Adviser in ‘Big Short’ Faces S.E.C. Action

Washington D.C., Oct. 18, 2013 â€"

The Securities and Exchange Commission today announced charges against a Morristown, N.J.-based investment advisory firm and its owner for misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties.

The SEC’s Enforcement Division alleges that Harding Advisory LLC and Wing F. Chau compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. in order to accommodate trades requested by a third-party hedge fund firm whose interests were not necessarily aligned with the debt investors.  Harding agreed to give the hedge fund firm rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO.  These rights, which were not disclosed to investors, included the right to veto Harding’s proposed selections during the “warehouse” phase that preceded issuance of the CDO’s debt instruments.  The influence of the hedge fund firm led Harding to select assets that its own credit analysts disfavored.

“A collateral manager’s independent selection of assets is an important selling point to potential CDO investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised.”

According to the SEC’s order instituting proceedings, the hedge fund firm was Magnetar Capital LLC, which had invested in the equity of the CDO.  Merrill Lynch, Pierce, Fenner & Smith Inc. structured and marketed the CDO, which closed on Sept. 26, 2006.  Merrill Lynch, Magnetar, and Harding agreed in the spring of 2006 that Harding would serve as collateral manager for the CDO.  Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar’s strategy included “hedging” its equity positions in CDOs by betting against the debt issued by the CDOs.  Because Magnetar stood to profit if the CDOs failed to perform, Chau knew that Magnetar’s interests were not necessarily aligned with investors in the debt tranches of Octans I, whose investment depended solely on the CDO performing well.

The SEC’s Enforcement Division alleges that while assembling the collateral for Octans I, Chau and Harding allowed Magnetar an undisclosed influence over the selection process.  Harding’s own credit analysis of many of the selected assets was disregarded, and Magnetar’s influence over the portfolio was omitted from materials used to solicit investors for the CDO.  Chau and Harding misrepresented the standard of care that Harding would use in acquiring collateral for Octans I.

The SEC’s Enforcement Division further alleges that Harding and Chau breached their advisory obligations to several other CDOs for which they served as investment managers.  As a favor to Merrill Lynch and Magnetar, Harding and Chau purchased bonds for those CDOs that Chau and Harding disfavored.  In accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch, “I never forget my true friends.”

The SEC’s Division of Enforcement alleges that by engaging in the conduct described in the SEC’s order, Harding and Chau violated Section 17(a) of the Securities Act of 1933 and Section 206 of the Investment Advisers Act of 1940.  Chau also is charged with aiding and abetting and causing Harding’s violations. The proceedings before an administrative law judge will determine what relief against Harding and Chau is in the public interest.

The SEC’s investigation, which is continuing, has been conducted by staff in the Complex Financial Instruments Unit and the New York Regional Office, including Steven Rawlings, Brenda Chang, Elisabeth Goot, Sharon Bryant, Kapil Agrawal, Howard Fischer, Daniel Walfish, and Douglas Smith.  The case was supervised by Reid Muoio, and the litigation will be led by Mr. Fischer, Mr. Walfish, Ms. Goot, and Ms. Chang.


Weekend Reading: Take the Wall Street Earnings Quiz

Investment banks are struggling in Wall Street’s third-quarter earnings season following a drop in mortgage refinancing and a downturn in trading. How well do you know the big banks? Test yourself by matching the financial giant to the quote about their earnings reports.

If you’re keeping score, one correct answer: Back to business school, #financebros. Two correct answers: Meredith Whitney won’t respond to your LinkedIn request. Three correct answers: Belated congratulations on your Gentleman’s B at Harvard. Four correct answers: A hedge fund recruiter calls you at least once a week. Five correct answers: This is partnership material. Six correct answers: Maybe @GSElevator should start following you on Twitter. Seven correct answers: You’re either Michael Duvally or a quant.

The financial firms are JPMorgan Chase, Wells Fargo, Citigroup, Bank of America, BlackRock, Goldman Sachs and Morgan Stanley.

1. “It’s pretty straightforward: Whenever regulators go after the big financial institutions and corporations, it’s very good business for the law firms that represent them,” said Allen D. Applbaum, a co-leader of global risk and investigations at FTI Consulting and a former federal prosecutor.

2. “It is a quarter,” the bank’s chief financial officer reiterated several times, sounding frustrated while discussing poor performance.

3. “This was the best third quarter that wealth management has had â€" ever,” the bank’s chief financial officer said.

4. “Weak mortgage banking clearly stole the show,” said Shannon Stemm, a financial services analyst at Edward Jones. “That said, they’re able to continue their consecutive earnings growth.”

5. “Fundamentals continue to be outweighed by policy decisions and global growth is dictated more by central bankers and elected officials than business leaders,” the bank’s chief executive said.

6. “It is growing its more stable businesses like wealth management and reducing risk in the more volatile businesses like fixed income,” said Ms. Stemm.

7. “I can’t think of a significant business that had revenue growth year over year,” the bank’s chief financial officer said.

The answers are below.

A look back on our reporting of the past week’s highs and lows in finance.

FRIDAY, OCT. 18

Morgan Stanley Helped by Stock Trading Unit | Under the leadership of James P. Gorman, the bank has changed tack to focus on less risky areas of the business. DealBook »

Madoff’s Sons Cleared in London Trial | A judge concluded that neither Andrew or Mark Madoff had any knowledge of their father’s Ponzi scheme. DealBook »

HSBC to Appeal $2.46 Billion Judgment | The long-running securities fraud lawsuit in the United States is related to a consumer-loan and credit-card business that the British bank acquired more than a decade ago. The New York Times »

THURSDAY, OCT. 17

Like That Athlete? Buy a Share | In a twist on fantasy sports, a company plans to sell stock in the future financial performance of the N.F.L. running back Arian Foster. DealBook »

SAC Deal Could End Its Advisory Business | Winding down its business of managing money for outside investors is said to be part of a plea agreement being negotiated with prosecutors. DealBook »

Revenue Fall at Goldman Sachs Raises Concerns | There is some concern that the pull back is not short term and could be the new normal. DealBook »

WEDNESDAY, OCT. 16

Investors Cheer Deal but Worry About Reruns | The deal was far from a permanent solution. And investors were tabulating what the long-term costs of the political turmoil could be. DealBook »

A Regulator Cuts Its New Teeth on JPMorgan in ‘Whale’ Case | The settlement with the Commodity Futures Trading Commission could portend a wave of other actions against banks and hedge funds that build outsize trading positions. DealBook »

Jury Rules for Cuban in Setback for S.E.C. | The loss in the Mark Cuban case could reignite concerns about the agency’s struggles in the courtroom. DealBook »

Despite Loss in Mortgages, Profit Soars for Bank | Bank of America reported a sharp rise in third-quarter earnings, but the bank’s mortgage operations faltered, underscoring that home loans remain a challenging business for the nation’s banks. DealBook »

BlackRock Posts 14% Rise in Profit | The giant money management firm is now managing a record $4 trillion after customers put more money into its stock mutual funds and exchange-traded funds. DealBook »

An Activist Investor Is Urging Darden to Break Itself Up | Barington Capital is calling for the 2,100-restaurant empire to be broken into as many as three separate businesses, according to a letter sent to its board. DealBook »

TUEDAY, OCT. 15

Stalemate in Washington Puts Unpredictable Strain on a Vital Debt Market | The market where Wall Street firms borrow billions of dollars of short-term debt each day remains vulnerable to shocks. DealBook »

Bank Expected to Admit Fault in Trading Loss | For JPMorgan Chase, fines totaling billions of dollars are no longer sufficient to placate the government. Now the bank’s regulators want something stiffer: a mea culpa. DealBook »

Sharp Rise in Revenue for Twitter | As Twitter prepares to hit the road to begin peddling its stock to the public, the company disclosed new revenue numbers that may help it persuade investors to buy the shares. DealBook »

Citigroup Hurt by Lower Profit From Fixed-Income Trading | Grappling with a tepid mortgage market and a broad slowdown in its fixed-income business, the nation’s third-largest bank by assets reported disappointing third-quarter earnings growth. DealBook »

Deal Professor: A Push to End Securities Fraud Lawsuits Gains Strength | A behind-the-scenes fight at the Supreme Court could end shareholders’ ability to sue companies for securities fraud, writes Steven M. Davidoff. DealBook »

MONDAY, OCT. 14

Buyout Firms Are Chasing Sky-High Sums for Next Moves | Nearly 2,000 private-equity firms are making pitches to state retirement systems, corporate pension funds and wealthy investors to raise nearly three-quarters of a trillion dollars. DealBook »

DealBook Column: The Bloodlust of Pundits Swirls Around Jamie Dimon | There is an almost bizarre disconnect between the headlines and what the people who matter are seeking, writes Andrew Ross Sorkin. DealBook »

Moncler Files to Go Public on Milan’s Stock Market | The cold-weather apparel maker is the latest fashion company to pursue a stock listing, driven by investors’ desire to tap into luxury retail. DealBook »

Divining the Future: Chastening the Giant Banks | Banks have lost some of their swagger, but they’re back in fighting form. Will they always be too big to fail? The International New York Times »

SUNDAY, OCT. 13

Legal Bills Rising, Cohen Is Said to Plan Art Sales | The billionaire hedge-fund manager has put two major paintings by Andy Warhol and an abstract canvas by Gerhard Richter up for sale. DealBook »

WEEK IN VERSE

‘Nerd Versus Jock’ | MC Frontalot on the eternal battle at the heart of finances and fantasy sports. YouTube »

‘Family Affair’ | Mary J. Blige tries to get SAC excited about operating as a family office. YouTube »

THE ANSWERS

1. JPMorgan Chase; 2. Goldman Sachs; 3. Bank of America; 4. Wells Fargo; 5. BlackRock; 6. Morgan Stanley; 7. Citigroup

Drunk Driving Arrest for Ex-Refco Financial Officer

The former chief financial officer of Refco, the collapsed brokerage firm, offered a Florida state trooper $1,000 to let him go after being pulled over for drunken driving earlier this week, according to a police report.

Robert C. Trosten, the former financial chief, told the trooper that the federal government would be angry “about his arrest because he was a big deal,” the report says. He also said that his arrest, which occurred on Tuesday night, would “make the front page of the newspaper” and the trooper would be “a big shot.”

Mr. Trosten pleaded guilty to fraud in 2008 and has been cooperating with prosecutors in their cases against other former Refco executives.

Cooperation agreements, which are struck by defendants in the hopes of receiving a more lenient sentence, typically require that defendants not commit any further crimes. If they do, the government can terminate the agreement.

A lawyer for Mr. Trosten, Scott Morvillo, said on Friday that “Mr. Trosten deeply regrets his conduct of Tuesday evening and is taking all measures to ensure that this will never happen again.”

A spokesman for the United States attorney’s office in Manhattan, which has the cooperation agreement with Mr. Trosten, declined to comment.

News of Mr. Trosten’s arrest, in Bradenton, Fla., was reported earlier in the Sun Sentinel’s FloriDUH column, which describes its content as “weird, wacky, strange, news from the Sunshine State.”

More than five years after pleading guilty, Mr. Trosten, 44, has yet to be sentenced. He has testified as a government witness in trials of other Refco defendants â€" Tone Grant, a senior executive at the brokerage firm, and Joseph Collins, Refco’s outside lawyer.

One of the largest Wall Street scandals before the financial crisis, Refco, a brokerage firm based in New York, collapsed in October 2005 after disclosing that its chief executive, Phillip R. Bennett, was hiding hundreds of millions of dollars in bad debt from the company’s auditors and investors. Mr. Bennett pleaded guilty and is in prison. Mr. Grant and Mr. Collins were both convicted at trial.

The Florida trooper reported that Mr. Trosten’s “eyes were bloodshot and watery and his speech was slurred and thick tongued.”

Mr. Trosten was charged with driving while under the influence, with property damage, and spent the night in a local jail, where his blood-alcohol content was registered at .198 and .213, the report says. For drivers over 21, the legal limit in Florida is .08, according to the state’s Department of Motor Vehicles Web site.

Madoff’s Sons Cleared in London Trial

Of the many questions asked about Bernard L. Madoff’s Ponzi scheme, among the most frequent is whether his sons, Andrew and Mark, knew about the fraud despite their staunch insistence that they were kept in the dark.

For the first time, a judge has weighed in on this question, concluding that neither had any knowledge of their father’s scheme.

Andrew Madoff and Mark Madoff, who killed himself in 2010, were two of eight associates of Mr. Madoff who won a significant victory on Friday when a judge in London dismissed a case brought against them by the trustee seeking money for victims of the fraud.

After a six-week trial, Judge Andrew Popplewell dismissed all of the claims against Mr. Madoff’s sons, ruling that neither of them “knew of, or suspected, the fraud” and stated that “their honesty and integrity has been vindicated.”

“The decision confirms what Mark and Andrew stated from day one â€" that they did not know of or participate in the fraud perpetrated by their father,” said Martin Flumenbaum, a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison who has represented the Madoff sons since their father’s arrest.

Andrew and Mark Madoff managed the legitimate market-making and proprietary-trading divisions of their father’s firm. Mark Madoff committed suicide in December 2010 on the second anniversary of his father’s arrest, only a few days after the lawsuit was filed in Britain. Neither has been criminally charged in the case.

The ruling in London comes during the same week that a criminal trial of five low-level employees of Mr. Madoff â€" none of whom were part of the London case â€" began in Federal District Court in Manhattan. Mr. Madoff, 75, is serving a 150-year sentence; nine people, including Mr. Madoff, have pleaded guilty.

From the start, lawyers for Andrew and Mark Madoff argued it was unfair for them to face the claims in a London court.

While the liquidator of Mr. Madoff’s British unit technically brought the case, the Madoff trustee in the United States, Irving H. Picard, financed the lawsuit and was the interested party. They were seeking to recover $50 million on behalf of the scheme’s victims.

“We are obviously extremely disappointed with the judgment handed down today as claims made against the defendants were serious and there was undoubtedly a case to answer,” said Amanda Remus, a spokeswoman for the trustee.

Judge Popplewell had harsh words for Mr. Picard. He criticized the “poisonous press releases” issued in the case and how he had pursued the defendants “aggressively and relentlessly over several years, on occasion with an unfair degree of hyperbole.” The judge also noted the “stress imposed” on “Andrew Madoff, seriously ill with cancer, and his and his brother’s families” by the lawsuit. Andrew Madoff is undergoing treatment in Seattle for mantle cell lymphoma.

Mr. Picard has so far recovered about $9.4 billion of the estimated $17.5 billion in cash losses from the Madoff fraud. He continues to trace the victims’ money in a process that is likely to take years. Mr. Picard and his lawyers have earned hundreds of millions of dollars in fees from the case.

In addition to the London action, Mr. Picard has a lawsuit pending against Andrew, Mark and other members of Mr. Madoff’s family. The lawsuit, which seeks about $255 million, contends that the family was “completely derelict” in ensuring that the firm’s operations were legal.

“I expect the findings by the court in England will have a significant impact on the trustee’s litigation in the United States,” Mr. Flumenbaum, the lawyer for Andrew and Mark Madoff, said.

The London case centered on payments that flowed between the Madoff firm’s London and New York offices. The liquidator contended that as directors of the overseas unit, Andrew and Mark Madoff, along with the other board members, were aware that certain payments from the United States were a sham. The trustee has described the London unit as “critical piece of the facade of legitimacy that Madoff constructed.”

Judge Popplewell said that the directors were not to blame.

“An honest and intelligent man in the position of each brother could reasonably have believed that the payments were in the interests of the company,” the judge wrote.

Other directors cleared in the case include Sonja Kohn, an Austrian banking executive who was close to Mr. Madoff, and Stephen Raven, the British unit’s chief executive.

The 188-page opinion contains a number of noteworthy passages detailing the complex relationship between Mr. Madoff and his sons.

“The brothers held Bernard Madoff in the high respect which the latter’s record, reputation and position as paterfamilias commanded,” wrote the judge. If Mr. Madoff, who was the chairman and effectively sole owner of the British unit, “regarded the research as being of value, they would ultimately have deferred to his view even had they raised objections.”

Judge Popplewell also expressed dismay over what Mr. Madoff’s sons, along with the other defendants, are being put through in the wake of the fraud.

“I very much regret that I must have added to their burden by the time it has taken to prepare this judgment,” he wrote. “The resolute and temperate way they have conducted themselves in these proceedings does them great credit.”

Putting a Price on Twitter

Twitter’s immature market debut leaves plenty of room for investors’ animal spirits. Early disorganization and a late focus on the top line make the microblogging service seem younger than Facebook when it went public. Facebook was profitable, while Twitter is in the red â€" but its revenue is growing faster than at Mark Zuckerberg’s social network.

Twitter’s most recent internal valuation is more than $12 billion, based on a $20.62 share price and the 603 million diluted share count including in-the-money options at the end of last month. Updated third-quarter figures in the latest draft prospect show revenue more than doubled from the same period last year to $169 million. Twitter lost $65 million in the quarter, its biggest quarterly shortfall since at least the start of 2011. That probably won’t scare off prospective investors, who mostly care about potential in this kind of technology initial public offering.

Facebook, an obvious benchmark, now trades on a multiple of about 20 times its last 12 months of sales. At that multiple, Twitter’s market capitalization would be in the $10 billion ballpark, but its revenue is growing much faster than Facebook’s roughly 50 percent year-on-year increase in the second quarter. That makes it easy to imagine a $15 billion valuation for Twitter.

It may be a stretch to suggest investors will immediately value a Twitter user as highly as a Facebook regular. But suppose they did: each of Facebook’s current 1.2 billion monthly users is worth more than $100. Apply that to 232 million twitterers, and a figure well above $20 billion comes up.

Twitter will want to avoid the share price plunge that followed Facebook’s initial public offering, so its bankers may price it conservatively. But it’s in a better position because revenue growth isn’t slowing, while Facebook’s expansion declined in the six months before it hit the market from over 100 percent a year to around 45 percent. The social network also hadn’t yet proved it could make money on mobile devices, but Twitter already gets 70 percent of its revenue that way.

The company’s timing may help, too. Advertising should increase solidly during the coming holiday season, and with heavy investment in research and development Twitter can point to several advertising streams, like video and television-related tweets, that are not yet fully tapped. With investors sure to bake hope into the I.P.O., Twitter’s last internal valuation is set to look old hat.

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

If You Feel Compelled to Do Something, Don’t

For a week, I kept notes about two different columns I was thinking of writing. When I finally sat down to try to write the first one, the notes had disappeared from my computer.

My first response was astonishment, then panic, and then the odd sense that I’m sure you’ve experienced at some point: this disappearance is a message. It happened for a reason.

And then the reason occurred to me in the title I had been thinking of for the second column I was considering: whatever you feel compelled to do, don’t.

The first column was going to be about a chief executive I met last week â€" articulate, thoughtful and impressive â€" who runs a food company that makes an unhealthy but incredibly seductive product.

I felt myself climbing up on my moral high horse. The headline I had in mind was, “When Good People Do Bad Things.” One voice in my head kept saying, “Do it, do it.” A more distant, wordless instinct quietly whispered to me, “Don’t.” And then my notes disappeared. I was spared from writing about a topic I hadn’t sufficiently considered. I almost surely would have regretted writing the column.

We all have experienced have all experienced a “trigger” â€" the feeling of being pushed into a negative emotion by something that someone says or does. For me, in this case, it was listening to this executive so seamlessly defend a product that seemed indefensible.

A trigger is actually a perceived threat, and it prompts a physiological shift that we know as “fight or flight.” Our prefrontal cortex shuts down, the limbic system, which regulates emotion, takes over, and our instinct is either to strike out aggressively to beat back the threat or to flee.

Both responses served us well many years ago when we lived on the savanna and the threat we faced was becoming lunch for a lion. Reacting without thinking had the potential to save our lives.

Today, the threats we experience are more mundane. They’re usually about feeling disrespected or devalued in one way or another. They still prompt our fight or flight response, but in the modern world, reacting without thinking rarely serves us well. Instead, taking the time to reflect gives us the opportunity to make a more considered choice about how to respond.

I am a fighter. When I feel threatened, my instinct is to become more aggressive and insistent. I say this with no pride, and some embarrassment. Thankfully, I get triggered far less frequently than I did when I was younger. Still, we each retain an infinite capacity for self-deception, and I’m no exception.

Over the past several weeks, I’ve been arguing inside my company that we should be expanding more rapidly. Several of my colleagues believe we ought to be more measured and deliberate in our growth. As I pushed my view, the story I told myself is that I was encouraging a healthy debate and that I just want to reach the best outcome.

But what I’ve finally begun to recognize is that when my anxiety rises, I instinctively lean forward, my loud voice gets still louder, my words become sharper and I push harder. Because I’m the chief executive, all this is amplified. My fight instincts can create fear and shut down real discussion.

That’s especially true because a significant number of my senior colleagues default to “flight” when they’re triggered. They tend to become quieter, and even to withdraw. Under pressure, they avoid conflict just as predictably as we fighters seek it out. Instead, they often quietly simmer. Their resentment slowly builds and eventually gets expressed passive-aggressively, or all at once, explosively, much later.

Fight and flight are equally dysfunctional the vast majority of the time.

The first key to managing triggers is to become aware, sooner, when they begin to arise. The signs are usually physical: a flushing in the face, a tightening in the chest, a rising heartbeat, the desire to strike out or withdraw.

Whichever one you’re compelled to do, don’t. If you’re a fighter, step back. If you tend to flee, stay engaged.

You can’t think logically once you’re in fight or flight, so instead focus on quieting your physiology. Take a few deep breaths, in through your nose to a count of three, out through your mouth to a count of six. Feel your feet, to ground yourself. As your body calms down, your emotions will follow suit and your mind will begin to clear.

Once I get my wits about me, I’ve found two sorts of reflection help most. The first is, “What part of this is my responsibility?” It’s very tempting to come up with a catalog of reasons that the other person is wrong, or that we’re the victims in any given situation, but that’s not generally very helpful. It’s difficult to fix other people. We can influence our own behavior.

Sometimes, of course, it’s really hard to let go of our righteous convictions about others, and their shortcomings. When I feel that, the most valuable question I’ve found to ask myself is “Who is the person I want to be in this situation?” Or even more specifically, “How would I behave here at my best?”

Choosing not to write about that food industry chief executive I met last week â€" at least not before I was capable of developing a more thoughtful, nuanced view â€" was me behaving better. Writing this column instead makes me more the person I want to be.

About the Author

Tony Schwartz is the chief executive of the Energy Project and the author, most recently, of “Be Excellent at Anything: The Four Keys to Transforming the Way We Work and Live.” Twitter: @tonyschwartz

K.K.R. to Buy European Debt Investment Firm

Kohlberg Kravis Roberts said on Friday that it planned to buy Avoca Capital, a European debt investment firm that oversees $8 billion in assets, in a bet that the Continent would offer attractive new opportunities.

Financial terms of the deal weren’t disclosed.

Through the deal, K.K.R.’s credit investment business will grow to about $28 billion, and will add to its ability to invest in European bonds, loans and structured products. The firm is wagering that new banking rules, including the tougher Basel III capital requirements, will allow alternative lenders to step up and provide financing to companies.

K.K.R. has already been building its operations on the Continent, having provided $2 billion in debt financing to European companies over the last two years.

Now, it will add the 11-year-old Avoca, which is based in Dublin and London and has 67 employees. Its chief executive and co-founder, Alan Burke, will head K.K.R.’s European credit arm and will report to Craig Farr, who oversees American firm’s global credit and capital markets businesses.

“We believe the European credit space offers significant opportunity,” Henry R. Kravis and George R. Roberts, K.K.R.’s co-founders, said in a statement. “Avoca has a very strong track record, an entrepreneurial management team and excellent capabilities that are complementary to ours in European senior and liquid credit.”

HSBC to Appeal $2.46 Billion Judgment

LONDON â€" HSBC Group said Friday that it would appeal yet again a $2.46 billion judgment in a long-running securities fraud lawsuit in the United States related to a consumer-loan and credit-card business that the British bank acquired more than a decade ago.

The shareholder lawsuit alleged that Household International, now known as the HSBC Finance Corporation, misled investors about its lending practices, the quality of its loans and its accounting between 1999 and 2002.

The lawsuit has wound its way through United States courts for 11 years and has been regularly noted in HSBC’s corporate filings. A federal jury in 2009 in Chicago found partially in favor of the shareholders, but HSBC and the other defendants have repeatedly challenged that verdict.

In a decision issued Thursday, Judge Ronald A. Guzman of Federal District Court in Chicago ordered HSBC, as well as three of Household International’s former executives, to pay about $1.48 billion in damages and $986.4 million in prejudgment interest. The defendants were ordered to pay interest while their challenge is heard, most likely in the United States Court of Appeals for the Seventh Circuit.

“We plan to appeal and believe we have a strong argument,” Patrick Humphris, a spokesman for HSBC, said Friday.

It is the largest judgment in a class-action trial for securities fraud, according to Robbins Geller Rudman & Dowd, the law firm representing the shareholders. It said it continued to challenge objections by the defendants to more than 25,000 additional claims that, if approved, could exceed $650 million. That would bring the total class of claims to more than 45,000 plaintiffs.

James Glickenhaus of Glickenhaus & Company, one of the three lead plaintiffs in the case, said in a statement, “We are very pleased that we went the distance in this case, all the way through a jury trial, and that we were able to obtain such a tremendous recovery for shareholders.”

The company previously set aside a reserve to cover legal costs that it could incur in the case, though it has not specified them. “HSBC believes it has meritorious grounds for appeal on matters of both liability and damages and will argue on appeal that damages should be nil or a relatively insignificant amount,” HSBC said in its most recent financial report in August.

In 2002, when Household International was still a separate company, it agreed to pay $486 million to settle allegations of predatory lending with attorneys general in 46 states. The shareholder lawsuit was filed later that year.

HSBC agreed in 2002 to pay $14.2 billion for Household, eventually completing the deal in 2003. The bank then merged the business with another subsidiary to form the HSBC Finance Corporation.

The deal was ill-fated for HSBC, with the bank writing down tens of billions of dollars in loans and exiting its operations for consumer loans and mortgages in the United States.

Stephen Green, then chairman of HSBC, said in 2009 that it was a deal the bank “wished we hadn’t done, with the benefit of hindsight.”

Household International had a storied history in the United States before its regulatory issues arose more than a decade ago. The firm was founded as the Household Finance Corporation in 1878 in Minneapolis and claimed to be the first company to offer installment loans, allowing consumers to repay debt through regular partial payments rather than one lump sum at the due date.

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Morgan Stanley Quarterly Profit Beats Estimates

Morgan Stanley reported adjusted earnings for the third quarter on Friday that handily beat analyst estimates, helped by strong results in its stock trading unit.

The bank’s income from continuing operations, excluding certain charges, was $1 billion, or 50 cents a share, for the quarter. This beat estimates of analysts polled by Thomson Reuters, which estimated a per-share profit of 40 cents.

Including charges and gains from discontinued operations, Morgan Stanley had a profit of $906 million, or 45 cents share, in its latest quarter. Last year’s results were dragged down by an accounting charge, which pushed the firm to a $1 billion, or 55 cents a share, loss.

Excluding one-time items, Morgan Stanley’s adjusted revenue came in at $8.1 billion in the third quarter, up from $5.29 billion over the same period last year. That also beat analysts’ expectations of revenue of $7.6 billion for the quarter.

Morgan Stanley was the last of the Wall Street banks to report earnings. Like its peers, Morgan Stanley’s revenue was also squeezed by a shift in the interest-rate environment.

Banks with large fixed income businesses like Goldman Sachs and Citigroup reported that their revenues fall drastically.

The stronger overall results are in stark contrast to last year, when the bank faced several challenges after Moody’s downgraded the firm’s ratings by two notches. Under the leadership of Mr. Gorman, the bank has changed tack to focus on less risky areas of the business. This has meant a strong push into wealth management services.

“Our results point to the increased consistency, strength and balance we are deriving from our business model,” Morgan Stanley’s chief executive, James P. Gorman, said in a statement.

On Friday the bank’s results showed solid gains in the bank’s equity trading business and steady growth in investment management.

Morgan Stanley Smith Barney, the company’s global wealth management division, posted net revenue of $3.5 billion in the year-ago period, slightly from the $3.2 billion over the same period last year.

Institutional securities, Morgan Stanley’s division which includes the company’s investment bank and its stock and bond trading, had revenues of $3.9 billion excluding certain charges, up from $3.7 billion a year earlier. This part of the business includes the company’s investment bank, and its stock and bond trading.

Fixed income and commodities revenue, however, was down as expected. The unit’s revenue was $835 million excluding charges, compared with $1.2 billion in the second quarter. Some analysts were expecting the bank’s fixed-income revenues to fall by as much as $500 million in the quarter.

Trading in bonds was tepid this quarter as clients held their positions amid wider economic uncertainty and ahead of a closely watched announcement by Ben S. Bernanke, the Federal Reserve chairman. The Fed’s decision not to scale back its $85 billion-a- month bond-buying program raised new questions about how strong the economic recovery in the United States has been.

The slowdown in bond trading has been a theme across Wall Street in the third quarter. Last week JPMorgan reported a 7.7 percent fall in its fixed-income trading from a year earlier. On Tuesday, Citigroup reported a 26 percent drop in trading revenue from a year earlier.

Investment management reported revenue of $828 million, compared with $631 million for the same period last year, driven by what the bank said was “favorable market conditions.”

Morning Agenda: SAC May Become a Family Office

PLEA DEAL COULD END SAC’S ADVISORY BUSINESS  |  The hedge fund SAC Capital Advisors is moving closer to a plea deal with prosecutors that would force it to wind down its business of managing money for outside investors, Ben Protess and Peter Lattman report in DealBook. An agreement to stop operating as an investment adviser is one feature of a larger deal SAC is negotiating over insider trading charges, according to people briefed on the case, who said the plea deal would also require SAC to plead guilty to criminal misconduct and pay more than $1 billion in penalties.

Such a move could be a symbolic one for the hedge fund, which has already returned billions of dollars to investors. It will probably continue to operate as a so-called family office, allowing its owner, Steven A. Cohen, to manage his personal fortune. But under the proposed terms of the tentative deal with the government, Mr. Cohen will be prohibited from managing outside money for a period, DealBook reports.

Still, the people briefed on the matter cautioned that the deal could still fall apart and an agreement was not imminent. A spokesman for SAC declined to comment, though he previously said that “SAC has never encouraged, promoted or tolerated insider trading.” Representatives for the government also declined to comment.

GOLDMAN’S FALL IN REVENUE RAISES CONCERNS  |  Goldman Sachs had a strong beginning to the year, with its profit doubling in the second quarter over the levels a year earlier. But hopes that 2013 would be a good bonus year were all but dashed on Thursday when the firm announced that revenue in its powerful fixed-income, currency and commodities division dropped 44 percent from a year earlier â€" the worst quarterly result in fixed income since 2008, Susanne Craig and Peter Eavis report in DealBook.

The poor performance forced Goldman to cut its way to a decent profit, slashing the amount of money it sets aside for bonuses. “The weakness in this division has led to renewed concerns from analysts and investors about the headwinds that Goldman and other banks are facing in big money-producing areas like the trading of interest rate products and currencies,” DealBook writes. “There is some concern that the pull back is not short term and could be the new normal.”

On an earnings call with analysts, Goldman’s chief financial officer, Harvey M. Schwartz, sounded frustrated at times. Analysts pushed, without much success, for more details on the drop in revenue for the unit. “It is a quarter,” Mr. Schwartz reiterated several times on the call.

BELGIAN BUYER FOR U.S. CRAFT BREWERY  |  The Duvel Moortgat Brewery of Belgium on Thursday announced a deal to buy the Boulevard Brewing Company, a craft brewery in Kansas City, Mo., as European interest in American craft beers begins to mirror the mania for them stateside, Stephanie Strom reports in The New York Times. The deal will give Duvel ownership of a large United States craft brewer that is well known in the Midwest and produces beers under its own name and others.

“I see here in Europe that consumers are getting more and more interested in American craft beers,” Michel Moortgat, one of three brothers who own Duvel, said in a telephone interview from Belgium. “In the future, with this partnership, we will be able to develop the taste for those beers more substantially here and in other countries like Japan and China.”

ON THE AGENDA  |  Morgan Stanley announces its third-quarter earnings, with a conference call at 10 a.m. General Electric also reports earnings before the market opens. The deal lawyer James C. Woolery is on Bloomberg TV at 10:15 a.m. Jan Hatzius, Goldman Sachs’s chief economist, is on CNBC at 11 a.m.

OWNING A STAKE IN A STAR ATHLETE  |  If thousands of fans are willing to pay up for a star athlete’s memorabilia, wouldn’t they pay for a few shares of such a superstar? On Thursday, Fantex Holdings, a start-up company, announced that it would allow fans to do that by creating a trading exchange for investors to buy and sell interests in professional athletes.

The company has already signed up Arian Foster of the Houston Texans, and investors can register with the company and place orders for the initial public offering. “But if such an investment sounds speculative, that is because it is,” Peter Lattman and Steve Eder write in DealBook. The filing laid out 37 pages of risk factors, including a possible career-ending injury or a performance slump.

“You are potentially one hit away from losing your money,” said Bradley Shear, a sports management professor at George Washington University. “On any given Sunday, anything can happen to any player.”

Mergers & Acquisitions »

Lenovo Is Said to Consider Bid for BlackBerry  |  The Chinese computer company Lenovo “is actively considering a bid for all of struggling Canadian smartphone maker BlackBerry,” The Wall Street Journal reports, citing unidentified people familiar with the matter.
WALL STREET JOURNAL

Activism in Oil Industry May Lead to More Deals  |  “Activist investors may spur a return to deal making in the energy industry as shareholders seek to reap greater value from oil and natural gas reserves,” Bloomberg News writes.
BLOOMBERG NEWS

Dr. Martens Nears a Deal  |  The private equity firm Permira is in negotiations to possibly acquire the family-owned Dr. Martens footwear and clothing brand, according to a person familiar with the discussions.
DealBook »

KPN Still Open to Deal With América Móvil  |  The Dutch company’s announcement comes a day after América Móvil, the Latin American telecommunications giant controlled by Carlos Slim Helú, dropped its takeover bid.
DealBook »

INVESTMENT BANKING »

Money Market Funds in U.S. Have $43 Billion Outflow  |  The one-week decline in money market fund assets was the largest since August 2011, as investors feared a possible United States default, according to data from Thomson Reuters’s Lipper service.
REUTERS

Bank of America Said to Consider Prohibiting Overdrafts  |  The bank “is considering a plan to introduce a checking account that wouldn’t permit customers to overdraw their balances at an automated teller machine or when making an automatic bill payment, according to people familiar with the bank’s strategy,” The Wall Street Journal reports.
WALL STREET JOURNAL

JPMorgan Agrees to Sell Manhattan Tower  |  JPMorgan Chase is selling 1 Chase Manhattan Plaza to Fosun International, the investment unit of a major Chinese conglomerate, for $725 million, Bloomberg News reports.
BLOOMBERG NEWS

A Spanish Lender’s Face-Saving Move  |  BBVA has attributed its sale of a 5 percent stake in China’s Citic Bank to the new Basel capital rules. But Basel may have provided a graceful way to reduce an underwhelming investment, Fiona Maharg-Bravo of Reuters Breakingviews writes.
REUTERS BREAKINGVIEWS

PRIVATE EQUITY »

Blackstone Earnings Rose 3% in Third Quarter  |  Real estate and investment banking helped propel the Blackstone Group to yet another profitable quarter.
DealBook »

Blackstone’s Solar Unit Raises $540 Million in Financing  | 
REUTERS

HEDGE FUNDS »

Eton Park Stung by Far-Flung Bets  |  Eton Park Capital Management, the firm founded by Eric Mindich, experienced an 8.89 percent loss in its illiquid “special investments” this year, Absolute Return reports, citing a third-quarter letter to investors.
ABSOLUTE RETURN

Man Group Reports First Net Inflows in 2 Years  |  The Man Group, the world’s largest publicly traded hedge fund, reported its first quarterly net inflows of money in two years, as clients became more confident about a global economic recovery.
DealBook »

I.P.O./OFFERINGS »

Google Reports Slide in Prices of Ads  |  “For more than a decade, Google’s search advertising business has seemed almost magical in its ability to mint money. But the magic is beginning to wear off as people spend more time on mobile devices, where the company makes less money on ads,” Claire Cain Miller reports in The New York Times.
NEW YORK TIMES

VENTURE CAPITAL »

New Silicon Valley Fund to Back Big Data Start-Ups  |  The new fund, backed by Andreessen Horowitz and the celebrity investor Ron Conway, will invest as much as $1 million in ventures that analyze social behavior.
DealBook »

LEGAL/REGULATORY »

After Shutdown, Resupplying Economic Data  |  After the shutdown prevented the government from releasing economic data, new figures will be available early next week, but delays could stretch into December. “What is more, the catch-up process could also help slow any decision by the Federal Reserve to ease back on its stimulus efforts,” Nelson D. Schwartz writes in The New York Times.
NEW YORK TIMES

Lingering Confusion Over Debt Ceiling’s Temporary Fix  |  “At first glance, the ‘default prevention’ section of the bill seemed to imply that the president would have the authority in the future to increase the country’s debt unilaterally, and that Congress could stop him only by passing a bill forbidding it,” Annie Lowrey reports in The New York Times.
NEW YORK TIMES

Swiss Private Bank to Close Over Tax Dispute  |  The Swiss bank Frey & Company said it was closing because of “unsustainable costs” from Switzerland’s dispute with the United States over tax evasion, Reuters reports.
REUTERS

HSBC Unit Fined $2.46 Billion in Subprime Case  |  A judge ordered the lender Household International, which is now part of HSBC Holdings, to pay $2.46 billion to investors in a class-action lawsuit stemming from 2002.
REUTERS