Trial of Former SAC Trader Goes to a Federal Jury

The fate of a former top trader for the hedge fund SAC Capital Advisors will soon hinge on whether or not jurors believe the government’s star witness, a technology analyst who has pleaded guilty to insider trading.

The trial of the portfolio manager, Michael S. Steinberg, who is accused of trading technology stocks after receiving confidential information from the SAC analyst, will go to the jury in United States District Court in Manhattan on Tuesday.

Wrapping up his defense on Monday, Mr. Steinberg’s lawyer, Barry H. Berke, called the analyst, Jon Horvath, a liar. “If you don’t believe something a witness says, you can reject his entire testimony,” Mr. Berke told the jury.

Mr. Steinberg, 41, did not know that the information that Mr. Horvath gave him had been illegally obtained, Mr. Berke argued.

The defense’s contention stands in sharp contrast with the insider trading case that the prosecution, led by Antonia M. Apps, an assistant United States attorney, has been trying to build over the last three weeks. Last month, SAC Capital, where both Mr. Steinberg and Mr. Horvath worked, agreed to plead guilty to insider trading violations and pay a record $1.2 billion penalty.

For the government, too, the case turns on Mr. Horvath.

“If Mr. Horvath was on that witness stand lying to get his deal, lying to get credit, wouldn’t he have told better lies?” Ms. Apps asked the jury in her rebuttal. Mr. Horvath pleaded guilty to securities fraud charges in 2012.

Both the defense and the prosecution gave their closing arguments on Monday, after weeks of testimony from 13 witnesses. Just before the lawyers mounted their cases, Mr. Steinberg and his wife spent a moment talking quietly. She then squeezed his hands.

Recalling many of the phone records, emails and trading records submitted as evidence during the trial, Harry Chernoff, an assistant United States attorney, began the prosecution’s closing remarks by recounting how in August 2008, after a brief telephone chat with Mr. Horvath, Mr. Steinberg immediately bought short positions in, or bets against, Dell, without asking any questions about where the information had come from.

He did not need to, Mr. Chernoff said, because “Michael Steinberg already knew the score.” The tip and the trade Mr. Steinberg subsequently made ahead of Dell earnings on Aug. 28, 2008, would ultimately reap $1 million in profits. The company ended up reporting a surprise fall in revenues and its stock had its biggest one-day drop in eight years.

Mr. Chernoff portrayed Mr. Steinberg as a “sophisticated” and “experienced” investment professional who should have questioned where the information Mr. Horvath was supplying him with had originated.

“Mr. Steinberg certainly knew how to do his job,” and was paid to know the source of any information he traded on, the prosecutor said.

When Mr. Horvath, who worked for Mr. Steinberg, came to him with illegal information, Mr. Chernoff said, Mr. Steinberg “gladly took it and traded on it again and again and again.”

He asked the jury to consider whether in certain situations Mr. Steinberg should have called a compliance officer to raise questions about whether the information was permissible or whether he had instead “just deliberately closed his eyes to the situation.”

The government must prove that Mr. Steinberg had actual knowledge that he was receiving insider information.

Mr. Chernoff recalled testimony from one witness, John Casey, an SAC compliance officer, who testified about SAC’s strict code of ethics and its annual training sessions for employees on insider trading.

In his closing, which took nearly three hours, Mr. Berke struck a more combative tone, telling jurors that the prosecution’s case had “collapsed.”

“The prosecution has such huge holes in their argument that they are using putty to fill it in,” he said.

Mr. Berke brought up a series of correspondences between Mr. Horvath and Mr. Steinberg in May 2009 about Nvidia, one of the technology companies the government contends Mr. Steinberg traded using illegal tips.

In a May 6, 2009, email to Mr. Steinberg, Mr. Horvath wrote that he had no visibility on the company’s gross margins. But two days earlier, Mr. Horvath had received an email from Danny Kuo, an analyst in a “circle of friends” who shared tips from sources inside public companies, that provided a specific gross margin number for Nvidia’s “April quarter.”

“Clear evidence of Mr. Horvath deceiving Mr. Steinberg,” Mr. Berke said. He also said that Mr. Horvath concealed from Mr. Steinberg the fact that the information he had obtained was illegal. As a result, Mr. Berke said, Mr. Steinberg did not have any suspicions about the nature of the information.

“It’s perfectly proper to speak to other buy-side, sell-side analysts,” Mr. Berke told the jury, referring to the many emails that showed Mr. Steinberg knew about specific members of the circle of analysts that shared tips.

He also addressed Mr. Horvath’s testimony that Mr. Steinberg asked him to get “edgy proprietary information,” calling these “proper, legitimate words.”

As Ms. Apps finished her rebuttal just before 5 p.m. to a tired-looking jury, she appealed to the jurors, three men and nine women, to look closely at the cooperating agreements.

“There are harsh consequences for cooperators who lie,” she said, adding that Mr. Horvath had an incentive to tell the truth on the witness stand. Mr. Horvath, who pleaded guilty to insider trading in 2012, is cooperating with the government in hopes of getting a lenient sentence.

S.E.C. Seeks $910,000 in Civil Penalties Against Tourre

Four months after being found liable for defrauding investors in a soured mortgage deal, Fabrice Tourre now faces a stiff financial penalty for his actions.

The Securities and Exchange Commission disclosed on Monday that it is seeking $910,000 in fines against Mr. Tourre, a former Goldman Sachs vice president whose defeat handed the government its first big legal victory in a case arising from the financial crisis.

The government is also seeking the forfeiture of $175,463 in ill-gotten gains, along with $62,858.03 in interest.

The onetime financier, 34, faces a significant fine for his part in a failed investment that has become one of the most enduring symbols of the 2008 financial crash. He was found liable for six of seven counts of civil fraud.

“Tourre’s conduct helped cause more than one billion dollars in losses. He was rewarded with the largest bonus he had ever received,” lawyers for the S.E.C. wrote in a court filing on Monday, arguing in favor of the stiff penalty. “Severe misconduct must have consequences, particularly when the consequent financial loss is of such great magnitude.”

A spokesman for Mr. Tourre did not have an immediate comment.

The three-week trial was notable for being one of the few that the S.E.C. pursued. The agency has instead settled most of the cases it brought related to the financial crisis and has not charged a top executive at a large bank with fraud.

But it pursued Mr. Tourre vigorously, assigning high-level officials at the commission to handle the matter. That has prompted critics to question why it expended so much effort against a young trader who was just 28 at the time in question.

Under federal securities law, Mr. Tourre faced penalties ranging from $5,000 to as much as $130,000 for each violation. But the judge overseeing his case, Katherine B. Forrest of Federal District Court in Manhattan, will have final say on the payouts.

The fines are separate from what Goldman has paid to the government for its actions in constructing and selling the mortgage investment, formally known as Abacus 2007-AC1. Goldman settled with the S.E.C. three years ago for $550 million, a record fine at the time.

But it was Mr. Tourre who, as a young midlevel employee at the Wall Street firm, became the most prominent face of the Abacus deal. Reams of documents and embarrassing emails â€" including one infamous message referring to a friend’s nicknaming him the “Fabulous Fab” â€" became the cornerstone of the government’s case, one built on the argument that the trader was the personification of greed.

At the heart of the prosecution’s argument was that the trader failed to disclose that the Abacus investment was constructed with the help of a hedge fund, Paulson & Company, that had bet the deal would fail. The transaction ultimately yielded a windfall for Paulson.

The S.E.C.’s lead prosecutor angrily denounced the trader during the trial as living in a “Goldman Sachs land of make-believe” where deceiving investors is not fraud.

By contrast, Mr. Tourre’s lawyers argued that their client was made the scapegoat for the entire financial crisis. They argued that supervisors at Goldman approved the deal, and that the firms participating in Abacus were experienced investors who knew that such a trade required one side to bet that it would succeed and another to wager that it would fail.

Ultimately, however, the jury concluded that Mr. Tourre had misled investors, even if some members felt that he was being made into an example for the industry.

In their court filing, the S.E.C. lawyers wrote that the former trader should bear the full financial brunt of his penalty and strongly argued against Goldman paying any part. Though he stood trial on his own, his former employer has paid for his lawyers and other advisers, and some have speculated that it would be willing to help defray at least some of the punishments that he might face.

But the commission insisted that Mr. Tourre be forbidden from accepting any kind of reimbursement from the firm, describing such fines as “designed both to ‘punish the individual violator and deter future violations of the securities laws.’”

“The deterrent impact of this case will be undermined” if Goldman is allowed to pay the penalty, the filing continued.

It is unclear whether Mr. Tourre has the resources to pay a significant fine. He abandoned his Wall Street career several years ago in favor of working on a doctoral degree in economics at the University of Chicago.

Lawyers for Mr. Tourre are expected to respond to the government’s motion next month, and Judge Forrest is scheduled to decide upon the final penalty by February.

Mr. Tourre has also laid the groundwork for an appeal of his case, citing a lack of sufficient evidence to support the jury’s findings.

Big Bonuses, but a Shift in Who Gets the Biggest

Wall Street’s senior executives have been holed up in conference rooms across Manhattan the last couple of weeks, locked in tense all-day sessions. The special project: dividing up this year’s spoils as bonus season approaches.

Over the last month or two, headlines have speculated that 2013 will turn out to be an excellent one on Wall Street. By some estimates, bonuses should rise as much as 10 percent across the board, if not more. A survey of bankers in London released over the weekend suggested they expected to receive bonus increases of as much as 44 percent.

By the sound of it, you would think that being a banker on Wall Street once again meant you were a 1980s-style Master of the Universe.

But you would be wrong. Don’t get out your violins, but the truth is that this year isn’t going to be nearly as profitable for many of the once prominent bankers who were paid seven and eight figures to advise the world’s top chief executives, according to interviews with more than a dozen top Wall Street executives. And if you were a suspender-wearing bond trader, bonuses are going to be minuscule, a product of a nearly impossible bond market this year.

While compensation on Wall Street may be up over all, the total number may hide an uncomfortable reality about the transformation of the finance industry: the old-school advisers to Fortune 500 clients on strategic mergers and acquisitions â€" made famous by the likes of Felix Rohatyn and the late Bruce Wasserstein â€" are unlikely to be the big rainmakers anymore.

They have been eclipsed by hedge funds, asset managers and anyone who has anything to do with initial public offerings. With the stock market up and more money pouring in every day, bonuses will be showered generously on employees connected to that world.

“It’s hard for some of my guys to accept, but the money is going to different people this year,” a senior executive of a large bank told me about the shift in dollars from strategic adviser to asset managers.

That’s not to say that some bankers won’t be making eye-popping amounts of money. Indeed, many will â€" especially those who were at firms in 2008, 2009 and 2010 who were paid in stock. Shares of firms like JPMorgan Chase, despite its well-publicized recent problems, and Goldman Sachs have risen immensely, creating seven- and eight-figure payouts for some executives who are still at the companies.

But the amount of money being handed out this year, much of it in stock and subject to clawbacks, will be lower for many finance professionals. Goldman, for example, shaved the amount of money it reserved for compensation by about 5 percent for the first nine months of the year. On average, a Goldman employee would receive $319,775. Similarly, JPMorgan scaled back compensation at its investment bank by 4.8 percent. The average employee â€" which includes secretaries and support staff in that calculation â€" gets $165,744.

According to Johnson Associates, a compensation consulting firm, big banks set aside $91.44 billion for 2013 bonuses in the first nine months, down from $92.49 billion in the period a year earlier.

An investment banking managing director might make $850,000, down from at least $1 million a couple of years ago and $2 million to $3 million before that. A vice president is likely to receive about $400,000, compared with $750,000 a couple of years ago.

The average income for a financial professional in New York City last year, according to Thomas P. DiNapoli, the New York State comptroller, was $360,700. It was $401,500 at its high in 2007.

This year may mark the biggest shift in who gets what. After the financial crisis, many top corporate advisers on Wall Street continued to be paid handsomely, even though they weren’t bringing in the same kind of revenue that they once did, given the drought in mega-mergers and private equity buyouts. Over the last three years, most of those bankers have kept busy advising corporate clients dealing with shareholder activists, patiently waiting for a return to what’s known in the merger business as “elephant hunting season.”

But unlike advising on a big merger, in which a multimillion-dollar fee is a rounding error for a corporation in the middle of a billion-dollar transaction, fees for advising on activist situations can be tiny, and in some cases are done gratis as a relationship-builder in hopes of scoring an even bigger fee later.

With the once highflying merger business in decline, at least for now, banks are trying to figure out what to do with a staff that often looks bigger than it should be relative to the revenue they bring in. In some cases, banks have shrunk adviser departments, while most appear more likely to keep employees but pay them less.

“There’s an awakening that’s happening,” said another senior banker, who was not authorized to speak publicly. “Many of us went into this business in the late 1980s or early 1990s when it was the coolest job in the world. Now being a hedge fund manager or out in Silicon Valley is where the real money is being made.”

That awareness is reflected in the graduating class of Harvard Business School. Last year, 27 percent of the graduating class entered the finance industry, down from 35 percent the previous year. In 2008, 40 percent of the graduating class went into finance. That may be a good trend line given the overemphasis of Wall Street in the overall economy and the resulting brain drain in so many other industries.

Where are they going?

For the most part, the biggest swing has been into technology. Eighteen percent went into high technology last year, compared with only 12 percent the previous year.

It seems like Harvard Business School’s graduating class knows how to follow the money.

Andrew Ross Sorkin is the editor at large of DealBook. Twitter: @andrewrsorkin

K.K.R. to Buy Debt-Trading Affiliate for $2.6 Billion

Kohlberg Kravis Roberts said on Monday that it planned to buy a publicly traded credit investment affiliate for about $2.6 billion as it seeks to simplify its corporate structure while expanding its balance sheet.

Under the terms of the deal, KKR will issue 0.51 of a unit for each share of KKR Financial Holdings, commonly known as KFN. As of Monday’s closing price, that values the specialty finance company at about $12.79, a premium of about 35 percent.

Shares in KFN jumped 31 percent after hours, to $12.40, while those in KKR fell slightly, to $24.99.

The transaction is the second time that KKR has absorbed a separate-but-affiliated investment vehicle to expand its business. Four years ago, the investment giant bought KKR Private Equity Investors, a publicly traded vehicle that co-invested in the firm’s leveraged buyout funds. It was through that transaction that KKR became a publicly traded company, essentially swapping its stock for its affiliate’s, after plans for a traditional initial public offering became bogged down during the financial crisis.)

With the KFN deal, KKR is buying a $2.9 billion debt investment portfolio â€" among its assets are pieces of collateralized loan obligations and commercial real estate loans and bonds â€" that it already manages.

The transaction is expected to close in the first half of next year, pending approval by KFN’s shareholders and regulators.

KKR was advised by Goldman Sachs and the law firm Simpson Thacher & Bartlett, while its independent directors were advised by Lazard Ltd. and the law firm Cravath Swaine & Moore. KFN received advice from Sandler O’Neill + Partners and the law firm Wachtell, Lipton, Rosen & Katz.

Regional Bank Says It Will Take Charge Because of Volcker Rule

The Volcker Rule was approved just a week ago, but it’s already forcing some banks to come clean about owning the kind of risky securities that the new regulation is intended to prevent banks from investing in.

A big regional lender, Zions Bancorporation, said on Tuesday that it was taking a charge of $387 million to rid itself of a sizable portfolio of trust-preferred collateralized debt obligations and other C.D.O.’s. The bank, based in Salt Lake City, said it was taking the fourth-quarter, noncash charge and putting the portfolio up for sale because it believed the securities would be considered “disallowed investments” under the Volcker Rule.

The bank announced the move just days after federal regulators approved a tougher version of the rule, which is the centerpiece of the Dodd-Frank Act, passed in response to the final crisis. The rule, inspired by Paul A. Volcker, the former Federal Reserve chairman, is intended to deter banks from making risky bets with their own money, in hopes of avoiding the need for future bailouts of the financial system.

Yet, the unexpected announcement by Zions is an indication that the impact of the Volcker Rule will not just be felt at traditional Wall Street firms but at other kinds of banks as well. The move by the lender also reflects the kind of careful analysis other banks may be undertaking as they to understand the provisions of the 71-page rule and its more than 800 pages of supplementary information.

Banks have until July 21, 2015, to divest themselves of risky assets under the rule, but can get an extension from the Federal Reserve if necessary. The Volcker Rule, however, also required banks to make an immediate adjustment for the accounting treatment they used for the securities, which slightly reduced Zions’s ratio of common equity capital â€" a measurement of a bank’s fiscal strength.

In conference call with analysts to discuss the charge, the chief financial officer of Zions, Doyle Arnold, said the bank was surprised that the final version of the rule required it to divest itself of most of the securities holdings under the section of the rule for “covered investments.”

“This is not something that we had anticipated, nor do we think we reasonably could have anticipated based on what was in the proposed rule,” Mr. Arnold said. “So we have been studying this very, very intently for the last few days.

Bank analysts said it was not clear how many other banks had as large a portfolio of trust-preferred C.D.O.’s, which have characteristics like both equity and debt. Jason Goldberg, an analyst with Barclays, said in an interview that the Volcker Rule could have other “unintended consequences” for community and regional banks as bankers better digest the rule.

“There are going to be other nuances,” he said.

Shares of Zions closed slightly higher on the day, rising 10 cents to $28.57.

Former Top Goldman Executive to Run Cushman & Wakefield

Edward C. Forst, a former co-head of Goldman Sachs’s investment management division who twice stepped down from top roles at the company, has agreed to join Cushman & Wakefield, the commercial real estate giant, as its president and chief executive.

Mr. Forst will take over at Cushman on Jan. 6, ending the firm’s six-month search for a new top executive. Carlo Barel di Sant’Albano, Cushman’s chairman, has been acting as interim chief since Glenn Rufrano stepped down in June.

“We very clearly came to the conclusion that he would be absolutely and enthusiastically the right leader for the firm going forward,” Mr. Sant’Albano said by phone.

Mr. Forst joined Goldman in 1994 and later became a rising star within the company. He was at one point a member of the firm’s influential management committee and a confidant of Lloyd C. Blankfein, Goldman’s chief executive. Mr. Forst was appointed chief administrative officer in 2004, a role that led him to oversee Goldman’s real estate activities, including the leasing agreement for the firm’s 43-story, $2.4 billion headquarters in Battery Park City.

Mr. Sant’Albano said it was Mr. Forst’s management experience running several of the firm’s important businesses that appealed greatly to the board. Cushman, a commercial real estate services firm whose majority owner is Exor of Italy, offers consulting, leasing, valuation and other services to clients worldwide.

“What I believe he brings to the table goes beyond real estate,” Mr. Sant’Albano said. “I think what he brings is tremendous leadership qualities.”

That same leadership created friction among some of Mr. Forst’s colleagues, and he left the firm in 2008 to take a senior post at Harvard. It was there that he briefly served as an adviser to Henry M. Paulson Jr., the former Treasury secretary and another former Goldman chief.

Mr. Sant’Albano dismissed news reports of Mr. Forst’s internal friction as overblown.

Mr. Forst surprised some Goldman insiders when he returned to the firm a year later, becoming its senior strategy officer. He later became co-head of asset management before leaving the company in 2011. Most recently, Mr. Forst served as an adviser to Fenway Partners, a private equity firm based in New York.

“Ed has been a valuable adviser and contributor to our firm and we look forward to a continuing relationship. We wish him all the best in this new role,” a Fenway spokeswoman said in an email.

Private Equity’s Lucrative Second Bite of a Chip Company

The private equity firm Silver Lake Partners is taking a second juicy bite of Avago Technologies.

Silver Lake just about quintupled its money on its initial carve-out of Avago, a chip company, from Hewlett-Packard Now it’s back, underwriting Avago’s $6.6 billion purchase of a rival, the LSI Corporation. The market’s warm embrace of the deal means Silver Lake’s $1 billion convertible loan is already in the money.

LSI has several attractions to Avago. The purchase helps add a bit of stability to its fast-growing but volatile business of making chips for Apple and Samsung mobile devices. Combining the two companies’ strengths in fiber optics and chips for data center storage should also result in new products to sell.

There’s also a more immediate financial benefit. Avago is incorporated in Singapore, where the corporate tax rate is 17 percent - so the combination will generate tax savings on LSI’s profits. And Avago has identified $200 million of costs that can be cut. If true, the present value of these savings pay for most of the $1.8 billion premium it is paying.

These factors might have been more than enough to persuade Silver Lake to back the deal. But the private equity shop also had familiarity. Silver Lake and Kohlberg Kravis Roberts carved out Avago from Hewlett-Packard in 2005. By the time it had fully sold its entire stake, it made five times its investment. Moreover, Silver Lake retained a board seat - so it had an inside view of the company and the transaction.

That, along with the sweet terms of the convertible - a 2 percent yield and strike price just 5 percent above Avago’s close prior to the transaction’s announcement - gave the private equity firm plenty of incentive to take another bite of Avago.

It will be hard for Silver Lake to duplicate its first go-around with Avago. But with Avago shares jumping on Monday, Silver Lake is already in the money. Avago’s chips are all about connecting people - but connections count even more on Wall Street.

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

Private Equity’s Lucrative Second Bite of a Chip Company

The private equity firm Silver Lake Partners is taking a second juicy bite of Avago Technologies.

Silver Lake just about quintupled its money on its initial carve-out of Avago, a chip company, from Hewlett-Packard Now it’s back, underwriting Avago’s $6.6 billion purchase of a rival, the LSI Corporation. The market’s warm embrace of the deal means Silver Lake’s $1 billion convertible loan is already in the money.

LSI has several attractions to Avago. The purchase helps add a bit of stability to its fast-growing but volatile business of making chips for Apple and Samsung mobile devices. Combining the two companies’ strengths in fiber optics and chips for data center storage should also result in new products to sell.

There’s also a more immediate financial benefit. Avago is incorporated in Singapore, where the corporate tax rate is 17 percent - so the combination will generate tax savings on LSI’s profits. And Avago has identified $200 million of costs that can be cut. If true, the present value of these savings pay for most of the $1.8 billion premium it is paying.

These factors might have been more than enough to persuade Silver Lake to back the deal. But the private equity shop also had familiarity. Silver Lake and Kohlberg Kravis Roberts carved out Avago from Hewlett-Packard in 2005. By the time it had fully sold its entire stake, it made five times its investment. Moreover, Silver Lake retained a board seat - so it had an inside view of the company and the transaction.

That, along with the sweet terms of the convertible - a 2 percent yield and strike price just 5 percent above Avago’s close prior to the transaction’s announcement - gave the private equity firm plenty of incentive to take another bite of Avago.

It will be hard for Silver Lake to duplicate its first go-around with Avago. But with Avago shares jumping on Monday, Silver Lake is already in the money. Avago’s chips are all about connecting people - but connections count even more on Wall Street.

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

A Judge Takes Wall Street’s Watchdogs to Task

Stern Words for Wall Street’s Watchdogs, From a Judge

WASHINGTON â€" It used to be common for the federal government to prosecute prominent people responsible for debacles that rattled the financial system. Michael R. Milken, the junk bond artist, went to prison in 1991; Charles H. Keating Jr., the face of the savings-and-loan crisis, pleaded guilty to four counts of fraud in 1999; and it looks like Jeffrey K. Skilling, the former chief executive of Enron, will be in prison until 2017.

And what of the recent financial crisis? The statute of limitations on most plausible charges is running out, and it seems there will not be a single prosecution of a prominent figure in the entire mess.

Judge Jed S. Rakoff wants to know why. In a blistering essay in the issue of The New York Review of Books that arrives this week, he argues that the Justice Department has failed in its rudimentary responsibilities, offering excuses instead of action.

Judge Rakoff, who sits on the Federal District Court in Manhattan, has long been outspoken, idiosyncratic and iconoclastic. In 2002, in a decision that was promptly overturned, he ruled the federal death penalty statute unconstitutional. More recently, he has presided over a series of big financial cases and has blocked proposed settlements as too opaque or lenient, to the frustration of both Wall Street and prosecutors.

I asked him what had prompted his unusual essay.

“As a judge, I got to see many cases that grew out of the financial crisis and to see situations that gave me pause,” he said. “When I added my own background as both a prosecutor and defense counsel, I was struck by how things were proceeding in a different way than they had in the past.

“That caused me to think about it more than I otherwise would have,” he said, “and I thought my views as a citizen might commend themselves to others.”

In his essay, Judge Rakoff is careful to say that he does not know if high-level executives committed crimes as they presided over the collapse of the market for mortgage-backed securities. That would seem to keep him out of judicial-ethics trouble and available to hear future cases. But he seems inclined to credit the conclusions of the Financial Crisis Inquiry Commission, which found rampant incompetence, mendacity and fraud.

Judge Rakoff is more direct in critiquing the Justice Department’s principal reasons for failing to prosecute top executives. He acknowledges that it can be hard to prove criminal intent, particularly against people several levels removed from those who constructed and marketed the securities.

But the legal doctrine of “willful blindness” could be put to valuable use, he writes, adding that “the department’s claim that proving intent in the financial crisis is particularly difficult may strike some as doubtful.”

A second argument against prosecution is even weaker, the judge writes, singling out statements by Lanny A. Breuer, an assistant attorney general in charge of the department’s criminal division, in a 2012 interview with the PBS program “Frontline.” Mr. Breuer said there were “very sophisticated counterparties on both sides” on many transactions and that proving fraud is hard if they did not accept what they were told at face value.

“I have to prove,” Mr. Breuer said, “not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying.”

That last phrase, Judge Rakoff writes, “totally misstates the law.”

“In actuality, in a criminal fraud case the government is never required to prove â€" ever â€" that one party to a transaction relied on the word of another,” he writes.

(Mr. Breuer told me that he had meant to describe a different and uncontroversial requirement in fraud prosecutions â€" that prosecutors must prove the statements at issue were material.)

Judge Rakoff also has no patience with Attorney General Eric H. Holder Jr.’s statement to Congress that some prosecutions should be approached with caution because they may “have a negative impact on the national economy, perhaps even the world economy.”

Judge Rakoff says that “this excuse â€" sometimes labeled the ‘too big to jail’ excuse â€" is disturbing, frankly, in what it says about the department’s apparent disregard for equality under the law.”

Brian Fallon, a Justice Department spokesman, said Judge Rakoff “does not identify a single case where a financial executive should have been charged, but wasn’t.”      

“The department has criminally prosecuted thousands of defendants for financial fraud and other related crimes in the last five years, and there are a number of active investigations still ongoing,” he added. “Even in striking the nation’s largest-ever settlement with JPMorgan last month, the department preserved its ability to investigate and potentially charge individuals at the company if the evidence supports it.”

Having found the department’s rationales unconvincing or worse, Judge Rakoff asks: “What’s really going on here?”

Freely admitting that he is speculating, he offers three theories. One was that the department had other priorities, including terrorism, the Madoff scandal and insider trading cases. A second was that the government’s own role in the financial crisis complicated matters.

“This would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the government wanted him to do,” he writes.

The third reason is the most interesting: An institutional shift toward prosecuting companies rather than individuals. This has yielded some enormous monetary settlements but has, Judge Rakoff writes, “led to some lax and dubious behavior on the part of prosecutors, with deleterious results.”

The fear of prison concentrates the mind in a way the prospect of writing a check on a corporate account does not. “And from a moral standpoint,” Judge Rakoff writes, “punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.”

A Judge Takes Wall Street’s Watchdogs to Task

Stern Words for Wall Street’s Watchdogs, From a Judge

WASHINGTON â€" It used to be common for the federal government to prosecute prominent people responsible for debacles that rattled the financial system. Michael R. Milken, the junk bond artist, went to prison in 1991; Charles H. Keating Jr., the face of the savings-and-loan crisis, pleaded guilty to four counts of fraud in 1999; and it looks like Jeffrey K. Skilling, the former chief executive of Enron, will be in prison until 2017.

And what of the recent financial crisis? The statute of limitations on most plausible charges is running out, and it seems there will not be a single prosecution of a prominent figure in the entire mess.

Judge Jed S. Rakoff wants to know why. In a blistering essay in the issue of The New York Review of Books that arrives this week, he argues that the Justice Department has failed in its rudimentary responsibilities, offering excuses instead of action.

Judge Rakoff, who sits on the Federal District Court in Manhattan, has long been outspoken, idiosyncratic and iconoclastic. In 2002, in a decision that was promptly overturned, he ruled the federal death penalty statute unconstitutional. More recently, he has presided over a series of big financial cases and has blocked proposed settlements as too opaque or lenient, to the frustration of both Wall Street and prosecutors.

I asked him what had prompted his unusual essay.

“As a judge, I got to see many cases that grew out of the financial crisis and to see situations that gave me pause,” he said. “When I added my own background as both a prosecutor and defense counsel, I was struck by how things were proceeding in a different way than they had in the past.

“That caused me to think about it more than I otherwise would have,” he said, “and I thought my views as a citizen might commend themselves to others.”

In his essay, Judge Rakoff is careful to say that he does not know if high-level executives committed crimes as they presided over the collapse of the market for mortgage-backed securities. That would seem to keep him out of judicial-ethics trouble and available to hear future cases. But he seems inclined to credit the conclusions of the Financial Crisis Inquiry Commission, which found rampant incompetence, mendacity and fraud.

Judge Rakoff is more direct in critiquing the Justice Department’s principal reasons for failing to prosecute top executives. He acknowledges that it can be hard to prove criminal intent, particularly against people several levels removed from those who constructed and marketed the securities.

But the legal doctrine of “willful blindness” could be put to valuable use, he writes, adding that “the department’s claim that proving intent in the financial crisis is particularly difficult may strike some as doubtful.”

A second argument against prosecution is even weaker, the judge writes, singling out statements by Lanny A. Breuer, an assistant attorney general in charge of the department’s criminal division, in a 2012 interview with the PBS program “Frontline.” Mr. Breuer said there were “very sophisticated counterparties on both sides” on many transactions and that proving fraud is hard if they did not accept what they were told at face value.

“I have to prove,” Mr. Breuer said, “not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying.”

That last phrase, Judge Rakoff writes, “totally misstates the law.”

“In actuality, in a criminal fraud case the government is never required to prove â€" ever â€" that one party to a transaction relied on the word of another,” he writes.

(Mr. Breuer told me that he had meant to describe a different and uncontroversial requirement in fraud prosecutions â€" that prosecutors must prove the statements at issue were material.)

Judge Rakoff also has no patience with Attorney General Eric H. Holder Jr.’s statement to Congress that some prosecutions should be approached with caution because they may “have a negative impact on the national economy, perhaps even the world economy.”

Judge Rakoff says that “this excuse â€" sometimes labeled the ‘too big to jail’ excuse â€" is disturbing, frankly, in what it says about the department’s apparent disregard for equality under the law.”

Brian Fallon, a Justice Department spokesman, said Judge Rakoff “does not identify a single case where a financial executive should have been charged, but wasn’t.”      

“The department has criminally prosecuted thousands of defendants for financial fraud and other related crimes in the last five years, and there are a number of active investigations still ongoing,” he added. “Even in striking the nation’s largest-ever settlement with JPMorgan last month, the department preserved its ability to investigate and potentially charge individuals at the company if the evidence supports it.”

Having found the department’s rationales unconvincing or worse, Judge Rakoff asks: “What’s really going on here?”

Freely admitting that he is speculating, he offers three theories. One was that the department had other priorities, including terrorism, the Madoff scandal and insider trading cases. A second was that the government’s own role in the financial crisis complicated matters.

“This would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the government wanted him to do,” he writes.

The third reason is the most interesting: An institutional shift toward prosecuting companies rather than individuals. This has yielded some enormous monetary settlements but has, Judge Rakoff writes, “led to some lax and dubious behavior on the part of prosecutors, with deleterious results.”

The fear of prison concentrates the mind in a way the prospect of writing a check on a corporate account does not. “And from a moral standpoint,” Judge Rakoff writes, “punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.”

Justice Department to Clear Gannett’s Acquisition of Belo With One Condition

The Justice Department said on Monday that it would require the sale of one television station in St. Louis in order for Gannett‘s acquisition of Belo to proceed.

The agency announced the settlement as it filed a antitrust lawsuit in the United States District Court for the District of Columbia to block the settlement. The station to be sold under the agreement is Belo’s KMOVâ€'TV, a CBS affiliate. Gannett’s KSDKâ€'TV, meanwhile, is the NBC affiliate in St. Louis. The two stations are the top two in that market.

“Gannett’s KSDKâ€'TV and Belo’s KMOVâ€'TV compete head-to-head in the sale of broadcast television spot advertising in the St. Louis area, and this rivalry constrains advertising rates,” William J. Baer, Justice’s antitrust chief, said in a statement. “The full divestiture required by the department will ensure that KMOV-TV will remain a vigorous competitor in St. Louis.”

Gannett planned to sell six stations, including KMOV-TV to Sander Media, an investment group headed by Jack Sander, who was chief of Belo until 2006. The Justice Department is requiring that Gannett, Belo and Sander Media divest their interests in the St. Louis station to an independent purchaser approved by the government. The settlement must be approved by a federal judge.

Gannett, the publisher of USA Today, announced the acquisition of Belo - one of the biggest deals for local television in decades â€" for about $1.5 billion in June. The deal is intended to accelerate Gannett’s shift away from print.

Don’t Expect Eye-Popping Fines for Volcker Rule Violations

The adoption by five federal agencies of the Volcker Rule aimed at keeping banks from engaging in proprietary trading, is - to borrow a quote from Winston Churchill - the end of the beginning.

Getting the regulation adopted took over three years. But when it comes to sanctioning banks that violate the rule, don’t expect to see regulators rushing to bring the hammer down on offenders.

The Federal Deposit Insurance Corporation, the Federal Reserve, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission and the Securities and Exchange Commission worked together to reach a complex set of regulations. Many of the particulars of the nearly 50-page rule - and an additional 900 pages of explanations - show that much is open to interpretation.

The Volcker Rule was intended to prevent banks from “engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments.” It prohibits proprietary trading, where a bank uses its trading account to benefit from short-term movements in prices or engages in arbitrage transactions. The goal is to keep banks from executing transactions that can put the entire enterprise at risk.

But the rule contains a list of exemptions, including trades made for liquidity purposes and market-making activity for customers. Even hedging transactions are permitted, as long as they are “designed to reduce or otherwise significantly mitigate and demonstrably reduces or otherwise significantly mitigates specific, identifiable risks.”

Thus, a trade might be a permissible hedge to protect the bank against certain risks. But it could qualify as improper proprietary trading if it does not fall within an exception. The difference will depend on the particular circumstances of the trading and the relation to a bank’s overall securities positions, so there will be few if any bright lines to follow.

From an enforcement perspective, the heart of the Volcker Rule is the requirement that banks put in place extensive procedures to comply with the prohibition on proprietary trading. The agencies provided an appendix to the rule with more than 10 pages of detailed instructions to help banks meet the minimum standards to ensure that they adequately monitor trading.

The requirements include the adoption of written policies and procedures for dealing with trading activity; the commitment of adequate resources to oversight; the implementation of internal controls to limit how trading desks operate; and independent testing of the compliance program. Needless to say, this will impose significant costs on banks that engage in the types of transactions that could run afoul of the Volcker Rule.

To further bolster these measures, the agencies will require the chief executive to file an annual certification “that the banking entity has in place processes to establish, maintain, enforce, review, test and modify the compliance program.” This comes on top of the requirement in the Sarbanes-Oxley Act, which dictates that senior management must attest to the veracity of a company’s financial statements.

This puts more pressure on the chief executive to ensure that the bank is following the rule at the risk of being accused of making a false statement. That concern should filter through the ranks of a trading operation to avoid putting bank officers in an embarrassing situation.

The Volcker Rule itself contains only a minimal enforcement mechanism. If a bank engages in prohibited proprietary trading, it can be required to divest itself of the investment and restricted from future trading of that type. But there is no separate punishment incorporated into the rule for violations, despite suggestions that the rule include its own schedule of civil penalties.

In adopting the rule, the agencies instead stated that they would rely on their existing enforcement powers to address violations. The bank regulators can impose a penalty of $5,000 a day for a violation of any law or regulation, and as much as $1 million for a deliberate violation. The securities and commodities laws authorize similar civil penalties for intentional or reckless violations.

It remains to be seen whether established enforcement provisions will be used for Volcker Rule violations. The vagueness of the rule’s prohibition on certain types of proprietary trading will make it difficult to show that a trader knowingly violated it, or even acted recklessly, because it will be easy for an individual to claim ignorance.

A more likely path for enforcement is through the internal controls requirement imposed by the Volcker Rule on banks. Proof of an inadequate compliance program does not involve showing an intent to defraud, but only that the person or company failed to comply with corporate reporting requirements. This was the rule the S.E.C. used against JPMorgan Chase in the so-called London whale trading mess. But even that incident might not have violated the prohibition on proprietary trading because the traders contend that the trades were intended to mitigate the bank’s risk.

The near-term prospect of enforcement actions for violations of the Volcker Rule appears to be minimal. The Federal Reserve extended the implementation period to July 2015, and the compliance requirements will phase in for smaller banks. That reduces the chances of any bank being investigated for a violation until it has a compliance program in place.

More important, it will take time for the agencies to figure out what types of trading come close enough to the prohibition to even warrant an inquiry. The Volcker Rule relies primarily on banks to police themselves as part of their compliance programs. Questionable trades, therefore, may be quickly reversed before they are ever reported to the government. If the violation has already been remedied, that would obviate the need for an enforcement action.

By putting their faith in mandatory compliance programs, the agencies charged with enforcing the Volcker Rule seem to be relying on the threat of possible regulatory intervention to get banks to forgo questionable trading without having to resort to their enforcement powers.

Bankruptcy Judge’s Opinion Raises Many Questions About Tronox Spinoff

The opinion by Judge Allan Gropper in the Tronox bankruptcy case has already received a fair share of attention, but having spent most of an afternoon reading it in all of its 166-page glory, I can say that the opinion is even more interesting than the initial reports suggest.

Namely, the opinion suggests that at best Kerr-McGee entered into a radical revamp of its corporate structure in an attempt to avoid past environmental legacies, all without considering the effect of such a move on its creditors, and any countermoves they might make. Or it was willfully blind to the effect on its creditors. Take your pick.

And the opinion also leaves open the real possibility that Kerr-McGee’s lawyers and bankers dropped the ball on this one.

The basic idea is that Kerr-McGee, of “Silkwood” fame, had a viable oil and gas business. Unfortunately it was tainted by decades of environmental misdeeds, which sucked up a good bit of its earnings.

To solve this problem, it created a new holding company to which it transferred the “good” oil and gas subsidiaries. The new holding company renamed itself “Kerr-McGee” and was acquired by Anadarko for $16 billion.

The old Kerr-McGee became Tronox, which had a small chemical business and enough environmental liabilities to choke numerous horses and other animals, too. By early 2009 Tronox gave up the ghost and entered Judge Gropper’s bankruptcy courtroom.

The really odd thing about the Kerr-McGee split is that it’s hard to figure out what sort of transactions were actually involved: Did the old company sell its subsidiaries to the new holding company? Was there some sort of merger? Kerr-McGee seems to have simply made it so.

Tronox didn’t get any payment at all for giving up its oil and gas subsidiaries. But corporations don’t just give away shares of operating subsidiaries for kicks. Normally.

Judge Gropper had an easy time finding that the transaction was both an actual and a constructive fraudulent transfer. An actual fraudulent transfer involves a transaction designed to “hinder, delay or defraud” creditors.

A constructively fraudulent transfer involves a transaction for less than “reasonably equivalent value” that leaves the one who makes the transfer insolvent. Transferring your key operating subsidiaries in exchange for a smile counts as a lack of reasonably equivalent value.

New Kerr-McGee tried to defend on this point by arguing that Tronox could not have been insolvent, because it was spun off in an initial public offering that resulted in actual proceeds to Kerr-McGee.

Judge Gropper comes really close to saying that the prospectus filed in connection with the I.P.O. is not to be trusted. I wonder if the Securities and Exchange Commission is paying attention to bankruptcy court opinions?

The other interesting thing the opinion brings out is how little was done on a transactional level to avoid future problems. In a normal distressed transaction, one would expect to see opinion letters on either the debtor’s solvency or the payment of “reasonable equivalent value.” A fairness opinion would also help. None were produced here.

So transactional formalities were widely ignored throughout this deal. New Kerr-McGee was advised by Simpson Thacher & Bartlett and Lehman Brothers. For obvious reasons, that just leaves the lawyers.

Transferring subsidiaries for no consideration, without compliance with the relevant bits of the Delaware corporate code, seems like a strange thing coming from such a well-respected law firm.

Do they have any potential liability here? We really don’t know, because Kerr-McGee asserted attorney-client privilege throughout this litigation. At lot will turn on whether the client proceeded in the face of contrary advice from Simpson.

Otherwise, Kerr-McGee might be looking for some help paying.

The parties are still fighting over the total damages, but the numbers start at $5 billion and go up from there.

Judge Allan Gropper's opinion

Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.

FTI Consulting Names New Chief

FTI Consulting, the business advisory firm, on Monday named Steve Gunby, president and chief executive, succeeding Jack Dunn, who is stepping down after 21 years at the firm.

Mr. Gunby, 56, will join FTI from the Boston Consulting Group, where he  has been a senior partner and managing director since 1993. He leads the global transformation and large-scale change practice and previously led the firm’s operations in the Americas.  

He began with Boston Consulting in 1983 in the Boston office and founded the firm’s  Washington office in 1995.   Mr. Gunby is a graduate of the Yale Law School, the Yale School of Management and Cornell University.

He will start at FTI on Jan. 20.

The firm also announced on Monday that it would have an independent chairman of the board.

When Dennis Shaughnessy retires as executive chairman this month, Gerard E. Holthaus, currently the presiding director of the board, will become non-executive chairman.

Mr. Holthaus was chief executive of Algeco Scotsman, a prefabricated modular space and secure storage solutions company, from 1997 to 2010.

Morning Agenda: A Bet on Cloud and Mobile Software

Avago Technologies said on Monday that it had agreed to buy the LSI Corporation for about $6.6 billion in cash, moving into the world of networking and storage chips in a bet on the increased use of cloud and mobile software.

To finance the deal, Avago turned to Silver Lake, which acquired the company with Kohlberg Kravis Roberts in 2005 and took it public three years later, DealBook’s Michael J. de la Merced writes. The leveraged buyout yielded a return of five times the original investment.

Under the terms of the transaction, Avago will pay $11.15 a share, about 41 percent above LSI’s closing stock price on Friday. As part of the deal, Silver Lake will invest $1 billion in the form of a convertible note, supplementing a $4.6 billion loan from a group of banks.

NEW DEAL FOR A.I.G.’S AIRCRAFT UNIT The American International Group struck a new deal for its big aircraft leasing arm, agreeing to sell the business to AerCap Holdings of the Netherlands for $5.4 billion.

The transaction is the second that A.I.G. has announced for the International Lease Finance Corporation in just over 12 months, Mr. de la Merced reports. A group of Chinese investors agreed to buy the unit â€" known as I.L.F.C. â€" last December, but its financing fell apart, leaving room for a new bidder to emerge.

Now AerCap, a rival airplane lessor, is stepping in. The company will pay about $3 billion in cash and issue 97.5 million new shares. That would make A.I.G. its biggest shareholder, with a stake of roughly 46 percent.

“The combination of AerCap’s young fleet of in-demand aircraft and proven portfolio management capabilities with I.L.F.C.’s attractive order book and broad marketing reach will continue to lead the industry,” Robert H. Benmosche, A.I.G.’s chief executive, said in a statement. “However, as we have said all along, the aircraft leasing business is not core to our insurance operations.”

MONCLER SHARES RISE IN MARKET DEBUT Investors warmed to Moncler, the luxury winter apparel maker, as the Italian company’s shares rose 41 percent in their first day of trading, DealBook’s Chad Bray writes.

Moncler, which abandoned plans to go public in 2011 because of market turmoil, made its stock market debut after pricing its shares at 10.20 euros, or about $14, valuing the company at $3.51 billion. The offering was priced on Wednesday at the top end of the expected range and was heavily oversubscribed.

ON THE AGENDA Lawyers for Michael S. Steinberg, a former top manager at SAC Capital Advisors, are scheduled to present their case to jurors. It will be short, however, and Mr. Steinberg is not expected to testify.

A PARADISE OF UNTOUCHABLE ASSETS Forget the Cayman Islands or Switzerland. The newest haven for offshore assets â€" as Denise Rich, the convicted Ponzi schemer R. Allen Stanford and doctors fearful of malpractice claims can attest â€" appears to be a country of 15 small islands in the South Pacific Ocean: the Cook Islands.

Leslie Wayne writes in The New York Times: “The Cook Islands offer a different form of secrecy. The long arm of United States law does not reach there. The Cooks generally disregard foreign court orders, making it easier to keep assets from creditors, or anyone else.”

Mergers & Acquisitions »

Carrefour in Deal to Acquire European Shopping Malls  |  The French retail company Carrefour has agreed to buy a group of European shopping malls for about $2.75 billion from the French real-estate firm Klepierre, The Wall Street Journal reports. Wall Street Journal

Thai Retailer and Chinese Supermarket End Merger Attempt  |  Wumart Stores and C.P. Lotus did not finalize a deal by their self-imposed deadline of Saturday, and both said on Monday that they had agreed not to extend negotiations. DealBook »

Shareholders Urge Troubled British Insurer to Seek a Sale  |  Large shareholders in the British insurer RSA Group are urging the company to solicit takeover offers after questions about accounting in its Irish business led to the resignation of its chief executive last week, The Sunday Times of London reports. Sunday Times

South African Fund Rejects Offer for Drug Maker Adcock Ingram  |  Reuters writes: “South Africa’s state pension fund on Sunday rejected a sweetened offer for drug maker Adcock Ingram, likely derailing a $1.2 billion bid by Chile’s CFR Pharmaceuticals to enter fast-growing Africa.” Reuters

Sprint May Make Bid for T-Mobile Next Year  |  Sprint may make a bid for T-Mobile US in the first half of next year, The Wall Street Journal writes, saying such a deal, if approved by regulators, would leave the American mobile phone market with three dominant players. Wall Street Journal

GSK to Raise Stake in Indian Unit  |  GlaxoSmithKline plans to spend about $1 billion to increase its stake in its Indian unit, the latest Western company to bolster its holdings in Indian, The Financial Times reports. Financial Times

AOL Preparing to Wind Down Patch  |  “Tim Armstrong, the chief executive of AOL, is finally winding down Patch, a network of local news sites that he helped invent and that AOL bought after he took over,” David Carr writes in The New York Times. “At a conference in Manhattan last week, Mr. Armstrong suggested that Patch’s future could include forming partnerships with other companies, an acknowledgment that AOL could not continue to go it alone in what has been a futile attempt to guide Patch to profitability.” New York Times

INVESTMENT BANKING »

Volcker Rule’s Success Depends on Regulators  |  Gretchen Morgenson of The New York Times writes: “Put simply, the success or failure of the Volcker Rule will depend upon the appetite of financial regulators to regulate. This is always the case, of course, with regulation. But it is particularly so with the Volcker Rule because some of its most important measures are open to interpretation.” New York Times

Bankers and Lawyers Concerned With British ‘Ring Fencing’ Efforts  |  Securities lawyers and bankers in London are concerned with flaws in draft legislation intended to protect retail bank customers from risky trading activities by investment banks, a process known as “ring fencing,” The Financial Times reports. Financial Times

British Bankers Expect Bonuses to Rise in 2013  |  Top bankers in London are expecting a 44 percent increase in their bonuses this year despite efforts by the European Union to reign in outsize pay packages, Bloomberg News reports, citing a survey by a recruitment firm. Bloomberg

Credit Suisse to Finance Banking Software Marketplace  |  The Financial Times writes: “Credit Suisse will finance an online marketplace for investment banking and hedge fund software, in the latest attempt by a bank to reduce the sector’s rapidly spiraling technology costs.” Financial Times

PRIVATE EQUITY »

Carlyle to Invest $200 Million in New Energy Exploration Firm  |  The Carlyle Group has agreed to invest up to $200 million in the next three years in Discover Exploration, a new oil and natural gas exploration company based in London. DealBook »

Japan Blocks Lone Star Bid for Train Operator  |  Reuters writes: “Lone Star Funds’ $755 million bid to buy an Osaka-based train and warehouse operator was blocked by a municipal government on Monday, derailing what would have been a big comeback acquisition for the United States private equity firm in Japan.” Reuters

HEDGE FUNDS »

Gottex Fund Management to Acquire Rival EIM  |  The Swiss hedge fund Gottex Fund Management has agreed to acquire the EIM Group, creating a combined company with about $10 billion in assets under management, Reuters writes. The deal is expected to be completed in the first half of 2014. Reuters

BlackRock Ordered to Disclose Telecom Italia Stake  |  Italian regulators have threatened to fine BlackRock for not disclosing its increased stake in Telecom Italia, saying it must disclose the stake by Monday, Reuters reports. BlackRock said in a regulatory filing with the Securities and Exchange Commission that its stake doubled in October. Reuters

I.P.O./OFFERINGS »

Driller With Ties to Chesapeake Co-Founder Seeks $2 Billion  |  The Wall Street Journal writes: “A partnership linked to Aubrey McClendon, the former chief executive of Chesapeake Energy Corporation, filed for a public offering to raise up to $2 billion to buy and drill oil and gas prospects” in the United States. Wall Street Journal

Power Assets to List Hong Kong Electric Unit  |  Power Assets Holdings Ltd., a company controlled by Asia’s wealthiest person, Li Ka-shing, plans to publicly list the shares of its Hong Kong electric unit in a spinoff next month, Reuters writes. The listing could generate up to $5.7 billion in new capital to finance acquisitions by Power Assets. Reuters

VENTURE CAPITAL »

Airbnb Starts First National Ad Campaign  |  The New York Times writes: “Airbnb, which lets travelers rent accommodations in private residences worldwide, is introducing its first integrated, national advertising campaign on Monday, using birds and birdhouses as a metaphor for its customers and their accommodations.” New York Times

New Venture Capital Fund Looks to Invest in Middle East Technology  |  A new venture capital fund looking to invest in Middle Eastern and North African technology firms has been launched in Dubai, The Wall Street Journal reports. Wall Street Journal

LEGAL/REGULATORY »

Former Swiss Banker to Appear in Court on Tax Charges  |  Raoul Weil, a former UBS executive, is expected to appear in a Florida courtroom on Monday after he was extradited from Italy on charges that he helped Americans hide billions of dollars overseas, Reuters reports. Reuters

More Swiss Banks to Join U.S. Tax Pact  |  Reuters reports: “Several Swiss regional banks said on Monday they would cooperate with U.S. officials to avoid prosecution in a crackdown on Swiss lenders suspected of helping wealthy Americans evade taxes through offshore accounts.” Reuters

Supreme Court to Hear Case on 401(k) Funds  |  The Supreme Court will hear an appeal in a case involving Fifth Third Bancorp over whether workers can sue for losses in 401(k) funds that include their employer’s shares, The Wall Street Journal reports. Wall Street Journal

Ikea Spying Revelations Stir Outrage in France  |  A French court is examining whether executives at the furniture maker Ikea broke the law by ordering investigations of its employees’ personal lives over the course of a decade, The New York Times writes. New York Times

Avago to Buy LSI for $6.6 Billion

Avago Technologies plans to make the biggest acquisition in its history â€" with the help of a former owner.

Avago, a semiconductor company, said on Monday that it had agreed to buy the LSI Corporation for about $6.6 billion in cash, moving into the world of networking and storage chips in a bet on the increased use of cloud and mobile software.

To finance the deal, Avago turned to Silver Lake, which acquired the company â€" then part of Agilent, the former semiconductor arm of Hewlett-Packard â€" with Kohlberg Kravis Roberts in 2005 and took it public three years later.

Silver Lake sold the last of its holdings last year, but retained a seat on Avago’s board. To date, the transaction was one of the most lucrative in Silver Lake’s history, generating a return of five times the initial investment.

Under the terms of the transaction, Avago will pay $11.15 a share, about 41 percent above LSI’s closing stock price on Friday.

As part of the deal, Silver Lake will invest $1 billion in the form of a convertible note, supplementing a $4.6 billion loan from a group of banks. Silver Lake’s seven-year note carries a coupon of 2 percent and converts to common stock at a price of $48.04, 5 percent above Friday’s closing price.

The transaction is intended to broaden Avago’s business, expanding into a lucrative sector with limited competition and healthy profit margins. The 32-year-old LSI focuses on making chips that control networks, especially storage for data centers. It reported $196.2 million in profit last year on revenue of $2.5 billion.

Buying LSI would help move Avago into a more mainstream industry, away from its specialized products for mobile device, network infrastructure and industrial companies. Its existing clients include Samsung, Cisco and its former parent, HP.

Avago also expects to benefit from economies of scale, projecting about $200 million in annual cost savings beginning in the first full year after closing, and double-digit improvements in operating margins.

“This highly complementary and compelling acquisition positions Avago as a leader in the enterprise storage market and expands our offerings and capabilities in wired infrastructure, particularly system-level expertise,” Hock E. Tan, Avago’s chief executive, said in a statement. “This combination will increase the company’s scale and diversify our revenue and customer base.”

As part of a plan to expand through acquisitions, Avago first began considering a potential deal about six months ago, in consultation with Silver Lake, according to people briefed on the matter. Once it had settled on LSI, it began working on a way to pay for the deal without having to issue a significant amount of stock, taking advantage of low interest rates and a former owner willing to lend a hand.

“We are pleased to renew our highly successful partnership with Hock Tan and the Avago management team,” Kenneth Hao, a managing partner at Silver Lake, said in a statement. “We believe this is a strategically compelling transaction that creates a tremendous opportunity in the enterprise storage and networking markets, and will position Avago as one of the global leaders in the semiconductor industry.”

The deal is expected to close in the first half of 2014, pending approvals from regulators and LSI’s shareholders. The deal does not include a so-called go-shop provision that lets the target company solicit higher bids.

Carlyle to Invest $200 Million in New Energy Exploration Firm

The Carlyle Group commits up to US$200m equity capital in Discover Exploration Limited, a new oil and gas exploration company led by the former Cove Energy plc oil & gas management team

 

The investment enables Discover Exploration to participate in an immediate two-well, deep-water drilling programme in the Taranaki and Canterbury basins offshore New Zealand, and to fund an exploration programme offshore the Comoros

London, UK - Global alternative asset manager The Carlyle Group (NASDAQ:CG) today announced it has made a majority investmentin Discover Exploration Limited. The equity investment of up to $200 millionover the next three years will fund existing operations in New Zealand and the Union of the Comorosas well as new opportunities. This is the first investment by CIEP, a fund that focuses on oil and gas exploration & production, midstream, oil field services and refining and marketing in Europe, Africa, Latin America and Asia.  CIEP is headed by Managing Director Marcel van Poecke, an industry veteran and a seasoned investor in the energy sector.

Discover is an unlisted, geology-led oil and gas exploration company headquartered in London. The Company was founded by the same management team responsible for the successful creation of Cove Energy plc in 2009 and its eventual sale three years later for £1.2bn. Led by Executive Directors Michael Blaha, John Craven and Michael Nolan, the team has strong technical expertise in deep-water hydrocarbon plays, solid industry reputations and continuing relationships with major oil companies.

Discover’s strategy is to deliver value through participation in exploration and appraisal programmes focusing on deep-water petroleum systems. The Company concentrates on young and emerging basins, de-risked through 2D and 3D seismic surveys, and aims to participate in multi-well drilling programmes through farm-ins, farm-outs and M&A activity.

This investment will fund Discover Exploration’s near-term, high-impact drilling programme offshore New Zealand with operating partner Anadarko Petroleum Corporation (NYSE:APC), and will provide working capital for its stake in offshore the Comoros and to grow the business.

In addition, Discover will seek early value creation through participation at ground floor level in targeted areas, where large interests are available. The Company has solid industry relationships and works with reliable, well-financed and proven partners to build a balanced portfolio of exploration assets with both oil and gas potential.

Discover’s current exploration portfolio:

• 10% participation in the PEP38451 permit in the Taranaki basin, offshore New Zealand, operated by AnadarkoPetroleum Corporation- the first exploration well spud on November 25, 2013;
• 10% participation in the PEP38264 permit in the Canterbury basin, offshore New Zealand, operated by Anadarko - the first exploration well is expected to spud in early 2014;
• 60% participation in a Production Sharing Contract covering c. 18,000 km2 offshore the Comoros, currently awaiting approval by the National Assembly - license area is on trend with the major Rovuma delta gas discoveries (gas-in-place approaching a combined 175 trillion cubic feet) made by Anadarko and ENI S.p.A (BIT:ENI NYSE:E), offshore Northern Mozambique.

Michael Blaha, Executive Chairman of Discover, said: “We are delighted that CIEP has agreed to support the Company with significant investment funding to allow us to acquire these two New Zealand opportunities and to capture other future opportunities that are available to us from host Governments and our international peers in the oil and gas industry. We are confident of using the success we enjoyed with Cove Energy as a bridgehead to our new endeavours. We see the respective skills of the management team and CIEP as providing an excellent and dynamic combination.”

John Craven, CEO of Discover, commented:“This investment by CIEP will enable us to continue on-going discussions with several parties with regard to developing or gaining access to a number of deep water turbidite plays worldwide. Furthermore, I am very pleased Discover is entering the Taranaki and Canterbury basins in New Zealand with a near-term drilling programme and with Anadarko as the operator. These two licenses fit perfectly with our strategy of pursuing prospective, deep water petroleum systems in emerging basins.”

Marcel van Poecke, Managing Director, and Head of CIEP said: “Discover is an outstanding company and offers an exciting opportunity to combine its international oil and gas experience with the resources we have available in Carlyle’s global energy platform. Our investment will fund Discover’s exploration activities and enable the acquisition of additional concessions in frontier exploration geographies.”

Investec Bank plc acted as financial adviser and Lawrence Graham LLP acted as legal adviser to Discover.

* * * * *

For More Information

The Carlyle Group
Rory Macmillan, External Affairs Director
+44 (0) 207 894 1630
roderick.macmillan@carlyle.com

Catherine Armstrong, Media Relations Manager
+44 (0) 207 894 1632
catherine.armstrong@carlyle.com

Discover Exploration Limited
John Craven, CEO
c/o Edward Westropp
+44 (0) 207 831 3113
edward.westropp@fticonsulting.com

FTI Consulting
Edward Westropp
Georgia Mann
+44 (0) 207 831 3113
georgia.mann@fticonsulting.com 

About The Carlyle Group
The Carlyle Group is a global alternative asset manager with US$185bn of assets under management (“AUM”) across 122 funds and 81 fund of funds vehicles as of September 30, 2013. Carlyle's purpose is to invest wisely and create value on behalf of its investors, many of whom are public pensions. Carlyle invests across four segments - Corporate Private Equity, Real Assets, Global Market Strategies and Solutions - in Africa, Asia, Australia, Europe, the Middle East, North America and South America. Carlyle has expertise in various industries, including: aerospace, defense & government services, consumer & retail, energy, financial services, healthcare, industrial, technology & business services, telecommunications & media and transportation. The Carlyle Group employs more than 1,450 people in 34 offices across six continents.

Web: www.carlyle.com
Videos: www.youtube.com/onecarlyle
Tweets: www.twitter.com/onecarlyle
Podcasts: www.carlyle.com/about-carlyle/market-commentary/481

About Carlyle’s Existing Energy Platform
Carlyle has carefully constructed a broad-based energy investing platform (over $25bn in AUM) offering innovative investment opportunities, including international energy investing in oil & gas exploration & production, midstream, oil field services and refining & marketing in Europe, Africa, Latin America and Asia (CIEP), U.S. energy investing (NGP Energy Capital Management where Carlyle owns 47.5% of revenues), project finance (Energy Mezzanine), Power (Cogentrix) and Commodities (Vermillion) and the firm’s proven buyout capabilities in transactions such as Philadelphia Energy Solutions and Kinder Morgan. Supporting this is the Carlyle network and capital markets experience.

About CIEP
Established in May 2013, the CIEP team will focus on oil and gas exploration and production midstream, oil field services and refining and marketing in Europe, Africa, Latin America and Asia. CIEP is led by Marcel van Poecke, a leading international energy investor and operator, and his team is comprised of long-tenured international energy professionals with oil and gas industry investment and operational expertise. It includes Paddy Spink, Senior Advisor to CIEP with 35 years’ upstream experience in Africa, Latin America & Europe and Carlyle Managing Director Joost Dröge, an industry veteran with over 25 years’ downstream experience in Europe. The CIEP team focuses on transactions where it has a distinctive competitive advantage and can create tangible value for companies in which it invests, through industry specialization, deployment of human capital and access to Carlyle’s global network. The team operates primarily from offices in London while leveraging Carlyle’s local offices to pursue opportunities across Europe, Africa, Asia and Latin America and is reinforced by Carlyle’s regional fund teams and global investment professionals.

About Discover Exploration
Discover is an unlisted, geology-led oil and gas exploration company headquartered in London. The Company was founded by the same management team responsible for the successful creation of Cove Energy plc (“Cove”) in 2009 and its eventual sale three years later for £1.2bn. Led by Executive Directors Michael Blaha, John Craven and Michael Nolan, the team has strong technical expertise in deep water petroleum systems, solid industry reputations and continuing relationships with major oil companies.

Discover holds a Production Sharing Contract offshore in the Comoros that was signed with the Comoros Government in March 2013 and is currently awaiting the approbation of the National Assembly. The Company has also acquired a 10% participation in two Petroleum Exploration Permits for the Taranaki and Canterbury basins in offshore New Zealand. Both permits are operated by Anadarko and have a near-term exploration drilling programme. Discover also has a pipeline of other opportunities to acquire additional participations in attractive exploration blocks across the globe.

Web: www.discover-exploration.com

About Discover’s Management Team & Board of Directors
The management team, led by Executive Directors Michael Blaha (Executive Chairman), John Craven (CEO) and Michael Nolan (CFO), has strong technical expertise in deep water petroleum systems and solid industry reputations. Paul Griggs (Corporate Development Director) and Alexander Mollinger (Commercial Director), both former Cove associates, are also part of the management team.

In addition, Marcel van Poecke (Managing Director and Head of CIEP), Alexander Berger (CEO of Oranje-Nassau Energie B.V. and Non-Executive Director of Cairn Energy plc (LON:CNE)), Paddy Spink (Senior Advisor to CIEP) and Andrew Marino (Managing Director at Carlyle) are on the Board as Non-Executive Directors.

Michael Blaha, Executive Chairman
Michael Blaha is a petroleum engineer with 33 years of oil and gas experience in Africa, the Middle East, Asia and Europe. He was co-founder and Executive Chairman of Cove, helping to guide the company in three years from a £1m cash shell through to its £1.2bn sale to PTT Exploration and Production Public Company Limited (“PTTEP”; BKK:PTTEP). Prior to Cove, he held a number of senior roles in Royal Dutch Shell plc (“Shell”; NYSE:RDS.A NYSE:RDS.B LON:RDSA LON:RDSB AMS:RDSA). He was Country Chairman in Algeria in 2005-2009, Director of External Relations for E&P Africa in 2003-2005, Vice-President E&P for Russia (Sakhalin and Salym) in 2001-2003 and Vice-President E&P for Iran (Soroosh and Nowrooz) in 1998-2001. Earlier in his career, he worked at the Shell headquarters in The Hague on developing business in China, Iran and Russia. He also held senior roles in the Philippines, Syria, Thailand and he United Kingdom.

John Craven, Chief Executive Officer
John Craven is a petroleum geologist with 40 years of experience in upstream oil and gas exploration and production companies. He was co-founder and CEO of Cove, helping to guide the company in three years from being a £1m cash shell through to its £1.2bn sale to PTTEP. Before this, he was founder and CEO of Petroceltic International plc (“Petroceltic”; LON:PCI), the exploration company with African and Mediterranean assets. Under his direction and stewardship, Petroceltic grew into a business with a diversified portfolio of exploration and appraisal projects in Italy, Algeria and Tunisia. Mr Craven also held senior executive positions with Gulf Oil Corporation Limited (NSE:GULFOILCOR), Dana Petroleum plc and Vanco. He is currently also the Chairman of Falcon Oil & Gas Ltd (CVE:FO LON:FOG).

Michael Nolan, Chief Financial Officer
Michael Nolan was co-founder and former Finance Director of Cove, helping to guide the company in three years from being a £1m cash shell through to Cove's £1.2bn sale to PTTEP. He is a founder and Non-Executive Director of Fastnet Oil and Gas plc (LON:FAST), Rathdowney Resources Ltd (CVE:RTH) and Orogen Gold plc (LON:ORE). A qualified accountant, he has 19 years’ experience working in public companies in the natural resource sector.

Paul Griggs, Corporate Development Director
Paul Griggs was a close advisor to the Board of Cove, helping to guide the company in three years from being a £1m cash shell through to its £1.2bn sale to PTTEP. He has 30 years’ experience in the oil and gas industry working with companies such as Sterling Energy plc (LON:SEY), OMV AG (VIE:OMV), BHP Petroleum and Lion Petroleum Corporation.

Alexander Mollinger, Commercial Director
Alexander Mollinger is a petroleum engineer with 8 years of upstream oil and gas experience in technical and commercial roles in Europe and Africa. Previously, he was the commercial adviser to Cove, helping to guide the company through its £1.2bn sale to PTTEP. Prior to joining Cove Alexander Mollinger worked at Shell.

Legal Disclaimers

This release does not constitute an offer for any current or future Carlyle fund.

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