Hedge Funds Sniff for Even Bigger Payouts From Banks

One of the biggest bets on Wall Street rests on a theory that also deeply unsettles Wall Street.

The provocative theory is that the big banks have not paid enough in recent legal settlements to make amends for their role in stoking the subprime housing boom and bust. Hedge funds, contending that the banks have so far underpaid, have bought subprime mortgage-backed bonds, which they hope will rise in value. That would happen if Wall Street banks ultimately pay out a lot more money to settle other, more stringent litigation tied to these bonds. And the hedge funds holding the bonds may often be behind these more demanding lawsuits.

The notion that the big banks are getting off lightly in these settlements might seem stretched. After all, in recent months, several large banks have agreed to deals with government authorities and alliances of private investors that carry substantial penalties. The $13 billion that the Justice Department extracted from JPMorgan Chase last year was a record.

Around the same time, JPMorgan entered into a $4.5 billion settlement with a range of prominent investment firms, BlackRock and Pimco among them, over allegations that it packaged mortgages into bonds before the financial crisis that didn’t meet certain agreed-upon standards.

But as large as those penalties appear, some hedge funds believe they may have been too small for the abuses that they say actually took place. After digging deep into the pools of loans that back the bonds, the hedge funds assert that, in the case of certain securities, the banks’ missteps were more widespread than publicized. They argue that the big-name investment firms could have gotten more out of their JPMorgan settlement. To the hedge funds, it is as if an oil producer had to pay compensation only for the most obvious destruction caused by an oil spill, allowing it to escape its liability for large-scale damage that was not immediately obvious.

Now, the hedge funds, sniffing profits, see themselves as the ones to go after the banks for bigger sums. In recent months, the hedge funds have been buying bonds that are the target of lawsuits that typically want bigger payouts than the broad-based private litigation brought on behalf of big companies like Pimco.

If the more exacting lawsuits succeed, and the banks have to plow money into the bonds, the hedge funds stand to make a windfall. And the bond prices could rise merely if investors anticipate legal success, well before any settlement is ever reached.

The overall size of the hedge funds’ bet could be substantial. Nomura estimates that as many as 200 bond deals face lawsuits that aren’t part of the private litigation being brought on behalf of prominent investors. At the time they were issued, those bonds could have had a value of $100 billion to $200 billion. “Those deals are trading very well,” said Paul Nikodem, who is head of residential mortgage-backed securities research at Nomura.

Now, one hedge fund has gone one step further â€" it is trying to coax other investors out of participating in the JPMorgan settlement with private investors, which was brokered by Gibbs & Bruns, a Houston law firm. Fir Tree Partners last week proposed to buy several JPMorgan bond deals from other investors at set prices, asserting that its offer would give the other holders a higher and quicker return than if their bonds were included in the Gibbs & Bruns deal.

For instance, Fir Tree says that its offer for one bond, which contains first mortgages, is equivalent to 7 percent of the losses incurred on the bond, far higher than the 0.75 percent that the hedge fund says is available under the Gibbs & Bruns deal. (The law firm didn’t comment when asked.)

On five of the deals, Fir Tree, either alone or with others, has directed the bonds’ trustees to start litigation against JPMorgan.

Over all, the hedge funds face several challenges, however. Litigation can be costly. It can be difficult to amass the required level of support from other bondholders â€" typically 25 percent of their voting rights â€" to direct the trustee to carry out lawsuits.

And a recent ruling by a New York State appellate court may have made it all but impossible for hedge funds to file new lawsuits on precrisis mortgage bonds. In addition, because of the ruling, some existing legal actions may be thrown out because they were filed too late. (A trustee bank, HSBC, last week filed a motion opposing the ruling.)

The hedge funds may also face an uncomfortable type of counterattack that could complicate their litigation. The banks’ lawyers may question whether a hedge fund trading in litigated mortgage bonds had been unduly influenced by potentially material nonpublic information that the fund gained through the discovery process in their litigation.

Still, the hedge funds say that the numbers are on their side. They contend that the sheer awfulness of the mortgage loans in the bonds gives them a solid chance of victory. Fir Tree, for instance, says that it has been involved in a review of over 40,000 loans. It claims to have found that, in certain bonds, as many as 98 percent of the mortgages had flaws that should have kept them out of the deals.

Because of the deep dives into the loan data, some mortgage bond analysts think the hedge funds’ lawsuits could fare well. “We definitely do think there will be positive resolutions,” Mr. Nikodem, the Nomura analyst, said. “The payouts will likely be higher than for Gibbs & Bruns.”

SAC’s Counsel Testifies at Insider Trading Trial in Unexpected Move by the Defense

Peter Nussbaum, the general counsel of SAC Capital Advisors, took the witness stand on Tuesday in a bold and surprising move by the defense at the insider trading case of Mathew Martoma, a former SAC trader.

The move came after the government rested its case and after three weeks of testimony from 20 witnesses. The defense’s case is expected to take considerably less time.

By calling on Mr. Nussbaum, the most senior employee at SAC to testify in the insider trading case, the defense could open the door for prosecutors to more closely scrutinize compliance at the multibillion-dollar hedge fund, which the government last year accused of being a “veritable magnet for market cheaters.”

Mr. Martoma has been charged with undertaking one of the most lucrative insider trading schemes on record, and his case is at the heart of a decade of investigations into SAC, which resulted in the hedge fund pleading guilty to five counts of wire and securities fraud last November. SAC has agreed to pay a $1.2 billion penalty. It was Mr. Nussbaum who pleaded guilty on behalf of SAC.

But Mr. Nussbaum, who has overseen all legal and compliance affairs at SAC for nearly 14 years, could also help to bolster the defense’s case that Mr. Martoma did nothing wrong and that the big trades at the center of the case against him were influenced by SAC’s founder, Steven A. Cohen.

Mr. Cohen, a billionaire, has not been called as a witness but late last week emerged as an important figure in the case when the government’s main witness told the jury that F.B.I. agents had told him that he and Mr. Martoma were a “grain of sand” and that the government was really after Mr. Cohen. Mr. Cohen has not been charged criminally with any wrongdoing.

The prosecution has accused Mr. Martoma of “corrupting” two doctors who were involved in clinical trials for an experimental Alzheimer’s drug being developed by the drug makers Elan and Wyeth by seeking inside information from the doctors about the safety of the drug. Mr. Martoma then used the information, the government contends, to make trades that helped SAC avoid losses and realize profits of $276 million.

To bolster its case, the government has focused on testimony from Dr. Sidney Gilman, a former medical professor at the University of Michigan who was also a paid consultant for Elan and played a major role in the drug trial. Mr. Martoma met Dr. Gilman through the Gerson Lehrman Group, an expert network that linked hedge funds with industry experts.

But during the five days of testimony by Dr. Gilman, 81, questions were raised about his memory of important events during the critical period from 2006 to 2008, when he and Mr. Martoma spoke 43 times in paid consultations set up by Gerson Lehrman, as well as multiple other times in meetings not arranged by the expert network.

Dr. Gilman testified that he lied to F.B.I. agents and prosecutors for nearly a year and acknowledged that he recalled only some details of a meeting he had with Mr. Martoma days before the insider trading trial was to begin.

Then, when cross-examined by Richard M. Strassberg, a lawyer for Mr. Martoma, Dr. Gilman testified that his memory of interactions with Mr. Martoma had “evolved.”

The jury has seen dozens of emails and phone records of communications between Dr. Gilman and Mr. Martoma to show the two met, often days after Dr. Gilman was given new confidential information from Elan about the drug trial.

Seeking to discredit Dr. Gilman, Mr. Strassberg focused on the flaws in the doctor’s memory and sought to show that Dr. Gilman was confused about what information was actually not in the public domain. In his opening statement, Mr. Strassberg told the jury that Mr. Martoma was just doing his job as a portfolio manager and that there was nothing sinister about seeking information.

On Tuesday, Mr. Cohen and his involvement in the sales of the Elan and Wyeth shares in 2008 came up several times in testimony.

Early in the day, the jury learned that Mr. Cohen used separate accounts to keep secret the sale of Elan and Wyeth shares. In July 2008, Mr. Cohen requested that the firm’s holdings in the two companies be moved into an account that did not have “as many eyes” watching, Phillipp Villhauer, the head of trading execution at SAC, testified.

Later, in his 15 minutes on the stand before the end of the day, Mr. Nussbaum told the jury that Mr. Cohen had a special contract with Wayne Holman, a SAC portfolio manager who left the firm in 2006 to set up his own hedge fund, to provide trading advice to Mr. Cohen about Wyeth.

What Private Equity Is Listening for in the State of the Union

In his State of the Union speech on Tuesday night, President Obama is expected to highlight a willingness to bypass Congress to get things done. That new stance could make private equity bosses nervous.

The Obama administration has an opportunity, stemming from a recent court decision, to try to change the tax treatment of private equity earnings, a tax expert has said. In theory, the Treasury Department and the Internal Revenue Service could act without Congress’ involvement to change how the existing tax law applies to this form of income, which is known as carried interest.

Ken Spain, a spokesman for the Private Equity Growth Capital Council, a lobbying group, said in an email on Tuesday that he did not expect Mr. Obama to mention carried interest or private equity in the speech directly.

“However, I think there might be some broader thematic elements that the issue of carry could fall under,” Mr. Spain said.

Carried interest â€" the profit that a private equity manager gets from running investment funds â€" is currently treated for tax purposes as capital gains, taxed at a 20 percent rate. Yet, a number of academics and lawmakers have argued that it should be treated as ordinary income because it is earned through active management rather than passive investment.

A court decision last year involving the private equity firm Sun Capital and a company it bought, Scott Brass, introduces a wildcard.

The decision held that a fund operated by Sun Capital â€" as distinguished from the firm itself â€" was engaged in a “trade or business” in its ownership of Scott Brass. The decision may have tax implications, because the premise of private equity taxation is that the funds are passive investors rather than active owners, Victor Fleischer wrote in his column in DealBook last summer.

Efforts to raises taxes on carried interest have not gotten far in Congress. But this case could provide an opening for the Obama administration, Steven M. Davidoff wrote in his DealBook column in October.

Mr. Davidoff wrote: “It may now be that this battle to tax carried interest is not won or lost in the halls of Congress over high-minded concepts of fairness or equity, but rather in the halls of the I.R.S. by applying common sense presumptions that existed all along.”

A spokesman for the I.R.S. declined to comment on Tuesday.

Defenders of the private equity industry scoff at the notion that this decision could change how carried interest is taxed.

“It is pure speculation to assume this will have any bearing on established tax law that has been in place for a century,” Steve Judge, the president and chief executive of the Private Equity Growth Capital Council, wrote in DealBook in November.

Private equity firms themselves, though, are aware of the possibility that their tax treatment could change.

“There remains some uncertainty regarding Blackstone’s future taxation levels,” the Blackstone Group said in a quarterly filing with regulators in November, noting legislative efforts to raise taxes on carried interest.

“If we were taxed as a corporation or were forced to hold interests in entities earning income from carried interest through taxable subsidiary corporations, our effective tax rate could increase significantly,” the filing said.

Erskine Bowles to Lead Morgan Stanley Board

Morgan Stanley announced Tuesday that Erskine Bowles, who has served as a director of the board since 2005, had been named as lead director.

Mr. Bowles will replace C. Robert Kidder, effective Feb. 1.

In a statement announcing the change, Morgan Stanley said Mr. Erskine’s appointment reflected the firm’s policy of rotating lead directors after a period of time. Typically, rotations occur every few years.

Mr. Bowles has also served as the chair of the compensation, management development and succession committee since 2010. He was named co-chair of the national commission on fiscal responsibility and reform in 2010 and served as the president of the University of North Carolina from 2006 through 2010.

“Erskine brings strong leadership to the board with over four decades of distinguished experience in financial services and public service,” said James Gorman, Morgan Stanley’s chairman and chief executive. “We also want to take this opportunity to thank Bob for his outstanding service over the years, guiding the board through the financial crisis and the transition to a new C.E.O.”

Mr. Bowles has also served as a senior adviser to Carousel Capital, a private investment firm, since 2001 and was previously a general partner at Forstmann Little & Company, the private equity firm.

Mr. Bowles is also an outspoken advocate for fiscal reforms. He is a founder of “Fix the Debt,” a  debt reduction campaign that has advocated for cuts to social safety net programs and tax code changes that benefit corporations.

 

Yahoo Earnings Shed More Light on Alibaba’s Growth

While Yahoo is nominally the focus of its fourth-quarter earnings report, another company is receiving just as much scrutiny: Alibaba of China.

And based on Yahoo’s latest results on Tuesday, Alibaba, the Chinese e-commerce behemoth, is still growing fast.

According to Yahoo’s investor presentation, Alibaba reported nearly $1.8 billion in third-quarter revenue, a 51 percent gain compared with the same period in the previous year. And the company swung to an $801 million profit, from a $246 million loss during the year-ago period. (The loss in 2012 arose primarily from a $550 million payment to Yahoo related to royalties tied to intellectual property agreements.)

Some might complain that Alibaba’s growth has slowed, considering the company reported a 61 percent gain in revenue for its second quarter in 2013. But people close to the Chinese concern expect next quarter to show big gains, especially because it will include sales from Nov. 11 and Dec. 12. Both dates â€" think 11/11 and 12/12 â€" are considered two of the busiest shopping days in China.

All told, Yahoo’s stakes in both Alibaba and Yahoo Japan, a separately owned affiliate, contributed about $222 million to the American company’s bottom line this quarter, up 49 percent from the same time a year ago.

Over all, Yahoo reported $351.7 million in net income for the quarter.

The enormous growth of Alibaba has been considered one of the main ballasts for Yahoo’s own financial performance. The two companies first joined in 2005 when the American web pioneer took a 40 percent stake for about $1 billion (Yahoo now owns about a 24 percent stake in Alibaba).

A number of investors have treated investments Yahoo as a way to gain some exposure to its Chinese partner.

That may change once Alibaba holds an initial public offering, which would be one of the most highly anticipated market debuts of recent years. Rumors over when the company would go public, as well as its enormous growth, have pushed estimates of Alibaba’s worth ever higher.

As of a few weeks ago, analysts and investors had speculated that Alibaba is now worth somewhere around $100 billion to $150 billion, with a few outlier guesses approaching the $200 billion mark.

Question on J.C. Penney’s Poison Pill: Why Now?

J.C. Penney’s announcement on Tuesday that it had set a new, lower threshold for its poison pill is really about the question: Why now?

The struggling retailer reduced the limit to 4.9 percent, from 10 percent, preventing any single shareholder from holding more than a 4.9 percent stake without board approval.

J.C. Penny is subject to the occasional takeover rumor, but more important, has lately been a hedge fund hotel. Bill Ackman’s Pershing Square Capital Management came and noisly left. So did David Tepper’s Appaloosa Management, though less noisily. But others like George Soros’ fund and Richard Perry’s Perry Corp have arrived and stayed. Still, Perry has reduced its stake and hedge funds’ interest in the company has waned. The immediate conclusion of many in the media was that J.C. Penny’s move was intended to prevent any more activist investors from accumulating a large position.

But this may not be the case, and the reason lies in the tax reasons behind its action.

J.C. Penny can justify the low trigger because of complex tax rules â€" tax rules that are even more complex than normal. When a company accumulates losses, called net operating losses or NOLs, these have value. If the company returns to profitability, it can use them for up to 20 years to offset future gains and avoid paying tax. In some cases, the NOLs can actually be transferred to other parties.

The tax code also sets forth a limit on the NOLs being transferred, a so-called ownership change.

Unfortunately, the way the tax code defines a change of control is quite broad. An ownership change occurs when the percentage of a company’s stock owned by shareholders with a stake of 5 percent or more increases by more than 50 percent over a three-year period. If, for example, a shareholder with a 5 percent stake acquired enough stock to go over the 7.5 percent level, this would constitute an ownership change. The company would be at risk of losing its NOLs unless an exception could be found.

The rules, of course, have lots of intricate exemptions that keep tax lawyers busy, but the 5 percent threshold is the sticking point.

The risk is that a shareholder goes over the 5 percent level and then again increases its shareholdings enough to kill the NOLs. The risk is real, and companies have used this risk to justify adopting poison pills that deter shareholders from acquiring as much as a 5 percent stake. According to FactSet SharkRepellent, there are currently 162 public companies with such poison pills, which are sometimes known as NOL poison pills, including Citigroup and Krispy Kreme.

But pills with these limits are controversial. They are a blunt hammer. A poison pill meant to preserve a company’s tax advantages could have exceptions and allowances for share increases less than 50 percent as well as initial positions above the 5 percent level. None do, though.

That is probably because a poison pill that limits a shareholder’s stake to less than 5 percent has a convenient side effect of deterring activist activity. A hedge fund may now be unwilling to undertake an activist campaign because it cannot buy enough stock to justify this activism.

And even though questions have been raised about the tactic, it has been blessed by the Delaware courts.

J.C. Penny stated on Tuesday that is has $2 billion in NOLs. So it has some justification in adopting the new limit for its poison pill. The retailer is even taking steps to deal with any shareholder objections. It is putting the issue to a shareholder vote. If shareholders approve the pill, it will be in place until 2017, a relatively long period but not unusual.

In addition, J.C. Penny is going to ask shareholders to put similar provisions in its charter, making it more permanent. This seems a bit like overkill, though we haven’t seen the text.

If J.C. Penny’s shareholders approve the pill, it will make it make it difficult for anyone new to acquire a significant stake. Right now, according to Capital IQ, J.C. Penny has only two 5 percent shareholders â€" Soros Fund Management, with 6.6 percent, and the Vanguard Group, with 6.2 percent. They would be prevented from acquiring more shares. Other shareholders would be limited to a 4.9 percent stake.

But J.C. Penny could have adopted this poison pill at any time. Why is it doing so now, especially when it appears that the threat from hedge funds is receding?

I asked J.C. Penny for comment. Daphne Avila, an employee and representative of J.C. Penny responded that the “tax benefits represent a significant corporate asset that the Company believes may deliver substantial benefits to stockholders.” She said that the J.C. Penny board had considered a number of factors, including “the potential for diminution upon an ownership change, and the risk of an ownership change occurring.”

It’s hard to even read tea leaves from this statement. But perhaps now that things have settled down â€" Bill Ackman has left and J.C. Penney’s former chief executive has rejoined the company â€" the board felt that it was safe to just deal with this issue. Or maybe the board felt that it wanted to protect management for a while to make sure it had time to turn around the company’s fortunes.

Both seem to ring true, but it’s hard to know. And of course, there is the question of why even bother to lower the threshold for the poison pill at this time, since the company never acted while Mr. Ackman and others were acquiring shares.

We are left with a mystery, while shareholders may also be wondering what the true effect will be. The hedge funds, though, seem to have already come and gone.

Answers to a Puzzling Deal at Alibaba Remain in the Shadows

The Chinese Internet giant Alibaba is looking to join the ranks of Google and Microsoft with an initial public offering that could give it a value of more than $100 billion. But the company’s recent acquisition of the Hong Kong-listed company Citic 21CN shows just how much we still don’t know about Alibaba and its business.

Alibaba announced last week that it was in a deal to buy a 54.3 percent stake in Citic 21CN for about $171 million. Before the announcement, Citic 21CN was a sleepy Bermuda company listed in Hong Kong since 1972 with its principal business in “system integration and software development.” Its stock was moribund, and its biggest shareholder was the Chinese state company Citic Group, hardly an Internet force.

Why did Alibaba acquire this company?

At the time, Alibaba stated that the investment was aimed at developing “a pharmaceutical product information platform by leveraging on Citic 21CN’s vast pool of pharmaceutical product data and combining this with Alibaba Group’s e-commerce, cloud computing and big data capabilities.”

It sounds a little like corporate mumbo jumbo, and it sent investors into a frenzy.

In an unusual move, Alibaba did not pay a premium for a controlling stake in Citic 21CN. Instead, it paid almost a 60 percent discount to Citic 21N’s trading price only 10 days before. Other investors had no luck; they bid up Citic 21CN’s shares about 370 percent in a single day.

People speculated that the rise was because Alibaba’s investment in the company was a “backdoor listing.”

In a public filing with the Hong Kong Stock Exchange, Citic 21N stated that the acquisition “may involve the possible injection of certain complimentary businesses by” Alibaba. This may have also spurred the backdoor I.P.O. speculation.

Frankly, if this is why people bid up Alibaba’s stock fourfold, it seems a silly assumption.

Some have been speculating that Alibaba may want a backdoor I.P.O. because the Hong Kong Stock Exchange has refused to waive its “one share, one vote” rules. Such a waiver would allow Alibaba to complete an I.P.O. on the exchange with a structure that would keep control with its founder and executive chairman, Jack Ma, and a handful of top people at the company. It has been intimated by people close to Alibaba that it may move its I.P.O. to the United States or another location with more permissive rules.

Talk of Alibaba’s possible move to the United States has apparently prompted the Hong Kong Stock Exchange to show signs that it may waiver from its opposition. Recent reports are that the exchange is considering a public debate on whether to keep these rules.

But if the Hong Kong Stock Exchange doesn’t cave to pressure, does anyone think that Alibaba could surreptitiously shove billions of assets into Citic 21CN without the Hong Kong Stock Exchange saying something? The same rules barring Alibaba’s share structure would apply to Citic 21CN if Alibaba tried to use it as a backdoor listing.

The rationale for this frenzy seems overblown, but the fact that it happened highlights perhaps a bigger issue. Alibaba’s acquisition was structured in a manner as if it were intended to incite speculation, which only heightens concerns over how this company will be run after its I.P.O. if it remains controlled by Mr. Ma and his colleagues.

Alibaba did not solely purchase this stake in Citic 21CN. Alibaba’s partner was Yunfeng Capital, a private equity firm also co-founded by Mr. Ma. Yunfeng is focused on investing in Chinese telecommunications, technology and health care companies. When the purchase clears Chinese regulatory authorities, Yunfeng will own 16.2 percent and Alibaba 38.1 percent of Citic 21CN.

Why would Alibaba acquire control of Citic 21CN with Mr. Ma’s private equity firm instead of going it alone? Certainly, it had the capital. If Alibaba, which underwent an $8 billion debt refinancing last year, can’t afford a $171 million purchase, then it has bigger problems.

When the transaction was announced, Alibaba did not explain why it acquired this stake with Yunfeng.

When asked for comment, a representative of Alibaba directed me to the initial news release announcing the transaction.

In the absence of a compelling reason, the acquisition raised the question of whether Mr. Ma was benefiting from his ties to Alibaba. The e-commerce company is providing capital and expertise to Citic 21CN, and to the extent Alibaba uses its huge network in China to help the company, then Mr. Ma’s private equity fund firm will also benefit.

Mr. Ma has announced that his profits from Yunfeng will be donated to charity to benefit the Chinese environment, but the private equity firm will still benefit from the deal.

It is hard to think how this would play out if Alibaba were listed in the United States. In 2007, when Google Ventures invested about $3.9 million in 23andMe, the company founded by Sergey Brin’s wife at the time, Anne Wojcicki, Google was criticized for investing in a start-up of a founder’s wife. That was only a few million dollars.

The bigger question may be why Alibaba would acquire such a sleepy company.

In a filing with the Hong Kong Stock Exchange, Citic 21CN states that Alibaba’s intention is to develop Citic’s “domestic drug data platform as well as to develop a data standard for medical and health care products.”

Perhaps this business has promise, but it is not even Citic 21CN’s biggest. Drugs are a new area for the company and accounted for about 3 percent of its revenue of $63 million in its last fiscal year.

You might think that paying a huge amount for a company with little revenue is par for the course for an Internet giant. But Citic 21CN was not known for having a particularly compelling technology or vision. (It doesn’t even have an active website.) Indeed, if Citic 21CN were such a great company, you would have thought that Alibaba would have paid a premium to buy it. Alternatively, why not just buy the drug business itself rather than paying for the other businesses, too? Or spend $171 million to build a drug business yourself?

This leaves the Citic 21CN investment as puzzling.

This all may be well and good, because Alibaba is a private company now. Once it is public, however, Alibaba’s practices may fall under more scrutiny. If Mr. Ma and his colleagues keep control of the company, one has to wonder what this means for public shareholders. Will Alibaba continue to enter into deals with affiliates of Mr. Ma, and if it does, will it be for companies like this?

To be fair, hype around the next big company tends to cause frenzied speculation. We saw this with the Facebook I.P.O. Alibaba may also be prone to be more open about its dealings once it has public shareholders. It has already moved to resemble the corporate structure of a Western company and is a model in China for corporate governance.

But the scrutiny is only going to get worse for Alibaba as it heads toward a public listing. Once Alibaba does go public, it no longer has the luxury of being coy about its actions, no matter how small. That’s the price you pay for being in the limelight, up among the technology giants of the world.

In Praise of Bitcoin, With Little Regard for Banks

A hearing on the regulatory future of Bitcoin on Tuesday turned into a forum on the shortcomings of the traditional banking industry.

The hearing, called by New York State’s top financial regulator, Benjamin M. Lawsky, gave five Bitcoin advocates the chance to enumerate what they view as the advantages Bitcoin could provide over current systems of moving money around the world.

“Solutions don’t really come from the current industry,” said Cameron Winklevoss, who, with his twin brother, Tyler, has invested in Bitcoin companies. They were early players in Facebook.

Even Mr. Lawsky got in some digs when he complained that it takes three days for his bank to transfer money to pay a credit card bill at the same bank.

When Mr. Lawsky asked about efforts by banks to create their own Bitcoin alternatives, Fred Wilson, a leading venture capitalist at Union Square Ventures, said “no one is going to build on top of JPMorgan Chase’s Bitcoin.”

JPMorgan’s chief executive, Jamie Dimon, went on the record last week and played  down the potential of virtual currencies like Bitcoin, which have become so hot over the last year. Bitcoin aficionados argue that digital money could provide a way to circumvent the transaction fees and penalties charged by banks.

The hearing underscored just how ambitious Bitcoin advocates are in their desire to create a new payment system. For his part, Mr. Lawsky showed openness to regulations that would encourage the new technology.

“We need to think internally about how we can be a more modern, digital regulator,” he said. Mr. Lawsky has proposed the creation of a BitLicense for virtual currency firms, but the concept rarely came up on Tuesday.

Regulators have so far been reluctant to come up with specific rules for virtual currencies or even to specify who should be supervising them. Mr. Lawsky indicated on Tuesday that he hopes to make New York the first state to provide regulatory clarity.

The panel on Tuesday morning was the first of five during a two-day hearing, and some of the other testimony may provide a more critical look at Bitcoin. But even Tuesday morning’s panel was not entirely friendly. The panelists suggested they were suspicious of any regulations that would force virtual currency start-ups to follow the same money-laundering laws imposed on traditional banks.

“If that’s the condition of a company starting, than maybe we don’t do it in the United States,” said Jeremy Liew, a partner at Lightspeed Venture Partners, a firm that invests in Bitcoin companies.

But Mr. Lawsky and his colleagues said that the industry was going to need to find a way to operate under the same laws as other financial firms.

“If the choice for regulators is to permit money laundering on the one hand, or to permit innovation on the other, we are always going to choose squelching the money laundering first,” he said.

Hanging over the hearing was the criminal complaint unsealed on Monday against a leading Bitcoin entrepreneur, Charles Shrem, and a business partner, who were accused of helping people buy drugs online using virtual currencies.

During the hearing, the Bitcoin Foundation, where Mr. Shrem was vice chairman, put out a statement indicating that Mr. Shrem had resigned on Tuesday.

Mr. Lawsky said the arrest shows the possibility that virtual currencies could be used to smooth the way for illegal activity. But the people testifying said that Mr. Shrem’s arrest showed that current laws are enough to stop wrongdoing in the Bitcoin universe, particularly because all transactions are recorded on a public ledger.

In the end, the panelists did much more than defend Bitcoin â€" they spoke about it as an almost messianic force for good in the world.
“It’s about freedom, ultimately, and whether you want to live in a society that embraces innovation and free speech and freedom or not,” Mr. Wilson said.

A minute later, Tyler Winklevoss echoed that: “Back to what Fred said: Bitcoin is freedom. It’s very American.”

Wall Street Listens for Litigation and Tax Clues in Obama’s Speech

Like last year, Wall Street might not be at the top of President Obama’s agenda in his State of the Union address on Tuesday night. But that doesn’t mean the financial community won’t be listening for certain cues.

The president plans to address immigration reform, the environment and income inequality, among other issues. Banks, on the other hand, might be more concerned with their legal bills, for instance, as the government continues to crack down on firms for sour mortgages they made in the lead-up to the financial crisis.

But the president doesn’t necessarily have to address Wall Street’s problems directly to give clues about what the future holds. Patting regulators on the back for JPMorgan Chase’s landmark $13 billion settlement, for example, could be seen as encouragement for authorities to pursue action against other institutions.

“We’ll all be reading between the lines,” said Brad Hintz, an analyst with Sanford Bernstein. “To me, we’re not the center of attention on this one.”

Wall Street has already been bracing for larger legal bills, which by some calculations could cost banks nearly $50 billion. Firms have been setting aside generous litigation reserves, which were so big at Morgan Stanley, in fact, that they dinged the bank’s fourth-quarter earnings.

Some observers, however, are looking for signs that Mr. Obama may want to ease up on regulations related to mortgages being made now. Or, more specifically, the ones banks are not making.

“One of the most positive things you could see in this speech is having the president address head-on that there is a mortgage credit crunch and that people who should be getting loans can’t get mortgages and can’t move into homes,” said Jaret Seiberg, an analyst with Guggenheim Securities. “It’s not that the president’s words are going to magically widen the credit box, but it would be a recognition that this problem is real and it’s hurting consumers and it might influence the regulators to take a half a step back.”

Earlier this month, the Mortgage Bankers Association lowered its forecast for mortgage originations in 2014 by $57 billion to $1.12 trillion for the year, citing declining mortgage application activity and rising interest rates. The group also lowered its expectations for refinance originations to $440 billion in 2014, from $463 billion.

Mr. Seiberg said he was encouraged last week by remarks from Michael A. Stegman, the counselor to the Treasury secretary for housing finance policy, that included concerns about broadening the availability of mortgage credit over the long term. Mr. Seiberg said he hoped that an acknowledgment of the issue by the president on Tuesday night could get the ball rolling on broader changes.

“The hope is that the president influences the regulators and the regulators influence the banks and the banks make credit more available to consumers,” he said.

One issue the president does plan to address, income inequality, could affect Wall Street if Mr. Obama outlines specific plans to change the tax code.

“I’ll be listening for things related to the tax code, but I don’t expect that to be a major focus,” said Byron Wien, the vice chairman of Blackstone Advisory Partners.

In November, the chairman of the Senate Finance Committee released a long-awaited set of proposals to overhaul the tax code for multinational corporations, fueling speculation on what broader tax code changes Congress may want to implement. Financial institutions, eager to clear up the uncertainty around taxes, will be looking for any hints that the president may drop on Tuesday night.

“Our members are mainly concerned about making sure the rules are clear,” said Alison Hawkins, the vice president of communications at the Financial Services Roundtable, a banking and insurance industry trade group. “If tax reform happens any time this year or if the president encourages tax reform this year, we’d see that as a positive sign.”

Big banks were a target of Mr. Obama’s address in 2012, although he didn’t mention Wall Street once during the State of the Union last year.

“And I will not go back to the days when Wall Street was allowed to play by its own set of rules,” Mr. Obama said in 2012. “The new rules we passed restore what should be any financial system’s core purpose: Getting funding to entrepreneurs with the best ideas, and getting loans to responsible families who want to buy a home, or start a business, or send their kids to college.”

Robert Diamond’s New Firm Hires Executive From J. C. Flowers

As Robert E. Diamond Jr. builds his new firm â€" his latest venture since leaving Barclays as chief executive â€" he has hired some experienced help to serve by his side.

Atlas Merchant Capital, the firm that Mr. Diamond founded last year, said late on Monday that it had hired David Schamis from J. C. Flowers & Company as a founding partner. Mr. Schamis will handle his new employer’s private equity investment arm.

Mr. Schamis, who joined J. C. Flowers in May of 2000, said in a statement that the chance to work with Mr. Diamond was “too compelling to pass up.”

“Bob is one of the world’s most accomplished bankers and his track record in building and selling Barclays Global Investors and in buying Lehman during the financial crisis â€" two of Barclays’ most successful transactions ever â€" is legendary,” he said.

Mr. Schamis is no slouch either, having previously worked at Salomon Brothers and having served on the boards of firms like Ascensus Retirement Services and the investment bank Fox-Pitt Kelton.

But the news release leaves out that his most notable recent board seat was at MF Global, the futures brokerage firm that collapsed nearly three years ago. It was Mr. Schamis who came up with the idea of bringing in Jon S. Corzine, the former Goldman Sachs chief executive, as chief executive at MF Global, according to Fortune magazine.

With Eye on Spain, Liberty Said to Join Hunt for ONO

LONDON â€" On the heels of its $13.7 billion deal on Monday to buy the Dutch cable operator Ziggo, John C. Malone’s Liberty Global media company is now reported to be in talks to acquire the Spanish telecoms operator ONO, according to The Financial Times.

Liberty Global faces competition from the British cellphone giant Vodafone, which is also in early-stage takeover talks with ONO over a deal that could be worth more than $10 billion.

The battle for ONO, whose shareholders include a number of private equity firms like Providence Equity Partners, is the latest potential consolidation in Europe’s telecommunications and cable sector.

Access to Spain’s large domestic market is driving interest from both Liberty Global and Vodafone, although a deal for ONO may still fall through, because the Spanish cable operator also is mulling an initial public offering.

Both companies already have large operations in other European markets, which would make it difficult to gain antitrust approval for large deals. And ONO’s existing cable, pay-TV and cellphone operations (the company reported revenue of 1.2 billion euros, or $1.6 billion, in the first nine months of 2013, the latest figures available) could provide an enticing prospect for any large telecoms firm with an eye on European expansion.

Along with its takeover of Ziggo, Liberty Global already scooped up the British cable provider Virgin Media for $16 billion last year. Vodafone, whose shareholders on Tuesday approved the $130 billion sale of its 45 percent stake in Verizon Wireless, bought the German company Kabel Deutschland for around $10 billion.

Medium Raises $25 Million in New Financing Round

Medium is about to become large.

The collaborative publishing startup has just closed a $25 million round of financing, the company confirmed, marking its first major funding raise since it launched a little more than a year ago.

Among the multiple parties involved in the round are Google Ventures (courtesy of general partner Kevin Rose), SV Angel’s Ron Conway and a number of other investors, such as Chris Sacca and Peter Chernin.

And more: Tim O’Reilly, Michael Ovitz, Gary Vaynerchuk, Betaworks, Code Advisors, CAA Ventures and Science.

The single largest contribution to the round, however, comes from Greylock Partners, the Silicon Valley firm which has previously invested in companies like Facebook, LinkedIn and Tumblr. So large, in fact, that general partners David Sze and Josh Elman will join CEO Evan Williams on Medium’s board.

This also marks the first time that Medium â€" a blogging product that sits somewhere in between Williams’s previous companies Twitter and Blogger â€" has taken capital from outside venture firms since its founding.

Previous to this raise, essentially all of the money invested in Medium was from Williams himself via his incubator and investment vehicle, The Obvious Corporation.

That made a certain amount of sense. Williams, of course, is a co-founder and former CEO of Twitter, and officially became a billionaire when the microblogging service went public last year.

Which raises the question: Why is Williams taking outside capital at all?

Williams, in an interview earlier this week, cited a few reasons: As Medium scales, taking money from multiple investors is a signal of long-term thinking and diversification to the company’s employees; and the more parties that have a stake in Medium outside of Williams, the more they have a stake in the company’s success.

Williams also specifically picked Sze and Elman for board seats for different reasons. Sze has a good investment track record, having sat as an observer on Facebook’s board of directors, and he is a current director on LinkedIn’s board. Elman and Williams go back to their days working together at Twitter, where Elman was a product manager on the company’s growth team.

And lastly, Williams can tap into the networks that outside investors bring with them â€" often something he doesn’t have time for while working on product and running his company full time.

Medium has gone through its fair share of criticism in its first year. Though Williams has long said the company is a “new place on the Internet where people share ideas and stories that are longer than 140 characters and not just for friends,” outsiders still haven’t been able to grasp just exactly what that means. Moreover, due to its early invite-only status and high-minded design principles, many viewed it as a space for high-quality content only.

Williams maintains that’s not true. He’s said he has taken a come-one, come-all approach to content on the platform, not barring any one particular form of content over another. “We welcome all the so-called ‘crap’ as well as the longer essays. But Medium isn’t just a long-form platform,” he said in an interview.

Ideally, Williams envisions Medium much like a magazine creative director, inviting the types of items that may show up in a magazine, from features to top-ten lists to cartoons to even video. Williams has also taken to hiring editors for different sections of Medium, though a Medium “editor” isn’t like a traditional magazine editor; section editors essentially work in talent discovery and story development, finding talented writers, inviting them to the platform and working on ideas with them to fully flesh out their stories.

Medium pays some of its writers, but more to spur the network’s creativity and invite others â€" who aren’t necessarily professional writers â€" to use the platform as an arena for self expression.

The biggest change over the past few months is the departure of colleagues Biz Stone and Jason Goldman, both of whom have worked with Williams for years at Twitter and, before that, Blogger. Stone and Goldman are no longer involved in the day-to-day aspects of Medium, said Williams, and haven’t been for some time as they have focused on their own startups.

Williams said this is amicable. While the three founded and built Medium inside its Obvious Corporation incubator, Stone and Goldman have also founded their own pet projects over time. Stone, of course, recently launched the mobile Q&A app Jelly, while Goldman has been involved in development at Branch, a startup that recently sold to Facebook.

Williams said the company plans to use its new capital on general expansion, including a move to a larger space on San Francisco’s Market Street, as well as continued hiring and infrastructure scaling.

(Re/code also did a long interview with Williams that is forthcoming.)

37.804372 -122.270803

A Familiar Trip for a Pre-Crisis Buyout

Another big pre-crisis buyout is heading for an unexpectedly safe landing. Seven years after taking travel technology company Sabre private for $5 billion, owners TPG and Silver Lake Partners are making the round-trip return to public markets. It’s one of many boom-time deals whose badly timed takeoff led to a bumpy ride.

From 2008 to 2012, Sabre’s revenue grew by only 5 percent in total. The company lost more than $125 million in the first nine months of last year. Along the way, a legal settlement with American Airlines parent AMR cost $350 million. And Sabre, which helps airlines process reservations and also owns Travelocity, still has net debt of $3.2 billion, over four times its $730 million of adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, for 2013, estimating the fourth quarter based on the pattern in 2012.

That measure of operating profit, which ignores impairments, acquisitions and many other costs, gives investors a way to evaluate Sabre’s initial public offering. One of its biggest rivals, Amadeus IT, trades at about 12.5 times Ebitda on the Madrid Stock Exchange. Sabre is more heavily indebted and growth has been slower. A multiple of around 10 would give it an enterprise value of $7.3 billion.

Subtract net debt and Sabre’s equity would be worth about $4.1 billion, or almost three times the original $1.4 billion check written by TPG and Silver Lake. Allow for management fees of 1.5 percent a year along with a 20 percent cut of the gain and, on a back-of-the-envelope basis, investors in the firms’ funds would net a 13 percent internal rate of return on the investment.

The biggest buyout funds from 2002 and 2003 have generated a median internal rate of return of about 26 percent, according to Preqin. The crop from 2004-2007 are so far running below 9 percent. That suggests the Sabre result is respectable, especially given the deep intervening recession, but still underwhelming compared with private equity’s history.

In theory, exiting Sabre at the same valuation after five years instead of seven - as the buyout firms probably hoped at the outset - could have generated a net internal rate of return of closer to 19 percent. Returns on other deals from the era, like Hilton Worldwide and Neiman Marcus, have similarly suffered from the wait. And for many buyouts of that vintage - including First Data, Toys “R” Us, Sungard and Univision - the clock is still ticking.

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

J.C. Penney Amends Poison Pill Plan

J.C.Penney altered its poison pill plan on Tuesday as it seeks to defend itself against potential activist investors and preserve a tax benefit.

The company lowered the threshold for its poison pill plan to 4.9 percent from 10 percent. It also said it had extended the plan until Jan. 26, 2017. The provisions were originally set to expire this August.

The threshold now requires investors to receive board approval to purchase more than 4.9 percent of the company’s shares. Not doing so would activate the poison pill, which would flood the market with shares of the company and dilute investors’ interest.

Existing shareholders who currently hold 4.9 percent or more of the company’s stock would be subject to the amendments only if they tried to buy additional shares.

The new plan takes effect immediately and will be subject to a shareholder vote in May.

J.C.Penney said that the poison pill changes were meant to protect its net operating loss carry forwards, or N.O.L.’s, which allow companies to offset future taxable income and liabilities. The retailer said it had $2 billion in such carry forwards.

J.C.Penney is still struggling to recover after a turbulent run with the activist investor William A. Ackman.

Mr. Ackman, who runs the hedge fund Pershing Square Capital Management, sold his roughly 18 percent stake in J.C.Penney in August after resigning from the board weeks before. The move effectively cut all ties between Mr. Ackman and the retailer, which suffered after adopting changes for which Mr. Ackman had agitated.

Mr. Ackman enlisted Ron Johnson, the former architect of Apple’s retail strategy, as the company’s chief executive. But Mr. Johnson’s strategy, like expensive renovations and the elimination of discount sales, ended up backfiring. The company ousted Mr. Johnson after just 17 months and replaced him with his predecessor, Myron E. Ullman III.

J.C. Penney’s stock has toppled nearly 80 percent over the last two years, and the company announced this month that it would shed about 2,000 jobs and close 33 stores.

Several companies have recently taken defensive steps to protect themselves against activist investors, who have stepped up their activity. Investors like Daniel S. Loeb and Carl C. Icahn often purchase shares in companies they intend to shake up.

Jos. A. Bank and Men’s Wearhouse, which share a number of the same investors, have both amended their poison pill provisions in their continuing takeover battle. Hertz, the car rental company, adopted a poison pill provision in December, citing “unusual and substantial activity” in the company’s shares.

As Apple Shares Fall, Icahn Picks Up More

Wall Street investors were shaken by Apple Inc.’s latest quarterly results. But not Carl C. Icahn.

The activist investor took to his favorite broadcasting tool, Twitter, on Tuesday to disclose that he had purchased an additional $500 million in shares in the iPhone maker. (Last week, he said he owned about $3.6 billion worth of Apple stock, meaning that his current stake as of Tuesday could be worth more than $4 billion.)

But let’s let Mr. Icahn speak for himself.

Just bought $500 mln more $AAPL shares. My buying seems to be going neck-and-neck with Apple’s buyback program, but hope they win that race.

â€" Carl Icahn (@Carl_C_Icahn) 28 Jan 14

Shares in Apple had already fallen more than 7 percent by then on Tuesday morning. And the stock fell more after Mr. Icahn’s post.

As his Twitter message suggests, Mr. Icahn has not quite let go of his belief that Apple should increase its stock buyback program.

So why step in now? For the veteran investor, Apple’s latest results just look like a buying opportunity. Here’s what CNBC’s Scott Wapner says he was told by Mr. Icahn:

Of $AAPL, @Carl_C_Icahn says over the years he’s made a great deal of money buying on these dips esp when reason for dip is misinterpreted.

â€" Scott Wapner (@ScottWapnerCNBC) 28 Jan 14

@Carl_C_Icahn tells me there was a major positive in $AAPL’s message yesterday - new products in new categories coming within the year.

â€" Scott Wapner (@ScottWapnerCNBC) 28 Jan 14

Lloyds Banking Group to Cut More Than 1,000 Jobs

LONDON - The Lloyds Banking Group said on Tuesday that it would eliminate an additional 1,080 jobs as part of a restructuring plan first it began in 2011.

The bank, which was bailed out by the British government during the financial crisis, said in June 2011 that it would eliminate as many as 15,000 jobs by the end of this year. Lloyds said at the time that the jobs cuts would save as much as 1.5 billion pounds, or about $2.5 billion, annually by the end of 2014. The bank currently has about 90,000 employees.

“Lloyds Banking Group is committed to working through these changes with employees in a careful and sensitive way,” the bank said. “All affected employees have been briefed by their line manager today.”

The jobs cuts will be spread across the bank’s retail, risk, operations and commercial banking divisions. The bank also plans to outsource another 310 jobs.

“The group’s policy is always to use natural turnover and to redeploy people wherever possible to retain their expertise and knowledge within the group,” the bank said. “Where it is necessary for employees to leave the company, it will look to achieve this by offering voluntary redundancy. Compulsory redundancies will always be a last resort.”

Lloyds received a £17 billion bailout in 2008, and the British government still owns about a third of the bank.

Since it was bailed out, the bank has sold noncore businesses to streamline its offerings and has focused its lending efforts on its home market, Britain.

The bank has returned to profitability, reporting earnings of £1.5 billion in the third quarter.

Martin Marietta Materials Seals Deal for Texas Industries

Martin Marietta Materials has agreed to acquire Texas Industries in an all-stock deal worth more than $2 billion, the companies announced on Tuesday morning.

In the deal, Martin Marietta will exchange seven-tenths of one of its shares, worth $71.95, for each Texas Industries share.

Martin Marietta is a big producer of sand and gravel, and acquiring Texas Industries, a construction supplies company, will expand its range of offerings and deepen its presence in the fast growing Texas market.

“We like the Texas market a lot,” Martin Marietta’s chief executive, C. Howard Nye, said in an interview. “This augments the position we have in Dallas, Fort Worth. And the Texas market for the long term is one of the most dynamic in the country.”

The two companies began merger talks last year but could not agree on a deal. Talks restarted recently and proceeded over the weekend, with final details coming together on Monday.

Mr. Nye said his company had been looking at Texas Industries since 2010, when it reviewed its strategic plan.

Shares of Martin Marietta, which has a market value of about $4.9 billion, were up 4.4 percent on Tuesday, regaining ground lost in the days leading up to the finalization of the deal.

The acquisition will benefit the company in two ways, Mr. Nye said, protecting Martin Marietta’s balance sheet and reducing its tax bill.

The deal will be significant for the two shareholders that control more than 50 percent of Texas Industries’ stock. Southeastern Asset Management, the money manager that opposed the Dell buyout, owns about 28 percent of the shares, and NNS, a group controlled by the Egyptian billionaire Nassef Sawiris, owns 23 percent. Both Southeastern and NNS have previously owned Martin Marietta shares, and Mr. Nye said this fact helped smooth the deal.

Acquiring Texas Industries will allow Martin Marietta to move past its failed bid for a rival, Vulcan Materials, two years ago. That deal led to a messy legal dispute, but Martin Marietta shares have risen steadily since then.

“We had a lot of conviction about the Vulcan transaction or we wouldn’t have gone ahead with it,” Mr. Nye said. “But this was one of the options we were considering. When you’re going through a strategic planning process, it’s not necessarily about one company.”

JPMorgan Chase, Deutsche Bank and Barclays advised Martin Marietta Materials, while Cravath, Swaine & Moore provided legal advice. Citigroup advised Texas Industries, and Wachtell, Lipton, Rosen & Katz provided legal advice.

Vodafone Shareholders Approve Sale of Verizon Wireless Stake

Vodafone shareholders approved the company’s sale of its 45 percent stake in Verizon Wireless on Tuesday, paving the way for one of the largest acquisitions in corporate history.

Investors overwhelmingly voted in favor of the $130 billion sale to Verizon Communications. The deal will return about $84 billion to shareholders in what Vodafone said was the single largest return of value in history, according to a presentation on its website.

Vodafone, one of the world’s largest cellphone operators, confirmed its intent to sell the stake in Verizon last year. The deal will give Verizon, which counts nearly 100 million cellphone subscribers in the United States, complete ownership of its wireless business.

Vodafone plans to announce more details of the transaction in its quarterly results next week. The deal will consist of $58.9 billion in cash and $60.2 billion in Verizon stock.

The deal comes as the European telecommunications industry continues to consolidate amid ongoing regulatory uncertainty. On Monday, AT&T said it was not in discussions to buy Vodafone, spurring speculation on whether Vodafone was better off on its own.

“Our sustained investment in Verizon Wireless has created a great deal of value for shareholders from a market leader with great momentum,” Gerard Kleisterlee, Vodafone’s chairman, said in a statement last fall. “Verizon’s offer now provides us with an opportunity to realize this value at an attractive price.”

Under Pressure, Abercrombie & Fitch Splits Roles of Chairman and C.E.O.

Abercrombie & Fitch said on Tuesday that it has spit the roles of chairman and chief executive, a significant move by the embattled teen retailer as it faces pressure from investors.

The appointment of Arthur C. Martinez, the chairman of HSN Inc., as nonexecutive chairman strips Michael S. Jeffries of a role that he has held since 1996. Mr. Jeffries will remain chief executive, however.

Beyond adding Mr. Martinez, Abercrombie added two other new directors: Terry Burman, the chairman of the Zale Corporation, and Charles R. Perrin, a former chief executive of Duracell. The retailer’s board now numbers 12 members, all up for re-election ever year.

And the company also eliminated its shareholder rights plan, designed to prevent investors or potential buyers from buying too much control over the retailer’s shares.

Tuesday’s news seemed heralded by shareholders, with Abercrombie’s stock up 6 percent in early morning trading at $36.74.

The move by Abercrombie is the biggest change yet since the emergence of dissatisfaction among its investors. Once heralded as a champion of teen clothing â€" a feat built largely on a provocative advertising campaign and no small end of controversy â€" the company has since fallen behind rivals.

Among the biggest targets for criticism has been Mr. Jeffries, who has been credited for masterminding the retailer’s rise and then overseeing its descent. The 69-year-old executive has had his share of clumsy comments, including publicly saying he wanted to chase only “the cool kids” and admitting his company was exclusionary.

Investors have certainly lost confidence in the retailer: Its shares have fallen 30 percent in the 12 months ended on Monday, before news of the governance shakeup.

One of the more vocal critics has been Engaged Capital, an activist hedge fund that holds a stake of about 0.5 percent. The investment firm had publicly urged Abercrombie to replace Mr. Jeffries, or, failing that, to explore selling itself.

Abercrombie didn’t quite go that far. Days after Engaged made its demand, the board renewed Mr. Jeffries’ employment contract, but tied his compensation more closely to the company’s performance.

Casablanca Capital Urges Changes at Cliffs Natural Resources

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Adding Up the Costs of Data Breaches

There seems to be an announcement almost weekly that a retailer has been the victim of a cyberattack in which consumer information has been stolen. Has this become the next wave of 21st century white-collar crime as the world of electronic credit and payments opens up companies to more and more thefts of financial information?

The latest disclosure of a possible security breach comes from Michaels Stores, which said it was looking into possible fraudulent activity involving its stores but had not yet confirmed any misuse of customer financial information. As hackers’ sophistication increases, companies have a harder time even detecting whether computer systems have been attacked and the extent of any security breach.

Unlike many types of white-collar crime that affect only individual companies and markets, a broad swath of society is at risk when hackers obtain personal financial information. As The New York Times reported, Target was particularly vulnerable to having its system invaded by hackers, who may have exposed credit and debit card information on up to 40 million customers.

Companies that have been attacked are still trying to figure out how quickly to disclose a security breach.
Neiman Marcus, for example, sent a letter to Senator Richard Blumenthal of Connecticut, who had questioned the retailer’s failure to promptly notify customers. It gave a timeline of how it was hacked by the same computer program that attacked Target and said it had received information shortly before Christmas about a possible problem with credit cards used at its stores. A report on New Year’s Day confirmed that its computer system had been breached, but the company did not make any public announcement until Jan. 10.

On the other hand, Michaels Stores disclosed the potential breach even before it confirmed that financial information had been obtained. In a letter to customers, the company said it had “recently learned of possible fraudulent activity on some U.S. payment cards that had been used at Michaels, suggesting we may have experienced a data security attack.”

There is pressure on a company whose information has been stolen to keep quiet and delay disclosures to customers and shareholders. From a law enforcement perspective, keeping a security breach confidential may help criminal investigators track down who received the information and how they might be selling it. A public announcement of a cyberattack puts the perpetrators on notice to tread more carefully in how they might use customer financial information.

The challenge is not finding a crime to prosecute. It is locating the perpetrators and bringing them to the United States to face charges. The malware used to infiltrate computer systems at Target and Neiman Marcus reportedly originated in Russia, and the stolen information has been passed around Eastern Europe. That means that most of those involved in the hacking are beyond the reach of American authorities.

There are plenty of criminal laws on the books that can be used to prosecute cybercrime. Federal statutes make it a crime to access a computer to fraudulently obtain information (18 U.S.C. § 1030(a)(4), and to use “a means of identification of another person,” including by selling or trading stolen personal financial information (18 U.S.C. § 1028A).

Unlike other types of white-collar crimes, in which defendants often claim they did not believe their conduct constituted a violation, cybercriminals know exactly what they are doing and why. (While technologically sophisticated, they are still just thieves.) So these cases present a different challenge for prosecutors, who often need secrecy to track down those behind the cyberattacks.

But the need for a company victimized by hacking to disclose information can be just as great, especially when personal financial information is involved. Although credit card holders are not subject to significant losses if they promptly report fraudulent transactions, that is cold comfort when trying to figure out whether fraudulent charges have been made.

If a credit card account is misused, the cardholder has to spend time straightening out unauthorized transactions and dealing with the issuance of new cards. Even more dangerous is the potential for identity theft, which could result in substantial disruptions to an individual’s financial life that can take months to fully rectify.

For publicly traded companies like Target and Neiman Marcus, there is an additional obligation to disclose material information to shareholders in a timely manner. For any retailer, a cyberattack may drive customers away and affect income through increased expenses for stronger computer security, providing identity theft protection to affected customers and refunding of any fraudulent charges.

The potential effect on the bottom line could be significant, and something every shareholder is likely to want to learn about sooner rather than later. Yet neither Target nor Neiman Marcus has submitted a filing with the Securities and Exchange Commission giving an estimate of the potential costs of the hacking they experienced, leaving shareholders in the dark about the effect of these episodes.

Companies that have so far avoided the hacking afflicting retailers must be aware of the potential that their computer systems are vulnerable to a cyberattack. At the recent World Economic Forum in Davos, Switzerland, the chief executive of Western Union pointed out that dealing with hackers had become a “street fight.”

Hackers are getting more sophisticated, which means the costs to fight them will grow as companies address the type of porous security that got Target into so much trouble. Shareholders are likely to hear more about how companies are trying to protect themselves and the rising cost of doing so.

R.B.S. to Reduce Foreign Exchange Benchmark Offerings

LONDON - The Royal Bank of Scotland said Tuesday that it would reduce the range of foreign exchange benchmarks it offers to clients who trade currency markets.

In a memo sent to clients and reviewed by DealBook on Tuesday, the bank said it would only offer a limited array of “fixes” - a benchmark rate that reflects what a currency is trading at a certain time of day - beginning on Feb. 8.

The change comes as R.B.S. and many of the world’s largest banks are facing a series of investigations by regulators into whether traders attempted to manipulate key currency benchmarks in the $5-trillion-a-day foreign exchange market.

“Subject to market conditions, we will continue to accept orders you place with us at these fixings but it is important for you to be aware that in order for R.B.S. to appropriately manage market risk, we may enter the market ahead of the fix,” the bank said. “This, or other market factors, may result in the market moving for or against you depending on the size of your order relative to market liquidity.”

More than a dozen traders at some of the world’s largest banks, including traders at R.B.S., Deutsche Bank and HSBC, have been placed on leave amid questions about whether they colluded to manipulate benchmark currency rates.

Authorities in the United States, Britain, Switzerland, Germany and Hong Kong have all begun investigations, which are in the early stages.

Many of the world’s largest banks, including Citigroup, Barclays and UBS, have acknowledged that they are subject to those inquiries. None of the banks nor any of the traders who have been suspended has been accused of wrongdoing.

The foreign exchange market is lightly regulated, and the banks that dominate the marketplace control much of the information about how currencies are priced.

Trading around the “fixes” is one area that regulators have focused on, given the potential that large orders placed just ahead of the allotted measurement time could impact a benchmark price, such as the United States dollar to the British pound.

The benchmark, particularly the 4 p.m. prices in London and in New York, are used by insurance companies, fund managers and others in calculating their holdings.

“Going forward, we will implement a cut-off for acceptance of orders at fixings,” R.B.S. said. “The appropriate cut-offs for each fixing will be communicated to you by your FX coverage person.”

The bank will continue to provide fixes at 9 a.m. and 4 p.m. in London, 4 p.m. in New York and a 1:15 p.m. Central Europe Time tied to the European Central Bank. It also will provide fixes related to the Indian rupee, the Korean won and the Thai baht.

Fantex Moves Forward With Football Player I.P.O.

Fantex, a start-up looking to sell stocks tied to athletes’ future earnings, is getting back in the game after taking a couple of hits.

The company said on Tuesday that it was moving forward with a planned initial public offering of stock linked to Vernon Davis, the star tight end of the San Francisco 49ers who experienced a concussion last fall. With Mr. Davis back on the field, Fantex is hoping that investors will show up for its inaugural deal.

The offer represents the second attempt by Fantex to pull off an athlete I.P.O. Last fall, the company caused a stir on Wall Street and in the sports world when it said it would offer shares linked to the future income of the Houston Texans running back Arian Foster. But less than a month later, Fantex postponed the offering when Mr. Foster was placed on injured reserve.

Mr. Davis, the second N.F.L. player to sign with Fantex, is now set to be the guinea pig for this new and highly speculative type of investment. Fantex plans to offer shares representing a 10 percent interest in Mr. Davis’s future income, including the value of his playing contracts, corporate endorsements and appearance fees.

If enough investors sign up to reserve stock, Fantex expects to sell 421,100 shares at $10 each, raising $4.2 million. The company plans to pay Mr. Davis $4 million for the tracking shares, with the balance of the I.P.O. covering the costs of the deal.

For investors to make money, the total value of Mr. Davis’s future income has be more than $42 million. The company has valued that potential money pot at $61 million.

Unlike some other investments, the Fantex tracking shares do not give the investor a direct legal right to the athlete’s income.

Adding some star power to this endeavor, Fantex announced separately on Tuesday that the golf legend Jack Nicklaus would join its advisory board. Mr. Nicklaus, 74, a retired athlete in possession of an immensely valuable brand, said in a statement: “I wish a platform such as this existed early in my professional career.”

An open question is whether more athletes will decide to take the Fantex proposition, accepting a lump sum in exchange for a significant portion of all future income related to their brand, including after they retire. The Vernon Davis I.P.O. represents a smaller portion of the athlete’s income than the one connected to Mr. Foster, which, if it eventually goes forward, would claim a 20 percent share.

The company’s debut in the fall was marred by a pair of seemingly inauspicious events. Not long after his I.P.O. was announced, Mr. Foster required back surgery to repair a ruptured disc, ending his season. Mr. Davis left a game in the first half after suffering a concussion.

But Buck French, the chief executive and co-founder of Fantex, seemed to take the setback in stride, saying that things never go quite as planned. He also said the injuries made prospective investors more aware of the risks.

“With the belief in short-term pain, long-term gain as a mantra, I think it certainly conditioned the market to the risks inherent in the security that we outlined in the prospectus,” Mr. French said.

The threat of injury is just one of the risks that investors in the Fantex stock accept.

While the stock simulates owning a portion of an athlete’s brand, it is actually an ownership interest in Fantex itself, a risky start-up without a proven track record. While the company hopes to pay a dividend, that is not guaranteed. In addition, Fantex is allowed to dissolve the tracking stocks at any time and convert them into shares of the management company.

Rather than trade on the New York Stock Exchange or the Nasdaq, the tracking stocks will trade only on an exchange operated by Fantex, where there is no guarantee of liquidity. Fantex plans to take a 1 percent commission from both the buyer and seller in any secondary transactions.

At core, Fantex is a sports marketing and management company, with plans to promote Mr. Davis’s brand after completing his I.P.O. The company will keep 5 percent of the money flowing to investors in the deal.

To promote the offering, Fantex is holding a “road show” tour across the United States in a former Madden Cruiser, the bus made famous by the football great John Madden. Investors can start reserving shares on Thursday.

“I fundamentally believe that this overarching concept of Fantex will exist one day,” Mr. French said. “Whether it’s us or not, I guess that comes down to how well we execute and whether the market wants it to exist.”

Tension Grows Between Japan and China

Relations between China and Japan have been strained since World War II. But now, the regional clash is having a global economic effect, Andrew Ross Sorkin writes in the DealBook column. The battle was on full display last week at the World Economic Forum in Davos, Switzerland, setting off fears that the souring relationship could pose direct economic risk to businesses across the globe. And there may be no one to defuse the situation.

Mr. Sorkin writes: “One of the greatest challenges multinational companies doing business in the region may face is that the United States government may not be positioned to step into the middle of the debate.”

BITCOIN EXECUTIVE ARRESTED  |  Bitcoin continued to make headlines on Monday with the disclosure that one of the virtual currency’s most prominent players, Charles Shrem, was arrested on Sunday at John F. Kennedy International Airport. He was charged with conspiring to launder money using his company, a Brooklyn-based Bitcoin exchange called BitInstant, Nathaniel Popper writes in DealBook. His business partner, Robert Faiella, who is known as BTCKing, was also arrested on Monday at his Florida home in connection with the money-laundering scheme.

BitInstant won backing last year from Winklevoss Capital, which is run by the twins Tyler and Cameron Winklevoss of Facebook fame. In a statement, Winklevoss Capital said, “We fully support any and all governmental efforts to ensure that money-laundering requirements are enforced, and look forward to clearer regulation being implemented on the purchase and sale of Bitcoins.”

Unrelated to the arrests, Benjamin M. Lawsky, the New York State superintendent of financial services, is set to hold a two-day hearing on the legality of Bitcoin starting on Tuesday.

DIFFERENT MEDIUM, SAME MESSAGE FOR PERKINS  |  It is usually considered good practice to stay on point. But perhaps not after comparing criticism of America’s wealthiest to Nazi attacks on Jews. On Monday evening, two days after The Wall Street Journal published a letter by the venture capitalist Thomas J. Perkins in which he questioned whether “progressive radicalism” indicated the possibility of a new Kristallnacht, Mr. Perkins appeared on television, sticking to his message that those in the 1 percent were being demonized by the 99 percent.

During the interview on Bloomberg Television, Mr. Perkins, a founder of the venture capital firm Kleiner Perkins Caufield & Byers, said he regretted using the word Kristallnacht. “My point was that, when you start to use hatred against a minority, it can get out of control,” Mr. Perkins said. “I regret the use of that word. It was a terrible misjudgment,” he said. “I don’t regret the message at all.”

While Mr. Perkins remained committed to message during the interview, he also managed to discuss a wide range of topics, including his watch (a Richard Mille worth hundreds of thousands of dollars), his former wife (the author Danielle Steel) and his underwater airplane.

ON THE AGENDA  |  The Federal Open Market Committee convenes its January meeting. The Standard & Poor’s/Case-Shiller home price index for October is released at 9 a.m. The consumer confidence index for January comes out at 10 a.m. President Obama delivers the State of the Union address at 9 p.m. Comcast releases earnings before the bell. AT&T and Yahoo release earnings after the market closes. The New York Department of Financial Services holds a hearing at 10 a.m. on the regulation of digital currencies. The Senate Committee on Banking, Housing and Urban Affairs holds a hearing at 10 a.m. on the Export-Import Bank of the United States. The House Committee on Financial Services holds a hearing at 10 a.m. on the Consumer Financial Protection Bureau.

VODAFONE: HUNTER OR PREY?  |  Vodafone, the British telecommunications giant, is at a crossroads. Despite making a number of deals in the last year to expand its offerings, Vodafone could soon become a takeover target, Mark Scott writes in DealBook. And while the company is known for engineering the largest corporate acquisition in history (last year’s $130 billion deal to sell its 45 percent stake in Verizon Wireless to Verizon Communications), its path forward is uncertain.

Speculation that AT&T might be looking to purchase Vodafone have been swirling since last week, when AT&T’s chief executive met with the European commissioner who oversees the Continent’s telecommunications sector in Davos, Switzerland. Though AT&T announced on Monday that it was not in talks to purchase Vodafone, valued at more than $100 billion, the denial only fanned the speculative flames. Indeed, “no other target offers the same blend of scale, mobile focus and freedom from political interference,” Quentin Webb writes for Reuters Breakingviews.

And while Vodafone has operations in emerging markets, its dependence on its core European business makes it especially vulnerable. “That reliance on sluggish European economies has led analysts and investors to speculate that the company may be open to a takeover approach from a large international rival that would add Vodafone’s European and developing markets operations to its existing global business,” Mr. Scott writes.

 

Mergers & Acquisitions »

Martin Marietta Materials to Acquire Texas Industries  |  The acquisition of the construction supplies company Texas Industries for about $72 a share will allow Martin Marietta Materials to move past its failed bid for Vulcan Materials two years ago. DealBook »

Bank of Montreal Parent to Buy British Fund Manager  |  The Bank of Montreal’s parent has agreed to buy the fund manager F&C Asset Management for $1.2 billion, Reuters reports. REUTERS

Comcast and Charter Near Agreement on Time Warner Assets  |  The Comcast Corporation is close to a deal to buy cable assets in New York City, North Carolina and New England from Charter Communications if Charter succeeds in acquiring Time Warner Cable, Bloomberg News reports, citing unidentified people familiar with the situation. BLOOMBERG NEWS

Time Warner Cable Hires Centerview  |  Time Warner Cable has hired the investment bank Centerview to advise the company on Charter Communications’ $61 billion takeover bid, The Financial Times writes. FINANCIAL TIMES

United Technologies Considers Sale or Spinoff of Sikorsky  |  United Technologies is considering Sikorsky, the maker of the Black Hawk helicopter, as a candidate for a tax-free spinoff or potentially a sale to a rival. DealBook »

Google Acquires British Artificial Intelligence Developer  |  Google has acquired DeepMind Technologies, a British start-up whose founders include Demis Hassabis, a computer game designer, neuroscientist and former child chess prodigy. DealBook »

INVESTMENT BANKING »

Bair, a Critic of the Revolving Door, Joins Board of Santander  |  Sheila C. Bair, who ran the Federal Deposit Insurance Corporation, once argued that former regulators should be barred from joining the banks they oversaw. Though Santander is based in Madrid, it has extensive operations in the United States. DealBook »

Past Sins Haunt Royal Bank of Scotland  |  The bank said it would set aside 3 billion pounds, or nearly $5 billion, to cover litigation losses tied to soured mortgage-backed securities and other assets sold before the financial crisis began. DealBook »

In Recruiting Game, Wall Street Still Competes  |  As this year’s recruiting season begins, some college students say they view finance positions as springboards for later careers, while others are drawn to the challenge and fast-paced environment. Still others are, naturally, motivated by the high salaries that Wall Street offers. DealBook »

Former JPMorgan Executive Said to Settle Hiring Dispute  |  JPMorgan Chase appears to have settled a dispute with Frank Bisignano, a former close confidant of its chairman, Jamie Dimon, the latest reminder that the inner circle that helped the bank weather the financial crisis is no more. DealBook »

JPMorgan to Decide on Dimon’s Stock Options  |  JPMorgan Chase’s board must resolve whether Jamie Dimon, the bank’s chairman and chief executive, can collect two million stock options valued at about $34 million, Bloomberg News writes. BLOOMBERG NEWS

Study Puts Price Tag on ‘Too Big to Fail’  |  An analysis commissioned by the Green Party in the European Parliament estimates that the cost of the implicit guarantee that governments will back large financial institutions was about 234 billion euros in 2012. DealBook »

PRIVATE EQUITY »

K.K.R. to Buy Sedgwick, an Insurance Claims Processor  |  The $2.4 Billion deal for Sedgwick Claims Management Services is the latest multibillion-dollar transaction by Kohlberg Kravis Roberts in recent months. DealBook »

Thoma Bravo Explores Sale of Blue Coat  |  The private equity firm Thoma Bravo is considering a sale of Blue Coat Systems, a maker of enterprise security and network software, which it acquired in February 2012 for $1.3 billion, Reuters reports, citing unidentified people familiar with the situation. REUTERS

Kravis Named Chairman of Education Charity  |  Henry R. Kravis, a co-founder of the private equity giant Kohlberg Kravis Roberts, has been elected chairman of the board of Sponsors for Educational Opportunity, a charitable organization based in New York. DealBook »

The Story of Trilantic Capital  |  Charlie Ayers, the chairman of the private equity firm Trilantic Capital Partners, discusses how he spun out the firm from Lehman Brothers in a video by Privcap. PRIVCAP

HEDGE FUNDS »

Distressed Debt Hedge Fund Commits $530 Million to Europe  |  Marathon Asset Management has gained a reputation for finding opportunities by picking over what is left in the aftermath of financial disaster. It is starting a new fund dedicated to distressed debt in Europe. DealBook »

Herbalife Shares Rise After Bullish Analyst Takes New Job  |  Timothy Ramey has resigned from his job as an analyst at D.A. Davidson to serve as a consultant for Post Holdings, the parent company of the maker of cereals and other foods. The chief executive of Post is the fourth-largest shareholder of Herbalife. DealBook »

Elliott Management Cultivates Activist Image  |  Elliott Management, the hedge fund started by Paul E. Singer, used to be in the practice of distressed debt investing but has lately been building a reputation as an activist investor, The Financial Times reports. FINANCIAL TIMES

Tiger Global to Invest in Brazilian Online Retailer  |  The hedge fund will invest nearly $520 million in the Brazilian online retailer B2W Companhia Digital, a sign that it continues to see promise in Brazil’s vibrant Internet sector. DealBook »

Judge Throws Out Racketeering Claims Filed by Cohen’s Former Wife  |  A judge narrowed the scope of a civil lawsuit filed by Patricia Cohen, Steven A. Cohen’s ex-wife. But he had some choice words about their continuing legal squabbles. DealBook »

I.P.O./OFFERINGS »

File-Sharing Platforms Could Be I.P.O. Candidates  |  File-sharing companies like Box and Dropbox are considering initial public offerings, The Wall Street Journal reports. Accellion, a file-sharing company for mobile and nonmobile devices, is also considering an I.P.O. WALL STREET JOURNAL

Fund Managers Concerned With Expected Number of London I.P.O.’s  |  Small-cap fund managers have expressed concern that a high number of initial public offerings on the London Stock Exchange could make it impossible for them to provide enough funds to companies, The Financial Times reports. Some fund managers may need to sell existing investments to fund purchases of new shares. FINANCIAL TIMES

VENTURE CAPITAL »

Bitcoin and the Fictions of Money  |  The venture capitalist Marc Andreessen and other experts have weighed in on the promise and pitfalls of Bitcoin, but so far, there is little discussion of what the collective decision to believe a fiction like Bitcoin might mean, Quentin Hardy writes in the Bits blog. NEW YORK TIMES BITS

Opposite Coasts Duel on Bitcoin Rules  |  California and New York are both preparing to write regulations on how investors can use Bitcoin and other virtual currencies, Bloomberg News reports. BLOOMBERG NEWS

Chinese Market Entices Venture Capitalists Again  |  After a number of recent initial public offerings by Chinese companies, venture capitalists are looking for deals again in mainland China, The Wall Street Journal reports. WALL STREET JOURNAL

Venture Capital Extending Its Reach  |  Though venture capital firms used to invest largely in technology companies, they are increasingly providing funding to companies that sell low-tech or no-tech products, TechCrunch writes. TECHCRUNCH

Venture Capitalist Heads to Japan  |  Gen Isayama, chief executive of the venture capital firm WiL, is starting a $300 million fund in Japan, Bloomberg Businessweek reports. BLOOMBERG BUSINESSWEEK

LEGAL/REGULATORY »

Securities Class-Action Suits Up Slightly in 2013  |  More class-action lawsuits were filed against public companies in 2013 than in the previous year, but the filers were seeking billions less in damages than they have on average. DealBook »

U.S. Relaxes Some Data Disclosure Rules  |  The Obama administration will allow Internet companies to talk more specifically about when they are required to turn over customer data to government agents, the Justice Department said on Monday. NEW YORK TIMES

Fed President Urges More Stimulus  |  Narayana R. Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said the central bank should increase its efforts to stimulate the economy â€" a view he conceded had not gained much traction with his colleagues. NEW YORK TIMES

As Loehmann’s Liquidates, Bargains Get Bigger as Shelves Get Emptier  |  Loehmann’s, which filed for bankruptcy last year, began liquidating its collection of discount clothes and other merchandise earlier this month. But some customers may have been dismayed to see markdowns that averaged just 30 percent. DealBook »

Senior Justice Department Attorney to Join Morrison & Foerster  |  Charles Duross, who led the Justice Department’s unit that enforces the Foreign Corrupt Practices Act, is joining the law firm Morrison & Foerster as head of its global anticorruption practice. DealBook »