Madoff Action Seen as Possible for JPMorgan

Federal authorities are preparing to take action in a criminal investigation of JPMorgan Chase, suspecting that the bank turned a blind eye to Bernard L. Madoff’s Ponzi scheme.

The Madoff case, coming on the heels of a tentative $13 billion settlement over JPMorgan’s mortgage practices, poses another major threat to the reputation of the nation’s largest bank.

Reflecting the magnitude of the investigation, prosecutors and JPMorgan have held preliminary discussions about a so-called deferred prosecution agreement, people briefed on the inquiry said. Such an arrangement would suspend criminal charges against JPMorgan in exchange for a fine, certain other concessions and an acknowledgment that the bank will face charges if it fails to behave. Prosecutors may also require JPMorgan, which has repeatedly said that “all personnel acted in good faith” in the Madoff matter, to hire an independent monitor.

While deferred-prosecution agreements are the Justice Department’s preferred tool for punishing corporate giants â€" they allow prosecutors to appear tough without imperiling a company’s health â€" they are typically deployed only when misconduct is severe. For a large American bank, they are nearly unheard-of.

But the government, the people added, has not ruled out a harsher punishment for JPMorgan Chase’s national banking subsidiary. Prosecutors could demand that the unit plead guilty to a criminal violation of the Bank Secrecy Act, a federal law requiring financial institutions to report suspicious activity to the government.

Underscoring concerns that a guilty plea could destabilize the bank, the people said, prosecutors have discussed the ramifications of criminal charges with one of JPMorgan’s regulators. But the regulator, the Office of the Comptroller of the Currency, assured the prosecutors that it would not interfere.

Representatives for JPMorgan, the Comptroller and the prosecutors declined to comment. Authorities could announce an action by the end of the year, the people briefed on the inquiry said. Prosecutors, the people said, are weighing criminal charges against JPMorgan employees who did business with Mr. Madoff. It is unclear which employees are under investigation.

The investigation, led by the F.B.I. and the United States attorney’s office in Manhattan, centers on whether JPMorgan failed to alert federal authorities to Mr. Madoff’s conduct. JPMorgan served as Mr. Madoff’s primary bank for more than two decades, giving it a unique window onto his practices.

The case will most likely hinge on a series of e-mails that suggest JPMorgan continued to work with Mr. Madoff even as questions mounted about his operation. In one e-mail that surfaced in a separate lawsuit, a JPMorgan employee acknowledged that Mr. Madoff’s outsize returns seemed “a little too good to be true.”

The people briefed on the inquiry, who spoke on the condition of anonymity because they were not authorized to discuss private negotiations, cautioned that the government had not decided to charge any current or former JPMorgan employees. Likewise, the discussions with the bank itself are preliminary and the government has not concluded what action to take. Two of the people noted that prosecutors were more likely to seek a deferred prosecution agreement than to demand a guilty plea.

Neither JPMorgan nor any other big Wall Street bank has ever been subjected to such an agreement before, according to a University of Virginia Law School database. Among large American banks, only Wachovia and the banking arm of American Express have entered into such an agreement.

But if it does pursue a guilty plea, the government would deal another blow to the reputation of JPMorgan and its chief executive, Jamie Dimon. The bank was once an industry favorite in regulatory circles.

The actual repercussions would depend on the underlying criminal charge. The most serious potential violation could complicate JPMorgan’s business with certain clients, possibly forcing investors like pension funds to withdraw some money from the bank. But a lesser violation would be likely to have more of a reputational consequence.

For the government, it would represent an extraordinarily rare show of force. Ever since a criminal indictment led to the demise of the accounting firm Arthur Andersen, Enron’s auditor, the government has been wary of imposing criminal charges on big corporations for fear that it would imperil the institution and have ripple effects on the broader economy. Under federal guidelines, prosecutors must weigh “collateral consequences,” like job losses and economic implications, in such an action.

HSBC, for example, paid $1.9 billion to settle a money-laundering case, but the Justice Department stopped short of indicting the British bank. The case reinforced concerns that big banks, having grown so large and interconnected, are too big to indict.

Yet Preet Bharara, the United States attorney in Manhattan whose office is handling the JPMorgan case, has disputed that theory. In a recent speech, Mr. Bharara said he rejected the idea from companies that “because we’re so big, to take action against us, the sky is going to fall.”

“I don’t think anyone is too big to indict â€" no one is too big to jail,” Mr. Bharara said at another speech.

The Manhattan United States attorney and the F.B.I are not the only ones pursuing JPMorgan over the Madoff case. The Office of the Comptroller of the Currency recently sent the bank a notice indicating that the agency would soon fine the bank over the Madoff case, two people briefed on the case said.

Irving H. Picard â€" the trustee seeking to recover money for Mr. Madoff’s victims â€" also sued JPMorgan in 2010, saying the bank allowed “fraudulent transfers” and accusing it of “aiding and abetting” Mr. Madoff’s fraud. The trustee sued UBS, HSBC and UniCredit Bank Austria, as well, although a federal appeals court in Manhattan has tossed out his lawsuits against the banks. Mr. Picard recently petitioned the United States Supreme Court to hear his appeal.

JPMorgan has denied Mr. Picard’s allegations.

The developments come at a difficult time for JPMorgan, which faces an onslaught of government scrutiny.

The tentative $13 billion settlement in the mortgage case would resolve an array of state and federal investigations into the bank’s sale of trouble mortgage investments. The bank, authorities suspect, sold mortgage securities in the run-up to the financial crisis without fully warning investors of the risks.

JPMorgan is also grappling with an investigation into the bank’s decision to hire the sons and daughters of senior Chinese government officials. And Mr. Bharara’s office is examining whether some of the bank’s trading in the energy markets amounted to manipulation.

The Madoff case is particularly thorny. Any action would link the bank to the most notorious financial criminal in more than a generation. Mr. Madoff orchestrated a Ponzi scheme lasting decades that wiped out an estimated $17 billion in cash for his investors. Paper losses reached more than $64 billion.

Mr. Madoff is serving a 150-year sentence in a federal prison in North Carolina after pleading guilty in March 2009. In a 2011 interview from prison, Mr. Madoff told The New York Times that the banks he did business with “had to know.”

Mr. Madoff’s ties to JPMorgan trace to 1986, when it became his primary banker. Over the course of that relationship, Mr. Picard claims, JPMorgan “made at least half a billion dollars in fees and profits” from the relationship.

The bank, according to Mr. Picard’s lawsuit, generated handsome sums by allowing Mr. Madoff’s brokerage firm to “funnel billions of dollars” through its account with JPMorgan, “disregarding its own anti-money laundering duties.”

The bank, starting around 2006, also pursued derivatives deals linked to Mr. Madoff’s so-called feeder-fund investors, the hedge funds that invested their clients’ money with him.

About that time, concerns began to circulate within JPMorgan.

“I do have a few concerns and questions,” one JPMorgan employee wrote in February 2006 after studying some of Mr. Madoff’s trading records, according to an e-mail cited in the lawsuit. “All trades are generated by Madoff’s black box.”

But JPMorgan’s derivatives deals, which allowed investors to collect returns tied to the profits of the feeder funds, took off anyway. By June 2007, JPMorgan’s “Equity Exotics” unit had sold more than $130 million worth of the deals to investors, Mr. Picard’s lawsuit said.

That month, JPMorgan employees sought approval to push the total to $1.32 billion, according to the lawsuit.

On June 15, 2007, when a JPMorgan committee met to ponder the proposal, new suspicions emerged about Mr. Madoff. A senior risk management officer at the bank e-mailed colleagues to report that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” The senior officer added that “I think we owe it to ourselves to investigate further.”

But according to Mr. Picard, the bank’s further research amounted to a phone call with Mr. Madoff and “a Google search with no follow-up.”

Similar concerns were enough to deter JPMorgan’s own private bank from doing business with Mr. Madoff. In an e-mail, a JPMorgan wealth management executive remarked that Mr. Madoff’s “Oz-like signals” were “too difficult to ignore.”

After Mr. Madoff’s arrest in December 2008, Mr. Picard said, a flurry of JPMorgan e-mails captured the lack of surprise at the bank.

One employee, referring to the agenda for the June 2007 meeting, wrote, “Perhaps best this never sees the light of day again!!”

Pinterest Raises $225 Million, as Valuation Jumps to $3.8 Billion

The tech world may be abuzz about Twitter, but a big new social network is showing that it’s no slouch.

Pinterest confirmed on Wednesday that it had raised $225 million in a new round of financing that values the company at $3.8 billion.

The round was led by Fidelity, a new investor, and included existing backers Andreessen Horowitz, Bessemer Venture Partners, FirstMark Capital and Valiant Capital Partners.

That’s quite the haul for 2013: the company disclosed in February that it had reaped $200 million.

And it reflects just how quickly the three-year-old social network â€" a virtual scrapbook where users post and share pictures and other media â€" is growing, at least in terms of estimated worth. AllThingsD, which first reported the latest financing round on Wednesday, noted that the last fund-raising was done at a $2.5 billion valuation.

By comparison, two years ago Pinterest raised $27 million at a $200 million valuation, AllThingsD reported at the time.

Compare that trajectory to Twitter’s, whose valuation jumped from $200,000 in July 2007 to $3.6 billion in December 2010, according to Pitchbook. In the prospectus for its forthcoming initial public offering, the company said that as of August, it valued itself at nearly $13 billion.

Pinterest’s co-founder and chief executive, Ben Silbermann, said in a statement: “We hope to be a service that everyone uses to inspire their future, whether that’s dinner tomorrow night, a vacation next summer, or a dream house someday. This new investment enables us to pursue that goal even more aggressively.”

What that encompasses, according to the company, are a number of things. Among them is international growth, which has topped 125 percent since the beginning of the year. Pinterest has opened up shop in Britain, France and Italy and aims to begin operating in 10 more countries by year’s end.

The company also aims to bolster its mobile services, which it says have grown 50 percent so far this year. And it plans to invest in advertising, since until recently the social network ran no ads. It recently unveiled tests of advertising in the form of “promoted pins” earlier this month.

Funding Circle, British Peer-to-Peer Lender, Expands to U.S.

When the soccer team F.C. Barcelona asked Nick Daffern whether his company could set up some merchandise kiosks at its legendary stadium, the Camp Nou, the British businessman knew he had to find some cash fast to fulfill the order.

Within 10 days, he had borrowed £50,000 ($81,000) from Funding Circle, a British company that matches small business borrowers with individuals and institutions that bid to lend to them.

“If we had gone to our normal sources of funds, the banks, we’d have still been waiting six weeks later,” Mr. Daffern said. “But six weeks later we had delivered the units to Spain.”

Now, Funding Circle is coming to the United States.

To help finance the expansion into America, Funding Circle has raised $37 million from investors led by the venture capital firm Accel Partners. Ribbit Capital, Union Square Ventures and Index Ventures also participated in the financing, which was announced on Thursday. Funding Circle is using some of that money to acquire Endurance Lending Network, a much smaller American small-business lending network set up last year.

“Small businesses are very underserved by the banking system,” said Samir Desai, chief executive and a founder of Funding Circle. “We visited the U.S. and found the problem was as acute as it was in the U.K.”

Mr. Desai declined to say how much Funding Circle paid for Endurance.

Companies like Funding Circle and Endurance are known as peer-to-peer lenders. A wealthy individual or perhaps a pension fund can go to Funding Circle’s Web site and see a list of businesses that want to borrow. If they like what they see, they can bid to lend to the small business, which will probably opt for the lowest cost loan. The interest rate on the loans may not necessarily be cheaper than what a bank charges, but Funding Circle and Endurance say they can lend much more quickly than banks. The more enthusiastic proponents of peer-to-peer lending believe that it can distribute credit more efficiently than banks.

Funding Circle has made about $267 million in loans since it started in 2010. It has around 20,000 active investors contributing to its loans.

Still, skeptics say the sector may be held back by a lack of investors who want to risk their money lending to businesses and individuals over peer-to-peer platforms.

Right now, some investors say they are attracted to the relatively high interest rates they can earn. Funding Circle’s average interest rate is 9 percent, and their term is 45 months on average. Mr. Desai said that investors in the loans are on average making an annual return of 6 percent after fees and losses, which are running at about 2 percent of loans a year.

Funding Circle itself charges fees for matching borrowers and lenders. It charges investors a 1 percent fee and borrowers a fee of 2 percent to 4 percent. Mr. Desai said that, at current rates, the company could soon be posting annualized revenue of $10 million. He says he expects, however, that Funding Circle will make a loss in the coming months as it hires new employees and invests in new technology.

“We’re using data much more actively than banks have done,” Mr. Desai said. Still, he noted, a human underwriter looks at every Funding Circle loan.

Mr. Desai and two college friends from Oxford University initially invested $97,000 in Funding Circle, and hold the largest stake in the company.

One sector that Endurance is targeting in the United States is lending to entrepreneurs who set up restaurant franchises. But Funding Circle may encounter some crucial differences in America. In Britain, its loans of as much as $160,000 are unsecured, whereas small business lenders in the United States often insist on collateral. Funding Circle’s British loans do have guarantees from company directors, however.

Mr. Daffern, the British kiosk supplier, has so far taken out two $81,000 loans. “I am 58, so I was a little bit skeptical,” he said. “But the money they lent really helped us lift our profile.”

Jury Finds Bank of America Liable in Mortgage Case Nicknamed the ‘Hustle’

Bank of America, one of the country’s largest banks, was found liable on Wednesday for having purposely sold defective mortgages, a result that will be seen as a victory for the government in its aggressive effort to hold large American banks accountable for their role in the housing crisis.

Moreover, the jury also found a top executive at Bank of America’s Countrywide unit liable, pinning some â€" if not all - of the responsibility for the bad acts on an individual.

During the trial, federal prosecutors accused Rebecca Mairone, a top executive at Countrywide at the time, of having opted for quantity over quality in its mortgage writing program, which resulted in the bank churning out housing loans that were destined to fail.

In its case, federal lawyers claimed that Ms. Mairone, who now works at JPMorgan Chase, led a program nicknamed the “hustle,” derived from HSSL, or the “high-speed swim lane.” The program linked bonuses to how fast bankers could originate loans. As a result, the credit quality of the borrower was given short shrift, the government contended. When these loans were sold on to mortgage giants like Fannie Mae and Freddie Mac, they failed, generating more than $1 billion in losses.

The civil case, which has been tried in a Federal District Court in Manhattan, follows close on the heels of JPMorgan’s tentative agreement to pay $13 billion in fines and payments to settle with various state and federal authorities for its own exposure to the mortgage mess.

Countrywide, the mortgage originator that Bank of America bought in 2008, has been a morass of problems ever since the deal went through. While the bank bought Countrywide for $4 billion in 2008, analysts believe that to date it has already paid close to $50 billion in fines and settlements. In light of Wednesday’s decision, that figure is likely to continue to rise.

In a statement, Preet Bharara, the United States attorney in Manhattan, who has scored a number of legal victories as part of a campaign against crime on Wall Street, hailed the jury’s decision.

“In this case, Bank of America chose to defend Countrywide’s conduct with all its might and money, claiming there was no case here,” Mr. Bharara said. “The jury disagreed. This office will never hesitate to go to trial to expose fraudulent corporate conduct and to hold companies accountable, particularly when it has caused such harm to the public.”

Consumer advocates have long pushed for such an outcome, arguing that given the extensive losses suffered by homeowners and investors during the mortgage crisis, top executives at the firms in question should pay a price.

Prosecutors have asked that Bank of America pay a fine of $848 million, although the judge presiding over the case, Jed S. Rakoff, will set the penalty.

While the suggested fine pales in comparison to the check that JPMorgan is expected to write, lawyers point out that that the eventual cost could far exceed what the government has asked for because the jury’s decision is likely to spur a torrent of class-action suits that could cost Bank of America many billions of dollars in settlement payments.

Bank of America has spent the better part of the year trying to convince investors that its devastating mortgage problems are an issue of the past, and to some extent the bank has been successful, with its stock increasing 55 percent this year. And compared to JPMorgan, which just reported a rare quarterly loss because of increasing amounts of cash set aside for legal purposes, Bank of America beat analyst expectations, because of a strong performance in its credit cards.

Still, the weight of Countrywide’s mortgage exposure hangs heavy over the bank and compared to JPMorgan, Bank of America trades at a deep discount to its book value â€" a sign that investors believe that toxic housing loans will bedevil the bank for years to come.

As for JPMorgan, it has argued that the bulk of its toxic mortgage exposure comes from Bear Stearns, which regulators pressured the bank to buy in 2007. Lawyers and bankers counter this defense by saying that Washington Mutual, an institution that Morgan aggressively pursued, represents an even greater mortgage time bomb for the bank.

Appeals Court Throws Out Confidential Arbitration in Delaware

A decision by a federal appeals court has ended Delaware’s experiment with confidential arbitration.

In an opinion released Wednesday, a three-judge panel for the United States Court of Appeals for the Third Circuit upheld a lower court ruling that Delaware’s state-sponsored arbitration program violated the First Amendment.

The controversial arbitration program was established by Delaware in 2009. Delaware is the leading state for incorporations by public companies, and the five judges on Delaware’s Chancery Court specialize in business disputes. The state Legislature was worried about Delaware’s continuing pre-eminence in resolving these disputes in light of the extraordinary growth in confidential arbitration for resolving disputes.

To “preserve Delaware’s pre-eminence in offering cost-effective options for resolving disputes,” the Legislature established a business arbitration program. The program was limited to business disputes involving Delaware companies and had to involve an amount in dispute of at least $1 million.

The program was remarkable on several fronts. First, it essentially replicated the disputes you would see in Delaware’s public courts, albeit with more streamlined arbitration proceedings. Most notably, the disputes would be arbitrated by Delaware’s judges, who are prized for their knowledge and ability in adjudicating corporate law matters. Second, because it was arbitration, the deliberations and resolution would be confidential.

For the courtesy of arbitrating these disputes, Delaware would charge $6,000 a day with a $12,000 filing fee, generating revenue for the state.

The adoption of these rules was met with consternation, mostly by people outside of Delaware. Critics complained that it moved important business disputes that normally would be heard before the Chancery Court judges to a private sphere. This fear looks to the increasing use of arbitration in other areas, and the worry, real or not, that it will increase the legitimacy of arbitration to the detriment of shareholders and other stakeholders in the corporation.

This issue crystallized in the most prominent of arbitration cases to occur under the program in its short life: the arbitration involving Skyworks Solutions efforts to break its $262.5 million deal to purchase publicly traded Advanced Analgoic Technologies.

The parties sued each other over whether Skyworks was obligated to complete the deal. But because the parties had agreed to arbitration, shareholders were left in the dark as the companies battled.

Brian Quinn at the M&A Law Prof blog wrote at the time, “The problem with trying to follow a dispute like this from the outside is that nothing is public unless the parties want it to be. So, we end up getting bits and drabs of information here and there. It becomes very difficult for an observer, or the market, to get any idea what the issues are. Welcome to the world of private arbitration.”

The second main concern was that if these disputes were regularly litigated in arbitration, corporate law would be made but no one would know about it, making the life of companies and lawyers who advise them much harder.

But the experiment also had strong proponents. They argued that judges regularly participate in mediation. Moreover, parties can agree to arbitrate their disputes without these judges. Delaware wasn’t taking away cases so much as just co-opting them. Given Delaware’s important need to compete, arbitration was a natural extension of its corporate law expertise.

The Delaware Coalition for Open Government sided with the critics and sued in federal court, claiming that the arbitration statute was unconstitutional. A lower court struck down the statute in 2012 holding that these arbitration cases were essentially civil trials since the judges, place and proceedings were the same.

Accordingly, the First Amendment principle of open access applied. The statute failed because it allowed confidential proceedings.

At the time, I wrote that the decision made “logical sense:”

“It’s one thing for a dispute by two companies over a joint venture in a foreign country to arbitrate the dispute. And it makes sense for Delaware judges to be picked for this task.

But when it is a dispute that directly implicates third parties like shareholders, the arbitration provision may go a bit too far” since they provide for confidential dispute of the proceedings without knowledge of those third parties.

Delaware appealed, and on Wednesday, the federal appeals court upheld the trial court asserting that “[t]here is a long history of access to civil trials in a democratic society.”

The appellate court applied an experience and logic test to determine whether the arbitration statute was similar to court proceedings. Because these types of proceedings had traditionally been open to the public, they should remain open even if called arbitration. The court added that “the benefits of openness weigh strongly in favor of granting access to Delaware’s arbitration proceedings.”

Thus ends Delaware’s arbitration experiment.

There are still some grounds to allow Delaware to appeal to all of the judges on the circuit court, and ultimately, the Supreme Court, if it is willing to take up the case.

An appeal would not be without basis. One of the three judges in appellate court’s opinion dissented, stating that “the Court of Chancery, as a formal adjudicator of disputes, may not be able to compete with the new arbitration systems being set up in other states and countries.” The judge concluded that arbitration had never been open to the public and that Delaware therefore “did not intend to preclude the public from attending proceedings that historically have been open to the public.”

The program has not been popular in its few years of existence with less than a dozen cases decided under it. Still, this may have been because of its uncertain legality.

Despite this, Delaware is likely to appeal because it does have grounds for a case and has nothing to lose at this point. Lucky for us, we’ll be able to see the entire thing play out in public, as is our constitutional right.

Appeals Court Throws Out Confidential Arbitration in Delaware

A decision by a federal appeals court has ended Delaware’s experiment with confidential arbitration.

In an opinion released Wednesday, a three-judge panel for the United States Court of Appeals for the Third Circuit upheld a lower court ruling that Delaware’s state-sponsored arbitration program violated the First Amendment.

The controversial arbitration program was established by Delaware in 2009. Delaware is the leading state for incorporations by public companies, and the five judges on Delaware’s Chancery Court specialize in business disputes. The state Legislature was worried about Delaware’s continuing pre-eminence in resolving these disputes in light of the extraordinary growth in confidential arbitration for resolving disputes.

To “preserve Delaware’s pre-eminence in offering cost-effective options for resolving disputes,” the Legislature established a business arbitration program. The program was limited to business disputes involving Delaware companies and had to involve an amount in dispute of at least $1 million.

The program was remarkable on several fronts. First, it essentially replicated the disputes you would see in Delaware’s public courts, albeit with more streamlined arbitration proceedings. Most notably, the disputes would be arbitrated by Delaware’s judges, who are prized for their knowledge and ability in adjudicating corporate law matters. Second, because it was arbitration, the deliberations and resolution would be confidential.

For the courtesy of arbitrating these disputes, Delaware would charge $6,000 a day with a $12,000 filing fee, generating revenue for the state.

The adoption of these rules was met with consternation, mostly by people outside of Delaware. Critics complained that it moved important business disputes that normally would be heard before the Chancery Court judges to a private sphere. This fear looks to the increasing use of arbitration in other areas, and the worry, real or not, that it will increase the legitimacy of arbitration to the detriment of shareholders and other stakeholders in the corporation.

This issue crystallized in the most prominent of arbitration cases to occur under the program in its short life: the arbitration involving Skyworks Solutions efforts to break its $262.5 million deal to purchase publicly traded Advanced Analgoic Technologies.

The parties sued each other over whether Skyworks was obligated to complete the deal. But because the parties had agreed to arbitration, shareholders were left in the dark as the companies battled.

Brian Quinn at the M&A Law Prof blog wrote at the time, “The problem with trying to follow a dispute like this from the outside is that nothing is public unless the parties want it to be. So, we end up getting bits and drabs of information here and there. It becomes very difficult for an observer, or the market, to get any idea what the issues are. Welcome to the world of private arbitration.”

The second main concern was that if these disputes were regularly litigated in arbitration, corporate law would be made but no one would know about it, making the life of companies and lawyers who advise them much harder.

But the experiment also had strong proponents. They argued that judges regularly participate in mediation. Moreover, parties can agree to arbitrate their disputes without these judges. Delaware wasn’t taking away cases so much as just co-opting them. Given Delaware’s important need to compete, arbitration was a natural extension of its corporate law expertise.

The Delaware Coalition for Open Government sided with the critics and sued in federal court, claiming that the arbitration statute was unconstitutional. A lower court struck down the statute in 2012 holding that these arbitration cases were essentially civil trials since the judges, place and proceedings were the same.

Accordingly, the First Amendment principle of open access applied. The statute failed because it allowed confidential proceedings.

At the time, I wrote that the decision made “logical sense:”

“It’s one thing for a dispute by two companies over a joint venture in a foreign country to arbitrate the dispute. And it makes sense for Delaware judges to be picked for this task.

But when it is a dispute that directly implicates third parties like shareholders, the arbitration provision may go a bit too far” since they provide for confidential dispute of the proceedings without knowledge of those third parties.

Delaware appealed, and on Wednesday, the federal appeals court upheld the trial court asserting that “[t]here is a long history of access to civil trials in a democratic society.”

The appellate court applied an experience and logic test to determine whether the arbitration statute was similar to court proceedings. Because these types of proceedings had traditionally been open to the public, they should remain open even if called arbitration. The court added that “the benefits of openness weigh strongly in favor of granting access to Delaware’s arbitration proceedings.”

Thus ends Delaware’s arbitration experiment.

There are still some grounds to allow Delaware to appeal to all of the judges on the circuit court, and ultimately, the Supreme Court, if it is willing to take up the case.

An appeal would not be without basis. One of the three judges in appellate court’s opinion dissented, stating that “the Court of Chancery, as a formal adjudicator of disputes, may not be able to compete with the new arbitration systems being set up in other states and countries.” The judge concluded that arbitration had never been open to the public and that Delaware therefore “did not intend to preclude the public from attending proceedings that historically have been open to the public.”

The program has not been popular in its few years of existence with less than a dozen cases decided under it. Still, this may have been because of its uncertain legality.

Despite this, Delaware is likely to appeal because it does have grounds for a case and has nothing to lose at this point. Lucky for us, we’ll be able to see the entire thing play out in public, as is our constitutional right.

8 Questions for 3 Buffetts

Warren Buffett’s son Howard Graham Buffett and his grandson Howard Warren Buffett have written a new book, “Forty Chances: Finding Hope in a Hungry World,” which chronicles their philanthropic work on hunger, farming and poverty around the world. This is an edited transcript of a discussion with Warren Buffett, his son and grandson.

Q. We’ve heard a lot about efficient markets over the past week thanks to the Nobel Prizes. Warren, you’ve made a career out of exploiting inefficiencies. It’s hard not to come away from this book without thinking that food and agriculture are the most inefficient markets in the world. Why is that?

Howard Graham Buffett In the United States, it’s different than in Africa. In a developed country like ours, most of it has to do with distribution systems. In many cases, it has to do with not having enough labor to deal with some of the food that we produce. Our issues are not safety or, in most cases, accessibility. Accessibility can be an issue in rural areas. Affordability is less of an issue. Of course, it’s an issue for some people. A lot of it has to do with what our policies and rules are and whether that allows organizations to operate and function within them. And some of those rules are a bit prohibitive.

If you move to Africa, that gets really complex. It’s leadership, corruption, infrastructure, you name it. In eastern Congo, we just finished building â€" we didn’t build it, but we funded it â€" the building of a very small hydroelectric plant. And when it was completed, there were two European companies that came immediately. One is producing soap because the Democratic Republic of Congo doesn’t produce any soap and the raw materials are there. And one is extracting enzymes from papaya. Before, they had no power, so now they can do the processing. Sometimes the things we think are so simple but not so easy to grasp are the things that work the best. Even in the middle of conflict, we are able to provide business opportunity.

Q. Let’s talk about technology.

Warren Buffett I’ll just take a snooze over here.

Howard Graham Buffett He’s done four tweets and I’ve done zero.

Q. You address some of it in the book. There’s GPS-run farm equipment, Judea Pearl’s application of Bayesian networks and Clay Mitchell’s “farm of the future.” Is Silicon Valley involved enough in this area? Where can engineers and technology companies really make a difference?

Howard Warren Buffett There are some distinct areas where technology will continue to play a growing and increasingly important role, particularly addressing the challenge of linking individuals here in the United States, and increasing their awareness and compassion of the challenges that are taking place all over the world. We’ve seen certain Web sites pop up and become incredibly popular because they’ve done a very effective job at connecting someone sitting here in the United States with a smallholder-farmer in Kenya and the challenges she’s facing every day. Making that direct connection is something that establishes a lifetime link between someone in the United States with the ability to make a small $5 donation with someone somewhere else in the world for whom $5 can change a lot.

Howard Graham Buffett In the eastern Congo, we go up into areas controlled by the M23 rebels, so the World Food Program won’t even deliver food up there. We can find other people to deliver the food, but we didn’t have a payment system that could work because we couldn’t pay cash up there. So you can buy a little card for your phone, and everybody up there’s got a phone. It’s amazing. You can deliver the cash through the phone through the banking account, which actually solves a tremendous problem. That’s a place where technology works. Let me tell you about a place where technology won’t work. When you walk onto a farm and are standing on soil, there is no technology that is going to take that soil and transform it into something that is five times more productive.

Africa is the most weathered continent in the world, 75 percent of its soil has been degraded. You don’t just bring that back. I always like to say it’s like putting an oxygen mask on a cadaver; it just isn’t going to work. You have to rebuild soils, rebuild fertility. That’s how you get productivity. There’s not going to be a technology to shortcut that. Technology doesn’t build organic material. Technology in that case may be able to help you find small, inexpensive ways to do soil testing that we don’t have today. So there are places where technology can assist in trying to figure out what are the best solutions but they aren’t always going to be the solutions themselves.

Howard Warren Buffett We have hope in innovation because we have to. One of the most important roles of technology is around building awareness. We have a tool called Map the Meal Gap, where for the first time â€" starting maybe three years ago â€" people can go and see the number of hungry ndividuals right in their own community. That’s something you can’t do without the right technology in place.

Q. Warren, what does your lack of a stake in or an acquisition of an ADM, Monsanto or DuPont say about the investment thesis for the sorts of companies behind a lot of the work your son and grandson are doing?

Warren Buffett Generally speaking, food processing and farm building operations have been pretty capital intensive in relation to profitability, so it has not been a field that looks to me like I’ve got an edge in. There could be an exception to that. I’ve looked at some of the companies you mentioned and even had an investment in one of them but it’s a lot easier for me to understand Coca-Cola or Wells Fargo.

Q. Howard, you’re the one in the book who makes the direct link between value investing and applying the same long-term approach to philanthropy. It hasn’t exactly caught on too widely in investing. Is there any reason to think it can work better in your field?

Warren Buffett [Laughs]

Howard Warren Buffett I’ve had the benefit of watching my dad over the last 15 years work at this and seen what grandpa has made successful at Berkshire translate down. When you ask grandpa, “When you look to buy a company, what do you look at?” one of the first things he’ll say is, “The person who’s running it, the manager, the individual who knows more about that business maybe than even I do.” What my dad has done so effectively well is identify the best managers of philanthropic capital you could ever imagine. There’s a half dozen chapters in “40 Chances” dedicated to those kinds of people.

Howard Graham Buffett I didn’t start there, though.

Howard Warren Buffett One of my grandpa’s first rules in the management handbook is that shareholders are part owners of the company. When you talk about the dis-link in philanthropy between having a customer and a donor, or a producer of a product, that doesn’t exist anywhere. There are no shareholders in philanthropy; there are just beneficiaries. That’s a real problem and part of the projects we have worked on so hard, especially in Afghanistan. How do we take individuals who are trying to help and turn them into shareholders? They have to own what we’re building for them so that there are sustainable income-generating activities at the end. What grandpa’s done so well is bringing shareholders into the decision-making process and doing it in a way that’s unique to a company the size of Berkshire.

Howard Graham Buffett Think about what our process has been for 40 years. We show up, we give stuff away, so people think there’s no value in it. Then, when you try to build value in something, they want it free. It just doesn’t work. And we go home. You create dependency, you create conflict, but what you certainly don’t create is value. That’s part of why we wrote this book. We have to stop doing things that don’t work.

Warren Buffett I’m not sure there’s necessarily a parallel. In investing, you’re appealing to people’s desire to have a lot more next year, 10 years from now or in 20 years. In philanthropy, you’re appealing to a different side of their nature. You’re trying to convince people who have been fortunate in life that there are an awful lot of people that did not get the long straw. After you’ve taken care of yourself in a very good way and your family and all that, a lot of people can benefit if you apply some of those excess funds intelligently in education, in medicine, all kinds of things. It’s a different appeal. And people respond differently to them, too.

Q. When the day comes â€" say, maybe 50 years from now â€" when you become chairman of Berkshire, Howard, how do you think your very different life experiences from your father’s will affect the company?

Howard Graham Buffett The best experience I had was to spend 50 years around my dad. I know how he thinks, I know what he cares about and I know some of the promises he’s made to people he’s bought companies from. And the most important thing to do is keep that integrity and keep the credibility with those people and those managers who may be the original people who started the company. One thing about Berkshire that’s incredibly fortunate is that there could be more than one C.E.O. - it’s up to the board and everything else in the future â€" but it’s not like we have to look very far. Every company can’t say that. Part of that value is that Berkshire has 50 C.E.O.’s and you have an array of choice. It’s not like it’s going to be a struggle to find somebody who can do a great job running it. My job is pretty easy: It’s just to make sure nothing changes a whole lot.

Warren Buffett I think he’ll be pretty good at this point. He wouldn’t have been when he was 20 years old or 25. If a C.E.O. is put in there who does change in some way after they get in the job or if it becomes more about them than about the shareholders in the company, I think Howie will be good at detecting that. I think other members of our board will be, too. But he’ll also be in a position where it’s relatively easy to do something about it. It’s very hard if you have a C.E.O. that’s chairman and the directors meet every three or four months, it’s hard to change C.E.O.’s sometimes. They learn how to entrench themselves and start putting their friends on the nominating committee and all that. His position is for the one-in-a-hundred chance that somebody is not who we thought they were when we put them in. The Bible says blessed are the meek for they shall inherit the earth, but it doesn’t say they’ll stay meek after they inherit it. That’s the problem we’re loking at.

Q. With regard to tax policy in this country as it affects charitable contributions, how should they be treated?

Warren Buffett It depends on how the whole tax code is set up. In terms of the really wealthy people, I don’t think it makes much difference whether or not they’re deductible. Less than 1 percent of the money I have given away has been deductible. My carry-forward is $11 billion or something like that. It doesn’t mean anything. And I know some other pretty wealthy people who have given away a lot of money and tax deductions actually had nothing to do with it. And then, I’m sure it does with some people. What the total sensitivity to deductibility is, it’s hard to tell. Some people don’t itemize deductions at all, obviously. I don’t have a strong feeling. Of course, everybody who runs a philanthropic organization doesn’t want it touched. I do not have a strong feeling that it’s sacred that they be fully deductible or what portion of income. The code says to me if I give appreciated securities to a controlled foundation I like, I can’t deduct more than 20 percent of my ajusted gross income. If I give cash to public charities, I can deduct 50 percent. So we’ve got a lot of policy already built into the code. Do I think that 20 percent versus 50 percent has changed the mix of how people behave? I don’t think so very much.

Q. You’re a contrarian investor. On Tuesday, we had Tiger 21, a group of American and Canadian multimillionaire investors, choosing Berkshire Hathaway as their top pick, displacing Apple. To use your own famous phrase, should other investors be fearful as these buyers get greedy?

Warren Buffett The way to look at Berkshire is trying to figure out what our businesses are worth today and whether the money we reinvest will be reinvested reasonably intelligently. I try to give a lot of information in the annual report to enable our shareholders to make a reasonable estimate of what intrinsic value is. If you buy Berkshire at or below its intrinsic business value, I think you’ll do reasonably well over time because I think the money we reinvest will be compounded fairly intelligently. Therefore, if you don’t overpay going in, you’re likely to do O.K. It’s never going to be the stock of the year. From this size, it cannot compound at a terrific rate of return. It’s simply out of the question. I think it can compound at a reasonable rate of return.

Q. So Berkshire’s last five-year comparison against the S&P isn’t a concern?

Warren Buffett Let’s assume this year ends the way it is so far, four of those five years have been over 15 percent years for the S&P. That is not when we shine. We do better in down markets or modestly up markets. I’m certain our goal is to do moderately better than the S&P, and I think we can probably do it, but I don’t think it’s a sure thing.

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

Caterpillar’s Stock Drops, and 2 Big Deals May Be to Blame

Two of Caterpillar‘s biggest-ever deals may have played a role in the $3 billion of market value that the company’s stock shed on Wednesday morning.

The maker of heavy equipment disclosed that its third-quarter profit tumbled 44 percent from the same time last year, while revenue fell more than 18 percent for the same period.

The company said quarterly profit dropped to $946 million, as revenue fell to $13.4 billion. With the company cutting its full-year earnings forecast yet again, investors sold off shares, leading to a 6 percent drop in the stock’s price as of midday Wednesday, to $83.87.

The culprit: continued weakness in the mining sector. Caterpillar’s resource industries unit reported a 42 percent fall in sales from the same time last year, while the company’s construction and power units each reported only 7 percent declines. To compound problems, the manufacturer said that it could not forecast when mining customers would start ordering new equipment.

Caterpillar’s problems are in part a bet on mining that it bolstered in a big way through deal-making. In 2011, the company spent about $7.5 billion for Bucyrus International, paying a 32 percent premium in its biggest deal so far. A year later, it bought ERA Mining Machinery of Hong Kong for about $654 million.

Mining equipment sales carried a far bigger margin than Caterpillar’s existing businesses, and the company was wagering that a boom in the excavation of copper and other metals would yield big profits.

But Douglas R. Oberhelman, Caterpillar’s chief executive, conceded that mining production was still strong, but new equipment orders had not followed suit as customers had cut costs.

“What we were watching is mining production all year, while the order rates were coming down and down and down,” he said in an interview on CNBC Wednesday morning.

(It didn’t help that Caterpillar was forced to record a $580 million accounting charge in its fourth quarter last year after uncovering misconduct at a crucial ERA subsidiary, effectively writing off most of that acquisition’s value.)

Mr. Oberhelman added in his CNBC interview that Caterpillar’s bet on mining, including the Bucyrus deal, was for the long term. He insisted that the cycle would turn, as it has in the past. Just when that would happen is unclear: the company is expecting the business to remain weak next year.

“We just need a recovery in mining, which I’m sure will come,” he said.

Caterpillar’s Stock Drops, and 2 Big Deals May Be to Blame

Two of Caterpillar‘s biggest-ever deals may have played a role in the $3 billion of market value that the company’s stock shed on Wednesday morning.

The maker of heavy equipment disclosed that its third-quarter profit tumbled 44 percent from the same time last year, while revenue fell more than 18 percent for the same period.

The company said quarterly profit dropped to $946 million, as revenue fell to $13.4 billion. With the company cutting its full-year earnings forecast yet again, investors sold off shares, leading to a 6 percent drop in the stock’s price as of midday Wednesday, to $83.87.

The culprit: continued weakness in the mining sector. Caterpillar’s resource industries unit reported a 42 percent fall in sales from the same time last year, while the company’s construction and power units each reported only 7 percent declines. To compound problems, the manufacturer said that it could not forecast when mining customers would start ordering new equipment.

Caterpillar’s problems are in part a bet on mining that it bolstered in a big way through deal-making. In 2011, the company spent about $7.5 billion for Bucyrus International, paying a 32 percent premium in its biggest deal so far. A year later, it bought ERA Mining Machinery of Hong Kong for about $654 million.

Mining equipment sales carried a far bigger margin than Caterpillar’s existing businesses, and the company was wagering that a boom in the excavation of copper and other metals would yield big profits.

But Douglas R. Oberhelman, Caterpillar’s chief executive, conceded that mining production was still strong, but new equipment orders had not followed suit as customers had cut costs.

“What we were watching is mining production all year, while the order rates were coming down and down and down,” he said in an interview on CNBC Wednesday morning.

(It didn’t help that Caterpillar was forced to record a $580 million accounting charge in its fourth quarter last year after uncovering misconduct at a crucial ERA subsidiary, effectively writing off most of that acquisition’s value.)

Mr. Oberhelman added in his CNBC interview that Caterpillar’s bet on mining, including the Bucyrus deal, was for the long term. He insisted that the cycle would turn, as it has in the past. Just when that would happen is unclear: the company is expecting the business to remain weak next year.

“We just need a recovery in mining, which I’m sure will come,” he said.

A Moot Effort to Burnish the Reputation of Goldman Sachs

I hate to be the bearer of good news for Jamie Dimon, but everything is going to work out O.K.

How do I know? Two words: Lloyd Blankfein.

Will Rogers said it takes a lifetime to build a good reputation and only a minute to lose it. Hardly. In the case of Mr. Blankfein, chairman and chief executive of Goldman Sachs, it took other people’s lifetimes to build the reputation he inherited. Then, he oversaw its destruction. It took just five years to build his own name back up. Not so bad.

As for Mr. Dimon, he had to meet with Attorney General Eric H. Holder Jr. and suffer a modicum of humiliation. But, ultimately, he was personally able to hash out a $13 billion mortgage securities settlement for JPMorgan Chase, the bank he heads.

Now, he can gaze down the street to a ghost of his Christmas future: Once a scourge, Mr. Blankfein now scores his own meetings in Washington. With the president himself. Not three weeks ago, the Obama administration invited him along with other bankers to the capital to lend gravitas to their claims that breaching the debt ceiling would have been catastrophic.

The Wall Street Journal publishes op-ed articles by Mr. Blankfein about how to solve grave matters of state. He is feted at charity galas, where the business media warmly tracks his various facial-hair styles.

With one pretender to his position leaving the firm this week and his successor seemingly identified, Mr. Blankfein is going to leave Goldman on his own terms. He is back in the hearts and minds of people who make decisions and wield influence.

Unfortunately for the rest of us, we are pained by some memories.

Lloyd C. Blankfein presided over what was nearly a collapse of his 144-year old institution, had the Federal Reserve not converted Goldman instantaneously into a bank holding company so that the Fed could make available its extraordinary lending programs, and had the government not bought preferred stock.

Some financial types are given to making the contrarian argument that Goldman would have survived the 2008 financial crisis. They point out the firm had gone short on the housing market to protect itself. It had hedges in place. And it demonstrated an ability to raise capital from private investors when Warren E. Buffett infused money.

But Goldman had recklessly become entwined with the insurer American International Group, which couldn’t have paid Goldman back without being bailed out itself. It’s the same story with the firm’s hedges: They would have worked only because the counterparties were saved by taxpayers.

But grant for argument’s sake that Mr. Blankfein was the best investment bank chief executive during financial crisis. That’s grading on some generous curve there.

The bigger problem is that Mr. Blankfein presided over the implosion of the Goldman Sachs’s brand and reputation. When he arrived in his job in the spring of 2006, Goldman Sachs was a gold-plated name, the premier financial institution in the world.

Seven years later, Goldman is synonymous with exploiting its customers for its own interests. Its good name has collapsed. Among its peers, it has posted the largest decline since 2007, according to Reputation Institute.

It wasn’t just that Goldman arranged the infamous Abacus deal, allowing the hedge fund Paulson & Company to secretly bet against the collateralized debt obligation the bank was creating and selling around the world. It paid a $550 million fine for that. Last year, a disgusted employee, Greg Smith, announced his resignation in a New York Times Op-Ed article, decrying the bank’s “toxic and destructive” environment.

Yet when Mr. Blankfein testified in front of the Senate investigating Goldman’s practices, he claimed that Goldman was merely making a market in mortgage securities. In fact, Goldman was an arranger, more like an underwriter, with more serious responsibilities to those it marketed the securities to.

Postcrisis, Goldman advised the energy company El Paso Corporation to sell itself to Kinder, a deal rife with conflicts of interest. Mr. Blankfein got personally involved in wooing El Paso.

Goldman has repeatedly told the world it is addressing these concerns, trying to convince people that it is a friendly company to hang out with.

In 2010, Mr. Blankfein spearheaded the creation of a business standards committee. This year, the company told us it had put into effect the committee’s reforms. Among them: Goldman says it now evaluates products for their suitability for clients, has stronger procedures to resolve conflicts of interest, has improved its disclosures and links pay and promotions to employees who protect the firm’s reputation.

“One thing for damn sure, this is serious change,” said E. Gerald Corrigan, who is co-chairman of the Goldman committee.

In an early acid test of its independence, the standards committee proposed shifting some securities business to the investment banking unit, a move sure to roil fiefs within Goldman.

“To my astonishment,” it passed the committee unanimously, Mr. Corrigan said.

Transactions are now more carefully scrutinized. They go through an initial categorization: “Approved as proposed”; “conditionally approved” and “declined/withdrawn.” The latter category is small, which, the bank says, reflects improved sensitivities at the bank. About half are “conditionally approved.” They go through a rigorous process to meet new standards. After that, Goldman says, it approves more than 90 percent of them.

Mr. Corrigan voiced strong support for Mr. Blankfein. “I simply do not think any board would have concluded, given the circumstances, that a change at the top in the leadership was necessary or appropriate.”

Goldman Sachs writes in its annual report: “Our reputation is one of our most important assets.” And: “Integrity and honesty are at the heart of our business.”

Oh, whoops. That’s actually from the 2007 annual report, just as it was selling its garbage securities to unsuspecting customers.

Well, maybe we can believe the firm this time.

The real question is: Does Goldman actually need to change? Is having a good reputation worth much? Goldman (and other investment banks) don’t really have customers as much as counterparties, whom it may be as likely to bet against as bet with.

In his recent book, “The Death of Corporate Reputation” (FT Press), the Yale legal scholar Jonathan R. Macey explains that companies, especially financial firms, once depended on their reputations to attract and retain business, but no longer. Instead, clients have no other choice but to use the services of particularly important firms.

“Reputation is no longer an asset in which it is rational to invest,” he contends.

Mr. Blankfein wasn’t personally responsible for all of the problems at the firm. But as chairman and chief executive, he is the embodiment of the culture.

There was one thing Goldman’s board could have done to show it was serious about reforming its culture. That was give Mr. Blankfein the boot.

It never did.

So, Mr. Dimon, don’t lose any sleep.

Rabobank Nears Settlement on Interest Rate Inquiry

LONDON â€" The Dutch lender Rabobank said Wednesday that it was close to reaching settlements with American, British and other authorities over its role in the setting of global benchmark interest rates.

The bank is one of several banks under investigation over allegations of rigging of the London interbank offered rate, or Libor.

In a statement Wednesday, the lender said that various authorities had almost completed their investigations into Rabobank’s role in the process of setting Libor and the Euro interbank offered rate, or Euribor.

The Commodity Futures Trading Commission, the Justice Department, Britain’s Financial Conduct Authority along with the Serious Fraud Office have been looking into the bank. Dutch authorities are also investigating.

“Rabobank expects to be able to enter into settlements with these authorities within the next two weeks,” the bank said in a statement.

A person familiar with the inquiry said a settlement could come as early as next week.

The bank declined to comment on any possible settlement amounts. The Financial Times and The Wall Street Journal reported late Tuesday that the settlement with Rabobank could be nearly $1 billion, which would make it the second-largest agreement after the $1.5 billion penalty imposed on UBS related to the interest-rate scandal.

The Financial Conduct Authority declined comment Wednesday. The C.F.T.C. and the Justice Department didn’t immediately respond to requests for comment Wednesday.

At court hearing on Monday, the Serious Fraud Office said it had identified 22 individuals at various banks as potential co-conspirators in its wide-ranging inquiry into the manipulation of Libor.

So far, only three individuals have been charged criminally in Britain: Tom A.W. Hayes, a former Citigroup and UBS trader; and James Gilmour and Terry Farr, two former brokers at RP Martin Holdings in London. Mr. Hayes is also facing criminal charges in the United States.

The three have yet to enter pleas in the case.

Barclays agreed to pay $453.6 million in June 2012, and the Royal Bank of Scotland reached a $612 million deal in February. Last month, British and American authorities fined the British financial firm ICAP a combined $87 million for its role.

Citigroup, Deutsche Bank and other banks also remain under investigation by American and British authorities in the matter.

Real Estate Firms in $11.2 Billion Deal

American Realty Capital Properties said on Wednesday that it had agreed to buy Cole Real Estate Investments for $11.2 billion in a deal that would create a giant real estate investment trust. American Realty is offering either 1.0929 shares of its stock or $13.82 in cash for each Cole share. The deal comes as investors are looking to gain exposure to the strengthening real estate market.

A CHANCE TO END A PRIVATE EQUITY TAX BREAK  | A court case involving the private equity firm Sun Capital Partners has given the federal government a chance to sidestep Congress and eliminate a major tax break for private equity, Steven M. Davidoff writes in the Deal Professor column. “The question is whether the Obama administration takes up the fight.”

At issue is what is known as carried interest, the share of profits that a private equity manager makes from investing in companies. A subject of heated debate, such income is currently taxed at the capital gains rate of 20 percent instead of as income, which would put it at a maximum of 39.6 percent. The court case, which arose out of Sun Capital’s $7.8 million buyout in 2007 of Scott Brass, a manufacturer of high-quality brass and copper, has upended the treatment of carried interest, Mr. Davidoff writes. The court concluded that the Sun Capital funds were arguably involved in a “trade or business” through their ownership of Scott because the funds were “actively involved in the management and operation of the companies in which they invest.”

The phrasing in the tax code is similar to the statute at issue in the case, Mr. Davidoff writes. “In order to take advantage of capital gains treatment for carried interest, private equity firms must also satisfy rules that they are not engaged in a ‘trade or business,’ operating the company they own.”

IN DETROIT, ‘EXTRA’ PENSION PAYMENTS  | The federal judge dealing with Detroit’s bankruptcy is faced with a conundrum over extra pension payments that have been promised to workers and retirees. The extras have cost Detroit billions of dollars over the years, yet state laws say the extra payments must continue, Mary Williams Walsh reports in DealBook.

For years, the thinking behind the extra payments â€" with names like “the 13th check,” “the skim fund,” “the bump up” and “the waterfall” â€" was that the base pensions were too small. The pension board thought it found the money for these payments by skimming off “the excess” when returns on investments exceeded the plan’s target. But the pension fund also had years when its investments fell short of the target, and the extra payments meant the fund missed out on investment income that the money would have brought in.

“Earlier this month, a state labor judge ruled that Detroit illegally interfered with its pension system two years ago, when it stopped the extra payments in a last-ditch effort to save money and avoid bankruptcy,” Ms. Walsh reports, noting that the base pensions are still being paid.

ICAHN REDUCES NETFLIX STAKE  | Shares of Netflix may have fallen on Tuesday because Carl C. Icahn was cashing out, DealBook’s Michael J. de la Merced reports. The billionaire investor reported cutting his stake almost by half, to 4.5 percent, after growth in the company’s subscriber base helped spur a rise in the stock. Mr. Icahn sold 2.99 million shares at an average price of about $314.85, well above the $58-a-share average he paid last fall. In a post on Twitter, Mr. Icahn offered words of thanks to Netflix’s chief executive, Reed Hastings; its head of content acquisition, Ted Sarandos; and the star of “House of Cards,” Kein Spacey.

ON THE AGENDA  |  The Nasdaq OMX Group reports earnings before the market opens, while AT&T announces results after the market closes. Alan Greenspan is on CNBC at 7:30 a.m. and Bloomberg TV at 9 a.m. Eric P. Lefkofsky, the chief executive of Groupon, is on CNBC at 8:10 a.m. Gary D. Cohn, Goldman Sachs’s president, is on Bloomberg TV at 11 a.m.

A KOCH BROTHER’S FIGHT OVER A WIND FARM  | “If the vast wind farm proposed for Nantucket Sound is ever built, William I. Koch will have a spectacular view of it,” Katharine Q. Seelye writes in The New York Times. “Of course, that is the last thing he wants. Mr. Koch, a billionaire industrialist who made his fortune in fossil fuels and whose better-known brothers underwrite conservative political causes, has been fighting the wind farm, called Cape Wind, for more than a decade, donating about $5 million and leading an adversarial group against it. He believes that Cape Wind’s 130 industrial turbines would not only create what he calls ‘visual pollution’ but also increase the cost of electricity for everyone.”

But Jim Gordon, Cape Wind’s developer, who has spent $70 million of his own money on the project since 2001, vows that it will go forward. “This is a very sophisticated adversary,” Mr. Gordon said. “Koch has already spent a decade trying to push us off the path toward a better energy future.”

Mergers & Acquisitions »

Twitter Sheds a Light on Fast Growth of Its Newest Acquisition  |  In an amended prospectus, Twitter disclosed that MoPub, an ad company it recently acquired, had soaring revenue. It also disclosed the pay package for its chief executive, Dick Costolo. DealBook »

Men’s Wearhouse Said to Weigh Bid for Allen Edmonds  |  The retailer Men’s Wearhouse is weighing a bid for Allen Edmonds, even as it girds itself for a potential hostile takeover approach by Jos. A. Bank, people briefed on the matter said. DealBook »

EBay to Buy British Courier Service  |  EBay is buying Shutl, a same-day courier service based in London, in an effort to improve product deliveries, The Financial Times reports. FINANCIAL TIMES

Gates Buys a Stake in Spanish Builder  |  Bill Gates, the Microsoft founder, is the latest investor to make a bet on the recovery of the Spanish economy. DealBook »

INVESTMENT BANKING »

JPMorgan Said to Face Another Potential Payout  |  In talks that are separate from the tentative $13 billion agreement JPMorgan Chase is negotiating with the Justice Department, investors are seeking at least $5.75 billion from the bank over losses on mortgage securities, The Wall Street Journal reports, citing unidentified people. WALL STREET JOURNAL

Buffett Comes to JPMorgan’s Defense  |  “If you’re a financial institution and you’re threatened with criminal prosecution, you have no ability to negotiate,” Warren E. Buffett said of JPMorgan Chase on Bloomberg TV. “Basically, you’ve got to be like a wolf that bares its throat, you know, when it gets to the end. You cannot win.” BLOOMBERG NEWS

Former R.B.S. Executive Named Head of Cyprus Bank  |  John Hourican, who resigned from his position as head of investment banking at the Royal Bank of Scotland in the wake of the Libor scandal, has been tapped to lead the Bank of Cyprus, The Telegraph reports. TELEGRAPH

When Puerto Rico Turned to Wall Street  |  “In the $3.7 trillion municipal-bond market, Puerto Rico and its agencies more than doubled their borrowing since 2004, to $70 billion this year,” Bloomberg News reports. BLOOMBERG NEWS

PRIVATE EQUITY »

Safeway Said to Attract Interest of Private Equity  |  Buyout firms including Cerberus Capital Management “are exploring a deal for all or part of supermarket chain Safeway,” Reuters reports, citing unidentified people familiar with the matter. A deal “could potentially shape up to be one of the largest leveraged buyouts since the financial crisis.” REUTERS

HEDGE FUNDS »

As Third Point Does Well, Loeb to Return Money to Investors  |  Daniel S. Loeb said Third Point would return around 10 percent of its capital by the end of the year to try to “moderate” the hedge fund’s growth. DealBook »

SAC Capital Retrenches as Insider Trading Inquiry Drains Firm  |  SAC Capital Advisors will close its London office and cut six portfolio management teams in the United States, the hedge fund’s management revealed. DealBook »

I.P.O./OFFERINGS »

Moelis Said to Approach a Public Offering  |  Moelis & Company, the boutique investment bank founded by Kenneth Moelis, “is moving closer to a potential initial public offering, according to people familiar with the matter,” The Wall Street Journal reports. “While no filing is imminent and the firm may decide against doing one any time soon, if at all, Moelis officials are entertaining pitches from possible underwriters of such an offering, the people said.” WALL STREET JOURNAL

Russian Credit Card Firm Jumps After I.P.O.  |  The holding company for Tinkoff Credit Systems, which raised $1.1 billion in an I.P.O. in London, seeks to capitalize on Russians’ desire for easy access to credit cards as wages rise. DealBook »

Why a Stock Sale Could Be the Right Program for Netflix  |  Selling stock, the author says, would give Netflix cash it could use to pay off obligations, sign more movie deals, keep for a rainy day - or buy back stock should sentiment turn against the company again, Robert Cyran of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS

VENTURE CAPITAL »

Handybook, a Housecleaning Start-Up, Raises $10 Million  |  The financing reflects continued interest in companies that aim to simplify fragmented industries with on-demand services. DealBook »

LEGAL/REGULATORY »

Weak Job Gains May Delay Fed Action  |  The New York Times reports: “The relatively weak September numbers, the subsequent fiscal showdown, the lack of available data and the economic distortions created by temporarily closing government offices are all expected to further delay the Fed’s decision to begin scaling back on some of its efforts to stimulate the economy.” NEW YORK TIMES

Judge Orders Goldman to Pay Former Programmer’s Legal Bills  |  A federal judge has ruled that Goldman Sachs must pay the legal fees of a former computer programmer, Sergey Aleynikov, accused of stealing code from the bank. DealBook »

European Central Bank Announces Plan to Scrutinize Lenders  |  Reuters reports: “The European Central Bank vowed on Wednesday to submit the euro zone’s top banks to a comprehensive batch of tests next year, staking its credibility on a review that aims to build confidence in the sector.” REUTERS

Fine Expected for Rabobank Over Rate Manipulation  |  The Dutch lender Rabobank is expected to face a fine of almost $1 billion “for the alleged manipulation of Libor and other benchmark interbank lending rates as early as next week,” The Financial Times reports. FINANCIAL TIMES

Deloitte to Pay $2 Million to Settle Charges  |  Deloitte & Touche is settling charges that it violated federal audit rules, the Public Company Accounting Oversight Board said. REUTERS

2 Big Commercial Property Owners to Combine in $11.2 Billion Deal

American Reality Capital Properties and Cole Real Estate Investments, two of the largest commercial property owners in the country, are finally seeing eye to eye.

The two real estate investment trusts agreed to a $11.2 billion deal on Wednesday in which American Realty will buy Cole with a mix of cash and stock, bringing an end to tensions between the companies that have lasted much of the last year.

The combined company will become one of the largest commercial landlords in the country, leasing space to companies including Walgreens, Bed Bath & Beyond and FedEx.

The origins of the deal date back to March, when American Realty made an unsolicited offer for Cole that would have derailed Cole’s move to go public. Cole rejected the offer and went on to list on the New York Stock Exchange. Since the listing in June, Cole shares have climbed more than 17 percent.

Nonetheless, American Realty, the smaller of the two companies, still wanted to do the deal. It will pay a 14 percent premium over Cole’s closing Tuesday stock price of $12.82, and assume significant new debt in taking over the larger company.

“This merger represents a new beginning for former competitors, and we look forward to uniting two of the industry’s most talented organizations,” said Nicholas S. Schorsch, American Realty’s chief executive. “Far more can be accomplished by these two great companies working together than either one could have hoped to achieve independently.”

Under the terms of the deal, Cole stockholders can choose either 1.0929 shares of America stock or $13.82 cash for each share.

Real estate investment trusts are in vogue right now as they pay almost no corporate taxes and return most earnings to investors through dividends, making them attractive stocks for investors to own.

As part of the deal, American Realty plans to increase its dividend to $1.

Barclays and RCS Capital advised American Realty, and Proskauer Rose provided legal advice. Goldman Sachs advised Cole, and Wachtell, Lipton, Rosen & Katz, Venable and Morris, Manning and Martin provided legal advise. Christopher Cole and other executives received legal advice from Sullivan & Cromwell.

2 Big Commercial Property Owners to Combine in $11.2 Billion Deal

American Reality Capital Properties and Cole Real Estate Investments, two of the largest commercial property owners in the country, are finally seeing eye to eye.

The two real estate investment trusts agreed to a $11.2 billion deal on Wednesday in which American Realty will buy Cole with a mix of cash and stock, bringing an end to tensions between the companies that have lasted much of the last year.

The combined company will become one of the largest commercial landlords in the country, leasing space to companies including Walgreens, Bed Bath & Beyond and FedEx.

The origins of the deal date back to March, when American Realty made an unsolicited offer for Cole that would have derailed Cole’s move to go public. Cole rejected the offer and went on to list on the New York Stock Exchange. Since the listing in June, Cole shares have climbed more than 17 percent.

Nonetheless, American Realty, the smaller of the two companies, still wanted to do the deal. It will pay a 14 percent premium over Cole’s closing Tuesday stock price of $12.82, and assume significant new debt in taking over the larger company.

“This merger represents a new beginning for former competitors, and we look forward to uniting two of the industry’s most talented organizations,” said Nicholas S. Schorsch, American Realty’s chief executive. “Far more can be accomplished by these two great companies working together than either one could have hoped to achieve independently.”

Under the terms of the deal, Cole stockholders can choose either 1.0929 shares of America stock or $13.82 cash for each share.

Real estate investment trusts are in vogue right now as they pay almost no corporate taxes and return most earnings to investors through dividends, making them attractive stocks for investors to own.

As part of the deal, American Realty plans to increase its dividend to $1.

Barclays and RCS Capital advised American Realty, and Proskauer Rose provided legal advice. Goldman Sachs advised Cole, and Wachtell, Lipton, Rosen & Katz, Venable and Morris, Manning and Martin provided legal advise. Christopher Cole and other executives received legal advice from Sullivan & Cromwell.