told analysts during the second-quarter earnings call that possible ways to exit investments included more I.P.O.’s, outright sales and special dividend payments.

“We think that we’ll have plenty of exit options,” he said.

News of the banks’ hiring was reported earlier by The Wall Street Journal online.

Icahn Bolsters His Assault on Dell, as Odds Mount Against Him

Michael S. Dell has succeeded in changing the voting rules for his proposed takeover of the computer maker that bears his name, bringing him much closer to victory. But his chief nemesis, the billionaire Carl C. Icahn, isn’t giving up.

The question is whether the latest moves by the activist investor shore up his assault as the odds stack up against him.

On Monday, Mr. Icahn disclosed that he bought an additional 4 million shares in Dell late last week, raising his stake to roughly 9 percent.

Mr. Icahn has also filed suit in Delaware’s Court of Chancery, seeking to prevent Dell’s board from altering the rules of the proposed leveraged buyout. The lawsuit was filed a day before the special committee agreed to relax the voting standards, letting Mr. Dell and his partner, the investment firm Silver Lake, win by simply garnering a majority of shares voted at the meeting instead of all independent shares.

In exchange, Mr. Dell and Silver Lake effectively raised the price of their bid to $13.88 a share, through both a new offer of $13.75 and a promise to pay a special dividend of 13 cents a share.

By buying the additional shares, Mr. Icahn has cemented himself as Dell’s biggest outside investor with an 8.9 percent stake, surpassed only by the company’s eponymous founder and his 15.7 percent stake. He still has a major ally in Southeastern Asset Management, which currently owns about 4 percent.

But the Dell special committee’s move greatly diminished Mr. Icahn’s power to block the deal. The old voting standard counted shares not voted as no votes, creating a near-insurmountable barrier given Mr. Icahn and Southeastern’s combined stake. Even though the buyers were slightly ahead in terms of shares actually voted, the more than 300 million shares that weren’t cast were enough to block the deal.

By keeping the standard to just shares voted, the new rules dramatically alter that calculus. So, too, has the newly raised bid, which drew in reluctant big shareholders like Franklin Mutual Advisers and the hedge fund Pentwater Capital.

That’s why Mr. Icahn has pressed forward with his lawsuit, which is trying to roll back the changes. In a legal brief supporting the lawsuit, lawyers for Mr. Icahn argued that the Dell board is violating section 211 of the Delaware General Corporation Law by not having its annual meeting within 13 months of the previous one, which was held last July.

Part of the compromise between the Dell special committee and the buyers involved pushing back a special meeting for the deal to Sept. 12 and moving the record date â€" the day investors need to have held shares to qualify for the vote â€" to Aug. 13. And the company’s annual meeting was scheduled for Oct. 17.

“The directors have attempted to guarantee the success of Mr. Dell’s merger over the opposition of the stockholders and the commands of Delaware law,” Mr. Icahn’s legal team wrote. “There is nothing in Delaware statutory or case law that supports the board’s view of its role or the actions it has taken here.”

But experts say that the Delaware law is ambiguously worded. Here’s the relevant language from the statute:

If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director.

In other words, legal experts say, if an annual meeting isn’t held within 13 months of the last one, shareholders can ask the court to mandate one. But that’s as far as the requirements go.

Moreover, organizing a meeting would still take time even after the court orders one to be held, probably several weeks. Advisers to the Dell special committee have told the directors that even if Mr. Icahn were to prevail, the annual meeting probably couldn’t be held before mid- to late September anyway.

Mr. Icahn’s lawyers acknowledged in their brief that time is playing a role in ordering up an annual meeting as soon as possible. The financing backing the activist’s competing proposal, a major stock buyback that he would sponsor, expires on Sept. 30.

That said, the brief’s main thrust is that the Dell special committee shortchanged investors by not negotiating more toughly with Mr. Dell. The biggest way to have done that, according to Mr. Icahn, was by presenting shareholders with the choice of either the leveraged buyout or the stock buyback plan on the same day. (Never mind that the board has long been wary of the latter option as the best way to get the most value for investors.)

Here’s more from Mr. Icahn’s brief:

“The first question before the court on the merits is whether our law will allow these directors to act as Platonic guardians, repeatedly refusing to take no for an answer on the merger, stacking the cards in its favor and deliberately postponing the annual meeting until over 60 days after it is required to be held in order to avoid giving the stockholders the opportunity to decide for themselves which transaction they want.”

It’s possible that a Delaware judge could rule in Mr. Icahn’s favor by either overturning the change in voting rules or compelling an annual meeting sooner than October. That could thrust Mr. Dell’s takeover bid once more into the murk of uncertainty.

Both the buyers and the Dell special committee are betting that the chancery court will see things their way and keep the status quo, which would probably lead to the buyout succeeding. They point to previous words from Chancellor Leo Strine that praised the special committee’s work in negotiating with Mr. Dell.

More clarity could come soon after a hearing on Mr. Icahn’s lawsuit that is scheduled for Monday afternoon.

Buyout of American Greetings Is Approved by Shareholders

Shareholders of the American Greetings Corporation on Wednesday approved a $606 million buyout of the company by its founding family, ending a months-long negotiation over the deal.

The buyout at $19 a share received support from 81 percent of the voting power of the outstanding shares, the company said on Wednesday. Excluding the stock owned by the buyers, the deal received support from 67 percent of shares.

American Greetings, the No. 2 paper card maker after Hallmark, is now set to be privately owned by the Weiss family, which has a roughly $44 million stake giving it 43 percent of the vote. In order to be approved, the deal had to secure support from a majority of the shares unaffiliated with the family’s vote.

The deal is expected to close on or about Aug. 9.

Wednesday’s outcome comes after months of back-and-forth negotiations since the initial offer of $17.18 a share was announced in September, Steven M. Davidoff wrote in the Deal Professor column.

After discussions with a special committee of independent directors of the company, the Weiss family revised its bid to $18.20 a share in March. But the offer continued to face opposition from a large shareholder, TowerView, the investment company run by Daniel Tisch. The offer of $19 a share was announced in July.

The buyout showcased a rare example of shareholders flexing their power, Mr. Davidoff wrote.

“In years past, shareholder power was a hollow one,” Mr. Davidoff wrote. American Greetings was “the first test of this new shareholder attitude.”

Shares of American Greetings rose 0.2 percent on Wednesday morning, to $19 a share.

Not Banks, but Still Lending and Drawing Investors

In one sense, much of Internet commerce is largely a matchmaking service, connecting people looking for relationships, taxis and spare bedrooms. One of the hottest areas now is the market for personal loans, which is attracting money from venture capital investors, spurred by the fast growth of the largest online platform, Lending Club, and the paper profits for its early backers.

In their simplest form, these lending marketplaces link borrowers who want to refinance high-interest credit-card debt of 20 percent or more with investors looking to beat paltry bank savings-account yields of less than 1 percent.

At Lending Club, borrowers pay annual interest of about 14.5 percent, depending on their credit scores, for three- or five-year personal loans. Investors can earn interest rates of about 8.5 percent, the company says. The difference comes from defaults, which reduce annual returns by 3.5 percent, and the company’s annual fees of 2.5 percent.

Some of Lending Club’s earliest investors, including Norwest Venture Partners, Canaan Partners and Morgenthaler Ventures, are showing paper profits of more than 10 times their investment, based on Lending Club’s most recent valuation of $1.55 billion in an investment led by Google in May. Lending Club hopes to make an initial public offering next year.

That success has drawn the interest of venture capital firms looking for similar results.

“Investing in the networks that light up the sharing economy certainly looks like a good idea,” Fred Wilson, the managing partner of Union Square Ventures, said in a mid-July post on his Web site. Union Square invested in Lending Club in 2011 and has put money into multiple platforms. Last year it backed Funding Circle, which offers small business loans in Britain. This year it financed the personal-loan marketplace Auxmoney in Germany.

“There is a platform proliferation out there,” said Frank Rotman of QED Investors, a group of former executives of Capital One that has invested in four platforms. “Usually that happens when you see one company succeed and people say they want to find the next one. Right now everyone is trying to find the next Lending Club. They don’t want to feel like they missed the opportunity.”

The number of significant lending platforms has already grown to roughly 50 worldwide, according to Disruption Credit, an investment firm. The main personal loan platforms in the United States are Lending Club and Prosper Marketplace. On Deck and Kabbage do small-business lending. Overseas, Zopa Ltd. and RateSetter also do consumer lending in Britain, as does SocietyOne in Australia. And student-financing platforms include Social Finance, CommonBond, Pave and Upstart.

Disruption Credit’s chief executive, Michael Parekh , says such platforms can disrupt Wall Street and traditional banks much as Google has taken on old-style media companies and Amazon.com has taken business from traditional brick-and-mortar retailers. Disruption and other experts cite a vast $2.8 trillion consumer credit market up for grabs.

Lending Club itself, which just passed the $2 billion mark in total loans made, already plans to expand into small-business and student loans, and may pursue credit cards, insurance and mortgages. It may also expand globally.

In addition to its original base of individual investors, Lending Club has attracted the participation of a few community banks as well as institutional funds that invest in the loans. It also attracted a later-stage investment in 2012, at about one-third the current value, from the venture icon Kleiner Perkins Caufield & Byers, whose partner Mary Meeker joined its board. Other directors include John Mack, the former chief executive of Morgan Stanley, and Lawrence Summers, the former Treasury secretary. Kleiner’s China fund is also backing CreditEase, an online small-business consumer lender in China.

If Lending Club can complete an I.P.O. on schedule next year, “I believe this will be the financial-tech version of the Facebook I.P.O., a coming-of-age event just like Facebook was for social media,” said Dan Ciporin, general partner of Canaan Partners, Lending Club’s second-largest shareholder with a 15 percent stake.

Lending Club expects revenue could roughly triple, to $100 million in 2013 from $36 million in 2012, and could grow to $400 million by 2015. One Wall Street banker said other fast-growing online services like LinkedIn and Priceline trade at 7 to 10 times revenue expected for the following year. At that rate, he says, Lending Club could be worth more than $3 billion in an I.P.O. next year.

“I think this is viewed by venture capitalists as incredibly disruptive and rapidly scalable,” said Ron Suber, head of institutional sales at Prosper Marketplace.

Pat Grady, a partner at Prosper’s chief venture backer, Sequoia Capital, said big banks might be hobbled by their “legacy infrastructure” and “incumbent inertia.” He added, “In some ways the sky’s the limit. There’s nothing that says the banks of yesteryear have to be the banks of tomorrow.”

At a presentation in June at the inaugural Lendit conference for the nascent sector in New York, Lending Club’s founder and chief executive, Renaud Laplanche, compared its rapid embrace by customers to the adoption of electricity, color television, stoves and washing machines, saying he plans to “transform the banking system.”

Some platforms are adept at gleaning online data about their customers. Borrowers, for example, must agree to allow Lending Club to obtain data from their employers’ payroll processors. And the small-business lender On Deck has developed methods for evaluating borrowers based on dozens of online sources.

But some investors still have doubts.

One skeptical venture investor notes that such lending sites have flourished in an environment of a pullback by banks from unsecured consumer lending, an improving economy and a steep decline in interest rates on other investments starting with savings accounts. Other experts note that banks have a big advantage in their rock-bottom cost of funds.

“There’s been an explosion of new companies using the Internet to originate loans,” said Josh Koplewicz, founder of Thayer Street Partners, an investment firm that focuses on technology and financial services. “The barriers to entry are low. There are people setting up shop with a couple hundred thousand dollars.” But aside from a few big names like Lending Club, he says, it may be difficult for many to create enterprise value without some edge in access to borrowers.

Indeed, some venture firms’ investments have already shown paper losses. For example, venture firms including Accel Parners and Benchmark, which invested in Prosper Marketplace Inc. between 2005 and 2010, lost their stakes in January when Sequoia rebooted the company with a new round of financing and a new management team.
Prosper, which started offering loans in 2006, just before Lending Club, had offered higher rates and riskier loans, which led to investor losses during the 2008 market meltdown. Prosper also clashed with securities regulators over whether its offerings should be subject to disclosure rules.

Both Prosper and Lending Club temporarily curtailed their loan offerings in 2008 after the Securities and Exchange Commission required that loans offered to average investors be registered publicly; Prosper recently reached an agreement to settle a class-action investor lawsuit over the losses. Amid the economic slump, another platform, Zopa in Britain, abandoned its own costly push into the United States market. And some fledgling entrants like Loanio and Pertuity Direct shut down.

Even after meeting the S.E.C.’s requirements, Lending Club and its rivals have had run-ins with regulators. Lending Club can offer its loans to investors in only 26 states but thinks those limits would melt away after an I.P.O. Both Florida and Missouri fined the company $100,000 each last year for selling unregistered securities because Lending Club had allowed its registrations there to lapse.

In June, Ohio securities regulators filed charges against SoMoLend, an online small-business lender, accusing it of securities fraud and unregistered securities sales. SoMoLend, which declined to comment on pending talks with the regulators and a hearing set for October, has halted transactions with individual investors in the state.

Some Lending Club investors and executives are hedging their bets, taking some chips off the table even before an I.P.O. Both Canaan and Morgenthaler sold some of their shares in the $125 million stock sale to Google in May. About 30 Lending Club employees, including Mr. Laplanche, sold an average of less than 5 percent of their stock as well. Insiders also sold in a recent On Deck financing.

At the moment, the market wind is at Lending Club’s back. With broad United States market indexes up about 18 percent this year, social media and social commerce stocks have been surging even more. Facebook, up 45 percent this year, recently regained its I.P.O. price after 14 months below that level. The real estate marketplace Zillow has tripled this year, and the business network LinkedIn and business-review site Yelp have doubled. Even the discount-deal service Groupon, which replaced its chief executive after plunging 86 percent from its I.P.O. price, has risen 85 percent this year.

Loeb Humbly Accepts Sony’s Rebuff of His Shake-Up Plan

For an investor known for caustically challenging companies who rebuff his advances, Daniel S. Loeb was uncharacteristically humble in acknowledging Sony‘s rejection of his proposal to shake up the Japanese icon.

In an interview with Variety â€" whose parent company is partially owned by Mr. Loeb’s firm, Third Point â€" the hedge fund manager contended that he was actually pleased with Sony’s decision to hold onto all of its entertainment unit. The move, announced late on Monday, closed the door on his proposal to list up to 20 percent of the business on the public market.

Instead, Mr. Loeb pointed to Sony’s decision to disclose more information about the entertainment division’s financials as a win, arguing that it furthers his aim of more transparency and accountability.

In explaining Sony’s rejection of the Third Point plan, Sony’s chief executive, Kazuo Hirai, firmly said that the conglomerate benefited by having both its electronics and entertainment divisions under one roof, and that the company had more efficient ways of raising capital.

The gracious tone may be tied in part to the difficulty that Mr. Loeb would have in pressing a proxy fight at Sony. Though he could call for a special election, since the company’s board is up for re-election in June, foreign shareholder activists have long struggled to make meaningful changes at Japanese companies. Mounting a full-scale assault on one of the country’s most famous companies could prove exceptionally difficult.

The Third Point chief said that he would instead monitor Sony’s progress in improving profitability in its entertainment arm and reassess his feelings around next year’s annual meeting.

Mr. Loeb went so far as to soft-pedal his previous criticism of the entertainment arm, notably in an investor letter in which he pointed to the poor performance of “After Earth” and “White House Down”:

“It is probably unfair to focus on one or two bad movies, just in the way that Third Point from time to time can have one or two bad months or a bad year. What is important is the overall profitability and margins over a period of time.”

Sony wasn’t the only entity that Mr. Loeb sought to make amends with. He had nice words to say of George Clooney, who bitterly attacked the hedge fund mogul in an interview last week.

“Notwithstanding the fact that the media likes to create a stir, I admire Mr. Clooney’s passion for Sony and his loyalty to Sony and his friends there,” Mr. Loeb said, adding, “We are all for intelligent investment in creative content. I believe our interests are aligned in a way he probably doesn’t realize.”

Morning Agenda: Devilish Issues of Management-Led Buyouts

The $612 million bid by the Weiss family to buy the American Greetings Corporation, the greeting card company the family controls, is not as well known as the headline-grabbing $24.4 billion bid by Michael S. Dell and the private equity firm Silver Lake to buy the computer company Mr. Dell founded. But both deals “illustrate the rising tide of shareholder power, as well as the devilish issues that emerge when management tries to buy a public company,” Steven M. Davidoff writes in the Deal Professor column. “And even though Dell’s board has changed the voting rules, both companies are being tested by shareholders who view the buyouts as undervaluing their companies.”

Both companies are what Wall Street analysts charitably call a melting ice cube, Mr. Davidoff writes. In the case of American Greetings, whose stock traded at a high of $53.75 in 1998, the special committee of independent directors ultimately reached a deal with the bidders in March at $18.20 a share, after the Weisses initially offered $17.18 a share. But the announcement set off shareholder outrage. In the wake of complaints from TowerView, the investment company headed by Daniel Tisch and owner of 6.2 percent of the company, the Weiss family has raised the price to $19 a share. American Greetings shareholders will vote on Wednesday.

“In years past, shareholder power was a hollow one. Less than 1 percent of deals have been rejected by shareholders. American Greetings will be the first test of this new shareholder attitude,” Mr. Davidoff writes. “Will it be that these institutions finally step up and take the risk of running a business?”

U.S. SUES BANK OF AMERICA OVER MORTGAGE SECURITIES  |  The Justice Department sued Bank of America on Tuesday, claiming the bank defrauded investors by vastly understating the risks of the mortgages behind about $850 million in securities, Jessica Silver-Greenberg reports in DealBook.

Unlike previous legal troubles stemming from the bank’s 2008 acquisition of the subprime lender Countrywide Financial, “the latest litigation centers on Bank of America’s own homegrown mortgage operations,” Ms. Silver-Greenberg writes. “And the loans at issue were represented as prime jumbo mortgages â€" at the time, 2007, loans of more than $417,000 for a single-unit dwelling â€" rather than subprime mortgages, which were at the heart of the mortgage crisis.”

The lawsuit portrayed the bank’s mortgage operations as emblematic of Wall Street’s reckless practices in the days leading to the financial crisis. A spokesman for Bank of America contested the government’s characterization. “These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that,” Lawrence Grayson, a spokesman, said in a statement.

A PROMISE OF INNOVATION AT WASHINGTON POST  | “The big news in newspapers â€" that Jeffrey P. Bezos is buying The Washington Post â€" was not even 24 hours old when shock and wisecracks about the unexpected $250 million deal began to give way to acceptance and even envy,” Jenna Wortham and Amy O’Leary write in The New York Times. “Now that he is the private owner of The Post, it would not be surprising to see him worry little about turning a quick profit and instead push to upend the often ossified world of newspaper publishing, just as he did with books more than a decade ago.”

ON THE AGENDA  |  The Carlyle Group, AOL and Time Warner report earnings before the market opens. Mondelez International, Groupon and Tesla Motors report earnings this evening. Tim Armstrong, the chief executive of AOL, is on Bloomberg TV at 8:15 a.m.

CORY BOOKER’S TECH START-UP  | Cory A. Booker, the Twitter-using mayor of Newark who has hobnobbed with some of the biggest stars of Silicon Valley, has obtained money for an Internet start-up called Waywire from influential investors including Eric E. Schmidt, Google’s executive chairman, The New York Times reports. In a financial disclosure filed last month, Mr. Booker, 44, revealed that his stake in the company was worth $1 million to $5 million. His other assets, taken together, were worth no more than $730,000.

“That revelation, with just a week left in Mr. Booker’s campaign for the Democratic nomination for the United States Senate, shows how a few tech moguls and entrepreneurs, many of them also campaign donors, not only made a financial bet on the mayor’s political future but also provided the brainpower and financing to help create a company that could make him very rich,” The Times writes. “Waywire has also provided jobs for associates of Mr. Booker: the son of a top campaign supporter and his social media consultant, who is now on his Senate campaign staff.”

Mergers & Acquisitions »

AOL to Buy Video Advertising Platform for $405 Million  |  AOL announced on Wednesday that it had agreed to acquire Adap.tv, a video ad platform, for $405 million in cash and stock. “The Adap.tv founders and team are on a mission to make advertising as easy as e-commerce and the two companies together will aggressively pursue that vision,” Tim Armstrong, the chief executive of AOL, said in a statement. NEWS RELEASE

Blackstone Said to Consider Sale of La Quinta  |  The Blackstone Group is exploring a sale of La Quinta Inns and Suites, “a budget hotel chain it values at around $4.5 billion, a person familiar with the matter said on Tuesday,” Reuters reports. REUTERS

Wal-Mart May Bid for Hong Kong Supermarket Chain  |  Wal-Mart Stores is considering making a bid for ParknShop, which is being sold by Hutchison Whampoa, Reuters reports, citing unidentified people familiar with the matter. REUTERS

Chinese Firm Said to Consider Bid for Hong Kong Bank  |  Bloomberg News reports: “Yue Xiu Group, a trading arm of China’s Guangzhou city government, is considering a bid for Hong Kong family-run lender Chong Hing Bank Ltd., according to a person familiar with the matter.” BLOOMBERG NEWS

INVESTMENT BANKING »

JPMorgan Is Sued in Aluminum Warehousing Case  |  JPMorgan Chase, along with Goldman Sachs and Glencore Xstrata, were sued by a direct purchaser in Florida and an individual plaintiff over claims the firms drove up prices of aluminum, Bloomberg News reports. BLOOMBERG NEWS

UBS Agrees to Settle Federal Claims in Mortgage Case  |  UBS, the giant Swiss bank, has agreed to settle federal accusations that it misled investors about a complex mortgage security. DealBook »

ING Profit Fell 39% in 2nd Quarter  |  The Dutch financial services firm ING said net income in the second quarter fell to 788 million euros ($1.05 billion) from 1.29 billion euros a year earlier. BLOOMBERG NEWS

Deutsche Bank Hires Former Goldman Banker to Head Australian Unit  | 
WALL STREET JOURNAL

PRIVATE EQUITY »

TPG Asks for More Time to Spend Investors’ Money  |  The private equity firm TPG asked investors in its $19 billion flagship fund for an extra year to spend $3 billion of capital that has not yet been used, The Financial Times reports. FINANCIAL TIMES

For Some Private Equity Investors, Bank Stakes Prove Lucrative  |  The investors who have fared well in buying stakes in banks “are the ones who bought good franchises cheap, not distressed franchises very cheap,” said Joshua Siegel, managing principal and chief executive of StoneCastle Partners, according to The Wall Street Journal. WALL STREET JOURNAL

HEDGE FUNDS »

Billionaires’ Battle Over LightSquared Breaks Into the Open  |  The hedge fund tycoon Philip A. Falcone accused the satellite television mogul Charles W. Ergen of colluding to prevent his company LightSquared from leaving bankruptcy. DealBook »

In Rejecting Loeb, Sony Cites Poor Record for Subsidiary I.P.O.’s  |  In rejecting a proposal by hedge fund manager Daniel S. Loeb, Sony’s chief executive acknowledged the times when companies have regretted publicly listing part of a subsidiary. DealBook »

Sony Brushoff Leaves Loeb With Few Options  |  There are some encouraging signs for the hedge fund tycoon Daniel S. Loeb: even after the latest sell-off, Sony shares are still 8 percent higher than when he started his campaign, Peter Thal Larsen of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS

Soros Endorses de Blasio for Mayor of New York  | 
NEW YORK TIMES

I.P.O./OFFERINGS »

Cinda of China Looks to Hire Banks for I.P.O.  |  China Cinda Asset Management, which buys bad loans from China’s banks, “has invited bankers to submit proposals for its initial public offering in Hong Kong, which could raise around $2 billion, people familiar with the situation said on Wednesday,” The Wall Street Journal reports. WALL STREET JOURNAL

VENTURE CAPITAL »

Soros Backs Telecommunications Company in Brazil  |  A fund run by George Soros plans to invest $150 million for a majority stake in On Telecom, a Brazilian telecommunications company that offers connections over 4G networks, Reuters reports. REUTERS

LEGAL/REGULATORY »

In Washington, Little Progress on Housing  |  “The stopgap nationalization of housing finance has hardened into one of the most enduring legacies of the Great Recession,” The New York Times writes. NEW YORK TIMES

For the S.E.C., Financial Crisis Investigations Wind Down  |  The Wall Street Journal reports: “Securities and Exchange Commission enforcement officials have decided not to recommend filing civil charges against hedge fund firm Magnetar Capital L.L.C., which teamed up with Wall Street firms to create mortgage securities that suffered billions of dollars in losses during the financial crisis, according to people familiar with the situation.” It is a sign the S.E.C.’s investigations into “whether companies or individuals broke the law” ahead of the crisis are running out of gas, The Journal writes. WALL STREET JOURNAL

SAC Prosecutor Hits the Media Trail  |  Preet Bharara, the United States attorney in Manhattan, discussed why his office indicted the hedge fund SAC Capital Advisors and not its owner, the billionaire Steven A. Cohen. DealBook »

Pension Reform Could Disrupt Investment Funds  |  Shifting more responsibility to the private sector would cause some unintended consequences by cutting off an important source of financing for venture capital and private equity, Victor Fleischer writes in the Standard Deduction column. DealBook »

What We Should Have Learned From the Financial Crisis  |  “The sprawling Dodd-Frank Act, which rewrote banking regulation in 2010, didn’t resolve things so much as inaugurate a process of endless rules-writing by regulators,” Adam Davidson writes in The New York Times Magazine. NEW YORK TIMES

S.E.C. Says Former Marine Defrauded Military Personnel  |  The Securities and Exchange Commission said it had obtained an emergency asset freeze to halt a scheme by a former Marine who posed as a successful hedge fund trader, Reuters reports. REUTERS

AOL to Buy Adap.tv, a Video Ad Platform, for $405 Million

AOL agreed on Wednesday to buy Adap.tv, a video advertising platform, for about $405 million in cash and stock, in its biggest acquisition since becoming an independent company.

Under the terms of the deal, AOL will pay $322 million in cash and about $83 million in stock. That’s more than the $315 million that it paid for The Huffington Post two and a half years ago.

Video has been one of the biggest points of focus for Internet media companies for some time, with its ability to command higher ad rates. AOL has been focusing on amassing sources of video content as part of its bet on consumers increasingly watching video online instead of on TV.

“AOL is a leader in online video and the combination of AOL and Adap.tv will create the leading video platform in the industry,” Tim Armstrong, AOL’s chairman and chief executive, said in a statement. “The Adap.tv founders and team are on a mission to make advertising as easy as e-commerce and the two companies together will aggressively pursue that vision.

Founded in 2007, Adap.tv counts as investors Spark Capital, Redpoint Venture and Gemini Israel Fund.

The deal is expected to close by the end of September.

Carlyle Profits Rose in 2nd Quarter, as Firm Continued to Cash Out

The Carlyle Group posted big gains for its second quarter on Wednesday, including a sizable jump in payouts to investors. But analysts expected a little more from its results.

The investment giant said on Wednesday that it earned $155.8 million for the quarter ended June 30, up nearly fourfold from the same time last year. But that profit amounted to 39 cents per unit, far short of the average analyst estimate of 56 cents a share, as calculated by Standard & Poor’s Capital IQ.

The profit figure accounts for unrealized investment gains and appreciation in the value of Carlyle’s portfolio, the latter of which came in at 3 percent in the quarter.

The firm itself prefers to focus on distributable earnings, which measure actual payouts to investors in its funds. By that metric, Carlyle performed well, with distributable earnings rising 41 percent to $163 million.

Carlyle, like many of its peers, has been focusing on cashing out of its holdings and returning that money to investors. Private equity firms throughout the industry have been raising to take their portfolio companies public or sell them, taking advantage of the high valuations that come from the booming stock markets.

Carlyle itself has sold off shares in the likes of Hertz and Allison Transmission, moves that it is likely to continue throughout the year.

The firm also emphasized its fund-raising efforts, having collected $6.9 billion in the quarter. It now oversees $180.4 billion, up 16 percent from a year ago.

“We had a solid quarter across the firm and continued to demonstrate our ability to produce cash distributions for unitholders,” David M. Rubenstein, one of Carlyle’s co-chief executives, said in a statement.

Using generally accepted accounting principles, Carlyle lost $3.3 million for the quarter, down from $10.3 million a year ago.