Fund to Let Investors Bet on Price of Bitcoins

The upstart stock exchange Second Market has made a name for itself allowing investors to buy shares of hot private companies like Twitter. Now that those companies are going public, Second Market is turning its attention to the next new thing â€" bitcoin.

On Thursday, Second Market is expected to begin raising money for an investment fund â€" the first of its kind in the United States â€" that will hold only bitcoins, giving wealthy investors exposure to the trendy but controversial virtual currency.

The fund, the Bitcoin Investment Trust, aims to provide a reliable and easy way to bet on the future price of bitcoin, a currency generally traded on unregulated, online exchanges based overseas.

“If you speak with people who have tried to purchase bitcoin in the past â€" you’ll hear, ‘it’s a difficult process,’ ‘it’s a confusing process,’ ‘it’s a scary process,’ ” said Barry Silbert, the chief executive of Second Market, based in New York. “We want to make it an accessible asset class.”

Second Market’s venture into bitcoin represents the latest effort to bring the virtual currency into the mainstream. But it is also likely to fuel the debate around the legitimacy and legality of a form of money that exists outside the conventional banking system, and has already attracted scrutiny for being used in illicit transactions.

Created in 2009 by a still unknown individual, or group, known as Satoshi Nakamoto, bitcoins exist only in digital form and can be bought with traditional money through the Internet. New bitcoins are “mined” by programmers solving complex math problems. The original programmers determined that only a finite number of bitcoins would be created.

While bitcoin is accepted as a form of payment by a growing, but still small number of businesses, it is mostly the domain of speculators, some of whom are drawn to its potential as an alternative to national currencies. The fortunes of bitcoin have in some ways paralleled the postfinancial crisis interest in gold, another asset that has appealed to investors skeptical of the monetary policy of the major central banks.

“It’s still at a point where the value is set by what the next guy is willing to pay for it,” said Brian Riley, the senior research director at the CEB TowerGroup. “Even though it’s got the cool factor to it, it’s still not a place to park your 401(k).”

Bitcoins gained much wider public exposure this year, when the price doubled and then collapsed over a few weeks. Recently, the price of a single bitcoin has stabilized, trading at $135, down from its peak of more than $250 in April. The total value of all outstanding bitcoins is currently over $1.5 billion.

The Second Market fund’s creation comes just a few months after Cameron and Tyler Winkelvoss, the technology investors best known for their involvement with Facebook, announced the creation of a similar product. The Winkelvosses’ vehicle, though, will be an exchange traded fund, or E.T.F., accessible to all investors. As a result it must go through a lengthy and uncertain review process with federal regulators.

In contrast, the Second Market fund can begin raising money immediately because it will be available only to investors who meet a wealth threshold set by the Securities and Exchange Commission. Those who qualify, called “accredited investors,” must have a net worth of at least $1 million, excluding their primary residence, or annual income of more than $200,000 in each of the previous two years.

Mr. Silbert said that because of the risky nature of bitcoins, they should not be sold to ordinary retail investors who could buy E.T.F.’s.

“It’s premature for this kind of product to be in the public market,” Mr. Silbert said. “It should not be available to unsophisticated investors.”

Mr. Silbert, who started Second Market in 2004, has built a business making markets in risky, inaccessible investments. The company operates an exchange on which employees of private companies can sell their shares to wealthy investors, essentially a private-company stock market.

This kind of trading exploded in recent years because of the boom in social networking Web sites, driving up the valuations of start-ups like Facebook, Twitter, Groupon and Zynga.

Now that all these companies have either gone public or announced their intention to do so, there are questions about how Second Market and its ilk will adapt. Its biggest competitor, SharesPost, announced a partnership with Nasdaq to raise the visibility of its private exchange.

For Second Market, the bitcoin fund signals a push to diversify into new businesses. Beyond its exchange for private company shares, it has facilitated the buying and selling of other hard-to-trade assets like bankruptcy claims and auction rate securities. Another recently created division helps start-ups raise capital.

The company has already amassed a $2.25 million stake of bitcoins that will seed the new fund. Second Market has spent the last year developing relationships with over a hundred bitcoin players, including programmers, merchants and exchanges. Those relationships should make it easier for the company to quickly find the best price for bitcoin at a given time.

Second Market says the fund will make it possible for investors to have access to the bitcoin market without dealing with the sometimes unreliable online exchanges and the complex security issues involved in storing digital money. Packaging bitcoins as a fund may also allow the investment to be kept in tax-advantaged retirement account, Mr. Silbert said.

Second Market’s new fund is following in the steps of Exante, a hedge fund operator in Malta. That firm said that its Bitcoin Hedge Fund has amassed 90,000 bitcoins, which would be worth about $12.2 million.

Mr. Silbert, 37, has already been involved in the bitcoin world, parlaying his early purchases of the digital money into a broader array of investments in bitcoin-related companies including Coinbase, a bitcoin storage company, and Bitpay, a payment processor.

One of the risks for bitcoin investors is the uncertain regulatory environment. A Senate committee and a number of state regulators have been examining whether the currency is evading financial oversight, allowing it to be used by money launderers, tax dodgers and drug traffickers.

The world’s largest bitcoin exchange, Mt. Gox, based in Japan, has had numerous run-ins with American authorities, leading to periodic closings of the service for American customers.

On at least one front, though, Second Market is taking advantage of relaxed regulations that went into effect just this week letting financial firms publicly market their private funds. But that does not mean that investment experts think the bitcoin fund will be a smart purchase for most investors, even well-heeled ones.

“Just because the S.E.C. now allows a private fund to advertise an offering doesn’t mean it’s a prudent investment,” said Jay G. Baris, a lawyer who leads the investment management practice at Morrison & Foerster. “And investing in bitcoin does not have the same risk profile as investing in a blue chip stock.”

Undisclosed Pension Extras Cost Detroit Billions

Detroit’s municipal pension fund made undisclosed payments for decades to retirees, active workers and others above and beyond normal benefits, costing the struggling city billions of dollars, according to an outside actuary hired to examine the payments.

The payments included bonuses to retirees, supplements to workers not yet retired, and cash to the families of workers who died too young to get a pension, according to a report by the outside actuary and other sources.

How much each person received is not known because payments were not disclosed in the annual reports of the fund.

Detroit has nearly 12,000 retired general workers, who last year received pensions of $19,213 a year on averageâ€" hardly enough to drive a great American city into bankruptcy. But the total excess payments in some years ran to more than $100 million, a crushing expense for a city in steep decline. In some years, the outside actuary found, Detroit poured more than twice the amount into the pension fund that it would have had to contribute had it only paid the specified pension benefits.

And even then, the city’s contributions were not enough. So much money had been drained from the pension fund that by 2005, Detroit could no longer replenish it from its dwindling tax revenues. Instead, the city turned to the public bond markets, borrowed $1.44 billion and used that to fill the hole.

Even that didn’t work. Last June, Detroit failed to make a $39.7 million interest payment on that borrowing â€" the first default of what was soon to become the biggest municipal bankruptcy case in American history.

Detroit said that making the interest payment would have consumed more than 90 percent of its available cash. And besides, the hole in its pension fund was growing again, and it needed yet another $200 million for that.

When Detroit turned to the bond market in 2005, it acknowledged that it needed cash for its pension fund but did not explain its long history of paying out more than the plan’s legitimate benefits, including the bonuses, known as “13th checks,” which were reported earlier this month by The Detroit Free Press. Nor did the city describe the pension fund’s distributions to active workers, or that a 1998 shift to a 401(k)-style plan had been blocked and turned instead into a death benefit. In its most recent annual valuation of the fund, the plan’s actuary said it was still trying to determine the “effect of future retroactive transfers to the 1998 defined contribution plan,” without mentioning that it had not been carried out.

All of these things eroded the financial health of the pension system, but neither the magnitude of the harm, nor its effect on the city’s own finances, were disclosed to investors. German banks were big buyers of Detroit’s pension debt; now they are complaining that they were told it was sovereign debt.

Finally, in 2011, the city hired the outside actuary to get a handle on where all the money was going. The pension system’s regular actuaries, with the firm of Gabriel Roeder Smith, would not provide the information because they worked for the plan trustees, not the city.

The outside actuary, Joseph Esuchanko, concluded that the various nonpension payments had cost the struggling city nearly $2 billion from 1985 to 2008 because the city had to constantly replenish the money, with interest. The trustees began making the payments even before 1985, but it appears that Mr. Esuchanko could not get data for earlier years.

His calculations included only the extra payments by Detroit’s pension fund for general workers. Detroit has a second pension fund, for police officers and firefighters, which also made excess payments in the past. But Mr. Esuchanko could not get the data he needed to calculate those, either.

When Mr. Esuchanko reported his findings, Detroit’s city council voted to halt all payments except legitimate pensions, as described in plan documents. The police and firefighters’ plan trustees appear to have discontinued the practice earlier.

Detroit’s pension trustees, and their lawyers, were unavailable on Wednesday to comment on the extra payments.

Joseph Harris, who served as Detroit’s independent auditor general from 1995 to 2005, said the payments were approved by the pension board of trustees, and it would have been useless for the city to have tried to stop them during his term.

“It was like dandelions,” he said. “You just accept them. They were there, something you’ve seen all your life.”

When asked on what legal authority the trustees made the payments, Mr. Harris said, “My understanding was, it had to be approved by city council, and council was under the belief that the money was there â€"t hat the pension funds were earning the money, with the consideration that in bad times the city would be making up the difference. I hate to say that. Ultimately the fund has to be funded by the taxpayers.”

Undisclosed Pension Extras Cost Detroit Billions

Detroit’s municipal pension fund made undisclosed payments for decades to retirees, active workers and others above and beyond normal benefits, costing the struggling city billions of dollars, according to an outside actuary hired to examine the payments.

The payments included bonuses to retirees, supplements to workers not yet retired, and cash to the families of workers who died too young to get a pension, according to a report by the outside actuary and other sources.

How much each person received is not known because payments were not disclosed in the annual reports of the fund.

Detroit has nearly 12,000 retired general workers, who last year received pensions of $19,213 a year on averageâ€" hardly enough to drive a great American city into bankruptcy. But the total excess payments in some years ran to more than $100 million, a crushing expense for a city in steep decline. In some years, the outside actuary found, Detroit poured more than twice the amount into the pension fund that it would have had to contribute had it only paid the specified pension benefits.

And even then, the city’s contributions were not enough. So much money had been drained from the pension fund that by 2005, Detroit could no longer replenish it from its dwindling tax revenues. Instead, the city turned to the public bond markets, borrowed $1.44 billion and used that to fill the hole.

Even that didn’t work. Last June, Detroit failed to make a $39.7 million interest payment on that borrowing â€" the first default of what was soon to become the biggest municipal bankruptcy case in American history.

Detroit said that making the interest payment would have consumed more than 90 percent of its available cash. And besides, the hole in its pension fund was growing again, and it needed yet another $200 million for that.

When Detroit turned to the bond market in 2005, it acknowledged that it needed cash for its pension fund but did not explain its long history of paying out more than the plan’s legitimate benefits, including the bonuses, known as “13th checks,” which were reported earlier this month by The Detroit Free Press. Nor did the city describe the pension fund’s distributions to active workers, or that a 1998 shift to a 401(k)-style plan had been blocked and turned instead into a death benefit. In its most recent annual valuation of the fund, the plan’s actuary said it was still trying to determine the “effect of future retroactive transfers to the 1998 defined contribution plan,” without mentioning that it had not been carried out.

All of these things eroded the financial health of the pension system, but neither the magnitude of the harm, nor its effect on the city’s own finances, were disclosed to investors. German banks were big buyers of Detroit’s pension debt; now they are complaining that they were told it was sovereign debt.

Finally, in 2011, the city hired the outside actuary to get a handle on where all the money was going. The pension system’s regular actuaries, with the firm of Gabriel Roeder Smith, would not provide the information because they worked for the plan trustees, not the city.

The outside actuary, Joseph Esuchanko, concluded that the various nonpension payments had cost the struggling city nearly $2 billion from 1985 to 2008 because the city had to constantly replenish the money, with interest. The trustees began making the payments even before 1985, but it appears that Mr. Esuchanko could not get data for earlier years.

His calculations included only the extra payments by Detroit’s pension fund for general workers. Detroit has a second pension fund, for police officers and firefighters, which also made excess payments in the past. But Mr. Esuchanko could not get the data he needed to calculate those, either.

When Mr. Esuchanko reported his findings, Detroit’s city council voted to halt all payments except legitimate pensions, as described in plan documents. The police and firefighters’ plan trustees appear to have discontinued the practice earlier.

Detroit’s pension trustees, and their lawyers, were unavailable on Wednesday to comment on the extra payments.

Joseph Harris, who served as Detroit’s independent auditor general from 1995 to 2005, said the payments were approved by the pension board of trustees, and it would have been useless for the city to have tried to stop them during his term.

“It was like dandelions,” he said. “You just accept them. They were there, something you’ve seen all your life.”

When asked on what legal authority the trustees made the payments, Mr. Harris said, “My understanding was, it had to be approved by city council, and council was under the belief that the money was there â€"t hat the pension funds were earning the money, with the consideration that in bad times the city would be making up the difference. I hate to say that. Ultimately the fund has to be funded by the taxpayers.”

It’s Time for Bill Gates to Part Ways With Microsoft

Maybe Bill Gates should follow Steven Ballmer out of Microsoft.

Allowing Microsoft to buy Nokia’s smartphone business as he exits will saddle Mr. Ballmer’s successor with a flawed strategy. Mr. Gates, the company’s founder and chairman, bears some responsibility for this and other missteps. With less than 5 percent of the shares - scarcely more than Mr. Ballmer owns - Mr. Gates matters more to his charitable foundation than to Microsoft these days.

In a sense, it’s sacrilegious to suggest that Mr. Gates and the software behemoth he started part ways. He understands technology like few others and has demonstrated the acumen to create a huge business, now worth some $270 billion. With about $12.4 billion of stock, he is also still the biggest single shareholder and, given the long personal association, he surely cares about Microsoft’s future.

Yet his many talents don’t include effectiveness as chairman. Under his leadership, Microsoft’s board left Mr. Ballmer in place too long. Now that Mr. Ballmer is to retire as chief executive within a year, Mr. Gates doesn’t have a replacement ready, an important task for any chairman.

The board let Mr. Ballmer waste money by chasing consumer markets and hardware, with the company’s online services business losing $12 billion over the last three years alone. Directors also just sanctioned the purchase of Nokia’s smartphone operations for $7.2 billion, locking Mr. Ballmer’s successor into manufacturing devices - hardly a Microsoft strength these days.

True, in the last decade of Mr. Ballmer’s 13-year tenure the maturing company has returned more than $180 billion to investors, far more than any of its technology peers. Profit has also risen sharply. Despite this and Mr. Ballmer’s passion, evident at Microsoft’s annual investor meeting last week, shareholders just don’t seem to believe in the company’s strategy, developed with Mr. Ballmer and Mr. Gates in charge.

Over 10 years, Microsoft shares are barely higher. By comparison, with the odd exception like Hewlett-Packard, the likes of Apple, Google, Oracle and IBM have recorded big gains. The Nasdaq index has roughly doubled

Mr. Gates’s primary interest also arguably lies elsewhere these days. He stopped working full time at Microsoft five years ago. The $38 billion endowment of his charitable foundation dwarfs his Microsoft holding. Improving education and preventing disease worldwide may also seem more compelling these days than deciding whether a sprawling company should build tablet computers.

Mr. Ballmer’s belated departure offers Mr. Gates a window of opportunity. The world might be better off with his full attention on the foundation - and so would Microsoft’s investors.

Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Britain Sues Over Caps on Bankers’ Bonuses

LONDON - Britain said on Wednesday that it had filed a lawsuit at the European Court of Justice contesting a proposed cap on bankers’ bonuses.

The step is the latest by Britain in its campaign against a decision by European lawmakers earlier this year to limit bonus payments at Europe’s largest financial institutions to one year’s base salary. Britain’s Treasury argued that such a cap could be incompatible with European Union law and was introduced without considering its effect.

“These latest E.U. rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers’ fixed pay up rather than down, which will make banks themselves riskier rather than safer,” a spokesman for the Treasury said in a statement. “Regulation of pay in this manner goes beyond what is permitted in the E.U. Treaty.”

Britain said it would still impose the bonus cap rules because it was obliged to do so under European law but was seeking clarity on its objections from the European court in Brussels.

“Britain is launching a legal challenge as we think that the legislation as currently drafted is not fit for purpose,” the Treasury said.

Amid widespread public anger over outsize pay packages at banks while many taxpayers were still affected by the aftermath of the financial crisis, European lawmakers moved to put together a set of rules to address the public’s concerns. But many in London’s financial district have harshly criticized the rule, arguing it would harm the competitiveness of the city and Europe as a whole.

The bonus cap rule, which also states that a bonus can be twice the base salary if a majority of shareholders approve, is expected to take effect on 2014 payouts.

The British Bankers’ Association said earlier this month that about 35,000 employees at banks around the world could be affected by European Union bonus caps. The group had requested that the tougher bonus rules be postponed.

In JPMorgan Case, a Missed Opportunity to Charge Its Executives

Both the Securities and Exchange Commission and JPMorgan Chase won great public relations victories last week. But the public lost â€" and in ways that go far beyond this one spat.

By cracking down on the bank for its faulty internal controls in the $6 billion London Whale trading loss, the S.E.C. can claim to be the ferocious regulator we have all been waiting for. JPMorgan and its chief executive, Jamie Dimon, got the best coverage they could have hoped for under the circumstances: the sense that the bank is beleaguered, surrounded by regulators, but at least it could put the trading loss behind it.

Yes, the S.E.C. wrung an admission of wrongdoing out of the bank, and the regulators scored a large settlement. It’s an improvement for a regulator to display the ferocity of a mealworm, rather than a banana slug, but let’s hold the celebrations until it reaches at least the level of a garter snake.

After all, Mr. Dimon had already made a great display of admitting that he and the bank’s senior ranks had messed up â€" well, at least as soon as it was clear that bluster wasn’t getting them anywhere.

The admission was nice, but the S.E.C. did not charge any top executives with misleading disclosure. Why not?

Financial markets depend on true and accurate information. Disclosure isn’t some i-dotting, t-crossing regulatory nicety; it’s fundamental. And the Senate Permanent Subcommittee on Investigations, in its huge report on the trading loss, made a convincing case that the chief financial officer at the time, Douglas L. Braunstein, made several highly misleading statements in an April 13, 2012, conference call with shareholders and the public.

The bank counters by saying, essentially, that its officers believed what they said when they said it.

“Our senior executive team acted in good faith. These regulatory settlements involve no allegations of intentional misconduct by any of these people,” said Joseph Evangelisti, a company spokesman. Since the beginning, he says, “the goal was always to get it right,” pointing out that Mr. Dimon told his people, as quoted by the British financial regulator, that they should pretend that the pope was on one shoulder and the head of the S.E.C. was on the other, asking: “What is the right thing to do?”

Whether Mr. Braunstein’s statements were the “right thing,” they were unequivocally wrong as matters of fact. Even he, at a March Senate hearing, acknowledged that he made a number of inaccurate statements, though he said they were based on what he had been briefed on at the time. (He declined a request for comment.)

Let’s review. On that April 13 call, Mr. Braunstein made four statements that the Senate subcommittee found erroneous about the trades made by the bank’s chief investment office. He said the trading was “fully transparent to the regulators.” He said of the trading that “all of those positions are put on pursuant to the risk management at the firmwide level.” He said they were “made on a very long-term basis.” And most important, he emphasized that the traders were hedging.

It wasn’t only Mr. Braunstein. His comments mirrored talking points the bank had prepared days earlier. The Senate subcommittee report says the bank’s communications officer and chief investor liaison circulated talking points and met with reporters and analysts with the “primary objectives” to communicate that the chief investment office’s activities were “ ‘for hedging purposes’ and that the regulators were ‘fully aware’ ” of the trading. “Neither of which was true,” the Senate report says.

And of course, Mr. Dimon, the chief executive, had said that initially the trades were hedges but they had turned into something different.

The trading wasn’t disclosed to regulators, the bank’s top risk managers had no window into it, and the traders were actively buying and selling. Most significant, it wasn’t hedging. The trading in the London group of the chief investment office was proprietary, intended to create profit for the bank. That’s the kind of activity that will presumably be banned under the interminably delayed Volcker Rule, should the regulators deign to finish it and not permit large exemptions.

“Given the information that bank executives possessed in advance of the bank’s public communications on April 10, April 13, and May 10, the written and verbal representations made by the bank were incomplete, contained numerous inaccuracies, and misinformed investors, regulators and the public,” the Senate report says.

The public relations battle continues.

The S.E.C. says it isn’t finished yet. The investigation has three parts: the case against the traders for mismarking the value of the trades, for which two have been charged criminally; the look into the company for internal controls, which was settled last week; and a third, against senior individuals for misrepresentations. The third continues. The agency may yet come down on top executives for their misleading statements.

I got a different sense from the company, however. The S.E.C. investigated the April 13 statements and the bank regards its senior executives to be in the clear, a person at JPMorgan told me. Mr. Dimon, for one, has been cleared, according to bank statements that were approved by the S.E.C.

In the past, when companies have claimed to be cleared and the S.E.C. has insisted they weren’t, the companies were often right. When the S.E.C. settled with Citigroup over a misleading mortgage securities deal, called a collateralized debt obligation, the agency said it covered just one deal. The bank said the S.E.C. had wrapped up all the investigations into those types of deals. Lo and behold, the banks were right and the S.E.C. never came back.

As always, this stuff isn’t easy, and I have some sympathy for the agency. Companies have a legal obligation that their books, records and S.E.C. filings are accurate. If they aren’t, that’s negligent and a violation of securities laws. Not so with statements to the public on conference calls. Under the law, proving fraud requires the S.E.C. to either show what was on the executives’ minds or at least establish they were reckless. Even with a civil case, the agency needs evidence that the executives knew what they were saying wasn’t true â€" or that they had every reason to but went ahead anyway.

JPMorgan understands this perfectly well. The one unshakable talking point, repeated like a drumbeat, is the executives emphasizing their good faith.

The implications for the public are larger than this single case. One of the important aspects for the Volcker Rule, which aims to bar banks from speculating with money that is backed by taxpayers, will be how much disclosure regulators require.

Clear and complete disclosures would allow institutional investors, regulators, counterparties and financial experts to sort out whether the banks are complying with the law or not.

A slap for lesser sins darkens the future of the already enfeebled rule. Without serious disclosure and serious enforcement, the risk of another calamity rises.

Things Traders Say, ICAP Edition

Curry meals, steaks, Champagne and a Ferrari.

Those were some of the rewards promised to brokers at the financial firm ICAP in exchange for helping to manipulate a benchmark interest rate known as Libor, according to American and British regulators, which fined the firm a combined $87 million on Wednesday.

The documents released by the authorities on Wednesday include a trove of e-mails and instant messages between brokers and traders that were peppered with colorful language. Many apparently had a taste for the finer things, and some had a penchant for complaining.

The snippets of dialogue reproduced in the legal documents suggest that the brokers and traders spoke openly about giving and receiving bribes, even allowing themselves to boast.

One former broker at ICAP, Colin Goodman, who faces criminal charges by the Justice Department, had a number of nicknames and sometimes used them to sign e-mails. He was known as “Lord Libor” and “Lord Baliff,” according to Justice Department’s complaint. (The back-and-forth includes numerous misspellings, which are left intact.)

In November 2007, another former ICAP broker, Darrell Read, addressed Mr. Goodman by his nickname: “Welcome back M’Lord,” Mr. Read said, according to the Justice Department. Referring to Tom A.W. Hayes a former trader at UBS, Mr. Read continued, “Tom has been like a little lost sheep without you!!”

But even if Mr. Goodman was “Lord Libor,” he collaborated with others, according to the Justice Department. Mr. Read, who also faces criminal charges, sent him an e-mail in October 2006 urging him to try to keep the rate high, the complaint shows.

“Ta mate get your curry order ready will send [someone] round tomorrow,” Mr. Read said, according to the complaint. “If you can get them up there and keep them there tomorrow reckon the trader from UBS Tokyo will come over and buy you a curry himself!”

It wasn’t just curry that apparently whetted the appetite of the ICAP brokers. In December 2007, one derivatives broker added a postscript to his message to a cash broker: “Bubbly on its way with [Senior Yen Trader],” according to the Commodity Futures Trading Commission. (Unlike the Justice Department, the trading commission does not name the individuals in its order.)

“[Senior Yen Trader] will buy you a ferrari next yr if you move 3m up and no change 6m,” the derivatives broker said in a text message in February 2008, referring to three-month and six-month rates, according to the trading commission.

There was also talk of steak. In a conversation with a Royal Bank of Scotland employee who made submissions for the Yen Libor, one ICAP broker focused on sterling-based transactions requested that the rate be influenced downward, according to the trading commission’s order.

“If u cud see ur way to a small drop there might be a steak in it for ya, haha,” the broker said in March 2010, according to the order.

But not all offers were so lavish.

“Yeah just bought him a coffee!” a senior yen trader said in April 2008, according to the trading commission.

“:-D could be the cheapest bribe of your life!” a derivatives broker replied, the order shows.

Though several of the exchanges seem lighthearted, the tone sometimes became more sober, especially when financial rewards were being discussed.

In April 2007, Mr. Goodman sent an e-mail to Daniel Wilkinson, an ICAP employee overseeing yen deals, who was also criminally charged.

“With UBS how much does [Hayes] appreciate the yen libor scoop?” Mr. Goodman wrote, according to the Justice Department, adding, “It seems to me that he has all his glory etc and u guys get his support in other things.”

“I get the dribs and drabs. Life is tough enough over here without having to double guess the libors every morning and get zipper-de-do-da,” Mr. Goodman continued, according to the Justice Department. “How about some form of performance bonus per quarter from your b bonus pool to me for the libor service.”

Mr. Wilkinson responded minutes later, according to the Justice Department: “As for kick backs etc we can discuss that at lunch and I will speak to Tom about it next time he comes up for a chat.”

In another instance, the dialogue apparently became heated. A derivatives broker addressed a junior broker in October 2007, using all capital letters, according to the trading commission: “If [Cash Broker 1] is off today [Junior Broker 1] and these libors come roaring off I’ll hold you personally responsible. … keep onto that other muppet [Cash Broker 2] please if so!!”

On Wednesday, ICAP’s chief executive, Michael A. Spencer, said in a statement: “We deeply regret and strongly condemn the inexcusable actions of the brokers,” adding that none of the brokers still worked at the firm. “Their conduct contravenes all that ICAP stands for.”

In some of their messages, the defendants discussed the need to conceal what they were up to.

“Had a lot of compliance pressure recently due to the credit problems, we both need to be a little more subtle in our ‘views,’” Mr. Read told Mr. Hayes in an e-mail in November 2007, using all capital letters, according to the Justice Department.

“My e-mails etc. need to be worded more carefully.”

SAC in Settlement Talks

Federal prosecutors have begun talks with the hedge fund SAC Capital Advisors to settle criminal insider trading charges against the firm, DealBook’s Peter Lattman reports. The settlement talks are at an early stage, and the two sides are far from any agreement, people briefed on the case said. The government is seeking a guilty plea from SAC and a financial penalty of as much as $2 billion, they said.

Steven A. Cohen, the owner of SAC, also faces a civil action filed by regulators that could result in his being barred from the securities industry. Mr. Cohen’s lawyers would probably seek to resolve both cases simultaneously, Mr. Lattman reports. “Many expected that SAC would not be able to survive the criminal charge, which the United States attorney’s office in Manhattan brought against the firm in July. Yet SAC has withstood the indictment largely because Wall Street banks, like JPMorgan Chase and Goldman Sachs, have continued to trade with the firm and provide financing for its operations.”

“In trying to reach a settlement, Mr. Cohen wants to save his once-celebrated hedge fund, which has been brought low by a raft of criminal charges against former employees. Though SAC has said it has never encouraged or tolerated insider trading, it would have difficulty exonerating itself at trial, legal specialists have said.”

Settlement talks continue as two former SAC portfolio managers prepare for separate criminal trials. On Tuesday, one of those trials, the insider trading case against Mathew Martoma, was delayed for two months.

ALIBABA MOVES TOWARD NEW YORK I.P.O.  |  The Chinese Internet giant Alibaba has ended talks with the Hong Kong stock exchange over an initial public offering and is now moving forward with plans to list its shares in New York, Neil Gough reports in DealBook. Alibaba’s “dialogue with Hong Kong” has “come to the end,” a person close to the company said on Wednesday. The company is “now turning to the U.S. to start the listing process,” the person said.

In talks over the planned I.P.O. â€" which would be a large prize for any stock exchange â€" Alibaba had proposed a corporate structure similar to what Google, Facebook and other United States companies have, allowing a core group of 28 Alibaba executives to keep control of the company after the I.P.O. But the Hong Kong stock exchange does not allow dual classes of stock and other types of mechanisms to preserve corporate control, Steven M. Davidoff wrote in the Deal Professor column on Tuesday evening. Hong Kong apparently declined to make an exception in Alibaba’s case.

“Despite persistent complaints that Washington regulations hamstring companies that want to go public â€" witness the push for last year’s Jump-Start Our Business Startups Act, or JOBS Act â€" in this case, the United States has become the place to avoid more stringent regulation,” Mr. Davidoff writes. The talks with Alibaba had put the Hong Kong stock exchange in a pickle: the offering is expected to raise as much as $15 billion, creating a public company with a $70 billion market value, making it a must-get for the exchange.

ON THE AGENDA  |  Data on new home sales in August is released at 10 a.m. Eric Schmidt, the executive chairman of Google, is on CNBC at 4 p.m. A Senate Banking subcommittee holds a hearing at 2:30 p.m. on improving market access for financial services in India.

JPMORGAN MAY SETTLE WITH GROUP OF AGENCIES  | “JPMorgan Chase, seeking to avert a wave of litigation from the government, is negotiating a multibillion-dollar settlement with state and federal agencies over the bank’s sale of troubled mortgage securities to investors in the run-up to the financial crisis,” Jessica Silver-Greenberg and Ben Protess report in DealBook.

“During settlement talks this week, proposals emerged that would require JPMorgan to pay anywhere from $3 billion to about $7 billion, people briefed on the negotiations said. The settlement, the people said, might also require JPMorgan to provide some financial relief for struggling homeowners. Although the ultimate amount is still in flux, it is clear that any deal would dwarf the size of other settlements the bank has reached to resolve separate regulatory issues.”

Mergers & Acquisitions »

Fiat’s Chief Rolls the Dice With a Public Offering  |  Sergio Marchionne, who impressed the automotive world by resurrecting Chrysler from bankruptcy and driving it toward a merger with Fiat, yielded to pressure from the United Automobile Workers retiree health care trust by filing for an I.P.O. “Now Mr. Marchionne is gambling that the open market will set a price for Chrysler’s shares that will prompt the U.A.W. trust to turn back to Fiat for a better deal,” Bill Vlasic writes in The New York Times. NEW YORK TIMES

New York Life Agrees to Buy Dexia Unit  |  The insurer New York Life agreed to buy Dexia Asset Management for 380 million euros ($512 million), as it expands into the money management business, Bloomberg News reports. BLOOMBERG NEWS

M.&A. Diplomacy in Tech Deal  |  Applied Materials heeded local sensitivities and ceded governance duties in the proposed acquisition of its Japanese rival, while most of the financial benefits will accrue to its own shareholders, Robert Cyran of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS

Raising Its Stake in Telecom Italia, Telefónica Eyes Latin America  |  The Spanish telecommunications giant Telefónica agreed to raise its stake in the struggling Telecom Italia to 66 percent through a $437 million share issue in an attempt to gain greater control of the Italian operator’s assets in Latin American markets. DealBook »

BlackBerry Executives Sold Stock Amid Bad News  |  “Top BlackBerry executives sold small blocks of the company’s stock on the day that the smartphone maker warned of a huge quarterly operating loss and massive job cuts, according to Canadian regulatory filings,” Reuters reports, noting that there is no evidence of wrongdoing by the executives. REUTERS

INVESTMENT BANKING »

A.I.G.’s Chief Backs Off Comments Over Bonuses  |  After telling The Wall Street Journal that the uproar over bonuses at the American International Group was similar to racial crimes in the South, Robert H. Benmosche, the chief executive of A.I.G., said in a statement that he had made “a poor choice of words. I never meant to offend anyone by it.” His original comments were condemned by Benjamin M. Lawsky, New York’s superintendent of financial services. WALL STREET JOURNAL

When Leaning In Isn’t Enough  |  “The policies that will most help improve the lot of women in the workplace may be focused not on women but on families and, specifically, on men,” Eduardo Porter writes in the Economic Scene column in The New York Times. NEW YORK TIMES

Housing Recovery, for Now, Is on Track  |  “The housing market, one of the main drivers of the economic recovery, continues to gain strength despite the drag of rising mortgage rates and other economic headwinds, but some analysts are worried that it may slow in the months ahead,” The New York Times writes. NEW YORK TIMES

A Wager on Home Prices Is Poised to Pay Off  |  The Essent Group, a Bermuda-based mortgage insurer that raised $500 million from investors including Goldman Sachs and George Soros in 2009, “filed last week to sell shares in the first initial public offering of a home-loan guarantor in almost two decades,” Bloomberg News reports. BLOOMBERG NEWS

PRIVATE EQUITY »

Private Equity Sees a Bright Future in Africa  |  “Africa’s rapid economic growth has lured top American private equity firms to invest in recent years, including the Carlyle Group, Blackstone, K.K.R. and PineBridge Investments. While the continent represents a sliver of their overall investments, there’s likely much more to come,” CNBC reports. CNBC

HEDGE FUNDS »

A Hedge Fund Manager Who Doesn’t Mind a Losing Bet  |  Mark Spitznagel, the founder of Universa Capital, believes the stock market is going to fall by at least 40 percent in one great market “purge.” Until then, he is paying for the option to short the market at just that point, losing money each time he does. DealBook »

Paulson Bets on Puerto Rico  |  The hedge fund run by John A. Paulson bought an 80 percent stake in a resort complex near San Juan, betting that tax changes would attract wealthy financiers to the island, The Financial Times reports. FINANCIAL TIMES

I.P.O./OFFERINGS »

How Twitter Cleaned Up Before an I.P.O.  |  “Like the service, the aim was to make the Twitter I.P.O. as simple as possible,” one unidentified person familiar with the situation told Kara Swisher of AllThingsD. “While everyone wants to compare it to trying to avoid the circus around the Facebook I.P.O., it’s really less anti-Facebook than anti-old-Twitter.” ALLTHINGSD

Riverstone Holdings Plans $2.4 Billion I.P.O.  |  Riverstone Holdings, a private equity fund, is planning an initial public offering in London of a new investment company called Riverstone Energy, aiming to raise up to $2.4 billion. DealBook »

VENTURE CAPITAL »

Prosper Raises $25 Million in New Round, Adding BlackRock as a Backer  |  The new round of financing disclosed on Tuesday by Prosper Marketplace reflects the continued interest from Wall Street and the venture capital community in peer-to-peer lending. DealBook »

LEGAL/REGULATORY »

Criminal Charges Expected for ICAP Staff Over Libor  |  Federal prosecutors are expected to announce criminal charges against former or current employees of the British brokerage firm ICAP over the rigging of benchmark rates, The Wall Street Journal reports, citing unidentified people familiar with the plans. The announcement is expected to coincide with civil settlements from American and British authorities. WALL STREET JOURNAL

A Call for New Laws in New York to Fight High-Tech Crime  |  A task force made proposals, including strengthening the laws against identity theft and the theft of computer code, in a report unveiled by the Manhattan district attorney, Cyrus R. Vance Jr. DEALBOOK

New York Still Investigating Trading on Early Access  |  Eric T. Schneiderman, New York’s attorney general, said on Tuesday that his office was still scrutinizing high-speed trading based on early looks at sensitive data. DealBook »

Sweden Sells Remaining Stake in Nordea  |  Sweden sold its remaining 7 percent stake in the big bank Nordea, raising about $3.4 billion, Reuters reports. REUTERS

Bharara Acknowledges That Budget Issues Are Straining His Office  |  As lawmakers in Washington wrangle over financing the federal government, Preet Bharara, the United States attorney in Manhattan, said at a conference that budget constraints had severely limited his ability to hire lawyers. DealBook »

The Bankruptcy Question for BlackBerry  |  Bankruptcy could eventually become an option for BlackBerry, though it has not signaled yet that it is under consideration, Stephen J. Lubben writes in the In Debt column. The Canadian version differs from Chapter 11. DEALBOOK

Stryker to Buy MAKO Surgical for $1.65 Billion

The Stryker Corporation, the medical technology company based in Kalamazoo, Mich., said on Wednesday that it would pay $1.65 billion for the MAKO Surgical Corporation.

The agreed price of $30 a share represents a huge 86 percent premium for MAKO, which makes tools for robotic assisted surgery in orthopedics. MAKO shares closed at $16.17 on Tuesday.

“MAKO has established a compelling technology platform in robotic assisted surgery, which we believe has considerable long-term potential in joint reconstruction,” Kevin A. Lobo, chief executive of Stryker, said in a statement.

Stryker investors, however, did not appear to like the news. Stryker shares were down 2.6 percent in premarket trading on Wednesday morning.

The deal also anticipates the issuance of nearly four million additional MAKO shares related to a previously planned acquisition by MAKO. Details of that transaction were not announced.

“The combination of Stryker’s established industry leadership with MAKO’s innovative products and people contains the power to positively transform orthopedics,” Maurice R. Ferré, M.D., chief executive of MAKO, said in a statement. “It is with this in mind that MAKO’s board of directors unanimously voted to recommend that MAKO’s shareholders vote in favor of it.”

Citigroup advised Stryker, with Skadden, Arps, Slate, Meagher & Flom providing legal counsel.

ICAP to Pay $87 Million Fine in Libor-Fixing Case

LONDON â€" American and British regulators fined the financial firm ICAP a combined $87 million on Wednesday for its role in the manipulation of the benchmark interest rate known as Libor, making it the fourth major financial company to reach a settlement in the global investigation.

ICAP, a London-based company that acts as a broker for firms that trade financial products, agreed to a $65 million settlement with the Commodity Futures Trading Commission in the United States and a £14 million, or $22 million, settlement with Britain’s Financial Conduct Authority.

The Justice Department also brought criminal charges against three former ICAP employees on Wednesday over their roles in the scandal. The men, Darrell Read, Daniel Wilkinson and Colin Goodman, could face up to 30 years in prison for each count, according to American prosecutors.

The scandal over Libor, a benchmark to which interest rates on trillions of dollars of financial products are pegged, erupted in the summer of 2012, as investigators unveiled evidence that many big investment banks had manipulated the benchmark for their own profit. Libor is short for the London interbank offered rate.

American and British regulators said that some of ICAP’s employees had tried to alter the reported figures from which Libor is compiled. The brokers also received payments and other incentives from bank traders for the efforts to change Libor rate submissions, according to regulatory filings.

‘‘This was insolent conduct impacting a benchmark rate that influences almost anything consumers buy on credit,’’ a commodities commission member, Bart Chilton, said in a statement on Wednesday. ‘‘These benchmarks are just too important to become a playground for some big-talking bad guys.’’

Over more than four years through early 2011, ICAP employees spread misleading information about a number of Libor-linked interest rates in an effort to manipulate the rates, according to the regulatory filings released on Wednesday. The ICAP brokers, one of whom was called Lord Libor, received more than 400 requests from a single senior trader at a large international bank to alter the rates for financial gain.

During the lengthy attempts to manipulate the benchmark rates, the ICAP employees referred to individuals at other banks that helped to set Libor as “sheep,” while other traders provided the brokers with Champagne, dinners and eventually $72,000 in kickbacks to alter the rates.

“The misconduct in relation to Libor has cast a shadow over the financial services industry,” Tracey McDermott, director of enforcement and financial crime at the Financial Conduct Authority of Britain, said in a statement. “The findings we publish today illustrate, once again, individuals within the industry acting with a cavalier disregard both for regulatory obligations and the interests of the markets.”

The latest settlement follows a number of previous fines for some of the world’s largest financial institutions in connection to the global rate-rigging scandal.

Britain’s Barclays, the Royal Bank of Scotland and UBS of Switzerland already agreed to pay a combined $2.5 billion in fines related to Libor. Other banks, including Citigroup and Deutsche Bank, also remain under investigation, and future penalties could be announced before the end of the year.

The American criminal charges against some of ICAP’s former employees signify a new effort to bring prosecutions against individuals who have been implicated in the rate-rigging scandal. The three each face one count of conspiracy to commit wire fraud and two further counts of wire fraud.

While several large banks have paid multimillion dollar fines, no people have yet been convicted for their role in the global scandal.

“By allegedly participating in a scheme to manipulate benchmark interest rates for financial gain, these defendants undermined the integrity of the global markets,” Attorney General Eric Holder said on Wednesday. “They were supposed to be honest brokers, but instead, they put their own financial interests ahead of that larger responsibility.”

British prosecutors also have started to file charges against individuals in the Libor case. In June, a former UBS and Citigroup trader Tom A. W. Hayes was charged on eight counts of fraud. Britain’s Serious Fraud Office also charged Terry J. Farr and James A. Gilmour, two former brokers at RP Martin Holdings, a rival of ICAP. Mr. Hayes is accused of conspiring with employees at several financial institutions, including UBS, Royal Bank of Scotland and ICAP.

ICAP’s fine is much lower than those imposed on the banks that already have reached settlements because the authorities had to take into account the size of ICAP and its financial resources. The firm previously said that it had suspended one employee and placed three others on administrative leave. It said in June that its senior managers were not aware of or involved in any attempts by traders at large banks to manipulate Libor.

“We deeply regret and strongly condemn the inexcusable actions of the brokers,” ICAP’s chief executive, Michael Spencer, said in a statement on Wednesday, adding that none of the brokers still worked at the firm. “Their conduct contravenes all that ICAP stands for.”

Barclays was the first bank to agree on a Libor settlement of $453 million in June last year. UBS followed later that year with a $1.5 billion fine. The Royal Bank of Scotland, which is majority-owned by the British government following a bailout in 2008, settled Libor charges for $610 million in February.

The latest Libor settlement was accompanied by the publication of a series of colorful e-mail exchanges between ICAP employees and unnamed traders at some of the world’s largest banks. The messages outline the financial and other incentives that were offered to ICAP employees in exchange for manipulating the Libor rate.

In one series of messages, a senior trader at UBS offers to buy an ICAP broker a Ferrari if he alters some of the Libor rates.

“If you can get them up there and keep them there tomorrow reckon the trader from UBS Tokyo will come over and buy you a curry himself!” read another message.

A year after the first Libor fines were announced, global regulators are trying to rebuild confidence in one of the world’s most-used benchmark rates.

In July, the parent company of the New York Stock Exchange won a contract to administer and improve the benchmark, which has been overseen by the British Bankers’ Association, a trade body. The European Union also is considering regulating Libor and other financial benchmarks, according to a draft legislation published last week.

‘‘As should be clear from today’s action, any market participant who seeks to undermine the integrity of a global benchmark interest rate must be held accountable,’’ David Meister, the commodity commission’s director of enforcement said on Wednesday.

Alibaba Said to Shift Target from Hong Kong to U.S. for I.P.O.

HONG KONG-The Chinese Internet company Alibaba has ended talks with the Hong Kong stock exchange over an initial public offering and is now moving forward with plans to list in New York, a person close to the Chinese company said on Wednesday.

Alibaba’s ‘‘dialog with Hong Kong’’ has ‘‘come to the end,’’ said the person close to the company, declining to be named because the information is not public. The company is ‘‘now turning to the U.S. to start the listing process,’’ the person said.

Alibaba has yet to appoint underwriters for an I.P.O. or submit filings to sell shares in any market.

In its discussions over a potential listing â€" which, at as much as $15 billion, would be a huge win for any stock exchange â€" Alibaba had proposed to officials in Hong Kong that the company’s 28-member partner committee be allowed to continue to nominate a majority of its board of directors.

Hong Kong discourages dual-class shareholding or other structures that organize control over companies in a way that is disproportionate to individual shareholdings.

Hong Kong appears to have declined to make an exception in Alibaba’s case. A spokesman for the Hong Kong exchange declined to comment on Wednesday, citing company policy.

Dual-class and related share structures are permitted in the United States. Google, Facebook and the New York Times Company have dual-class listings, which give founders or family owners greater say over how a company is run.

Still, Alibaba does not intend to seek a dual-class listing. The company is ‘‘not going to come to the U.S. with dual-class’’ but is ‘‘going to come looking for a way’’ to use its existing partnership model, the person close to the company said.

Alibaba was founded in 1999 and its partner committee structure was introduced in 2010. Its 28 members include Jack Ma, the executive chairman, as well as Mr. Ma’s co-founders, top lieutenants and other long-serving senior staff members.

The partners own about 10 percent of the company, and the committee does not include SoftBank, the Japanese telecommunications company that owns 36.7 percent of Alibaba, or Yahoo, which has a 24 percent stake.

‘‘What sets our partnership apart from the others is that this is not a mere profit sharing mechanism, nor is it a vehicle of power to exert greater control over the company: rather, it is a system that provides a driving force within the company,’’ Mr. Ma wrote this month in a letter to Alibaba employees. ‘‘Partners, as operators of the company, builder of business, carriers of corporate culture, as well as shareholders, are the most likely to adhere to the company’s mission and insist on long-term interests to create long-term value for customers, employees and shareholders.’’

Analysts and investors expect Alibaba’s listing â€" if, when and where it happens â€" to be one of the biggest and most highly anticipated since Facebook raised $16 billion in May 2012.

Alibaba operates online businesses including the merchandise sourcing Web site Alibaba.com; Tmall.com, a platform for retailers to connect with online shoppers; and the consumer-to-consumer retail Web site Taobao Marketplace.

Alibaba’s profit tripled in the first quarter of the year, rising to $668.7 million from $220.5 million in the same period a year earlier, according to Yahoo’s stock exchange filings. Quarterly revenue increased to $1.38 billion, up 72 percent from a year earlier.