Alibaba Said to Be in Talks to Regain Stake in Payments Affiliate

The Alibaba Group, the Chinese e-commerce giant on the cusp of going public in the United States, is in talks with its Alipay payments affiliate about regaining a stake in the business, a person briefed on the matter said on Wednesday.

The two sides have been in discussions for nearly a year and a half, and no agreement is imminent, this person cautioned. Any pact would almost certainly be reached after Alibaba completes its initial public offering, which is expected to be one of the biggest ever.

And such a deal would still need to pass muster with the Chinese government, which has set out rules over foreign ownership of financial institutions.

Still, the prospect that Alibaba could again be formally reunited with its payment division would be of great interest to the Chinese Internet titan’s future shareholders.

Though technically a separate company, Alipay processes Alibaba’s e-commerce payments. It also houses Yu’E Bao, a money-market fund that now claims more than $80 billion worth of assets.

How the two came to be separate entities is a matter of some controversy. Three years ago, Alibaba’s founder, Jack Ma, split off Alipay in what he said was a way to stay compliant with government rules concerning foreign ownership of financial institutions. Yahoo, Alibaba’s biggest investor, complained, setting off a monthslong row that was eventually settled.

As part of that agreement, Alipay agreed to pay its onetime parent between $2 billion and $6 billion should it go public. Under the contours of one proposal currently being discussed between the two, Alibaba would receive a direct stake in the payments processor, potentially worth one-third of the company.

Mr. Ma currently owns just under 50 percent of Alipay, a stake several times larger than what he has in Alibaba itself. Other co-founders of Alibaba also own shares in the payments company.

A representative for Alibaba declined to comment. News of the discussions was reported earlier by The Wall Street Journal.

Abercrombie Settles Board Fight With Engaged Capital

Abercrombie & Fitch said on Wednesday that it had settled a proxy fight with the activist hedge fund Engaged Capital, agreeing to add four new independent directors to its board.

Under the terms of the agreement, the retailer said that it would nominate Bonnie R. Brooks, the vice chairman of the Hudson’s Bay Company; Sarah M. Gallagher, a former executive at Ralph Lauren; Diane L. Neal, the former chief executive of Bath & Body Works; and Stephanie M. Shern, a former global director of retail for Ernst & Young.

In return, Engaged agreed to end its bid for five seats on the board, including one for Ms. Neal.

The move will end a battle that has been contested for months between Abercrombie and Engaged, which argued that the retailer needed new blood on its board to help turn around a slump that has lasted for years.

Abercrombie had already instituted changes aimed at assuaging restive shareholders. Among them was splitting the roles of chairman and chief executive, which reduced the power of its longtime chief, Michael S. Jeffries, and adding three new directors to its board.

In a statement on Wednesday, Abercrombie noted that its 12-member board would now be almost wholly independent, save for Mr. Jeffries, and have seven directors who joined this year.

“Our new director nominees each bring strong and relevant backgrounds and will add valuable experience and perspective to the Abercrombie & Fitch board,” said Arthur Martinez, the retailer’s nonexecutive chairman.

Glenn Welling, the founder of Engaged, said: “We are very pleased to have worked constructively with the company to this end and are delighted with the addition of these four new independent directors with significant retail and apparel experience, who together with the other three new directors now make up a majority of the board.”

High Price in Utility Deal

Just about any way investors crunch the numbers, Exelon looks to be overpaying for Pepco.

The utility appears to be low-balling the projected cost savings from its purchase of Washington, D.C.-based Pepco for $6.8 billion. But modesty won’t fool regulators. They always demand a cut through lower electric bills. Yet even assuming Exelon is not showing all its cards, it will struggle to justify the premium it is offering.

Utilities routinely play down cost cuts from deals - or decline to estimate them at all. To do otherwise invites local utility regulators to insist that a chunk of the savings be passed directly to consumers. Yet even by such standards, Exelon is being coy. It says it will cut $250 million of costs over five years. On an annualized basis, that amounts less than 1 percent of the combination’s yearly $8 billion operating and maintenance budget. When Northeast Utilities hooked up with Nstar of Massachusetts, albeit in a merger of equals, it quietly put savings closer to 5 percent.

Given that Exelon also owns Baltimore Gas and Electric, near to Pepco’s operations, regulators in Maryland and Washington may feel justified in thinking Exelon is underestimating its ability to squeeze out savings. Unfortunately for Exelon’s shareholders, even if it were to match the achievements of Northeast Utilities-NSTAR they would still find themselves poorer.

Reducing operating and maintenance costs by 5 percent would create net present value of some $2.8 billion. But Exelon’s presentation assumes that only a third of net savings will be retained by investors. Even in this fantasy scenario, that would translate into a number that is still less than the $1.1 billion premium Exelon is paying for Pepco in cash.

The deal is not without strategic logic. Around 45 percent of Exelon’s earnings come from the unregulated wholesale power market - a risky and slow-growing business out of favor with investors. Pepco’s regulated transmission and distribution business would cut this to 35 percent.

Still, strategic shifts can be done with less sacrifice. Tiny premiums are not unusual in the utility sector. Duke Energy offered just a 4 percent bump over the undisturbed price for Progress Energy in 2011. It is hard to see why Exelon has been so generous to Pepco investors - and so parsimonious to its own

Christopher Swann is a Reuters Breakingviews columnist in New York. For more independent commentary and analysis, visit breakingviews.com.

What Bank of America’s Accounting Mistake Can Teach the Market

Mayra Rodríguez Valladares is managing principal at MRV Associates, a capital markets and financial regulatory consulting and training firm based in New York. She is also a faculty member at Financial Markets World and the New York Institute of Finance.

The fact that Bank of America neglected to correctly account for certain structured notes that it inherited when it took over Merrill Lynch should not have surprised the market. And it raises the question of what other bad news may be coming from the big banks.

There were several signals before this week that Bank of America and large banks might be having problems. First, structured products â€" whose eventual value at maturity varies based on the performance of something else, like a currency or stock index â€" are challenging to value. The more complex they are, the harder it is to even find data to properly value them and to measure their credit, market, operational and liquidity risks. Anyone who claims that valuing structured products and measuring their risks is easy is being blinded by the chase for yield.

In mid-January, Sarah J. Dahlgren, executive vice president of the Federal Reserve Bank of New York and chairwoman of the Senior Supervisory Group, wrote to the Financial Stability Board summarizing a study on banks’ exposure in a range of financial transactions with counterparties. The study, she said, found that ‘five years after the financial crisis, firms’ progress toward consistent, timely, and accurate reporting of top counterparty exposures fails to meet both supervisory expectations and industry self-identified best practices.”

Ominously, the study found that the “area of greatest concern remains firms’ inability to consistently produce high-quality data.” If banks cannot monitor counterparties and produce high-quality data, it is unlikely that they understand the true nature of their risks.

And in February, the board of governors of the Federal Reserve System announced a list of systemically important banks that could begin to publicly report their capital ratios under the advanced approach. This methodology allows banks to use their own internal data on probabilities of default and severity of losses to calculate their risks. Bank of America was conspicuously absent from the list. Typically, if a bank is not allowed to report under the advanced approach, it is experiencing challenges with corporate governance or internal controls or having problems collecting, aggregating and calculating data correctly and consistently.

Given the size and complexity of these big banks, there is no such thing as a small error. Bank of America’s accounting error led it to overstate its capital levels by $4 billion.

If Bank of America took five years to discover the true nature of its exposure to risk in structured products from Merrill Lynch, then what about the other big banks? Do they have strong enough management of their risks and good internal controls to detect accounting problems? Especially with structured products, it is worth analyzing whether the auditors â€" both internal and external â€" are getting enough information on how the banks value and measure their risks.

Given that Bank of America now has to resubmit its capital plan to the Fed, the market is likely to have even less trust in the Fed’s annual review of big banks’ capital plans.

Nor is that the only fallout. Bank of America’s problems also raise questions about the reliability of the large banks’ living wills â€" the reports that the banks submit to the Fed and the Federal Deposit Insurance Corporation explaining how, if they were to fail, they would be resolved in an orderly manner. Writing the living wills has been incredibly challenging for banks because they must have a deep comprehension of their institutions and understand where their risks lie. To do that, they need high-quality data.

The challenge for the Fed and the F.D.I.C. is huge. If the regulators were to discover that banks’ living wills were not credible, they would then be supposed to issue deficiency notices to banks and force the banks to rewrite the wills. But disagreements could arise between the Fed and the F.D.I.C., or even inside each regulator, as they tried to find a balance between making sure the banks were on firm financial ground and demanding too much of the banks.

And as soon as the market heard that banks had to rewrite their living wills or that a deadline for delivering a living will was extended, the markets would react to that, possibly aggravating the bank’s financial condition. And what if a bank received a vague deficiency note from regulators, possibly as soon as the next few weeks? Bank officials would struggle to figure out what to do, since some living wills for 2014 are already due this summer.

Complicating matters further, both for banks and regulators, is that there are many unsettled issues in the resolution process outlined in Dodd-Frank. If a legal banking entity failed, for instance, it is not clear how much its parent would have to do.

Regulators also fear that in trying to resolve a bank in an orderly manner, there could be a fire sale on repurchase agreements. Counterparties in a derivatives contract would probably rush to the failing institutions seeking to terminate their contracts, similar to what happened in the collapse of Lehman Brothers in 2008. That would aggravate the failing bank’s situation even more. An additional problem and one of the biggest challenges would be cross-border issues with foreign regulators.

Dodd-Frank’s main objective for living wills is to reassure the market that a bank can be resolved without a government bailout. Until banks are more transparent and living wills are made public, the market is buying banks’ bonds and stocks on faith.

Senators Express Concern on Reverse Mortgage Rules

Two prominent lawmakers are trying to protect the rights of heirs who inherit homes from their parents.

In a letter to Shaun Donovan, the secretary of the Department of Housing and Urban Development, Senator Charles Schumer and Senator Barbara Boxer urged the agency to clarify the rules around reverse mortgages, a type of loan that has increasingly saddled middle-age children with the mortgages of their parents.

Referencing an article from March in The New York Times, the senators said they were disturbed to read that “an increasing number of heirs are facing foreclosure on their homes after receiving inaccurate and confusing information on their options following a reverse mortgage borrower’s death.”

Reverse mortgages allow borrowers age 62 and older to borrow against the future value of their home, and do not need to be paid back until the borrower moves or dies. When the latter happens, heirs are entitled to 30 days to decide what they want to do with the property, and have up to six months to put financing in place. They are also entitled to satisfy reverse mortgages by paying 95 percent of the value of the home when the loan becomes due.

That discount is especially important now, given that many homes dropped in value after the financial crisis.

For many elderly borrowers, reverse mortgages offer a way to stay in the homes they spend years working to afford. But a growing list of middle-aged children are now discovering that what once appeared to be a saving grace has saddled them with unexpected debt.

Many reverse mortgage lenders have complicated the issue by aggressively pushing to foreclose on a home unless the mortgages are paid in full, and homeowners are not always aware of their rights.

Ms. Boxer and Mr. Schumer are asking HUD to clarify those rights after the agency issued what the senators deemed to be a confusing letter on the topic in 2008. The letter could be interpreted as limiting a lender’s ability to collect less than 100 percent of a mortgage balance.

A representative from the housing department could not be reached for comment.

Regulator’s Report Discovers More Issues With Bank Foreclosure Practices

A new report by a national regulator confirms that the country’s biggest banks committed widespread errors in dealing with homeowners who faced foreclosures during height of the mortgage crisis.

The report, released Wednesday, examined the Independent Foreclosure Review process, which was ordered after widespread evidence emerged about the way banks had mistreated homeowners who had defaulted on their mortgage payments.

At least 9 percent of the errors made by banks resulted in homeowners who were improperly denied loan modifications that would have staved off foreclosures, the report said.

The review also found that banks improperly charged more than half of the homeowners certain fees during the foreclosures process.

The findings were revealed in a report by the Office of the Comptroller of the Currency, which ordered the now-halted Independent Foreclosure Review. The new report offers a snapshot of the problems that mortgage holders experienced during the crisis, but it does not provide a complete picture of the morass that millions of homeowners faced when they fell behind on their mortgage payments in 2009 and 2010.

Regulators cut short the review last year, after independent consultants had looked at only a fraction of the mortgage files. Faced with criticism that the reviews were taking too long and costing too much in consulting fees, regulators decided to halt the review and negotiated a $10 billion settlement with the banks. Regulators reached that figure by estimating that banks, on average, had an 6.5 percent error rate when servicing mortgages.

The report released Wednesday, however, shows that banks were even slower than previously believed after they were ordered to review their files.

Bank of America, for example, had reviewed only 6 percent of its files, revealing a financial error rate of 8.9 percent. Wells Fargo had looked at about 9.6 percent of its records, finding an error rate of 11.4 percent. MetLife didn’t complete any reviews, but was still required to pay $85 million to compensate homeowners, based on the average estimate of suspected errors in the industry.

Since regulators required the banks in 2011 and 2012 to undertake the independent foreclosure review, the program has been a lightning rod for critics. Members of Congress and other critics say halting the review prematurely prevented regulators from revealing the full extent of the errors.

The new report shows that error rates at some banks were even more severe. PNC, a bank that had finished almost half of its review, reported an error rate of roughly 24 percent.

But another bank, Onewest, which was formerly IndyMac, the California bank that failed in July 2008 under the weight of soured real estate loans, was allowed to complete all of its reviews and had made errors in only 5.6 percent of its files.

The report by the Office of the Comptroller of the Currency comes a few days after a government watchdog criticized the way regulators negotiated certain aspects of the settlement.

In particular, the Government Accountability Office said this week that regulators failed to demand specific terms for $6 billion in foreclosure prevention measures that the banks agreed to undertake.

Many the banks told G.A.O. investigators that they could satisfy the terms of the settlement without taking on any additional prevention measures.

Regulators had discovered many issues with the way banks had handled foreclosures during the aftermath of the financial crisis, including bungled modifications and the practice of robo-signing, where reviewers signed off on mounds of foreclosure paperwork without verifying them for accuracy. Other errors ranged from wrongful foreclosures to improper fees charged to homeowners.

The settlement between the banks and regulators included $3.9 billion in cash that is supposed to be paid to 4.4 million homeowners. Banks are also required to provide an additional $6 billion in foreclosure prevention measures.

Energizer Split Leaves Biggest Problem Intact

Energizer’s split into household and personal care companies should improve the $7 billion company’s focus. It could also make one of the newly independent businesses an acquisition target. But the proposed transaction doesn’t address the batteries-to-tampons conglomerate’s bigger challenge: mustering more resources to take on industry gorilla Procter & Gamble.

Energizer shares jumped on Wednesday after the announcement of the plan to separate the company’s battery business from its Playtex feminine care and Schick razor brands. The bump came despite a slump in quarterly sales and only a modest gain in profit.

The company, spun off from the Ralston Purina conglomerate in 2000, has been struggling to find the right strategy. The battery business is declining, and though the outlook for tampons and razors is a bit brighter, P.&G.’s Duracell batteries, Always tampons and Gillette razors present stiff competition. Energizer has cut costs to make up for weak sales but also faces pressure to spend the savings on a marketing arms race.

A split would free up management time and probably unlock some hidden value. Energizer’s forward enterprise multiple of eight times is far less than that of its consumer peers, which trade on closer to 11 times earnings before interest, tax, depreciation and amortization, or Ebitda.

Assuming the battery business, which accounts for a little under half Energizer’s Ebitda, traded on a conservative multiple of seven times and that tampons and razors could, with a potential acquisition premium, reach 12 times enterprise value to Ebitda, then the sum of the parts might exceed the value of the current whole by about 20 percent.

There are costs to that strategy, though. For starters, the independent businesses would lack Energizer’s clout with retailers. And the personal care segment could no longer rely on battery profits to help fund new product development and marketing.

The current company already struggles to compete with P.&G., whose $84 billion in annual revenue is more than 18 times Energizer’s. It’s tough to see two smaller enterprises wrestling the 800-lb gorilla into submission.

Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Take My Buyout, Please …

Four decades ago, Thomas H. Lee was one of the pioneers of leveraged buyouts.

But Mr. Lee, who accepted an award for philanthropy on Tuesday evening at an event organized by the UJA-Federation of New York, had an alternate explanation for how the private equity business began â€" one that might have been delivered by a financially savvy Borscht Belt comedian.

“I thought I would tell you about the first buyout,” Mr. Lee said, with deadpan humor. “It happened at a great event like this. A great man was being honored.”

The man, overcome with gratitude, promised that he would give his new son-in-law a 40 percent stake in his company, the joke went. True to his word, he bestowed the stock certificate the following morning. He then offered the young man a role in the company. Sales? Manufacturing? Accounting? But none was to the son-in-law’s liking.

Stumped, the father-in-law asked what the young man had in mind, Mr. Lee went on.

“He says, ‘Well, why don’t you buy me out?’”

The crowd roared. Mr. Lee accepted an award named for Jack Nash, a financier who helped create the modern hedge fund business. The UJA-Federation gala, known as the “private equity recognition event,” raised $1.1 million.

The room in the St. Regis Hotel in Manhattan was filled with private equity and hedge fund types, in addition to representatives of the UJA-Federation, a charitable organization focused on Jewish philanthropy. The guests ate sushi and mini tofu-based ice cream cones.

“For an extraordinary asset manager, who’s that witty?” Bruce Richards, the chief executive of Marathon Asset Management, said in an interview after the speeches. Mr. Lee, he said, “takes the cake.”

Mr. Lee â€" or “Tomcat,” as he called himself, because he had “nine different lives” â€" peppered his remarks with wry humor.

One of these lives was as a philanthropist. Another was his life as a husband. And as a father. And as a hypochondriac. “I haven’t told you about my gravestone,” he said. “It’s going to say: ‘I told you I was really sick.’”

Mr. Lee, who founded a major private equity firm in Boston before moving to New York, poked fun at his former marriage; at George Steinbrenner, the deceased owner of the Yankees; and at the UJA-Federation itself.

“46 years ago I got married in this room,” said Mr. Lee, whose current wife, Ann Tenenbaum, was sitting nearby. “It was one of the worst nights of my life.”

Using the term for investors in private equity funds, he recalled something he said he had heard in New York. “You don’t know how limited you can be until you’ve been a limited partner of George Steinbrenner,” Mr. Lee said.

He took the joke one step further.

“So, you don’t know how well you can be solicited until the UJA comes calling,” Mr. Lee said. “But after all, it’s a call that I welcome.”

Troubled-Mortgage Funds Are on the Rise, but Face Headwinds

In the world of hedge funds, distressed-mortgage funds are suddenly hot, but it is unclear whether the strategy will live up to the marketing hype.

Donald R. Mullen Jr., an architect of Goldman Sachs’s subprime mortgage trade during the housing bubble, is raising $1 billion for a fund to be managed by his investment firm, Pretium Partners. Deepak Narula’s Metacapital Management also plans to start a fund to invest in delinquent mortgages, said a person briefed on the matter who was not authorized to speak publicly.

Both Mr. Mullen and Mr. Narula are jumping into an increasingly crowded space. The hedge funds Ellington Management Group, One William Street Capital and Angelo, Gordon & Company are either already in the market or planning their own funds. Other institutional investors that are active in the so-called nonperforming loan market include the Blackstone Group, Oaktree Capital and Lone Star Funds. Bloomberg News first reported about Metacapital, which has traditionally invested in mortgage securities and a few years ago was one of the top-performing hedge funds, moving into home loans.

The appeal of the distressed-mortgage market is understandable for managers looking to generate above-normal returns for their wealthy investors. Even though home prices have rebounded some in many areas hardest hit by the housing bust, there are still more than four million loans on which borrowers are delinquent. Hedge fund managers are wagering that after buying some of these troubled home loans at a substantial discount, they can reach an agreement to restructure the loans in a way that allows borrowers to resume payments â€" generating sufficient cash flow and decent returns.

A marketing document for Mr. Mullen’s distressed-mortgage fund projects some stellar performance. The fund, depending on the firm’s rate of success in restructuring troubled mortgages, expects to generate a net internal rate of return of 7 to 20 percent. A person close to the fund but not authorized to speak publicly said Mr. Mullen’s firm estimates returns at the higher end of that range, after paying fees and expenses.

But the performance of a six-year-old distressed-mortgage fund managed by Selene Investment Partners suggests that investors looking to sink money into a nonperforming-loan fund might want to temper their expectations a bit. The Selene Residential Mortgage Opportunity Fund 1 has posted good but not eye-popping returns.

The Selene fund, managed by a firm led by Lewis S. Ranieri, one of the early pioneers of the mortgage-backed securities market, has generated a net internal rate of return of 8.3 percent as of the end of 2013, according to a March investor letter.

An 8.3 percent internal rate of return after fees and expenses for a credit-oriented fund is not bad given the current 2.7 percent yield on a 10-year Treasury note. But the Selene fund was actually performing even better a few years ago. A July 2011 memorandum from a pension-consulting firm reported that the fund had a net internal rate of return of 11.4 percent. The fund’s gross return, before fees and expenses, was 19.8 percent.

An investor in the Selene fund who did not want to be identified said the performance of the fund had declined because the discount at which distressed mortgages can be purchased has narrowed. The performance has also suffered some as the fund has shrunk in recent years with the sale of restructured loans and other assets.

Meanwhile, an executive with another firm that invests in delinquent mortgages said a realistic rate of return for such a fund in the current market was in the “high single-digit, low double-digit” range. The executive did not want to be identified while commenting on potential competitors.

Selene, which declined to comment, is winding down its Selene 1 fund, as it said it would do when it raised about $826 million from investors in 2008 and 2009. At its peak, the fund managed about 7,400 mortgages with a face value of $1.93 billion. The fund now manages 1,332 loans that are valued at $127 million. To date, the Selene 1 fund has distributed $920 million to its investors in connection with the winding-down process.

But Mr. Ranieri’s firm is not walking away from the distressed-mortgage space. The firm still manages a second delinquent-mortgage fund it started in 2010.

Intrade Co-Founder Opens Fantasy Sports Site

The online betting and prediction market Intrade shut down last year after discovering financial problems and running afoul of regulators.

But now, a co-founder of Intrade, Ron Bernstein, is hoping he will have better luck in a different arena: fantasy sports.

His new site, Tradesports.com, which licenses Intrade’s technology, announced its public testing period on Wednesday. By styling itself as a fantasy sports site, the company hopes to avoid the kind of regulatory trouble that hastened Intrade’s demise.

Tradesports, which is based in New York, is relying on an exemption for fantasy sports in a 2006 law that cracked down on online gambling. Tradesports says it qualifies because it is offering games of “skill,” as opposed to luck.

“The Intrade model was just too gray,” Mr. Bernstein said in a recent interview. But he added that “the idea is so good, we couldn’t just let it go.”

For Intrade, which rose to prominence during the 2012 presidential race, as users wagered on the outcomes of primaries and congressional elections, the end came quickly. The company, based in Ireland, was accused that November by the Commodity Futures Trading Commission of offering contracts outside traditional exchanges and without regulatory approval. Intrade closed its site to United States residents.

The following March, after its outside accountants said they had found “significant financial irregularities in the internal accounts,” Intrade halted trading and froze customer accounts. It soon faced the possibility of liquidation because of a cash shortfall.

Thanks to a settlement in November with the estate of John Delaney, Intrade’s chief executive who died in 2011 while climbing Mount Everest, Intrade has made its customers whole, Mr. Bernstein said. The company otherwise has been largely dormant.

Mr. Bernstein, who helped start Intrade in 1999 and left in 2003, returned to the company after Mr. Delaney’s death. He said he was still planning legal action related to Intrade, though he would not go into detail. “We’re not the defendants,” he said. “We’re the plaintiffs.”

But his focus now is on Tradesports, which has been operating in a private testing mode for the last few weeks. With the new site, Mr. Bernstein is trying to combine real-time trading - a hallmark of Intrade - with principles of fantasy sports.

The site features various “contests,” each centered on a real-life sports game. Players, after paying an entry fee, get to buy and sell different prediction contracts, using fantasy money. The contracts might include, for example, that the Miami Heat will beat the Charlotte Bobcats; that more than a certain number of points will be scored in the game; or that LeBron James will score more than a certain number of points.

To ensure that the contest is one of skill and not chance, the site requires players to trade at least 200 shares of at least three different contracts. The winner or winners of the contest - those with the best outcome across their contracts - get real money as a prize. The company makes money when the entry fees exceed the advertised prizes.

The site may still attract the interest of the authorities. But embracing a fantasy sports model may serve it well, according to I. Nelson Rose, a professor at Whittier Law School who is an expert on laws related to gambling.

“Fantasy sports has always been a problem for law enforcement,” he said. “As a practical matter, law enforcement doesn’t want to go after fantasy sports because it’s too hard to prove that it’s actually predominantly chance.”

Rajiv Sethi, a professor of economics at Barnard College, who closely followed the downfall of Intrade, said that after testing Tradesports, he was impressed by how different it was from Intrade.

“It’s more like a chess tournament or a road race where you pay to enter - or bingo, really,” he said. “Except in bingo, there’s no skill involved.”

Mr. Bernstein, a former trader, said that while he had consulted legal counsel about the new site, he had not spoken with regulators about it. But he said he was confident that the data-rich nature of sports helped ensure the contests would be based on skill.

A spokesman for the trading commission declined to comment.

In the future, Mr. Bernstein said, he could imagine Tradesports expanding to include predicting the outcome of the Oscars or “anything that can be answered with a yes or no question.”

But the scope will be far more limited than that of Intrade, which ran into trouble with the trading commission by offering contracts on whether certain events, including specific acts of war, would occur by a certain date. Political elections, for example, will probably not be a feature of Tradesports.

The trading commission’s action against Intrade has not yet been resolved. And Mr. Bernstein is hoping to avoid having to deal with the agency again. “Different rules for different regulatory environments that have to be complied with,” he said.

Energizer to Split in Two

After years of buying up brands, Energizer Holdings has decided not to keep on going as a single consumer products conglomerate.

The company said on Wednesday that it plans to divide itself into two publicly traded concerns. One would contain its household products like Energizer and Eveready; the other would house personal care offerings like Schick razors and Hawaiian Tropic sunscreen.

The move reflects the latest effort by conglomerates to improve their shareholder value by splitting themselves apart, creating smaller and more focused companies.

It’s also the latest evolution of Energizer, which became an independent company when it was spun off from Ralston Purina 14 years ago.

“Since becoming an independent company in 2000, Energizer has built two successful divisions and each is now well-suited to realize its full potential on a standalone basis,” Ward M. Klein, Energizer’s chief executive, said in a statement. “We expect that Household Products will be well-positioned to leverage its leading brands and product portfolio to generate significant cash flows and the Personal Care business has achieved scale to be able to enhance its focus on continuing innovation and to drive top-line and market share growth.”

After the separation, Mr. Klein will become the chairman of the personal care company, while David Hatfield, the unit’s chief executive, will continue in that position.

J. Patrick Mulcahy, Energizer’s chairman, will play that role for the household products company, while Alan Hoskins, the division’s chief executive, will become chief executive of the standalone business.

Separately, the company said that its earnings for the quarter that ended on March 31 rose 16 percent, to $98.5 million. Net sales fell 3 percent to $1.06 million, which the company attributed to lower sales of household products and a shift in delivery of sun care products because of the timing of Easter.

Energizer is receiving advice from Goldman Sachs and the law firms Wachtell, Lipton, Rosen & Katz and Bryan Cave.

Countering ‘Too Big to Jail’

“Federal prosecutors are nearing criminal charges against some of the world’s biggest banks, according to lawyers briefed on the matter, a development that could produce the first guilty plea from a major bank in more than two decades,” Ben Protess and Jessica Silver-Greenberg write in DealBook. In doing so, prosecutors are looking to address public outrage and alter the belief that Wall Street institutions are “too big to jail.”

Prosecutors in Washington and New York have met with regulators about how to criminally punish banks without putting them out of business and damaging the economy. “The new strategy underpins the decision to seek guilty pleas in two of the most advanced investigations: one into Credit Suisse for offering tax shelters to Americans, and the other against France’s largest bank, BNP Paribas, over doing business with countries like Sudan that the United States has blacklisted. The approach applies to American banks, though those investigations are at an earlier stage,” Mr. Protess and Ms. Silver-Greenberg write.

The discussions with regulators “offer a lens into the political and legal minefields that prosecutors navigate when investigating big banks,” Mr. Protess and Ms. Silver-Greenberg write. Before, fears that indicting Wall Street would be detrimental to the financial system shaped prosecutors’ thinking. But Attorney General Eric H. Holder Jr. and Preet Bharara, the United States attorney in Manhattan, are now signaling a change in course.

 

ALSTOM BACKS G.E. BID  |  General Electric and Alstom, the French industrial giant, said on Wednesday that G.E. is ready to acquire Alstom’s energy business in a $13.5 billion deal, David Jolly writes in DealBook. But Alstom left open the possibility of a deal with Siemens, Germany’s largest diversified industrial group, and said it would establish a committee of independent directors to review G.E.’s proposal before the end of May.

Since news of the talks between Alstom and G.E. leaked last week, the French government has been seeking to force Alstom’s chief executive, Patrick Kron, to put the brakes on a deal, Mr. Jolly writes. Arnaud Montebourg, France’s economic minister, has demanded that Alstom consider a proposal from Siemens for an asset swap. But Mr. Kron and the company’s controlling shareholder, Martin Bouygues, have favored the G.E. proposal.

TOP OFFICER AT BARCLAYS IN AMERICA IS LEAVING  |  Barclays announced on Tuesday that Hugh E. McGee III, head of the bank’s business in the United States and one of the leaders who spearheaded an ambitious growth campaign, is leaving the bank on Wednesday, Chad Bray and Michael J. de la Merced write in DealBook. Mr. McGee’s departure â€' he is the latest senior executive to leave the bank in the last two years â€' comes as Barclays is moving to shrink its investment bank’s size and goals.

Regulators are requiring foreign banks to keep more of their assets in the United States even as Barclays looks to reshape its business and cut costs. At the same time, Barclays executives have been forced to defend the bonus payments in the investment banking unit to its shareholders and the public. In a statement, Mr. McGee said, “My focus has always been on clients, but given the need for Barclays leadership to focus on regulatory issues for the foreseeable future, I have decided that it is time for me to move on to new challenges.”

ON THE AGENDA  |  The ADP private payroll report is out at 8:15 a.m. The initial estimate of first-quarter G.D.P. is released at 8:30 a.m. The Federal Reserve’s policy-making committee makes an announcement at 2 p.m. after concluding its two-day meeting. Alan Greenspan, a former Federal Reserve chairman, is on CNBC at 4:30 p.m. The Carlyle Group releases first-quarter earnings before the bell.

On the Hill: The House Subcommittee on Financial Institutions and Consumer Credit holds a hearing at 10 a.m. entitled “Examining How Technology Can Promote Consumer Financial Literacy.”

A LOOK AT STOCK COMPENSATION  |  Eye-popping paydays for corporate leaders are nothing new. But the bulk of executive pay is often the result of good fortune rather than individual performance, Steven M. Davidoff writes in the Deal Professor column. Such has been the case for Marissa Mayer, the chief executive of Yahoo, who had received compensation worth potentially $214 million by the end of last year, most of which had little to do with her company’s performance.

Instead, her good fortune stems from Yahoo’s stake in the Chinese Internet giant Alibaba. To lure Ms. Mayer away from Google in 2012, Yahoo awarded her a generous pay package that included millions of dollars in restricted stock and options. Since then, the enthusiasm over a likely initial public offering by Alibaba has driven up Yahoo’s stock, and, as a result, the value of her pay package has increased. While Ms. Mayer does have some achievements at Yahoo, Mr. Davidoff writes, “Alibaba has most likely added most of the money to Ms. Mayer’s pocket.”

 

Mergers & Acquisitions »

Volkswagen Extends Offer to Acquire Control of Scania  |  The German company is seeking control of at least 90 percent of the Swedish truck maker’s shares to enact so-called squeeze-out provisions, which would allow it to force the remaining shareholders to sell their shares.
DealBook »

Alliant Techsystems’ Break-Up and the Return of the Morris Trust  |  Alliant Techsystems chose to break itself apart through a rarely used corporate maneuver known as the Morris trust, meant to avoid incurring taxes. DealBook »

Prana Living, a Yoga Gear Maker, Is Sold to Columbia Sportswear  |  Prana will join Columbia’s stable of sports apparel brands, as health and lifestyle companies find a booming market. DealBook »

The Quirk That Bolsters Allergan’s Defense  |  In any maneuvering around a proxy contest, the $45.6 billion takeover target could have an advantage â€" as well as time, Steven M. Davidoff writes in the Deal Professor column. Deal Professor »

Pfizer Most Likely Just the Tip of the Tax Sword  |  The biggest charm of Pfizer’s offer for AstraZeneca lies in switching to a lower-tax domicile, a strategy that is sure to be duplicated, Robert Cyran writes for Reuters Breakingviews. DealBook »

How Tax Laws Distort the Pfizer Deal  |  We don’t know if Pfizer is targeting a British rival because the combined firm will be more efficient or because of the tax savings, Victor Fleischer writes in the Standard Deduction column. DealBook »

INVESTMENT BANKING »

BNP Paribas Warns $1.1 Billion Might Not be Enough to Cover U.S. Fines  |  The French bank BNP Paribas, which reported a 5 percent rise in first-quarter profit on Wednesday, said there was a “high degree of uncertainty” about the nature and penalties it might face in an investigation by American prosecutors into whether it processed payments for countries facing United States sanctions, including Iran. DealBook »

Britain Outlines Stress Test for Its Banks  |  The Bank of England says banks will have to have enough capital to withstand 12 percent unemployment and a 35 percent decline in housing prices. DealBook »

Santander Offers $6.5 Billion to Buy the Rest of Its Brazil Unit  |  Santander announced a deal to acquire the 25 percent of Santander Brasil that it did not already own for about $6.5 billion. DealBook »

Barclays Said to Form ‘Bad Bank’  |  Barclays of Britain is planning to move its commodities division into a so-called “bad bank” of unwanted assets and units, which will be overseen by Eric Bommensath, the co-chief executive for corporate and investment banking, Bloomberg News writes, citing an unidentified person familiar with the situation. BLOOMBERG NEWS

PRIVATE EQUITY »

Settling the Bets of the Private-Equity Megadeal’s Golden Age  |  Energy Future Holdings, which lost billions of dollars as natural gas prices fell, will become one of the largest Chapter 11 filings in corporate history. DealBook »

A Texas Bankruptcy Seeks a Home in Delaware  |  Energy Future Holdings, a company concentrated in Texas, turned to a Delaware court for its bankruptcy case, prompting an objection, Stephen J. Lubben writes in the In Debt column. DealBook »

Following K.K.R. on Twitter  |  Kohlberg Kravis Roberts, the oldest of the giant private equity firms, is dipping a toe into social media. DealBook »

HEDGE FUNDS »

Emails Show Concern on Sotheby’s Board  |  Directors of Sotheby’s have expressed concern about compensation and the board’s performance, according to emails disclosed in a dispute with Daniel S. Loeb. DealBook »

Elliott Says Argentina Radio Silent on Talks  |  The hedge fund Elliott Management said Argentina had not responded to efforts to negotiate settlements tied to bonds from the country’s $95 billion default in 2001, Bloomberg Businessweek writes. BLOOMBERG BUSINESSWEEK

I.P.O./OFFERINGS »

Big Chinese Pork Producer Cancels Its $1.9 Billion I.P.O.  |  The WH Group, which owns Smithfield Foods, decided to cancel its initial public offering of stock in Hong Kong because of lackluster demand. DealBook »

Withdrawn Chinese I.P.O. Is the Least Bad Outcome  |  Delaying the offering gives the pork producer WH Group time to further integrate Smithfield and prove that it is worth a big valuation, Una Galani of Reuters Breakingviews writes. DealBook »

Revenue Up at Twitter, but Growth Is a Worry  |  In its second earnings announcement as a public company, Twitter said on Tuesday that it had more than doubled revenue, beating its own forecasts and the expectations of investment analysts, The New York Times reports. But Wall Street, it appears, is more worried about Twitter’s ability to add users and keep them engaged than about its ability to increase revenue. NEW YORK TIMES

British Parliament Berates Officials on Royal Mail I.P.O.  |  Both Conservative and Labour ministers attacked Vince Cable, the British business secretary, saying the initial public offering left as much as 1.2 billion pounds on the table. DealBook »

VENTURE CAPITAL »

SOLS, a 3-D Printing Start-Up, Raises $6.4 Million  |  The investment in SOLS Systems, an eight-month-old company that makes 3-D-printed custom orthotics, was led by an existing investor, Lux Capital, and a new one, Founders Fund. DealBook »

Tealium, an Ad Technology Start-Up, Raises $20 Million From Silver Lake  |  Tealium, which aims to help companies manage digital marketing tools like website tags, said the new financing came in the form of debt, rather than an equity investment. DealBook »

Doximity, an Online Network for Doctors, Raises $54 Million  |  The money, which brings Doximity’s total financing to $81 million, highlights investor appetite for relatively specialized social networks. DealBook »

Airbnb Takes to the Barricades  |  Airbnb released a petition over the weekend that aims to put pressure on Eric T. Schneiderman, the New York attorney general, who is battling Airbnb in court for the names of 15,000 hosts in the city and other related data, the Bits blog writes. Left unmentioned is the fact that Airbnb is valued at $10 billion, more than the Hyatt Hotels Corporation. NEW YORK TIMES BITS

LEGAL/REGULATORY »

New York State Makes New Efforts to Combat Payday Lenders  |  Benjamin M. Lawsky, New York State’s top financial regulator, is sending cease-and-desist letters to 20 companies suspected of making illegal payday loans, 12 of which appear to use debit card information to do so. DealBook »

Alliance Battles to Save Fannie and Freddie  |  Bruce R. Berkowitz’s mutual fund, an investor in Fannie Mae and Freddie Mac, is helping a group that supports the two companies, which lawmakers are trying to wind down. DealBook »

Slow Going on Overhaul of Mortgage Finance  |  The Senate Banking Committee is drafting a bill that would dismantle Fannie Mae and Freddie Mac and create a federal regulator called the Federal Mortgage Insurance Corporation, The New York Times writes. NEW YORK TIMES

2 Rulings May Curb Lawsuits Over Patents  |  The Supreme Court’s decision that existing law was too rigid should help cut the number of abusive or coercive patent suits brought by so-called patent trolls, The New York Times reports. NEW YORK TIMES

Newest Economic Data May Be Dull, but That’s Good  |  There are lots of important reports coming out this week, but don’t expect much excitement. Sometimes dull can be delightful, Neil Irwin writes on The Upshot. NEW YORK TIMES UPSHOT

Utility Operator Exelon to Buy Pepco for $6.8 Billion

The utility operator Exelon agreed on Wednesday to buy Pepco Holdings for $6.8 billion in a bid to strengthen its operations on the East Coast.

Under the terms of the deal, Exelon will pay $27.25 a share in cash, a nearly 20 percent premium to Pepco’s closing share price on Tuesday.

The transaction is the latest by Exelon, the Chicago-based utility and serial deal maker. Buying Pepco will add the smaller power company’s operations in New Jersey, Delaware, Maryland and Washington to Exelon’s existing East Coast operations.

The combined Exelon and Pepco businesses will have about 10 million customers.

“Exelon is one of the most respected energy companies in the country, and it is committed to building on the progress our team has made over the last few years to improve system reliability and customer satisfaction,” Joseph M. Rigby, Pepco’s chairman and chief executive, said in a statement.

The deal will be financed with cash on hand, $7.2 billion in financing lined up by Barclays and Goldman Sachs and newly issued Exelon stock.

As part of the transaction, Exelon agreed to reserve $100 million for a customer investment fund for the areas already served by Pepco, money that could be used for assisting lower-income customers or providing rate credits.

The acquirer also agreed to $50 million in charitable contributions throughout Pepco’s service areas for at least a decade.

Exelon was advised by Barclays, Goldman Sachs, Loop Capital Markets and the law firm Kirkland & Ellis.

Pepco was advised by Lazard, Morgan Stanley and the law firms Sullivan & Cromwell and Covington & Burling.

Carlyle Earnings Fall 18%

Private equity may be a booming business, but that wasn’t enough to lift the Carlyle Group’s earnings in the first quarter.

Carlyle, a private equity giant based in Washington, reported on Wednesday that its first-quarter profit â€" measured as economic net income, which includes unrealized investment gains â€" fell 18 percent from the period a year earlier to $322 million. The profit after taxes amounted to 85 cents a share, falling short of the expectation of $1.01 a share by analysts surveyed by Standard & Poor’s Capital IQ.

The results were weighed down by declines in Carlyle’s global market strategies business, whose investments include equities and credit, and in its real assets segment, which includes real estate. In its private equity segment, however, economic net income rose 8 percent from last year’s period.

Carlyle, like its big rivals, has been reaping profits from selling its investments into a buoyant stock market. It sold shares in companies it had already taken public, including CommScope, a telecommunications equipment maker; Allison Transmission, which makes vehicle transmission systems; and Nielsen, the television ratings company. It also sold the remainder of its position in BankUnited.

Such “exits” are expected to continue. Carlyle recently announced a sale of shares in HD Supply, an industrial distribution company. And it has been busy making new investments, including a deal to buy the clinical testing division of Johnson & Johnson for more than $4 billion.

The realized net performance fees in Carlyle’s private equity business, reflecting the firm’s share of investment profits, were 21 percent higher than a year earlier. Its portfolio of private equity investments from which it is able to collect profit recorded an 8 percent return in the quarter, handily outpacing the Standard & Poor’s 500-stock index during the period.

But over all, the results were more mixed. The firm’s realized net performance fees were flat from a year earlier. The one major metric that recorded a gain was distributable earnings â€" a measure of the cash generated by Carlyle that can be given to shareholders â€" which rose 7 percent.

“Carlyle had a solid start to 2014,” David M. Rubenstein, the co-founder and co-chief executive, said in a statement. “Fund-raising, fund performance and investing activity are all running at strong levels. As new top talent joins our seasoned leadership team and we launch new fund strategies and make targeted acquisitions, Carlyle continues to meet the increasingly complex demands of our global investor base.”

A continuing point of weakness was the real assets business, which recorded an economic net loss of $17 million, compared with a profit of $42 million a year earlier. Carlyle said the chief cause was unrealized investment losses in certain Latin American and European real estate investments â€" an issue that has affected the firm in previous quarters.

Its realized net performance fees in real assets fell to zero, from $16 million a year earlier.

In global market strategies, Carlyle said its economic net income fell by 46 percent to $56 million â€" probably reflecting choppy markets in credit and equities around the world.

Carlyle’s total assets under management rose to $198.9 billion by the end of the quarter, 13 percent higher than a year earlier. The increase reflected new capital raised from investors, market appreciation and the effect of acquisitions.

Carlyle reports its results using nonstandard metrics. According to generally accepted accounting principles, Carlyle earned $25 million in the quarter, 27 percent lower than a year earlier.

Volkswagen Extends Offer to Acquire Control of Scania

LONDON - Volkswagen said Wednesday that it had extended its offer to take full control of the Swedish truck maker Scania, in hopes of coaxing more of the company’s shareholders to sell.

In February, Volkswagen offered to buy the shares of Scania that it did not already own for 6.7 billion euros, or about $9.3 billion, in an all-cash deal.

The German automaker has declined to increase its price despite Scania’s independent directors concluding that the offer undervalued the company.

Volkswagen, which already controls 62.6 percent of the capital of the Swedish company, is seeking to expand that stake to at least 90 percent to enact so-called squeeze-out provisions, which would allow it to force the remaining shareholders to sell their shares. Volkswagen has been an investor in Scania since 2000 and controls 89.2 percent of the voting rights.

As of Friday, the original deadline, shareholders had agreed to sell enough stock to Volkswagen to give it control of 88.25 percent of Scania’s capital and 95.81 percent of the voting rights, Volkswagen said.

Volkswagen has extended the offer to shareholders until May 16. The offer remains conditional on Volkswagen’s gaining control of more than 90 percent of Scania’s shares. Volkswagen continues to say that it has no intention of increasing the price.

“We are pleased that the broad majority of Scania’s minority shareholders have accepted our very attractive offer,” Hans Dieter Pötsch, Volkswagen’s chief financial officer, said in a statement.

“On this basis, we are confident that during the extended acceptance period we will meet the necessary acceptance level for this transaction,” he added. “This would be a milestone in the process of completing our integrated commercial vehicles group, which will be for the benefit of all parties involved.”

Volkswagen has offered to pay 200 Swedish kronor, or $30.48, a share for each of its two classes of Scania stock, representing a 53.3 percent premium on its so-called B shares for the 90-day period that ended Feb. 21.

Scania’s B shares were up 2.6 percent, at 196.70 kronor, in trading in Stockholm on Wednesday morning.

Despite Volkswagen’s large ownership stake, Scania remains an independently managed company. Its board of directors includes several members with ties to Volkswagen. That includes the Scania board’s chairman, Martin Winterkorn, who is also the chairman of Volkswagen.

After being asked to evaluate the offer last month, a committee of Scania’s independent directors urged shareholders to reject the deal, saying it didn’t recognize the long-term value of the company.

Several Swedish pension funds also have publicly rejected the transaction.

Volkswagen wants full control so it can combine Scania with its Volkswagen Commercial Vehicles business and the German truck maker MAN, in which Volkswagen gained full control last year after taking a majority stake in 2011.

The automaker has said full integration would eliminate restrictions that have limited its ability to cooperate and engage in joint projects, allowing it to better compete against European rivals like Volvo and Daimler.

Alstom to Review $13.5 Billion Offer from General Electric

PARIS â€" General Electric and Alstom, the struggling French conglomerate at the center of a politically charged takeover battle, finally said publicly on Wednesday what the business world has known for a week: The American giant is ready to acquire Alstom’s energy business in a $13.5 billion deal.

Alstom, however, left open the possibility of a deal with Siemens of Germany and said it would establish a committee of independent directors to review the G.E. proposal before the end of May.

G.E. said the French company had “positively received” its offer for the energy business, which includes Alstom’s thermal power, renewables and electrical grid divisions. Alstom’s energy business employs 65,000 people and had sales last year of 14.8 billion euros, or $20.4 billion, about 70 percent of its total.

“This is a strategic transaction that furthers G.E.’s portfolio strategy,” Jeffrey R. Immelt, G.E.’s chairman and chief executive, said in a statement. “Power & Water is one of our higher growth and margin industrial segments and is core to the future of G.E.”

He said the deal would “generate more than $1.2 billion in annual cost synergies by year five and the transaction will be immediately accretive for G.E. shareholders.”

Since news of the talks leaked last week, the French political establishment has been seeking to force Alstom’s chief executive, Patrick Kron, to put the brakes on a deal that would dismantle a company that symbolizes France’s industrial and technological prowess.

Economy Minister Arnaud Montebourg has demanded that Alstom consider a less fully developed proposal from Siemens, the industrial giant, for an asset swap. But Mr. Kron and Alstom’s controlling shareholder, Martin Bouygues, have favored the G.E. proposal.

Alstom, in its own statement, confirmed that it had “received a binding offer from General Electric,” and said that its board had unanimously acknowledged “the strategic and industrial merits of this offer.”

Alstom said the committee of independent directors would take into consideration the interests of all stakeholders. “Patrick Kron and the committee will liaise with the representatives of the French State to consider their views,” the statement said.

The committee will be empowered to “consider unsolicited alternative proposals for the acquisition of Alstom, or of the power and grid businesses” â€" a reference to the Siemens offer.

Mr. Kron praised the G.E. deal. “Alstom’s employees would join a well-known, major global player, with the means to invest in people and technology to support worldwide energy customers over the long term,” he said in a statement.

A deal with G.E. would enable the French company to invest in the transport business as a stand-alone company, he said, as well as to pay down debt and return cash to shareholders.

Alstom and General Electric said they expected the deal to close next year.

The announcement came after Siemens’s board on Tuesday formally backed an offer to swap its transportation business for Alstom’s energy business. The German company said that it would proceed with an offer only if it gained access to Alstom’s books and management for four weeks to carry out due diligence.

Emails Show Concern on Sotheby’s Board

WILMINGTON, Del. â€" Directors of Sotheby’s have expressed concern about compensation and the board’s performance, according to emails disclosed on Tuesday during a hearing in a dispute with the activist investor Daniel S. Loeb.

The emails were read during a hearing before Vice Chancellor Donald F. Parsons Jr. in a lawsuit brought by Mr. Loeb, the manager of the hedge fund Third Point Capital. He contends Sotheby’s directors violated their fiduciary duty by improperly adopting a one-year poison pill to thwart his efforts to replace three directors on the 12-member board.

One of the board members, Steven Dodge, warned the company’s chief executive, William F. Ruprecht, that executive compensation was “red meat for the dogs.”

Mr. Dodge, who will retire from the board this year, also echoed some of the same concerns that have been aired by Mr. Loeb. “The board is too comfortable, too chummy and not doing its job,” he wrote in one email to a fellow director, Dennis Weibling. “We have handed Loeb a killer set of issues on a platter.”

The main issue is the legality of Sotheby’s shareholder rights plan, which allows passive investors to buy a stake as large as 20 percent but restricts active investors to 10 percent. Third Point, which has a 9.62 percent stake in the auction house, is arguing that poison pills were never intended to obstruct the election of directors. Third Point is asking the judge to remove the poison pill. Mr. Loeb has nominated himself and two colleagues for Sotheby’s board at a vote scheduled for May 6.

The case could have broad implications for corporate governance because it is the first court test for an activist investor facing this type of poison pill.

A lawyer for Sotheby’s said in court that the poison pill was put in place because the board was worried that Mr. Loeb intended to take over the company, something Third Point has denied.

The emails showed Mr. Ruprecht’s concerns about Mr. Loeb’s campaign. “This is about power and the ability to persuade,” he wrote. “Not a single director on our board has experience in a proxy fight.”

“The board is in the crosshairs,” he added.

Lawrence Hamermesh, a longtime corporate law practitioner in Delaware and now the director of corporate and business law at Widener University Law School, was skeptical about Sotheby’s poison pill.

“Here’s the way the Delaware law works: When a board tries to do something to deter a takeover-related effort, they have to reasonably perceive some real threat,” he said. “And I think they are viewing the election contest as a threat. And I’m not comfortable that that’s right. I don’t see how you can think that getting bounced out of office in an election is a real threat to corporate and stockholder interest.”

“It’s up to the stockholders to decide who gets to serve on the board, like a national election for president,” he added.

A lawyer for Sotheby’s declined to comment, but in the past the company has said the board is “independent, active, engaged and focused on further increasing shareholder value.”

Judge Parsons did not indicate when he would rule.

Yahoo Chief’s Pay Tied to Another Company’s Performance

Marissa Mayer has hit it big in the executive compensation lottery.

According to recent public filings and an analysis prepared by Equilar, an executive compensation data firm, by the end of last year, Ms. Mayer, the Yahoo chief executive, had received compensation worth potentially $214 million â€" most of which was for doing nothing.

Her good fortune stems from Yahoo’s stake in the Chinese Internet behemoth Alibaba, a deal that was arranged in 2005 by Yahoo’s co-founder, Jerry Yang. The enthusiasm and hype over a likely initial public offering by Alibaba has driven Yahoo’s stock to a sky-high valuation, a surge that has showered Ms. Mayer with vast riches.

Huge compensation packages for corporate chieftains are not uncommon, of course, and remain the subject of a fierce debate. Yet, the example of Ms. Mayer highlights the absurdities of executive compensation based on stock prices.

When Ms. Mayer was hired away from Google in 2012, it was meant to show that Yahoo, a faltering Internet giant, was again going to be a dynamic and hip place to work. To lure such a rock-star executive, Yahoo awarded her a pay package of $35 million in restricted stock and $21 million in options.

Some $15 million of that was to compensate Ms. Mayer for stock and options she forfeited when she left Google. At the time of her hiring, Yahoo shares were trading at $15.78 a share.

Since then, Yahoo’s stock has been on a tear, reaching a high of $41.72 before retreating in the recent technology sell-off to about $34. It’s up about 140 percent since Ms. Mayer arrived.

As a result of the rise in the stock price, Equilar calculates, Ms. Mayer’s $56 million package had grown to be worth about $186 million as of the end of last year, after Ms. Mayer forfeited some of the stock for failure to meet some performance requirements. In addition, Ms. Mayer was awarded $12.47 million worth of restricted stock in early 2013 that had grown to $23.7 million by year-end. Add in $4.3 million in cash paid to Ms. Mayer, and the figure rises to about $214 million for 15 months of work.

To be sure, for some of this compensation, Ms. Mayer will have to stay at Yahoo for another few years and meet performance goals. And Yahoo’s stock price will have to stay at this level. Yet $57.8 million worth of Ms. Mayer’s stock and options already vested last year alone.

By any measure, this was not the value initially intended to be paid to Ms. Mayer.

These are estimates, because after spending a few hours with Yahoo’s public filings, I found it impossible to calculate an exact figure of her earnings from Yahoo and had to turn to Equilar.

A spokesman for Yahoo declined to comment but directed me to the compensation figures in the proxy.

If you read Yahoo’s filing for its shareholder meeting, it states in a summary compensation table that Ms. Mayer was paid $61.5 million for 2012 and 2013, an amount the filing notes is based not on the current value of Ms. Mayer’s compensation but the value when granted. Nowhere does it say with a single number what Ms. Mayer’s package is worth as of year-end or even what she actually made last year â€" that $57.8 million figure.

A paycheck of more than $200 million is sweet, but the problem is that the value is not primarily a result of anything she has done as chief executive. Yahoo continues to struggle â€" its revenue last year was $4.68 billion, down from $4.98 billion in 2012. In the first quarter of 2014, Yahoo’s income fell 84 percent, to $30 million from $186 million in the quarter a year earlier. Moreover, there has been a bit of turmoil in Yahoo’s executive suites. Ms. Mayer’s trusted lieutenant, Henrique de Castro, who was hired to assist the turnaround, was recently fired as chief operating officer.

Still, Ms. Mayer has some achievements at Yahoo. She has revamped products and replaced much of Yahoo’s staff while reversing two years of losses in the number of people using its sites and services. All told, it’s too soon to know what will happen to Yahoo, and certainly those gains are not what is driving its stock price up right now.

For now, however, Yahoo still holds its crown jewel, its stake in Alibaba.

Yahoo initially bought 40 percent of the Chinese company in 2005. Yahoo sold part of it back to Alibaba in 2012 for $7.6 billion, but retained a 24 percent stake.

Since then, Alibaba has been growing rapidly and is expected to go to market in the coming months in an I.P.O. that may value the company at more than $150 billion, and Yahoo’s stake at $36 billion.

The noise over the Alibaba I.P.O. has drowned out nearly anything Yahoo says about its own business.

Even when Yahoo recently announced the decline in quarterly earnings, its stock jumped as much as 9 percent. It didn’t hurt that Yahoo also reported that Alibaba’s revenue growth had risen 66 percent in the fourth quarter of last year.

An analyst with SunTrust Robinson Humphrey has calculated that Alibaba now adds about $29 to every Yahoo share, assuming that the Chinese company is valued at $150 billion after its I.P.O. Yahoo’s stock closed on Tuesday at $35.83 a share.

Simply put, without Alibaba, Ms. Mayer’s options would probably be close to worthless and her package would be worth about $10 million.

In other words, Alibaba has most likely added most of the money to Ms. Mayer’s pocket, money from her pay package, a pay package intended to provide performance incentives.

What did Ms. Mayer do for this windfall? Sure, she is working hard and getting early results, but not at Alibaba. The Chinese company is managed by Jack Ma and his partners. It appears to want little to do with Yahoo, and has been pushing for Yahoo to sell its stake down. Indeed, as part of an Alibaba I.P.O., Yahoo has agreed to sell 40 percent of its stake, but can hang on to the rest indefinitely.

Ms. Mayer is not alone in her fortunate payday. Mr. de Castro received $58 million when he was pushed out less than a year and a half after his hiring. His pay package when hired was calculated to be worth $17 million by Yahoo.

Such paydays illustrate that it is often good fortune â€" a rise in the stock market or a turn in the economy â€" rather than individual performance that accounts for the bulk of executive pay.

Despite the good luck of Ms. Mayer and others, option and incentive compensation persist, spurred by government subsidies through favorable tax treatment and the fact that, unlike cash, stock compensation appears to cost the company very little to award. Not only that, companies are not required to disclose how much they miss the mark in awarding initial compensation.

It’s time to recognize that stock-based compensation can often be no more than casino chips. Stock is easy for a board to hand out without regard to the true cost, creating a huge win for executives in a game stacked in the chief’s favor.

Ms. Mayer’s case is extreme, but it shows it is time to rethink all stock compensation. Instead, executives can simply be paid in cash based on their effort â€" a novel concept to be sure.

U.S. Close to Bringing Criminal Charges Against Big Banks

Federal prosecutors are nearing criminal charges against some of the world’s biggest banks, according to lawyers briefed on the matter, a development that could produce the first guilty plea from a major bank in more than two decades.

In doing so, prosecutors are confronting the popular belief that Wall Street institutions have grown so important to the economy that they cannot be charged. A lack of criminal prosecutions of banks and their leaders fueled a public outcry over the perception that Wall Street giants are “too big to jail.”

Addressing those concerns, prosecutors in Washington and New York have met with regulators about how to criminally punish banks without putting them out of business and damaging the economy, interviews with lawyers and records reviewed by The New York Times show.

The new strategy underpins the decision to seek guilty pleas in two of the most advanced investigations: one into Credit Suisse for offering tax shelters to Americans, and the other against France’s largest bank, BNP Paribas, over doing business with countries like Sudan that the United States has blacklisted.

In the talks with BNP, which has a huge investment bank in New York, prosecutors in Manhattan and Washington have outlined plans to extract a criminal guilty plea from the bank’s parent company, according to the lawyers not authorized to speak publicly.

If BNP is unable to negotiate a lesser punishment â€" the bank has enlisted the support of high-ranking French officials to pressure prosecutors â€" the case could counter Congressional criticism that arose after the British bank HSBC escaped similar charges two years ago.

Such criminal cases hinge on the cooperation of regulators, some who warned that charging HSBC could have prompted the revocation of the bank’s charter, the corporate equivalent of the death penalty. Federal guidelines require prosecutors to weigh the broader economic consequences of charging corporations.

With the investigation into BNP, the lawyers briefed on the matter said, prosecutors met this month with the bank’s American regulators: the Federal Reserve Bank of New York and Benjamin M. Lawsky, New York’s top financial regulator.

The prosecutors who attended the meeting and are leading the investigation â€" Preet Bharara, the United States attorney in Manhattan, David O’Neil, the head of the Justice Department’s criminal division in Washington, and Cyrus Vance Jr., the Manhattan district attorney â€" left largely reassured.

During the meeting at the New York Fed’s headquarters in lower Manhattan, the lawyers said, Mr. Lawsky said he planned to impose steep penalties against BNP and its employees but would not revoke the bank’s license. The prosecutors secured similar assurances from the New York Fed, the lawyers said, though the Fed’s board in Washington must still approve the decision about BNP, which has not been accused of any wrongdoing.

Depending on the regulator â€" American and European banks are divided among a patchwork of agencies in New York and Washington â€" the path to filing charges could still be difficult. While regulators might be philosophically aligned with prosecutors, some feel bound by rules that govern their response to criminal charges.

At a meeting last September, a top federal regulator vowed not to interfere if Mr. Bharara obtained a guilty plea from JPMorgan Chase over its ties to Bernard L. Madoff, according to the lawyers and records of the meeting. But the regulator, Thomas J. Curry, a frequent critic of Wall Street, warned that federal law might require him to reconsider JPMorgan’s charter if the bank was convicted of a crime.

The discussions with regulators, recounted in interviews with the lawyers and in records obtained through a Freedom of Information Act request, offer a lens into the political and legal minefields that prosecutors navigate when investigating big banks. The interviews also demonstrate that defense lawyers continue to push prosecutors not to act without assurances that regulators will keep a bank in business.

In a recent speech to Wall Street lawyers, Mr. Bharara said this dynamic creates a “gaping liability loophole that blameworthy companies are only too willing to exploit.”

He noted that regulators often possess many of the same facts, including emails and documents, that underpin a criminal case. The prosecutors and regulators, he said, need to “work in concert.”

His comments echoed concerns that Attorney General Eric Holder raised at a Congressional hearing last year, when he remarked that “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them” amid regulatory concerns that charges could imperil the economy.

The off-the-cuff remarks ignited a national debate that reverberated through the Justice Department and the halls of the Capitol. Mr. Holder’s concerns also reinforced the popular idea that Wall Street, once considered too big to fail, is now too big to indict.

The idea is born from painful experiences like Arthur Andersen, Enron’s accounting firm that went out of business after a 2002 criminal conviction. In the wake of the firm collapsing, prosecutors adopted a more cautious approach when punishing big companies, imposing so-called deferred-prosecution agreements that suspend charges against corporations in exchange for certain concessions.

Those fears helped shape the case against HSBC, accused of “stunning failures” in preventing money laundering. Prosecutors in Washington, unsure how regulators would respond to a guilty plea, imposed a record fine and a deferred-prosecution agreement.

Mr. Holder and Mr. Bharara are now signaling a change in course.

Mr. Holder’s criminal division â€" which a week after announcing the HSBC case hosted a meeting with regulators to discuss “corporate resolutions,” according to records â€" has held discussions with the New York Fed about securing a guilty plea in the Credit Suisse tax shelter case.

While the criminal division might ultimately extract a guilty plea from Credit Suisse’s main banking affiliate in Zurich, the lawyers briefed on the matter said, they have not ruled out charges against the bank’s parent company. The case is expected to be announced before the action against BNP.

Representatives for BNP and Credit Suisse declined to comment.

Mr. Bharara, the lawyers said, has opened his own criminal investigations into a fraud at Citigroup’s Mexican affiliate and other American banks. And in the recent speech, Mr. Bharara warned, “You can expect that before too long a significant financial institution will be charged with a felony or be made to plead guilty to a felony, where the conduct warrants it.”

BNP has said that the consequences of a guilty plea could be dire. In a final bid for leniency, the lawyers briefed on the matter said, the bank is expected to meet with prosecutors next week in the Justice Department’s headquarters in Washington.

BNP, which has earmarked $1.1 billion to pay penalties in the case but might pay more, requested the meeting with Mr. O’Neil, Mr. Bharara and Mr. Vance after learning the prosecutors’ intentions to force a guilty plea from the bank’s parent company. The bank hopes that prosecutors will settle for a guilty plea from a BNP subsidiary.

The investigation into BNP has centered on whether the bank processed transactions for countries â€" including Sudan and Iran â€" that the United States government has sanctioned. The bank, which conducted its own internal investigation that “identified a significant volume of transactions that could be considered impermissible” between 2002 and 2009, may have improperly routed some money through its New York branches.

Prosecutors decided that the conduct warranted more than a deferred-prosecution agreement. But leery of spurring a run on the bank, the prosecutors turned to regulators for assurances â€" which were largely provided at the April 18 meeting at the New York Fed.

Still, to be meaningful, a guilty plea would require some consequences. Mr. Lawsky told prosecutors that he would consider temporarily suspending the bank’s ability to transfer money through New York branches on behalf of foreign clients, a move that could undercut the bank’s revenue.
A spokesman for Mr. Lawsky declined to comment, as did a spokesman for Mr. Bharara, Mr. Curry and Mr. O’Neil. The Fed and Mr. Vance’s office also declined to comment.

In other cases, Mr. Bharara reached an impasse with regulators.

He first met with Mr. Curry, the Comptroller of the Currency, in September 2012 to discuss the potential fallout from criminal charges, records show. A year later, as Mr. Bharara’s investigation into JPMorgan’s business with Madoff was heating up, he made another visit to the regulator.

Joined by his top lieutenants â€" Lorin L. Reisner, Joon Kim and Richard B. Zabel â€" Mr. Bharara sought to clarify the potential repercussions of a JPMorgan guilty plea, according to the meeting records. Mr. Curry, flanked by his own top aides, Paul Nash and Daniel Stipano, was sympathetic to the dilemma.

But Mr. Curry stopped short of promising that JPMorgan’s charter would be safe. He pointed to a federal law that requires the Comptroller’s office to hold a hearing about potentially terminating “all rights, privileges and franchises of the bank.” Ultimately, JPMorgan received a roughly $2 billion fine from Mr. Curry and Mr. Bharara, but did not have to plead guilty. Moving forward, Mr. Bharara is exploring ways around the automatic hearing, which applies only to money laundering convictions. Other charges, including wire fraud, do not automatically require a hearing.

“The revocation of a charter amounts to a death sentence for a bank,” said Daniel Levy, a former prosecutor in Mr. Bharara’s office, who is now a principal at McKool Smith. “Any rational prosecutor would want to know the consequences of a charge, if possible in advance.”