‘Safe Harbor’ in Bankruptcy Is Upended in Detroit Case

As Detroit struggles to come up with money to improve services for its residents, two large banks are poised to receive hundreds of millions of dollars to cancel a deal that helped push the city into bankruptcy in the first place.

The two banks, UBS and Bank of America, were the only creditors that managed to reach a settlement with Detroit before the city declared bankruptcy last July. They agreed to let Detroit out of financial contracts called interest-rate swaps for 75 percent of what the city owed, or about $230 million. They also agreed to give up some casino tax proceeds that Detroit had pledged to them as collateral for the swaps.

The 75 cents on the dollar is a far better deal than the city’s other creditors will probably get. And because of an unusual provision in the federal bankruptcy code, these two banks actually have a legal right to 100 cents on the dollar. The provision gives traders in swaps, options and other derivatives a so-called safe harbor, exempting them from the usual stay that blocks creditors’ efforts to collect debts.

The provision has turned on its head the meaning of safe harbor in bankruptcy. Bankruptcy proceedings are supposed to give debtors like Detroit a safe place to negotiate a way out their problems under the protective eye of a federal judge.

Bankruptcy law rests on the bedrock principle that the best outcome can be achieved if everybody shares equitably in the pain and losses. But in the brave new world of municipal bankruptcy, the law gives derivatives traders an even safer harbor than Detroit’s.

“These safe harbors make no logical sense in this context,” said Steven L. Schwarcz, a professor at Duke University School of Law who has written on the special treatment of derivatives in corporate bankruptcies. Detroit was in bankruptcy court last week seeking approval for its deal with Bank of America and UBS.

But on Friday, the bankruptcy judge, Steven W. Rhodes, sent the city and the banks back to confidential mediation to improve the terms for the city. The mediation was expected to continue through Christmas Eve.

But in the tangle that is Detroit’s finances, the swaps deal is only one part of the equation. The city is seeking to borrow $350 million from another bank, Barclays Capital, to finance its operations in bankruptcy, and it needs to resolve the swaps deal before it can get the loan. Without the loan, lawyers for the city say, it soon might not be able to meet its payroll.

But any time a debtor tries to borrow in bankruptcy, it stirs opposition, since the new loan will worsen the insolvency. The Barclays deal also gives it priority over all the existing creditors. And the bulk of the $350 million loan will go to pay UBS and Bank of America to terminate the swap contracts. Since those two banks would no longer need Detroit’s casino revenue as a backstop, the city could then use that money as collateral for the new Barclays loan.

The rest of the proceeds from the loan, $120 million, would go to the streetlights, the police, the razing of dilapidated properties and other city services that the residents of Detroit sorely need.

Last week’s hearing over these arrangements broke down when Judge Rhodes asked the city’s emergency manager, Kevyn Orr, to explain why 75 cents on the dollar was a good deal. Mr. Orr declined to answer the question and asked instead for the hearing to be suspended.

If the current mediation talks fail, the two banks would once again have the safe harbor advantage under law, leaving Detroit to fight back in court by arguing that the swaps were flawed in some way and unenforceable. James E. Spiotto, a bankruptcy lawyer with the law firm Chapman and Cutler in Chicago, who is not involved in Detroit’s case, said that prospect might explain why Mr. Orr was unwilling to sing the praises of Detroit’s swap settlement in court. If he had, it would be hard for Detroit to come back with a lawsuit contending the swaps were no good.

Bank of America and UBS declined to comment.

Congress created the safe harbor for derivatives because they could pose systemic risk â€" if one bankrupt institution failed to make payment, it could swiftly bankrupt its trading partners, and they, in turn, might bankrupt their other trading partners, setting off a toxic cascade.

But some bankruptcy experts question the fairness or even the effectiveness of this exception.

Professor Schwarcz said it was not clear that the safe harbors were serving their intended purpose even in cases where the debtors are companies â€" let alone in a municipal bankruptcy like Detroit’s, where thousands of residents are being dragged along on the miserable journey.

“When you’re in a municipal bankruptcy, where the debtor is a municipality, there are very strong public-interest considerations that ought to be balanced,” Mr. Schwarcz said. He and other specialists said there had not been any such discussion in Detroit’s case. Nor, they said, has anyone in Congress asked whether this part of the bankruptcy code was working properly.

“There is very, very strong interest-group support for keeping the safe harbors, but there’s not a well-developed interest group that understands the need to change them,” said David A. Skeel Jr., a corporate law professor at the University of Pennsylvania. “In my view, there ought to be strong pressure to change the safe harbors.”

Congress began exempting derivatives from the automatic stays on collecting debts in bankruptcy in 1978. The initial exemptions â€" options and futures, among them â€" were narrow, Mr. Schwarcz wrote in a legislative history of the safe harbor. But every few years after that, Congress broadened them and added new types of derivatives, including swaps in 1990.

Mr. Schwarcz found in his research that the expansion of the safe harbor helped the derivatives industry to grow. The growth then led to bigger risks of a meltdown, prompting calls from the derivatives industry for Congress to expand the safe harbor even further.

In all that growth and expansion, he said in an interview, no one stopped to make sure the safe harbor was truly reducing systemic risk or covering the right types of institutions. The surfacing of safe harbor in a bankruptcy like Detroit’s seemed especially jarring.

Detroit entered into the swap contracts back in 2005, when it tapped the municipal bond market for $1.4 billion to put into its workers’ pension funds. Much of the deal was structured with variable-rate debt, and the swaps were intended to work as a hedge, to protect Detroit if interest rates rose. But as things turned out, rates went down, and under those circumstances, the terms of the swaps called for Detroit to make regular payments to UBS and Merrill Lynch Capital Services, now part of Bank of America. Detroit has been doing so, even in bankruptcy. The swaps now cost it about $36 million a year.

In retrospect, it seems clear that Detroit was already struggling in 2005 and a poor candidate to borrow the $1.4 billion. The borrowing required an unusual structure to avoid violating the city’s legal debt limit. In 2009, the debt was downgraded to junk, putting the city out of compliance with the terms of the swaps. So Detroit restructured the swap obligations, offering the two banks the tax revenue that it received from local casinos as a backstop.

The city’s finances went from bad to worse after that. Now that Detroit is bankrupt, it needs those casino revenue, and some of its biggest battles are being fought over how it dealt with that swap restructuring back in 2009.

“You look at this transaction, and you say it smells,” said Mr. Skeel, who is currently a visiting professor at New York University’s law school. “It looks exactly like the sort of thing that you would want a bankruptcy judge to be in a position to sort out, and reverse if that is necessary. That’s something that the safe harbors make a lot harder.”

Cohen Said to Have Warned Friend About Possible Federal Investigation

By the summer of 2009, the billionaire investor Steven A. Cohen appeared to be growing suspicious that federal authorities were gathering evidence about insider trading in the hedge fund industry.

When a former employee approached Mr. Cohen that summer, seeking a job at SAC Capital Advisors, his hedge fund, Mr. Cohen called a friend at another hedge fund and told him to be careful about talking to the former trader, according to people briefed on the matter.

The phone call, which has not been previously reported, suggests that Mr. Cohen and potentially others in the hedge fund industry were gradually becoming aware of the broad investigation into insider trading, despite attempts by authorities at that time to keep it secret.

Indeed, word of the investigation was beginning to leak even as federal authorities were getting court approval that summer to place a wiretap on a phone at Mr. Cohen’s 35,000-square-foot mansion in Greenwich, Conn., for the first and only time.

Such awareness of an undercover investigation, months before it became publicly known, could have hurt the effort by federal investigators, who have been frustrated in trying to find evidence from wiretaps or emails that might link Mr. Cohen to any wrongful trading despite years of focusing on him. Federal authorities were unaware of Mr. Cohen’s phone call to Richard Grodin, who at the time was running a fund called Quadrum Capital, said two people briefed on the matter who were familiar with the investigation but not authorized to discuss it.

The 2009 wiretap on Mr. Cohen’s home, where the noted art collector keeps a yellow Jeff Koons balloon dog sculpture on his lawn, produced little in the way of incriminating evidence and was discontinued, said the people briefed on the investigation, who were not authorized to discuss it. These same people said that previous reports that authorities had wiretapped Mr. Cohen’s home phone in 2008 were erroneous.

Another area of frustration for investigators has been a lack of instant message conversations involving Mr. Cohen. The hedge fund owner, like most others at SAC, was a frequent user of AOL instant messaging services during 2007 and 2008, the period during which the undercover investigation began gathering steam. During the trading day, the best way to get Mr. Cohen’s attention was to send him an instant message, the people briefed on the matter said. But the hedge fund, as a general rule, did not save I.M. conversations before 2009.

In the 2009 phone call, which was not recorded in a wiretap, Mr. Cohen told Mr. Grodin that he believed Richard Choo-Beng Lee, a technology stock trader, might be cooperating with federal authorities, even taping telephone calls with people he knew in the industry, said people briefed on the matter who did not want to be identified. Mr. Cohen suggested that Mr. Lee, who had once worked for both men, might be trying to implicate others, the people briefed on the matter said.

Mr. Grodin, who had worked for SAC Capital five years earlier, was surprised. He doubted that Mr. Lee, known as C. B. to his friends, would cooperate with federal authorities in an investigation of the industry, the people briefed on the matter said.

But by October 2009, Mr. Cohen’s warning about Mr. Lee would ring true when federal prosecutors disclosed that he had been working with them for months, taping conversations with people in connection with an investigation that led to the arrest of the hedge fund billionaire Raj Rajaratnam that month.

Mr. Cohen, 57, has not been accused of any criminal wrongdoing. A spokesman for Mr. Cohen declined to comment.

A lawyer for Mr. Grodin did not return calls seeking comment.

Federal authorities continue to pursue Mr. Cohen, who was widely regarded on Wall Street as one of the best stock traders of his generation. Last month, his firm pleaded guilty to insider trading and agreed to pay a $1.2 billion penalty and stop managing money for wealthy investors, pensions and institutional investors.

The closest authorities have come to tying Mr. Cohen to improper trading at his firm is a civil failure-to-supervise action filed against Mr. Cohen by the Securities and Exchange Commission.

But the phone call to Mr. Grodin suggests that Mr. Cohen may have had more insight in 2009 into the investigation being conducted by the United States attorney’s office in Manhattan and the F.B.I. than others in the hedge fund business did. The investigation has led to the convictions or guilty pleas of 77 traders, analysts and industry consultants â€" including seven people who worked for Mr. Cohen’s fund.

It is unclear exactly when Mr. Cohen phoned Mr. Grodin, but the call appears to have coincided with an attempt by Mr. Lee to persuade Mr. Cohen to give him a job at SAC, where he had worked from 1999 to 2004. Mr. Lee was seeking either a full-time job or a consulting job with SAC, shortly after he began secretly cooperating with federal investigators in April 2009. Federal authorities had Mr. Lee call and tape the conversation with Mr. Cohen.

A person briefed on the matter who was not authorized to speak publicly about the investigation said Mr. Lee’s call to Mr. Cohen was useful in enabling federal authorities to persuade a federal judge to approve a brief wiretap on Mr. Cohen’s mansion.

Born in Malaysia, Mr. Lee, 57, who at the time of the investigation was living in California, was one of the first hedge fund traders to begin cooperating with the investigation. Mr. Lee and his business partner, Ali T. Far, shuttered their hedge fund, Spherix Capital in San Jose, Calif., and agreed to cooperate after the government gathered incriminating evidence against them, some of which was obtained through a 2008 wiretap on Mr. Lee’s cellphone. Both men pleaded guilty to insider trading charges.

Mr. Lee provided federal authorities with a list of stocks he used inside information to trade on while working at SAC and also names of people who had provided him with inside information, according to court documents. He also helped authorities better understand how SAC was organized and how traders and analysts were supposed to pass on their best ideas each week to Mr. Cohen and his trading team.

But Mr. Lee was not particularly skilled at undercover work, several lawyers familiar with the investigation said, and his attempts to get people to incriminate themselves while in taped conversations were awkward at best.

In a 2011 deposition in a lawsuit, Mr. Cohen, when asked why he turned away Mr. Lee when Mr. Lee came to him seeking a job, said he and others at his firm “had suspicions about his intentions.” Mr. Cohen added there were “rumors from people on the street” that Mr. Lee “was wearing a wire,” according to the deposition.

Jeffrey L. Bornstein, a lawyer for Mr. Lee, said he could not comment on anything specific his client might have done to assist federal investigations. He added that Mr. Lee “continues to cooperate fully with the federal authorities.”

Some federal authorities investigating Mr. Cohen say they believe that any case against the billionaire investor might be made only with the help of a cooperating witness who can directly tie him to any wrongful trading.

People briefed on the investigation, for instance, say prosecutors remain interested in learning what Mathew Martoma, a former SAC money manager, can tell them about a 20-minute call he had with Mr. Cohen in July 2008, shortly before the firm began unloading big positions in shares of Elan and Wyeth.

Mr. Martoma is charged with using inside information to help SAC avoid losses and generate trading profits of $276 million on shares of those two pharmaceutical companies. Prosecutors claim Mr. Martoma recommended that SAC sell those shares after receiving inside information about problems with a clinical trial for an experimental Alzheimer’s drug the two companies were working on. Mr. Martoma, who maintains his innocence, is set to go on trial on Jan. 6 in the Federal District Court in Lower Manhattan.

Mr. Lee, for his part, remains in limbo. Despite being one of the first to plead guilty, he has never been sentenced. The last court filing in his case was a letter from prosecutors on Sept. 27, 2011, to the judge that said Mr. Lee’s sentencing could take place after Jan. 3, 2012.

Two years later, there has been no update on his sentencing.

Carlyle Said in Talks for Johnson & Johnson Unit

The Carlyle Group is in exclusive talks to buy Johnson & Johnson‘s blood-testing unit, in what could lead to a transaction worth about $4 billion, a person briefed on the matter said on Monday.

Talks were ongoing and could still fall apart, this person cautioned.

Carlyle emerged as the lead bidder after an auction process that Johnson & Johnson has run for the division, which had drawn both private equity bidders and corporate suitors. The health-care titan has been looking to sell slower-growing businesses as it focuses on higher-growth opportunities.

Carlyle has struck a number of healthcare deals in recent years, including a $3.9 billion takeover, with Hellman & Friedman, of the clinical drug testing company Pharmaceutical Product Development more than two years ago, and a $6.3 billion acquisition of the nursing home operator ManorCare in 2007. (The latter has generated controversy for the investment giant.)

The firm would draw more than $1 billion of the cash required for a deal from its latest leveraged buyout fund, which formally closed last month at about $13 billion, according to the person briefed on the matter.

News of Carlyle’s exclusive talks with Johnson & Johnson was reported earlier by Reuters.

Banking Group Threatens Lawsuit Over Volcker Rule

The American Bankers Association is not happy with how regulators addressed concerns over how the Volcker Rule would affect community banks. Now, the industry trade group is threatening to take the matter to court.

Banks have long been lobbying to shape or water down the Volcker Rule, the provision 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. After much delay, five federal agencies approved the final rule this month, bolstering some provisions but leaving others open to loopholes.

In a letter Monday, the association said it would file a lawsuit challenging the rule, unless regulators immediately suspended a provision that could force regional and community banks to divest themselves of an investment in collateralized debt obligations backed by trust preferred securities, known as TruPs.

TruPs are preferred securities that are issued mainly by banks and insurers and have both debt and equity characteristics. Before the financial crisis, TruPs issued by regional and communities banks were often pooled together into C.D.O.’s that were sold to other banks and institutional investors.

The trade group sent the letter to the Federal Reserve chairman, Ben S. Bernanke; the Federal Deposit Insurance Corporation chairman, Martin Gruenberg; and the Comptroller of the Currency, Thomas Curry. The group warned that the provision, if left unchanged, would cause “imminent and irreparable” harm to some banks.

Last week, regulators tried to accommodate the concerns of the banking industry by issuing guidance that said regional and community banks need not automatically treat so-called TruPS C.D.O.’s as prohibited investments that must be shed under the Volcker Rule. The regulators issued the guidance in response to lobbying by the A.B.A. and a decision by Zions Bancorp of Salt Lake City to take a $387 million charge to rid itself of a portfolio of those C.D.O.’s.

In the guidance, issued Dec. 19, the regulators said banks should review the structure of each C.D.O. before determining whether the security was considered a prohibited “covered fund” under the rule and needed to be sold.

The A.B.A. said the regulatory guidance did not go far enough in clarifying the issue and the group said it could sue over the provision as soon as the end of this week.

In an interview on Monday, Wayne Abernathy, the A.B.A.’s executive vice president, said that the guidance issued by the regulators would not do much, and that most banks owning TruPS C.D.O.’s would still probably have to sell them and take a charge. Mr. Abernathy said the association was looking for a determination that TruPS C.D.O.’s are not covered by the Volcker Rule.

Banks have until July 21, 2015, to divest themselves of risky assets under the Volcker Rule, but can get an extension from the Federal Reserve if necessary.

In Soured Investments, Brokers Emerge as Culprits and Victims

For years, regulators have typically pursued brokerage firms over the failure of investments they sold rather than going after individual stockbrokers, because the target was larger and the possibility of reaching a financial settlement was greater.

Now, regulators are shifting their focus in their fight against fraud to encompass brokers. The shift comes even as some brokers are casting themselves as victims, saying they were duped by the same complex products that they once happily sold to customers.

Brokerage firms project a public face of their employees as attentive, diligent and proficient. In television and Internet marketing, they highlight the expertise and sound guidance of their advisers. In contrast to that depiction, brokers are now saying that some products were so complicated that they did not have the knowledge to sell them. Some have sought to have complaints about the products they sold expunged, and others have filed claims against their firms.

On Sept. 25, Michael Farah, a former broker at Wedbush Securities, won a $4.3 million arbitration award from his former employer â€" including $1.4 million in punitive damages. Arbitrators for the Financial Industry Regulatory Authority, the industry-financed group that oversees such claims, took up his case in a nine-day proceeding.

Mr. Farah said in his statement of claim that he was “unaware of the true state of facts” about the ill-fated collateralized mortgage obligations, the mortgage-backed securities that are pooled and grouped by risk. He recommended such products after his firm endorsed them, but said that his business was hurt after his clients lost money on them. “A broker has the right to rely on what he’s told about an investment by the firm,” said his lawyer, Phil M. Aidikoff. Wedbush didn’t respond to requests for comment.

Such actions may seem distasteful to the investors who lost substantial amounts to soured investments. But legal experts say that even when firms have been held liable for troubled products, the brokers are often off the hook.

“I call it the tsunami defense,” said Bill Singer, a New York securities lawyer who represents investors and brokers. Brokers often go unnamed in regulatory actions and arbitrations, as plaintiffs’ lawyers pursue the deeper pockets of the firm. But even when brokers are named when a product blows up, “typically there’s no liability on the broker,” Mr. Singer said.

Regulators, however, are considering tougher standards for the sale of complicated financial products that are sometimes not understood by either broker or customer.

In a 43-page report sent to brokerage firms in October, Finra said that its members needed to pay more attention to brokers’ understanding of complex products. The group outlined ideas it considered effective, such as limiting the ability of brokers to sell a product if they were unable to explain risks to investors.

In a decision last year, a Finra hearing panel took up a case involving collateralized mortgage obligations and inverse floaters, which are debt instruments whose interest rates move in the opposite direction of a benchmark rate, sold to customers of Brookstone Securities.

The panel found that the products “were so complex that it is inconceivable” that investors could understand what they were buying. Finra fined Brookstone $1 million and ordered the firm and two of its brokers to return $1.6 million to its customers. The firm closed less than two weeks after the Finra decision on June 4, 2012, and is appealing the ruling.

Alan M. Wolper, a lawyer for Brookstone and three of its employees, said that his clients described the product “in sufficient detail” so that customers could understand it.

Some experts are calling for more oversight over such products. Frank Partnoy, a professor of law and finance at the University of San Diego School of Law, said he would like to see a broad standard that prohibited brokers from selling products that customers did not understand, even in cases where customers had signed documents that labeled them as “sophisticated.”

“There’s been a proliferation of complex products on the retail side over the past couple years,” he said. “It’s sort of shocking it would happen postcrisis, so Finra must be feeling pressure to do something about it.”

As governed by their licenses, brokers are supposed to have a duty to make sure products are “suitable” for their clients, and the Finra chief executive, Richard G. Ketchum, said at the annual meeting of the Securities Industry and Financial Markets Association in November that brokers should take on an even higher obligation to act in a clients’ best interest.

On Nov. 22, the S.E.C.’s investor advisory committee recommended similarly that brokers be held to a so-called fiduciary standard. Brokers should understand the products they are selling so that they can give the best advice, but much is open to interpretation.

Finra rules only specify that brokers are responsible for due diligence when they are trying to sell a product that isn’t on their firm’s approved list. If a broker is selling something the firm has recommended, “each situation has its own facts and circumstances,” said a Finra spokeswoman, Michelle Ong.

In a letter on Nov. 13 to the S.E.C. chairwoman, Mary Jo White, Mr. Ketchum said that Finra had begun an initiative this year to focus on high-risk brokers, including those who had worked for problematic firms. That might lead to more penalties against brokers, but it doesn’t address why brokers often go undisciplined when they’ve sold products that lead to penalties against their employers.

In addition, brokers who have had to list customer complaints about questionable products in their “Broker Check” â€" the dossier of employment and regulatory history available online â€" are often successful in having negative marks erased from their records.

On Feb. 7, a Finra arbitrator in Omaha granted requests to expunge customer complaints from the records of 22 brokers at Securities America who had sold securities that were sold to select investors to raise capital known as private placements in Medical Capital Holdings and Provident Royalties. Those private placements turned out to be frauds.

The arbitrator wrote that the brokers were “unaware of any alleged failures of Securities America in approving the securities at issue.” In a separate ruling on May 22 that granted a request to expunge the record of six other Securities America brokers, the same arbitrator, Frank D. Connett Jr., appeared to put more responsibility on the investors than he did on the brokers.

Mr. Connett said that the securities the brokers sold were “not suitable for anyone.” Yet, he said that the investors who purchased them were knowledgeable and “were made fully aware of the risky nature of these notes.”

John Nester, a spokesman for the Securities and Exchange Commission, would not comment on any specific cases but said: “As a general matter, charging decisions are based on a careful analysis of the individual facts and circumstances to determine culpability.”

Individual investors, virtually all of whom give up the right to making a claim in court when they open brokerage accounts, have the option of going to arbitration when a Wall Street product fails. Even then, though, lawyers usually advise suing only the firm, which is most likely to have the resources to pay an award if the investor wins.

Joseph Borg, director of the Alabama Securities Commission, said that it was not practical for a regulator to go after hundreds or thousands of brokers when it could pursue a single firm and potentially land a settlement that could be used to pay back defrauded investors.

Mr. Singer said that as long as Wall Street continued to promote impenetrable products, investors needed to be alert that brokers were sales representatives first.

“If you want to buy into the mythology that stockbrokers are highly trained professionals who care about customers and research their recommendations,” he said, “keep watching TV.”

The Huge Costs of Being a ‘Faithless Servant’

The notion of hitting someone where it really hurts - in the wallet - is being taken a step further these days when it comes to violations of securities laws.

The government has many avenues of recourse at its disposal when settling cases involving insider trading and investment fraud. Efforts to impose even greater costs on defendants were shown in two cases last week.

In one, Joseph F. Skowron, a portfolio manager at a hedge fund owned by Morgan Stanley who is serving a sentence for insider trading, was ordered to return approximately $25 million in compensation to the firm because of his misconduct. In the other, the Securities and Exchange Commission is asking a federal judge to impose significant monetary penalties on Fabrice Tourre after he was found liable for fraud in the sale of a collateralized debt obligation. The S.E.C. is also seeking an order to keep him from accepting reimbursement of any penalty from his former employer, Goldman Sachs.

Mr. Skowron had received a five-year prison sentence for insider trading and was ordered to pay $3.8 million in restitution to Morgan Stanley for its legal costs from the criminal and civil investigations and another $6.4 million that represented 20 percent of his compensation from 2007 to 2010. In July 2013, the United States Court of Appeals for the Second Circuit rejected his challenge to the restitution order, finding that the firm was a victim of the crime because it was deprived of his honest services.

Morgan Stanley also filed a lawsuit against Mr. Skowron, accusing him of being a “faithless servant,” meaning that he violated the obligations of loyalty and good faith by putting his own interests ahead of the employer. Under New York State law, which governs in this case, an employee forfeits all compensation received during the time when the person was faithless, regardless of whether the employer suffered any damages from the violation.

Last week, Judge Shira A. Scheindlin of the Federal District Court in Manhattan issued an opinion finding Mr. Skowron acted faithlessly by violating Morgan Stanley’s internal code of conduct that clearly prohibited trading on inside information. She rejected the argument that this was only a single violation that did not support ordering repayment of all his compensation for over three years.
She explained that “Skowron knowingly committed insider trading, explicitly lied to the S.E.C. under oath, and failed to disclose his participation to Morgan Stanley over the course of several years.”

This means that Mr. Skowron will have to repay Morgan Stanley the compensation - approximately $25 million - that he received from April 2007, when he began receiving the inside information, through November 2010, when his tipper was arrested. Judge Scheindlin concluded that insider trading permeated Mr. Skowron’s work, so that the faithlessness could not be apportioned just to the particular trades involving confidential information.

Her decision gives a firm whose employees engage in securities fraud another weapon to seek compensation for the harm they cause to its reputation. Defendants like Rajat Gupta, a former director of Goldman Sachs who was convicted of tipping with information learned during board meetings, may face a similar claim for acting as a faithless servant.

Mr. Tourre was found liable for securities fraud after a trial in July. Goldman Sachs had earlier settled S.E.C. charges related to the sale of the collateralized debt obligation in 2010, paying a $550 million civil penalty.

The firm continued to pay for Mr. Tourre’s lawyers under a provision in its corporate articles requiring the advance of such expenses to employees accused of misconduct in connection with their work. This obligation continues at least through the first appeal, and can even include the payment of penalties related to a violation.

The S.E.C. has long been concerned that defendants will pass along the cost of civil penalties to a company or an outside insurer, reducing the impact of a finding of a violation. For example, $20 million of the $67.5 million that the former Countrywide Financial chief executive, Angelo R. Mozilo, paid as part of a settlement of civil securities fraud charges was provided by Bank of America under an indemnification provision in his contract.

The S.E.C., however, wants defendants feel the pain of a civil penalty. Therefore, the agency has been including provisions in settlements that prohibit a company from seeking reimbursement from insurers and deducting the payments on its taxes. As part of the 2003 settlement with a number of Wall Street firms over conflicts of interest in their stock research, they were prohibited from treating the $875 million penalty as tax deductible or eligible for payment under insurance policies.

In a filing last week, the S.E.C. asked the Federal District Court in Manhattan to impose a $910,000 civil penalty on Mr. Tourre for what it described as “egregious” violations. To make the penalty sting, it also asked that the final order in the case require him “to pay civil penalties personally and barring him from accepting reimbursement from any person or entity, including” Goldman Sachs.

This is a clever way to keep a defendant from asserting a claim against an employer by asking for an advance of the penalty before the case is completed, an amount the firm may never try to recover. Goldman is no longer a party to the case, so it cannot be ordered to refrain from paying any penalty imposed. The next best thing is to try to prohibit Mr. Tourre from taking money to cover a penalty, on pain of violating a court order that could result in a contempt proceeding.

Whether the S.E.C. will succeed in limiting corporate payment of penalties is another question. Issues of indemnification and advancement of costs are a matter of state law, and in Delaware, where Goldman Sachs is incorporated, the courts take a broad view of a company’s obligation to make payments on behalf of an employee. The S.E.C.’s end run around this may not trump the firm’s obligation to pay the costs of a penalty imposed on Mr. Tourre.

Wall Street is facing increased scrutiny from regulators and prosecutors over how it conducts business. Employees who find themselves caught in an investigation have even more to fear because the costs of an adverse judgment can include efforts by employers to claw back compensation and the prospect of paying any penalties out of their own pocket.

SEC v Tourre Memorandum of Law December 16 2013

Morgan Stanley v Skowron Opinion Dec 19 2013

William Morris Endeavor Hires Former Microsoft Finance Chief

William Morris Endeavor is already planning some big personnel moves, less than a week after striking a deal for a big peer in a bid for expansion.

The talent agency plans to announce on Monday that it has hired Peter Klein, who served as Microsoft‘s chief financial officer until June, as its finance chief, effective immediately. When its $2.4 billion takeover of IMG Worldwide is completed, Mr. Klein will be the C.F.O. of that agency as well.

His role is a new one for both companies.

And when William Morris Endeavor and IMG finally unite at some point, he is likely to serve as chief financial officer for the agency powerhouse.

The hiring of Mr. Klein is the first move by William Morris Endeavor and its backer, the investment firm Silver Lake, to put their stamp on IMG after winning the agency in a heated bidding war.

Mr. Klein is best known for his 11 years at Microsoft, where he rose through the ranks of a number of subsidiaries to become the technology giant’s finance chief from 2009 until this spring. He previously worked at the likes of McCaw Ceullular, Orca Bay Capital and Homegrocer.com.

He had become acquainted with Silver Lake when Microsoft bought Skype from the investment firm, and later when the software behemoth agreed to help support Silver Lake’s takeover of Dell.

Silver Lake executives, including its senior deal maker, Egon Durban, first broached the idea of bringing Mr. Klein into the William Morris Endeavor fold earlier this year, according to people briefed on the matter. (Silver Lake already owns a 31 percent stake in the agency, and will own about 51 percent of the combined William Morris Endeavor and IMG.)

As talks progressed, the agency’s co-chief executives, Ari Emanuel and Patrick Whitesell, also became involved.

“Peter’s impressive track record and international experience will be a tremendous asset as we begin a new and exciting chapter in our company’s history,” Mr. Whitesell and Mr. Emanuel said in a statement. “Peter’s proven ability to structure and manage teams on a global scale, and bring rigor and organizational effectiveness to businesses large and small, will help to strengthen both WME and IMG.”

Mr. Klein’s job will be to oversee the financial operations of both companies, including what many in the industry expect to be big cost cuts. But during his discussions over the chief financial officer job, he expressed interest in the growing nature of both businesses, something that Silver Lake and William Morris Endeavor hope will eventually become a gateway to digital content.

“I am thrilled to be joining Ari, Patrick and the teams at WME and IMG at such an important time,” Mr. Klein said. “The combination of WME and IMG creates a unique global platform in sports and entertainment, with tremendous growth potential.”

Why Older Technology Companies May Attempt Desperate Deals

Beware of old tech seeking the fountain of youth.

Hardware makers including Cisco Systems, IBM and Hewlett-Packard - with a combined two centuries of life among them - are increasingly falling prey to natural selection in Silicon Valley. They’re devouring smaller, newer firms to keep pace, but weaknesses are getting harder to hide. That could lead to bigger, desperate deals for richly valued business software and big data companies.

The signs of carnage can’t be missed. In October, IBM reported falling sales for the sixth quarter in a row, led downward by its hardware businesses. For H.P., it is nine straight quarters of a shrinking top line. Cisco recently said revenue would decline until mid-2014. Even established software and web companies like Oracle and Google are suffering when it comes to sales of servers and smartphones.

Apple is an exception, but its model of peddling highly desirable gadgets with cheap or free software isn’t so easy to duplicate. Further, competition from commoditized mobile devices running Android is biting even the iPad maker. Its sales growth is slowing.

The struggles are notable because financial statements reflect past innovation. Consistently falling sales are hard to reverse and often mean a company’s best days are behind it. BlackBerry is the latest case study. Its revenue actually kept growing even after it brushed off the introduction of the iPhone in 2007. Eventually, that changed - and swiftly.

Acquisitions, combined with cost cutting, tend to be a popular way of trying to rejuvenate. It’s often a losing proposition, though. Control premiums and purchase accounting typically muddle matters. Tech takeovers also have a habit of failing. H.P. alone has written down about $18 billion worth of M.&A .since 2011.

That won’t necessarily be a deterrent, however. Data analyzers like Splunk and Tableau Software, and cloud purveyors such as Workday and NetSuite, are among those with much brighter prospects. NetSuite, at $7 billion, is the “cheapest” among them, trading at nearly 400 times estimated 2013 earnings. Splunk and Workday, with a combined market value of over $20 billion, each fetch over 25 times estimated revenue. Slowing the aging process may prove irresistible to technology behemoths, but it would come at a hefty cost.

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

Wall Street’s Fraternity Network

Photographer: Joel Page/AP Photo

Dartmouth College’s Alpha Delta, an inspiration for the 1978 comedy “Animal House,”... Read More

Dartmouth College’s Alpha Delta, an inspiration for the 1978 comedy “Animal House,” sent a member to New York-based Morgan Stanley from the fifth consecutive class days after the chapter was reprimanded for providing alcohol to a minor. Close

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Photographer: Joel Page/AP Photo

Dartmouth College’s Alpha Delta, an inspiration for the 1978 comedy “Animal House,” sent a member to New York-based Morgan Stanley from the fifth consecutive class days after the chapter was reprimanded for providing alcohol to a minor.

Conor Hails, head of the University of Pennsylvania’s Sigma Chi chapter, was in a Philadelphia hotel ballroom last month for a Barclays Plc (BARC) recruiting reception. A friend pointed out a banker from their fraternity. Hails, 20, approached with a secret handshake.

“We exchanged a grip, and he said, ‘Every Sigma Chi gets a business card,’” Hails recalled. “We’re trying to create Sigma Chi on Wall Street, a little fraternity on Wall Street.”

As students vie for 2014 internships in an industry where 22-year-olds can make more than $100,000 a year, interviews with three dozen fraternity members showed a network whose Wall Street alumni guide resumes to the tops of stacks, reveal interview questions with recommended answers, offer applicants secret mottoes and support chapters facing crackdowns.

That’s one reason men continue to dominate on Wall Street, where no woman has run a big bank. General Motors Co. (GM) announced Dec. 10 it would make Mary Barra the auto industry’s first female chief executive officer, the same day research firm Catalyst Inc. showed women holding about one in eight executive roles in U.S. finance.

The fraternity pipeline helps undergraduates beat odds three times steeper than Princeton University’s record-low acceptance rate, with Goldman Sachs Group Inc. (GS) choosing 350 investment-banking interns this year from 17,000 applicants.

Penn’s Alpha Epsilon Pi, which gave up its charter in 2012 to escape sanctions for hazing, got a member into Morgan Stanley for the fourth year in a row. Dartmouth College’s Alpha Delta, an inspiration for the 1978 comedy “Animal House,” sent someone to the New York-based firm from the fifth consecutive class days after a New Hampshire court reprimanded the chapter for providing alcohol to someone underage, filings show.

‘Male Dominated’

Fraternities retain influence in the face of scrutiny by parents, politicians and police for binge drinking, hazing and at least 60 deaths in the U.S. since 2005. A freshman at Baruch College in New York died this month after suffering a blow to the head during a Pi Delta Psi hazing ritual, according to Monroe County, Pennsylvania, District Attorney David Christine.

The largest U.S. banks say they are meritocracies and run diversity programs to shift an industry that once only let women onto the New York Stock Exchange floor as clerks during wartime shortages. Goldman Sachs added 10 women last year to a partnership that had one when CEO Lloyd C. Blankfein was elected to it in 1988.

“There obviously has been much progress since 20 years ago,” said Siegfried von Bonin, head of Dartmouth’s Alpha Delta chapter. “But the reality is that it’s still very much a male-dominated culture.”

Alpha Deltas

Fraternity inboxes help show why. One of the recruiting e-mails to Dartmouth’s Alpha Delta arrived last month from an alumnus working in a unit of Wells Fargo & Co. (WFC), the largest U.S. mortgage lender.

The e-mail, a copy of which was obtained by Bloomberg News, was his best chance at reaching the college’s top men for next year’s analyst class in a San Francisco office that has had Dartmouth grads for eight straight years and Alpha Deltas for four, he wrote. Students could e-mail their resumes to him directly, he added, and they’d go to the top of the pile.

Fraternity members who went to work for Goldman Sachs, Citigroup Inc. (C) and Bank of America Corp. said they were sent back to campus on recruiting trips, where they could tap people from their houses for interviews ahead of other candidates, some more qualified. One said he would sometimes invent endorsements to send to bosses that didn’t mention fraternity connections.

Spokesmen for the three banks, Barclays, Morgan Stanley (MS) and Wells Fargo declined to comment.

Secret Motto

When alumni don’t reach out, fraternity members know how to find them. Von Bonin, 21, asked two at one of the world’s largest banks for interview advice, he said. They taught him to describe the benefits of the firm’s U.S. growth, fast-paced environment and training program.

“They really gave me valuable advice,” said von Bonin, who got the internship this year. A job offer came later.

Students and graduates on Wall Street said they didn’t see much wrong with a fraternity path to finance. Even applicants with the right handshake need to show drive, dedication and diligence, they said, and many kinds of groups foster bankers, just as houses spawn surgeons and senators.

The network sometimes works so well that it can help accidentally. Jeff Librot, a former head of the University of Delaware’s Sigma Alpha Epsilon chapter, wasn’t looking to use its connections when he applied for a Bank of Montreal (BMO) equities internship, he said. A banker there sent him an e-mail with the frat’s secret motto, “Phi Alpha.” Librot was picked.

Drinking Buddies

That national fraternity has sent almost 3,000 men into finance, according to resumes on LinkedIn, which shows no other industry employing more than 1,800. One of its most successful members, 59-year-old billionaire hedge-fund manager Paul Tudor Jones, apologized in May after telling University of Virginia students that motherhood keeps women from being focused traders.

Research by Lauren Rivera, an associate professor at Northwestern University’s Kellogg School of Management, has shown bankers preferring fraternity heads or other potential drinking buddies to candidates with better grades.

“People like people who are like themselves,” said Rivera, who interviewed 120 professionals involved in hiring graduates for banking, law and consulting jobs.

College women don’t always grasp that men their age are assembling connections that can matter more than schoolwork, said Erica O’Malley, who heads a diversity program at Grant Thornton LLP. She quizzed her children’s friends as they passed through her home near Chicago over the Thanksgiving break.

‘Mom, Stop’

“My daughter will be like, ‘Mom, stop,’” said O’Malley, who also heads an audit practice at the accounting firm. “They don’t really understand it.”

Her company issued a report in March showing the U.S. with the eighth-lowest proportion of female business leaders out of 44 countries. Some of the students who could help boost that ranking find themselves struggling to land work after college.

“I wish I did have more networks,” said Emily Hendrix, who plans to graduate in May after three years at Rollins College in Winter Park, Florida. “It would maybe make finding a job a little easier, a little less stressful.”

A resume that includes the honor council, cross-country team and Kappa Kappa Gamma sorority along with internships for the CME Group Inc. (CME), owner of the world’s largest futures exchange, and Bank of America’s Merrill Lynch unit seems robust enough to land one. Without job offers for next year, or strong leads from friends, she’s been compiling potential options into a spreadsheet listing 123 companies she’d like to work for.

Winning Women

Even as women make up the majority of the industry’s support staff, filling 24,000 of 32,000 administrative positions at Citigroup according to its diversity report last year, they hold few of its top spots. Just two are on the firm’s operating committee with 22 men. The 11 Goldman Sachs executive officers and top dozen at Morgan Stanley include one woman each.

Evolution comes slowly, according to Jeff Urwin, head of investment banking at JPMorgan Chase & Co. (JPM) The firm’s Winning Women program has led to about 13 additional hires each year since 2004.

“You tend to think of an institution in a structured way, but it’s actually a big organic entity,” Urwin said. “Driving any kind of change that gets at the culture in an organism is hard because it tends to return to the original form, if you don’t maintain that consistent pressure to drive that change.”

JPMorgan employs 140 Sigma Phi Epsilon members, according to an article on job preparation in the fraternity’s magazine this year. It shows only Bank of America and Wells Fargo employing more.

Grand Smudge

Fraternities have become so good at filling Wall Street’s openings that firms can hire several alumni for each woman. There are at least four members among 14 associates at San Francisco-based private-equity firm Hellman & Friedman LLC, according to resumes posted to LinkedIn. Two of the 14 are female. Fraternity brothers outnumber women four to one in the analyst program at Peter J. Solomon Co., a New York investment bank founded by the former Lehman Brothers Holdings Inc. vice chairman. Spokeswomen for both companies declined to comment.

When those men and women make it to the top, Wall Street’s bosses have a secret society all their own with parties in Manhattan’s St. Regis Hotel. Kappa Beta Phi, founded before 1929’s stock-market crash, throws an annual bash where bankers and billionaires in tuxedos are entertained by neophytes who sometimes don ladies dresses and pumps. Officers called Grand Swipe, Grand Smudge and Grand Loaf lead revelers who’ve included former Goldman Sachs head Sidney J. Weinberg, American International Group Inc. CEO Robert Benmosche and Mary Schapiro, who ran the Securities and Exchange Commission until last year.

Cohen’s Pledge

The fraternity pipeline works in reverse, too, when those titans return to campus bearing gifts as large as billionaire Steven Cohen’s $2 million pledge to Penn’s Zeta Beta Tau. His SAC Capital Advisors LP pleaded guilty last month to insider-trading charges.

Donors rebelled when Trinity College in Hartford, Connecticut, made fraternities go co-ed after a drunk student broke his neck in a shallow Psi Upsilon pool, Bloomberg News reported in May. With a private-equity veteran, real estate investor and stock analyst among grads condemning the school’s efforts, Trinity President James Jones decided to resign a year earlier than planned.

Dissolving ZBT

Patrick Laterza, who works in wealth management for Citigroup, went to Binghamton University last year to try to preserve Zeta Beta Tau’s chapter there, e-mails obtained through public-records requests show. It lost recognition from the fraternity’s national organization and from the school, a State University of New York campus. A pledge complained he had been waterboarded, the e-mails show.

“The situation with the chapter that was there was from my understanding a financial one,” said Laterza, who manages $130 million according to his LinkedIn page. “We found out later that there were more issues which were then discussed, and in the end the fraternity was dissolved.”

The most valuable thing fraternities do to prepare their own for Wall Street isn’t controversial or secretive, according to some of the men who went from one to the other.

“It’s going to help you assimilate,” said Theta Chi alum Christopher Albrecht, who joined Deutsche Bank AG (DBK) after graduating from Lehigh University in 2007. Colleagues “want to hire people and bring up people you can get along with.”

Mock Interview

Matthew Benson, a senior at Penn, recalled last month how he was led through a mock interview in January by an older Alpha Epsilon Pi member while sitting near cabinets lined with empty whiskey bottles. The fraternity, now known as Apes, moved off campus in 2012 instead of complying with sanctions that followed hazing claims, according to a university official.

The senior timing Benson’s answers and telling him to smile more is now an analyst for a multibillion-dollar buyout firm. Benson landed an internship with a merger adviser, then a job offer for next year. He’s already doling out advice to younger fraternity members, including one preparing for a venture-capital interview.

“I was helping him craft his story,” he said. “The kids are actually very proactive.”

To contact the reporters on this story: Max Abelson in New York at mabelson@bloomberg.net; Zeke Faux in New York at zfaux@bloomberg.net

To contact the editor responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net

Starboard Value Adds to Pressure on Darden Restaurants

Another activist hedge fund is putting pressure on the conglomerate Darden Restaurants.

Last week, under pressure from a different hedge fund, Darden announced that it would spin off its Red Lobster chain and take several steps intended to bolster its stock price.

But in a filing on Monday, the investment firm Starboard Value said “the plan outlined by management falls significantly short of the actions required to maximize shareholder value,” adding that it was “disappointed with the continued poor financial performance” of the firm.

In the filing, Starboard Value said that it had taken a 5.6 percent stake in the chain, believing that the company was an “attractive investment opportunity.”

Since September, the hedge fund Barington Capital has called for breaking up the company into as many as three separate businesses. The fund said one company should contain the mature Red Lobster and Olive Garden brands; another should hold younger, faster-growing chains like LongHorn and Capital Grille; and a third should consolidate the chain’s huge real estate holdings into a real estate investment trust.

Barington has also called for cost savings of more than $100 million.

News of Starboard Value’s plan was first reported in The Wall Street Journal online.

Kinder Morgan to Buy Tanker Companies

HOUSTON--(BUSINESS WIRE)--Kinder Morgan Energy Partners, L.P. (NYSE: KMP) today announced it has entered into a definitive agreement to acquire American Petroleum Tankers (APT) and State Class Tankers (SCT) from affiliates of The Blackstone Group and Cerberus Capital Management for $962 million in cash. APT and SCT are engaged in the marine transportation of crude oil, condensate and refined products in the United States domestic trade, commonly referred to as the Jones Act trade.

APT’s fleet consists of five medium range Jones Act qualified product tankers, each with 330,000 barrels of cargo capacity. With an average vessel age of approximately four years, the APT fleet is one of the youngest in the industry. Each of APT’s vessels is operating pursuant to long-term time charters with high quality counterparties, including major integrated oil companies, major refiners and the U.S. Navy. These time charters have an average remaining term of approximately four years, with renewal options to extend the initial terms by an average of two years. APT’s vessels are operated by Crowley Maritime Corporation, which was founded in 1892 and is a leading operator and technical manager in the U.S. product tanker industry.

SCT has commissioned the construction of four medium range Jones Act qualified product tankers, each with 330,000 barrels of cargo capacity. The vessels are scheduled to be delivered in 2015 and 2016 and are being constructed by General Dynamics’ NASSCO shipyard. Upon delivery, the SCT vessels will be operated pursuant to long-term time charters with a major integrated oil company. Each of the time charters has an initial term of five years, with renewal options to extend the initial term by up to three years. Kinder Morgan will invest approximately $214 million to complete the construction of the SCT vessels.

“This is a strategic and complementary extension of our existing crude oil and refined products transportation business,” said John Schlosser, president of KMP’s Terminals segment. “Product demand is growing and sources of supply continue to change, in part due to the increased shale activity. As a result, there is more demand for waterborne transportation to move these products. We are purchasing tankers that provide stable fee-based cash flow through multi-year contracts with major credit worthy oil producers.”

“Blackstone and Cerberus are pleased to have founded and built American Petroleum Tankers into a market-leading Jones Act tanker company,” said Sean Klimczak, Senior Managing Director at Blackstone. “We have enjoyed our partnership with APT’s management team and wish them continued success with Kinder Morgan in this next phase of APT’s growth.”

The transaction, which is subject to standard regulatory approvals, is expected to close in the first quarter of 2014, at which time it will be immediately accretive to cash available to KMP unitholders. APT currently generates about $55 million of annual EBITDA. After completion of construction of the four SCT vessels, KMP expects combined annual EBITDA of approximately $140 million, which is an EBITDA multiple of 8.4 times. The general partner of KMP, Kinder Morgan, Inc. (NYSE: KMI), has agreed to waive its incentive distribution amounts of $16 million in 2014 and $19 million in 2015 and $6 million in 2016 to facilitate the transaction.

Kinder Morgan Energy Partners, L.P. (NYSE: KMP) is a leading pipeline transportation and energy storage company and one of the largest publicly traded pipeline limited partnerships in America. It owns an interest in or operates more than 54,000 miles of pipelines and 180 terminals. The general partner of KMP is owned by Kinder Morgan, Inc. (NYSE: KMI). Kinder Morgan is the largest midstream and the fourth largest energy company in North America with a combined enterprise value of approximately $105 billion. It owns an interest in or operates more than 82,000 miles of pipelines and 180 terminals. Its pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke and steel. KMI owns the general partner interests of KMP and El Paso Pipeline Partners, L.P. (NYSE: EPB), along with limited partner interests in KMP and EPB and shares in Kinder Morgan Management, LLC (NYSE: KMR). For more information please visit www.kindermorgan.com.

This news release includes forward-looking statements. These forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management, based on information currently available to them. Although Kinder Morgan believes that these forward-looking statements are based on reasonable assumptions, it can give no assurance that such assumptions will materialize. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include those enumerated in Kinder Morgan’s reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they were made, and except to the extent required by law, Kinder Morgan undertakes no obligation to update or review any forward-looking statement because of new information, future events or other factors. Because of these uncertainties, readers should not place undue reliance on these forward-looking statements.

Jos. A. Bank Rejects Men’s Wearhouse Bid

Jos. A. Bank on Monday said it would not accept the offer of $55 a share from the Men’s Wearhouse, which came from the company it had been trying to buy just weeks before.

The Men’s Wearhouse turned the tables on Jos. A. Bank Clothiers last month after being pursued for months. By turning around and chasing after its former suitor, the Men’s Wearhouse revived the so-called Pac-Man defense, a tactic that gained popularity in the 1980s.

But the Pac-Man defense rarely works. Of about 20 such attempts, only six have resulted in successful deals.

Using virtually the same reasoning that the Men’s Wearhouse did when it rejected Jos. A. Bank’s offer, the company said Monday that the offer was inadequate.

“The company’s board of directors concluded that the price proposed by Men’s Wearhouse significantly undervalued the company and its near and long-term potential and was not in the best interest of the company’s shareholders,” Jos. A. Bank said in a statement.

However, the offer of $55 a share represents a 32 percent premium above Jos. A. Bank’s share price before it made its bid for the Men’s Wearhouse.

“Our board undertook a thorough review and determined that the per share consideration in the proposal made to us by Men’s Wearhouse was simply not in the best interest of our shareholders,” Jos. A. Bank’s chairman, Robert N. Wildrick, said in a statement.

Instead, he said that Jos. A. Bank would continue to review other deals that might help the company.

Shares in the company were down 1.5 percent in premarket trading.

The Men’s Wearhouse could still come back and bid higher for Jos. A. Bank. Retail analysts liked the idea of a combination, and saw more merit in Men’s Wearhouse being the acquirer.

However, relations between the two companies soured over the course of the back and forth.

Men’s Wearhouse could not immediately be reached for comment.

Another round of Pac-Man may have to wait until the new year.

The Bitcoin Mines of Iceland

INTO THE BITCOIN MINES  |  On the flat lava plain of Reykjanesbaer, Iceland, near the Arctic Circle, you can find the Bitcoin mines, Nathaniel Popper reports in DealBook. There, more than 100 whirring silver computers, each in a locked cabinet and each cooled by blasts of Arctic air, are the laborers of the virtual mines where Bitcoins are unearthed. The custom-built machines, running an open-source Bitcoin program, perform complex algorithms 24 hours a day, seeking to win a block of 25 new Bitcoins from the virtual currency’s decentralized network.

Emmanuel Abiodun, 31, founder of the company that built the Iceland installation, called the computers “money-printing machines.” He is one of a number of entrepreneurs who have rushed, gold-fever style, into large-scale Bitcoin mining operations in just the last few months, as a speculative mania has helped push the price of Bitcoins higher. These entrepreneurs are making enormous bets that Bitcoin will not collapse, as it has threatened to do several times. If the system did crash, the fancy computers would be essentially useless because they are custom-built for Bitcoin mining.

Mr. Popper writes: “The computers that do the work eat up so much energy that electricity costs can be the deciding factor in profitability. There are Bitcoin mining installations in Hong Kong and Washington State, among other places, but Mr. Abiodun chose Iceland, where geothermal and hydroelectric energy are plentiful and cheap. And the arctic air is free and piped in to cool the machines, which often overheat when they are pushed to the outer limits of their computing capacity.”

The virtual currency’s true believers “are taking the long view â€" the one in which Bitcoin, despite the ups and down, keeps appreciating in value and eventually becomes a serious currency,” Nick Bilton writes in the Disruptions column on the Bits blog.

Paul Krugman, in his column in The New York Times, writes that the appeal of Bitcoin is similar to that of gold. “Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it’s high-tech and algorithmic, so it must be the wave of the future,” Mr. Krugman writes. “But don’t let the fancy trappings fool you: What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse. In tropics and tundra alike, we are for some reason digging our way back to the 17th century.”

FED TO CRACK DOWN ON RISK-SHIFTING DEALS  |  The Federal Reserve moved on Friday to curb a type of financial maneuver that banks can exploit to make themselves look stronger than they actually are, notifying big banks that it was taking aim at so-called risk transfer transactions, DealBook’s Peter Eavis reports. The Fed said in its guidance that it would “strongly scrutinize” risk-transfer deals that have a substantial impact on a bank’s balance sheet. Banks that have recently used such transactions include Citigroup, Credit Suisse and UBS.

“Supporters of these complex deals say that they allow banks to protect themselves from future losses on loans or other assets. But regulators are concerned that banks may at times use them to evade the stiffer regulations that have been introduced since the 2008 financial crisis,” Mr. Eavis writes. “While risk-transfer deals have been around for years, the temptation to use them has risen as regulators have required banks to increase their capital.”

INVESTMENT STRATEGY RISES FROM OBSCURITY  |  The successful maneuvering by the billionaire Carl C. Icahn with CVR Energy illustrates the enormous growth of an obscure but increasingly popular securities structure â€" the master limited partnership, or M.L.P. â€" and its ability to create huge personal wealth, DealBook’s David Gelles reports. Since the financial crisis, the popularity of M.L.P.’s has soared.

Mr. Icahn’s deal helps show why. The investor paid at least $2 billion last year for 82 percent of CVR, an oil refinery business, something he knew little about. He then tried to sell the company quickly and failed. Yet this year Mr. Icahn took advantage of an M.L.P. structure and used the company to inflate his already enormous wealth.

Mr. Gelles writes: “In January, CVR, under Mr. Icahn’s direction, placed its refineries into a new company, CVR Refining. The new company is structured as an M.L.P., a publicly traded partnership that pays no corporate tax and distributes most profit to investors. Thanks to those generous distributions, stock market investors are valuing M.L.P.’s at a significant premium to traditional corporations, so there was a good chance CVR Refining would do well as a public company.”

ON THE AGENDA  |  The Federal Reserve turns 100 years old today. Data on personal income and outlays in November is out at 8:30 a.m. Please note that the newsletter will go dark for the holidays, to resume on Jan. 2. The DealBook site, however, will be updated regularly with news and analysis during this time. See you in the new year!

HOW JPMORGAN EXPANDED IN ELECTRICITY  |  “The good news arrived in a confidential letter from the Federal Reserve Board in Washington. The nation’s biggest bank, JPMorgan Chase, had won the right to expand its reach in a lucrative business that has nothing to do with banking: electricity,” Gretchen Morgenson reports in The New York Times. “Areas like electricity are generally off limits to banks because of the risks involved. But with its June 2010 letter, the Fed let JPMorgan take an even bigger role selling electricity in California and the Midwest, saying the push would ‘reasonably be expected to produce benefits to the public that outweigh any potential adverse effects.’”

“Three months later, JPMorgan traders began a scheme to manipulate electricity prices, ultimately forcing consumers in those regions to pay more every time they flicked on a light switch or an air-conditioner, the Federal Energy Regulatory Commission subsequently contended. The story of how the Fed cleared the way for JPMorgan â€" a decision that brought many millions in profits to the bank â€" illuminates how the Fed has allowed the bank into a variety of markets for basic goods.”

Mergers & Acquisitions »

Plan for Tribune Spinoff Raises Concern for Newspaper Operations  |  “A plan by the Tribune Company to separate eight newspapers, including The Los Angeles Times and The Chicago Tribune, from its more profitable digital and television businesses could threaten their survival, staff members, industry analysts and a congressman said last week,” Ravi Somaiya reports in The New York Times.
NEW YORK TIMES

Jazz Deal for Gentium Shows Benefits of Inversions  |  A big reason that American companies relocate to places like Ireland is so that they can acquire companies on a tax-efficient basis. In agreeing to to buy Gentium, a drug maker, for about $1 billion, Jazz Pharmaceuticals took full advantage of that benefit.
DealBook »

Oracle to Buy Responsys for $1.5 Billion  |  The acquisition will extend Oracle’s reach into online marketing. The software maker allows brands to coordinate advertising across the web.
DealBook »

Talent Agency James Grant Being Prepared For Sale  |  James Grant, the British talent agency owned by private equity firm Gresham, is being prepared for a sale worth up to $100 million, The Sunday Times in London reports.
Sunday Times

New Owners for Spanish Meats Company  |  Shuanghui International Holdings of China and the Mexican frozen food company Sigma agreed on Monday to share ownership of the Spanish meat processor Campofrio, valuing it at $957 million, Reuters reports.
REUTERS

South Africa’s Telkom to Sell Internet Business  |  Telkom, the South African telecommunications company, said that it has agreed to sell its Mauritius Internet business for an undisclosed amount as part of its turnaround, Reuters reports.
Reuters

Edgar M. Bronfman, Former Seagram Chairman, Dies at 84  |  Edgar M. Bronfman, who built Seagram into an empire well beyond the liquor industry and was a champion for the rights of Jews, has died at the age of 84, writes Jonathan Kandell of The New York Times.

New York Times

INVESTMENT BANKING »

An Architecture Critic on the Towers of Billionaire’s Row  |  Michael Kimmelman writes in The New York Times that the shiny new buildings along 57th Street in Manhattan “are stirring some populist fury and prompting an argument: Do we need more public oversight when it comes to the city’s stratospheric architecture? Are we selling off our skyline to the plutocrats? Or are those who occupy these spaces serving up much needed tax revenue to the city?”

“There are no simple answers. But I believe there may be ways to thread the needle â€" to encourage ambitious buildings and also to curb bad design. First, however we must be clear-eyed about the options.”
NEW YORK TIMES

Reality Is Returning to the Market  |  “Let’s reflect on how remarkable the American stock market has been lately, and on how well it has been weathering the first few days of a late-December shift in Federal Reserve policy,” Jeff Sommer writes in the Strategies column in The New York Times. “And then let’s get used to worrying again, because stormier times are coming, probably fairly soon.”
NEW YORK TIMES

R.B.S. Denies Plan to Increase Salaries to Evade Bonus Rules  |  Royal Bank of Scotland denied that it is looking at broadly increasing base salaries for its bankers, in an effort to evade European rules intended to crack down on outsized pay packages, The Financial Times reports.
Financial Times

Goldman to Put Own Money in New Real-Estate Fund Despite Volcker  |  Despite passage of the Volcker Rule, Goldman Sachs has raised $1 billion for a new real-estate investment fund, in which it has agreed to contribute up to 20 percent of its own money, The Wall Street Journal reports. It can do so because real-estate loans were excluded from trading restrictions.
Wall Street Journal

Wells Fargo Poised for Wall Street Run  |  The California bank will start knocking more loudly on the door of the bulge-bracket Wall Street firms, asserts Antony Currie of Reuters Breakingviews.
REUTERS BREAKINGVIEWS

Beating Back Pain  |  When his back pain returned after more than 25 years, Tony Schwartz writes, he decided it was time to address his fears directly.
DealBook »

PRIVATE EQUITY »

Aareal Bank to Buy Rival From Lone Star for $468 Million  |  Aareal Bank, the German lender, plans to buy Corealcredit Bank from the private equity firm Lone Star Funds for 342 million euros, or about $468 million, Reuters reports.
Reuters

HEDGE FUNDS »

Hedge Fund Has No Plans to Participate in Tender Offer for Celesio  |  Elliott Management, the New York-based hedge fund founded by Paul Singer, reiterated Monday that it has no plans to participate in a tender offer by McKesson Corporation for the German pharmaceutical wholesaler Celesio, unless the deal is sweetened.
DealBook »

Hollywood Studios Unfazed by Flops  |  Despite a number of prominent wrecks at the box office this summer, when studios collectively released 17 blockbusters between May and the beginning of August, Hollywood has scheduled five films for wide release on Christmas Day, James B. Stewart writes in the Common Sense column in The New York Times. But one major studio, Sony Pictures Entertainment, which has been under pressure from the hedge fund manager Daniel S. Loeb, did cut its slate for next year.
NEW YORK TIMES

For a Hedge Fund Pioneer, a Tiger Fund Burning Bright  |  A so-called seeding fund overseen by Julian Robertson, the billionaire investor, is beating the industry average return this year by a wide margin, according to a person briefed on the matter.
DealBook »

Paulson Sold Washington Mutual Bonds After Suit  |  Paulson & Company, the hedge fund run by John A. Paulson, sold its bonds in Washington Mutual after JPMorgan Chase filed a $1 billion lawsuit against the Federal Deposit Insurance Corporation, The Wall Street Journal reports.
Wall Street Journal

Hedge Fund Returns Again Tracking Below Stocks  |  Hedge fund returns continue to track below stocks this year, with the average hedge fund up 8.2 percent this year, compared with a 21 percent rise in equities, Reuters reports.
Reuters

I.P.O./OFFERINGS »

Premier Foods of Britain Preparing Rights Offering  |  The British food maker Premier Foods is preparing a 300 million pound rights offering to its shareholders as it attempts to stave off Apollo Global Management, a major creditor, The Sunday Times in London reports.

Sunday Times

VENTURE CAPITAL »

In BlackBerry’s Backyard, a Snowier Silicon Valley  |  “Unlike some cities that suffered when a big local business faltered, as Rochester did with Kodak and Xerox, BlackBerry’s backyard of Waterloo still bubbles with economic energy,” Ian Austen reports in The New York Times.
NEW YORK TIMES

Apple Looks to Take Bite From World’s Largest Wireless Carrier  |  Apple has reached a deal to bring the iPhone to China Mobile, the world’s largest wireless carrier, in January, Eric Pfanner and Brian X. Chen of The New York Times write.

New York Times

Start-Ups Seeking to Cash In on Regional Food at Holidays  |  Specialty start-up companies are putting regional food, such as sourdough bread from San Francisco and pastrami from Katz Deli in New York, on the table during the holiday season, The Financial Times reports.
Financial Times

LEGAL/REGULATORY »

Tiffany Ordered to Pay $448.7 Million to Swatch  |  Tiffany & Company was ordered by a Dutch arbitration panel to pay $448.7 million to Swatch over a failed joint venture, Reuters reports.
Reuters

Swiss Banks Race to Meet U.S. Tax Deadline  |  Bloomberg News writes, “Switzerland’s 300 banks have enlisted an army of auditors, lawyers and in-house workers as they race to meet a Dec. 31 deadline on whether to seek U.S. amnesty for helping American clients evade taxes.”
Bloomberg

Banks Struggling to Design Volcker Compliance  |  Banks are having difficulty creating compliance programs that comply with the Volcker Rule, which bans banks from proprietary trading, The Financial Times reports.
Financial Times

Ally in $98 Million Settlement on Bias in Auto Loans  |  The Consumer Financial Protection Bureau found that 235,000 minority borrowers were paying up to $300 on average more in interest than white borrowers on loans arranged by auto dealers.
DealBook »

Year-End Means Lawyers Seeking Clients to Pay Up  |  As the year winds down, law firms in the United States are involved in a delicate dance with their clients: trying to get them to pay their bills, The Wall Street Journal reports.
Wall Street Journal

More Whistle-Blower Cases in 2013  |  Britain’s Financial Conduct Authority opened 72 percent more cases in the first 10 months of 2013 based on whistle-blower complaints than its predecessor regulator did in the prior year, The Financial Times reports, citing research by Kroll.
Financial Times