Analyst Says Senior Trader Sought ‘Edgy’ Information

Jon Horvath needed to step up his game at SAC Capital Advisors.

Mr. Horvath, who gathered information about technology companies in which SAC invested, conceded in a self-performance review in 2007 that he offered a “poor contribution to” profit at the giant hedge fund. Mr. Horvath had also lost “a lot of money” from a bet on a data storage company, an episode that prompted a stern warning from his boss, Michael S. Steinberg.

Mr. Horvath’s attempts to rectify the mistake are now at the center of Mr. Steinberg’s insider trading trial. Mr. Horvath, the federal government’s star witness in the case who is hoping for leniency in exchange for testifying, claimed on Wednesday that Mr. Steinberg wanted him to cross a legal line.

“What I need you to do is get me edgy, proprietary information,” Mr. Horvath recalled Mr. Steinberg instructing him one evening after SAC’s trading floor went dark for the day. In testimony on Wednesday, his second day on the witness stand, Mr. Horvath added that “I thought he wanted me to cultivate sources of nonpublic information,” that is, violate insider trading laws.

Mr. Horvath moved swiftly to appease his boss, extracting confidential information from a friend about Dell’s financial results and broader corporate strategy. Mr. Steinberg then traded on the information, Mr. Horvath said, activity that underpins the government’s case.

“I thought my job was in danger,” Mr. Horvath said, portraying Mr. Steinberg as something of a bully. “I thought he’d fire me.”

Mr. Steinberg’s trial is unfolding in Federal District Court in Manhattan just weeks after SAC, run by the billionaire investor Steven A. Cohen, pleaded guilty to criminal insider trading charges. SAC agreed to pay $1.2 billion to the government, a record for insider trading, and wind down its business of managing outside money for investors. Mr. Cohen has not been charged criminally.

Mr. Steinberg, a 41-year-old senior trader who was among SAC’s earliest employees, is the first SAC employee to stand trial in the government’s long investigation of the hedge fund. Of the eight SAC employees charged criminally, six have pleaded guilty to securities fraud, including Mr. Horvath. One other employee, Mathew Martoma, is fighting the charges and faces a trial in January.

A 44-year-old native Swede who grew up in Canada, Mr. Horvath is the linchpin in the case against Mr. Steinberg. Although Mr. Horvath is older, Mr. Steinberg was the leader. They worked side by side on SAC’s trading floor; Mr. Horvath served as a sort of research assistant with a unique window into Mr. Steinberg’s trading.

But to Mr. Steinberg’s lawyer, Barry H. Berke, Mr. Horvath’s viewpoint is tainted.

He is “recreating history” in a desperate attempt to strike a deal with the government, Mr. Berke said in opening arguments. Mr. Horvath acknowledged on the witness stand that “I hope to avoid jail time.”

It is unclear whether Mr. Horvath will hold up under Mr. Berke’s cross-examination, scheduled for next week. Already, some of Mr. Horvath’s testimony appeared stiff, as if he rehearsed the answers.

Mr. Berke is expected to press Mr. Horvath about the details of the leak from Dell, a strategy that will suggest that Mr. Steinberg had no idea that SAC obtained the information improperly. Mr. Berke will most likely highlight that Mr. Steinberg is at the end of a five-person chain of information that started with an insider at Dell and wound its way to Mr. Horvath and Mr. Steinberg.

Jesse Tortora, who was friends with Mr. Horvath, was in the middle of the chain. A former employee at Intel who later became a technology stock analyst at another hedge fund, Diamondback Capital Management, Mr. Tortora accumulated a Rolodex that reached inside Dell.

The contacts paid off for Mr. Horvath. From late 2007 through 2009, Mr. Horvath said in testimony, Mr. Tortora provided a rich vein of information about Dell’s financial data.

Mr. Tortora, who has also pleaded guilty to insider trading and testified earlier in Mr. Steinberg’s trial, provided as many as five updates ahead of Dell’s August 2008 earnings report. Mr. Tortora, based on his source with ties to the company, believed that Dell was going to produce disappointing results that quarter.

Armed with that tip, Mr. Horvath alerted Mr. Steinberg, who then authorized a bet against Dell’s stock. Mr. Steinberg’s portfolio earned about $1 million on that trade.

That same year, Mr. Tortora informed Mr. Horvath that Dell’s chief financial officer was set to step down. And when Dell was planning a major cost-cutting venture, Mr. Tortora once again alerted Mr. Horvath.

Most times, Mr. Horvath would log the tips into an SAC database. When the information was particularly pertinent, like the cost-saving effort, Mr. Horvath would email it directly to Mr. Steinberg.

“I like the Dell chart,” Mr. Steinberg replied, indicating SAC should double down on the stock.

While the emails could be damning, it is possible that Mr. Steinberg was unaware that the information had been improperly obtained. The Dell source, theoretically, could have had authorization to release the information.

“I told Mike that Jesse had a contact at Dell, inside the company,” Mr. Horvath said. But he did not remember whether the conversation happened over the phone or in person. And SAC never knew the insider’s name.

Vivendi to Spin Off Its Internet and Mobile Unit

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A New Credit Boom

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CVS Caremark to Buy Infusion Business

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The Overlooked Secret to Great Performance

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Moncler Sets Price Range for I.P.O.

LONDON - Moncler, the Italian maker of luxury winter jackets, plans to raise as much as $1.1 billion in its initial public offering on the Milan stock exchange.

The price range for the apparel maker, which had abandoned a plan for an initial share sale in 2011, was 8.75 euros to 10.2 euros a share, according to a statement late Tuesday from Eurazeo, the French investment company that owns 45 percent of the company. Moncler has an option to increase the size of the offer by 15 percent, which would value the share sale at €783 million.

Most of the proceeds are expected to go to Eurazeo, Moncler’s largest shareholder, and the private equity firm Carlyle Group. Remo Ruffini, the Italian entrepreneur and Moncler chairman who bought the company in 2003 before bringing in private equity partners, plans to keep his entire 32 percent in the company, a spokeswoman for Moncler said.

Mr. Ruffini is widely credited with turning Moncler â€" a shortening of Monestier-de-Clermont, the village in Grenoble, France, where the company was founded â€" from an outfitter for the French Olympic ski team into a global fashion brand. In recent years, Moncler has added separate collections designed by Thom Browne and Giambattista Valli to its more traditional lines. Last year, the company had sales of €489.2 million and €161.5 million euros in earnings before interest, taxes, depreciation and amortization. It has122 stores.

Moncler’s planned sale is the latest in a growing number of I.P.O.’s in Europe as companies and their investors seek to benefit from an economic recovery and growing consumer confidence. Fashion labels in particular have pursued stock offerings, driven by investors’ desire to tap into luxury retail, a sector that has quickly rebounded since the global financial crisis. Among those that have taken to the stock markets are Michael Kors and the Italian brands Prada and Brunello Cucinelli, while Marc Jacobs stepped down from Louis Vuitton to focus on an I.P.O. for his own label.

Carlyle abandoned plans for a Moncler I.P.O. in Milan in 2011, when the market was volatile, and instead decided to sell a stake to Eurazeo in a deal that valued Moncler at about €1.2 billion. If priced at the top of the range, Moncler’s initial share sale would value the company at €2.5 billion.

The final price of the shares is to be announced on Dec. 11; they are expected to start trading on Dec. 16.

Goldman Sachs, Bank of America Merrill Lynch and Mediobanca are global coordinators of the sale. JPMorgan Chase, Nomura, Banca IMI and UBS will work as joint book runners and BNP Paribas, Equita SIM and HSBC will serve as lead managers. Claudio Costamagna, a former Goldman Sachs banker, and Lazard are advising Moncler.

A Prediction: Bitcoin Is Doomed to Fail

The developers of bitcoin are trying to show that money can be successfully privatized. They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.

Bitcoin relies on thoroughly contemporary technology. It consists of computer-generated tokens, with sophisticated algorithms guaranteeing the anonymity, transparency and integrity of transactions. But the monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of money.

Economists have long declared that currencies are essentially a tool to increase the efficiency of barter, which they consider the foundation of all organized economic activity. In this view, money is a convenient instrument used by individuals to get things done. It is not inherently part of the apparatus of government.

I think of the concept of privately issued tender as “right money,” because the whole idea appeals instinctively to right-wing thinkers. They dislike centralized authority of all sorts, including monetary authority. For example, Friedrich Hayek, Margaret Thatcher’s favorite economist, proposed replacing the state’s monopoly on legal tender with competing currencies offered by rival banks.

Mr. Hayek presumably would have approved of bitcoin. The currency’s issuer is an unknown computer programmer, about as far from a government as can be imagined. Right now, bitcoin is tiny; at the current exaggerated exchange rate, the total projected volume of “coins” is worth less than the gross domestic product of Mongolia. Still, Mr. Hayek might well have dreamed of bitcoins becoming a global currency for wages, prices and loans. He would, though, have hoped for a more stable value, not the increase from $13 to $900 per bitcoin in less than a year.

But the right-money historical narrative is simply wrong, as the anthropologist David Graeber explains in his book ”Debt: The First 5,000 Years.” Straightforward barter played a tiny role in all premodern economies. Instead, what we think of as purely economic activity was inseparable from an intricate structure of social relationships and spiritual beliefs. Purely commercial activity was rare â€" and it almost always relied on some form of government-issued money. Barter was not the precursor to money; it has always been the inferior alternative.

So it is not surprising that barter economies only develop when governments break down. Similarly, truly private money is an inferior alternative to the money that comes with the backing of a political authority. After all, no bank or bitcoin-emitter can be as public-minded as a government, and no private power can raise taxes or pass laws to unwind monetary excesses.

In short, while the freedom promised by right money may be ideologically appealing, monetary relations are too closely interwoven with other economic, political and social relations to be managed well by any institution with less sway than a government. The detailed work of money creation can be delegated to independent central banks and to a credit system of regulated private banks, but the ultimate authority of any functioning monetary system will always be the ultimate political authority.

Bitcoin exemplifies some of the problems of private money: Its value is uncertain, its legal status is unclear, and it could easily become valueless if users lose faith. Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system. The authorities might be motivated by a genuine concern about the stability of a shadow monetary system or they might act out of self-preservation. Tax evasion would be too easy in a right-money parallel economy.

Mr. Hayek thought left-wing thinkers ignored the dangers of big government. He may have been right, but his idealism cannot overturn reality. All effective money is state-backed â€" what could be called “left money.”

Of course, the global monetary system has suffered from appalling management in recent years. The authorities, especially in the United States, first allowed banks to act almost as if they were in a right-money world, lending and speculating wildly. That led to a typical right-money disaster â€" a sudden loss of trust and the failure of leading institutions. The authorities rescued the financial system, but their monetary system still cannot provide steady support to the rest of the economy.

The outcome could have been much worse. Banks are still in business and consumer inflation rates are generally low. Still, the typical current combination of low interest rates, large government deficits and high ratios of debt to G.D.P. amounts to an invitation to monetary accidents.

Part of the interest in virtual currencies like bitcoin is that their anonymity can provide a convenient cloak for criminal activity. Part is technological â€" this is a cool idea. And part is speculative â€" gamblers bet that bitcoin’s value will increase.

But I suspect another important factor is political: Bitcoin appeals because governments are not fully living up to the responsibility that comes with state-sponsored money. Bitcoin, or something like it, will thrive until the authorities do better.

Edward Hadas is economics editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

American-US Airways Merger Cleared

Airlines Clear Final Merger Obstacle

Scott Olson/Getty Images

Travelers checking in at American Airlines kiosks at Chicago's O'Hare International Airport. A bankruptcy court ruling on Wednesday puts an end to a rocky two-year period for the airline.

A federal court approved American Airlines’ reorganization plan on Wednesday, clearing the way for the airline’s exit from bankruptcy and removing the final hurdle to its merger with US Airways to form the world’s largest airline.

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The ruling by Judge Sean H. Lane, of the United States Bankruptcy Court for the Southern District of New York, puts an end to a rocky two-year period for the airline, which sought court protection to reorganize its business, shed debt and rewrite labor agreements.

A central feature of the reorganization plan was the merger with US Airways, a prospect that had the backing of American’s creditors and employees. But the plan was temporarily disrupted after a challenge from the Justice Department over the summer on the grounds that it would hurt competition and lead to higher fares.

Just weeks before the trial was schedule to start, however, and after months of uncertainty, regulators and the airlines settled the suit on Nov. 12. The bankruptcy court found the settlement did not modify the plan of reorganization enough to warrant a new vote by creditors and shareholders.

The airline said it expected the merger to close on Dec. 9. It said that the last day of trading for all outstanding securities, including those of its parent company AMR Corp. as well as shares of US Airways, would be Dec. 6. Once the merger closes, AMR will be renamed American Airlines Group, and be listed on the Nasdaq under the ticker symbol AAL.

The airline as well as labor groups welcomed the ruling, which offers a chance for American to reclaim a top spot among the nation’s carriers. The merged airline will have 6,700 daily flights, 1,500 airplanes and about 100,000 employees. Its combined annual revenue will reach about $38 billion.

American, which has lagged rivals in recent years, was the last of the legacy airlines to file for bankruptcy, stumbling from its perch as the nation’s top carrier after falling behind Delta Air Lines and United Airlines. Both of those airlines had already reorganized their businesses in recent years and had expanded through mergers of their own.

American and US Airways argued that a combination was the best hope to provide travelers with a similar global network capable of competing with Delta and United or risk being left behind.

But American will have to work hard to convince passengers that a larger carrier can offer better and more customer-friendly service. Airline mergers are usually bumpy events, often marred by reservation problems and computer glitches. United, for example, suffered repeated flight delays and disruptions last year because of problems associated with its merger with Continental Airlines.

It will be up to a renewed management team, led by US Airways’ W. Douglas Parker, to instill energy and fresh thoughts at American, where morale has been sapped by labor tensions in recent years. The combined airline, which will keep the name American Airlines, will be based in the Dallas-Fort Worth region.

Mr. Parker has been a cheerleader for airline consolidation for years. He orchestrated the combination of American West with US Airways in 2005 and then sought to merge the carrier with Delta as well as United, unsuccessfully.

After American filed for bankruptcy, Mr. Parker saw an opening to go after a fast merger despite the opposition of American’s managers. He made his case quickly, first with airline employees, then with its creditors. He then persuaded the representatives of his rival’s pilots, flight attendants and mechanics to all back a merger with US Airways provided that Mr. Parker would run the show.

The vote, which crystallized the employees’ defiance against American’s managers and what they described as a failed strategy over the years, proved a turning point in the battle for American’s future.

Thomas W. Horton, American’s chairman and chief executive, had initially outlined a plan for the airline to come out of bankruptcy as an independent carrier, but was eventually forced to endorse the merger proposal once creditors supported it. Mr. Horton will remain as the chairman for a limited time.

Still, the merger has been criticized by consumer groups that fear that losing yet another carrier to a merger would lead to higher airfares and further reduce competition. Similar arguments were raised in August by the Department of Justice when it sued to block the deal.

But just two weeks before the trial was scheduled to begin, antitrust regulators struck a deal with the airline.

As a condition for dropping their objections, federal regulators requested that the airline sell some takeoff and landing rights at Reagan National Airport in Washington and New York’s La Guardia Airport as well as divest gates and ground assets at five other airports: Chicago O’Hare International, Los Angeles International, Boston Logan International, Dallas Love Field and Miami International.

Brazil High Court Puts Off Depositor Ruling Until Next Year

SAO PAULO â€" Brazil’s highest court announced on Wednesday that it would vote next year on a case that could cause several of the country’s largest banks to need a bailout.

Multiple class-action lawsuits could together cost the nation’s banks 149 billion reais, or $64.8 billion â€" more than a quarter of the banking system’s equity â€" according to the Central Bank of Brazil.

For some individual banks, the numbers would be much worse, with Caixa Econômica Federal, Brazil’s third largest bank, potentially owing more than twice its equity.

Hearings on the case began Wednesday, and the justices could have chosen to begin voting this week, but they decided that they would hear oral arguments, then suspend the case until the start of 2014.

Several of the lawsuits have been working their way through Brazil’s notoriously slow legal system for more than 20 years, but an end is now in sight.

In the late 1980s Brazil was fighting hyperinflation, and successive governments imposed multiple plans to try to break inflationary expectations. The plans included measures such as forbidding banks to index interest payments to inflation and freezing many savings accounts.

The plaintiffs claim that the government plans were unconstitutional and that the banks’ profited by them at the expense of savers, while the banks argue that they merely followed the law and did not make any unusual profits.

Fábio Braga, a partner with the Brazilian law firm Demarest Advogados, said it was hard to predict how the case would go.

“The precedents we have are from over 10 years ago, when the court’s composition was entirely different,” he said.

But Mr. Braga said Brazil’s constitution permitted the court to take into account the impact of its decisions on the economy, and that could help the banks’ position.

Brazil’s government clearly hopes so, as over the past week it has sent both the finance minister and the central bank president to meet privately with supreme court justices to explain the potential impact on the economy.

Mario Pierry, managing director of Latin America equity research for Deutsche Bank, said it was hard to know both who would win the case and if the government’s estimate of a 150 billion real price tag was accurate.

“Banks’ management teams don’t even want to say how much they have reserved, because they don’t want people to think they might lose this case,” he said.

David Beker, chief Brazil economist for Bank of America Merrill Lynch in São Paulo, said the figure could be much less, as the court could rule in favor of the plaintiffs in relation to some of the economic plans but not others.

“What we do know is that if the banks lose, the public ones are probably going to have to be recapitalized,” he said.

The government-controlled Banco do Brasil and Caixa Econômica Federal, the country’s largest and third largest banks, had the largest share of the controversial savings accounts.

If the banks require a bailout next year, it would come at an especially bad moment for the government, which faces both presidential elections in October 2014 and criticism from ratings agencies over its budget numbers.

“A ruling against the banks would mean that the risk of a ratings downgrade increases greatly,” Mr. Beker said.

Thanksgivukkah Reading: A Lending Boom for ‘the Devil Incarnate’

To the dismay of regulators, investors are increasingly embracing to higher credit risk for the potential of higher returns.

“Covenant-lite” loans are growing rapidly after almost disappearing during the 2008 credit crisis. This can be a salve for smaller companies already burdened with debt. And it can leave investors blind to financial trouble that would be reported in other loans.

Lynnley Browning reported that banks have ceded their role in leverage loans to private equity firms. Those shadow banking players use leveraged loans to bankroll mergers and refinance debt. Investors are given little insight into how the loans to private companies are structured.

“Borrowers with less than stellar credit have been able to borrow galactic amounts of debt at down-to-earth rates,” a panel from Carter Ledyward and Milburn said at a meeting of the Loan Syndications and Trading Association.

At the leveraged loan industry’s annual conference on Oct. 17, nearly one in four participants voted to label cov-lite loans “the devil incarnate.” A senior banker who sells leveraged loans said cov-lite loans were “more like purgatory, because you can watch your company degrade but not trip any covenants that allow you to call a default.” Some 61 percent, the largest group of participants, said they “don’t love them, but can live with them.”

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

WEDNESDAY, NOV. 27

HedTK | DealBook »

TUESDAY, NOV. 26

Once Suitor, Jos. A. Bank Is a Target | In a strategy that harks back to the Pac-Man defense, Men’s Wearhouse bid $55 a share in cash to acquire its one-time suitor. DealBook »

New Boom in Subprime Lending | Wall Street and private equity firms, hedge funds and other opaque financing pools have grown frustrated by low returns on other forms of debt and turned instead to riskier but more lucrative bets on ever-smaller companies. DealBook »

Analyst Seeks to Avoid Jail by Testifying in SAC Trial | The trial of Michael Steinberg has lost a bit of its tension because it comes after SAC’s guilty plea and the firm’s agreement to stop managing money for outside investors. DealBook »

Deal Professor: Risky Investment Vehicle With High Yields Gains Prominence | Business development companies are publicly traded and return big dividends, making them attractive to small investors. But they also come with high risk, writes Steven M. Davidoff. DealBook »

MONDAY, NOV. 25

Debate Over Activists’ Paying of Board Nominees | Companies say that it is not clear who the activist director is really working for â€" its shareholders or the hedge fund. DealBook »

DealBook Column: Render Unto Caesar, But Who Backs Bitcoin? | Bitcoin aspires to be a universal electronic currency. On that score, it is unlikely to succeed, writes Andrew Ross Sorkin. DealBook »

Chrysler’s Stock Sale Is Delayed Until 2014 | Its parent company, Fiat, will have more time to negotiate the purchase of a 41.5 percent stake held by a union health care trust. DealBook »

Lending Practices at R.B.S. Condemned in Two Reports | The British bank principally owned by the government said that it had hired a law firm to examine its lending practices. DealBook »

Client Conflicts Undermine Planned Merger of 2 Law Firms | Orrick, Herrington & Sutcliffe and Pillsbury Winthrop Shaw Pittman were in advanced merger talks that would have created one of the country’s 10 largest firms. DealBook »

SUNDAY, NOV. 24

In Bitcoin’s Orbit | There are dozens of digital alternatives, like PeerCoin, Litecoin and anoncoin, whose backers point to advantages they say their currency has over bitcoin. DealBook »

Once Cable’s King, Malone Aims to Regain His Crown | John Malone, Liberty Media’s chairman, is looking to shake up the cable industry, which has been losing pay-TV subscribers. DealBook »

WEEK IN VERSE

Devil Inside | INXS provides a theme song for the resurgence in subprime loans. DealBook »

Thanksgiving Song | Adam Sandler celebrates the holiday. DealBook »

Chanukah Song | Adam Sandler celebrates the other holiday. DealBook »