17 Brokerage Firms Agree to End Analysis Previews

Seventeen brokerage firms, including Citigroup, Goldman Sachs, JPMorgan Chase and Merrill Lynch, have agreed to stop participating in money management surveys aimed at tapping into research analysts’ changing views on companies before those opinions are publicly issued.

The firms’ decisions to end their participation in money managers’ questionnaires were disclosed on Tuesday by , the New York attorney general. The 13 other firms that signed on to the deal were Barclays Capital; Deutsche Bank; Morgan Stanley; UBS; Credit Suisse; Sanford C. Bernstein; Stifel, Nicolaus & Company; Keefe, Bruyette & Woods; Thomas Weisel Partners; the Macquarie Group; FBR Capital Markets; Wolfe Research; and Vertical Research Partners.

All of the firms also agreed to continue cooperating with the attorney general’s investigation into analysts’ surveys, which is continuing. In January, the attorney general sent subpoenas to the firms seeking details of their participation in the surveys.

Photo Eric T. Schneiderman, the New York attorney general, has struck a deal with 17 brokerage firms. Credit Joshua Bright for The New York Times

Mr. Schneiderman’s deal with the firms comes after last month’s announcement that BlackRock, the world’s largest asset management company, would end its practice of surveying Wall Street analysts to glean clues about their shifting stances on companies.

The attorney general has been critical of companies that allow some clients to receive market-sensitive information ahead of others, a practice he calls “Insider Trading 2.0.” Mr. Schneiderman’s investigation into the BlackRock surveys determined that they were designed to obtain information that could be used to trade ahead of changes in analysts’ recommendations.  

Analysts’ changing assessments on the companies they follow can be market-moving events. As a result, traders receiving such information ahead of other investors can generate outsize profits.

Mr. Schneiderman praised the firms’ actions in a statement late Tuesday.  “All of these firms have shown leadership in agreeing to stop a practice that can offer an advantage to powerful clients at the expense of others,” he said. “Our markets will only be fair and healthy if everyone plays by the same rules, which is why we will continue to take action against those who provide unfair advantages to elite traders at the expense of the rest of us.”

Regulators require brokerage fi! rms to monitor and curb the information flow from research departments to prevent the potential for trading ahead of analyst reports. The BlackRock surveys were the subject of an article in The New York Times in July 2012.

Internal documents obtained by The Times and cited in the article showed that BlackRock’s questionnaires would ask analysts whether a company’s near-term profits were more likely to surprise “on the upside or downside,” and how likely it was that a company would be “taken over in the next six months.” Analysts responding to this question were asked to exclude transactions that had already been announced.

The attorne general’s investigation into BlackRock indicated that brokerage firms allowed analysts to participate in the surveys in part because money managers are big clients and generate considerable trading commissions. BlackRock, with $4.3 trillion under management, is one of the largest trading customers on Wall Street.

The attorney general’s investigation also concluded that BlackRock rewarded analysts for participating in the surveys by assigning them higher ratings in industry rankings. These rankings are closely watched on Wall Street and can burnish analysts’ career prospects and fatten their paychecks.

Trading Site Failure Stirs Ire and Hope for Bitcoin

The apparent collapse of Bitcoin’s best-known and once-dominant trading platform has provoked outrage among its users, but it has also stirred hopes that the way may now be clear for more established players to transform and rein in a largely unregulated market.

Hours after it stopped trading without warning Monday night, the secretive Bitcoin exchange Mt. Gox said that it would “close all transactions for the time being in order to protect the site and our users.” The action and brief statement left users wondering where their money went, amid accusations that as much as 6 percent of the Bitcoins in circulation were now missing â€" worth more than $300 million at current exchange rates.

Outside the offices of Mt. Gox in central Tokyo, disgruntled Bitcoin traders and their supporters held up signs that read “Where Are My Bitcoins?”

“I’m filled with disbelief,” said Kolin Burges, a trader from London who flew to Japan this month after the exchange stopped paying out funds. “I was prepared for the worst, but it’s hard to believe they might have lost their coins.”

Toru Hanai/Reuters Protesters outside of the building in Tokyo where Mt. Gox is housed.

Yet the unanswered questions about Mt Gox did not shake the faith of many in Bitcoin. With one of its earliest online marketplaces seemingly gone, the world of virtual currency may now be forced to become a more mature part of the financial system.

“I think it’s a significant event, but I think there’s a decent chance that it is part of what we would call this sort of shaking out of the industry as it matures and slowly becomes a little more regulated,” said Benjamin M. Lawsky, New York state’s top financial regulator.

Mr. Lawsky is not the only regulator trying to determine the next steps. Three commissioners from the Commodity Futures Trading Commission were at a meeting recently where Bitcoin was on the agenda, and the agency’s lawyers are also examining the regulators’ options, according to a person briefed on the matter who spoke on the condition of anonymity.

Financial regulators around the world have weighed in over the last few months on how to oversee Bitcoin, with some countries, like Russia, banning it altogether, and others, like Germany, generally favoring the new technology.

The interest in Bitcoin is that its underlying technology holds the promise of allowing users to move money around the world without using an intermediary, thus lowering the cost of financial transactions.

Troubles at Mt. Gox have rattled the Bitcoin world before. A year ago, the exchange suspended operations for several hours, and Bitcoin trading nearly ground to a halt.

But since then some prominent venture capitalists have invested millions in new Bitcoin companies that are intended to provide more sophisticated platforms for virtual currency transactions. Many of those investors went public on Tuesday to declare their continued confidence in the technology.

Cameron Winklevoss, an early Bitcoin proponent who, along with his brother, Tyler, owns about $64.1 million worth of the virtual currency, said that Mt Gox’s closure “underscores just how far the Bitcoin ecosystem has come.”

“Several exchanges have seamlessly picked up the slack and the market price has shown remarkable resilience,” Mr. Winklevoss said in an email. “Mt. Gox is in the past, and the brightest minds in the room are hard at work building a responsible and secure future.”

Such optimism was reflected in the oft-volatile price of Bitcoin, which rose on Tuesday after plummeting overnight. Tuesday evening, the price of a Bitcoin stood around $525, not far from where it was when the Mt. Gox news emerged Monday night.

“There’s a little bit of a sense of relief that the whole thing didn’t crumble,” said Gil Luria, a managing director at Wedbush Securities, who has written research notes on Bitcoins. “Over the next few weeks and months, we’re going to see new exchanges either gain prominence or emerge.”

Many users of Mt. Gox had long ago given up on the company after numerous incidents in which it was forced to temporarily shut down.

At one point last year, Mt. Gox handled 80 percent of all Bitcoin transactions. But the exchange’s market share began to significantly decline last year, when newer exchanges like Bitstamp in Slovenia, and BTC-e in Bulgaria, took its place, according to data from the Genesis Block, a virtual currency research firm.

A number of other early Bitcoin companies have also struggled recently. A few weeks before the problems at Mt. Gox, the founder of the popular early exchange BitInstant, Charles Shrem, was arrested and accused of helping to facilitate drug transactions on the now-defunct online marketplace Silk Road.

“There’s definitely been a clear transition happening,” said Greg Schvey, the Genesis Block’s head of research.

Among the new, more experienced companies entering the space is SecondMarket, which runs an exchange for the buying and selling shares of private companies. On Monday, as Mt. Gox was preparing to go offline, SecondMarket announced its plans to start a new, regulated Bitcoin exchange for major banks. Until now, virtually all Bitcoin exchanges have allowed anyone to sign up and trade, which has made them harder to police.

Companies dedicated to being more regulator-friendly for consumers and merchants, like BitPay, Coinbase and Circle, have also grown in number and size. BitPay, for example, is currently working with 24,000 merchants to take payments in Bitcoin, up from 10,000 last September and 1,000 in 2012, according to a spokeswoman. Last year, BitPay processed $110 million to $120 million in transactions.

Some early Bitcoin adopters have been uncomfortable with the involvement of banks and regulators in a virtual currency whose early appeal was its apparent freedom from any central bank or government. But many of the new Bitcoin companies have said that virtual currencies will have to face more regulation if they want to be widely used.

“I think it’s important always to know what the rules of the game are,” said Steve Hanke, a professor of applied economics at Johns Hopkins University.

In Japan, financial regulators have so far declined to step in to help Mt. Gox customers, saying the virtual coins are a traded product, not a currency, and therefore remain outside of their purview.

Tibanne, the company that operates Mt. Gox out of Tokyo, according to the local registry office, has told other Bitcoin companies that it is planning to file for bankruptcy, according to John O’Brien, a spokesman for a coalition of Bitcoin companies that has been responding to the problems.

A bankruptcy administrator could distribute Mt. Gox’s assets â€" any remaining Bitcoins plus any nonvirtual cash â€" to its creditors, a process that could take a year or more. But the company could also be acquired, given the value of its customer list and name recognition.

Even those who fear they have lost money they held with Mt. Gox remained enthusiastic on Tuesday about the potential of virtual currencies.

“My thoughts and my heart also go out to all of those others in the community who lost a lot more than me today,” said Rick Falkvinge, the 42-year-old founder of the Pirate political party based in Sweden. Despite losing what he said was $80,000 in Mt. Gox, Mr. Falkvinge said that he remained “absolutely bullish on Bitcoin.”

Hiroko Tabuchi and Ben Protess contributed reporting.

Author’s Unmasking May Undercut Book

In a book proposal recently sent to publishers, the writer known only as @GSElevator â€" a popular Twitter account consisting of things purportedly overheard inside ’s elevators â€" bragged about being aggressively recruited by the bank.

He said that after enduring more than 15 interviews, he landed a job, writing: “I have the offer and the guaranteed package.” The proposal then describes his career in fixed income, leaving publishers with the clear impression that he had worked at Goldman.

He had not.

“Almost Clintonian,” said one dismaye publisher who had seen the proposal.

“Very tricky wording,” said another editor on Tuesday.

A day after the author of the planned book, “Straight to Hell: True Tales of Deviance and Excess in the World of Investment Banking,” was revealed to be John Lefevre, a former bond salesman who was never employed by Goldman, Simon & Schuster stood by its author. It said that it had expected that his identity would eventually be uncovered.

“The great interest in the identity of who wa! s behind the Twitter feed, and in his employment history, only speaks to how much his @GSElevator tweets have been a lightning rod for conversation, as well as to the quality of his writing,” said a statement from the publisher.

A spokeswoman for Touchstone, the imprint of Simon & Schuster that acquired the book, said that it planned to proceed with publication. Yet Mr. Lefevre’s admission that he had never worked for Goldman appeared to undermine his credibility, if not the premise of his book. Publishers were drawn to the book because of the sardonic, sharply written Twitter feed, which has about 630,000 followers. “My Twitter feed,” said the 18-page proposal, “has hit a cultural nerve, offering an uncensored view into a world that is both envied and loathed, but never dull.”

In 2011, asked by The New York Times in an email if he was really a Goldman employee, he answered, “Yes. However, I cannot really elaborate on this in terms of team or location, other than to say that I am a career banker.” When asked what his Goldman colleagues were like, he said, “They are obsessed with working for Goldman Sachs.”

Contacted on Tuesday, Mr. Lefevre, 34, who lives in Texas and worked at Citigroup for seven years, declined to comment. His agent, Byrd Leavell, did not return a phone call.

When Touchstone acquired the book for six figures in January, the publi! sher said! it would go well beyond the Twitter feed to tell a wild, behind-the-scenes tale of the financial world. The book, planned for an October release, was promised to be “a humorous, insightful, and profoundly uncensored account of Wall Street.”

One publisher who considered bidding on the book said he was concerned about taking on a giant like Goldman Sachs, which used its power and resources to attack the credibility of “Why I Left Goldman Sachs,” the tell-all by Greg Smith, a former Goldman Sachs employee. Mr. Smith received a $1.5 million advance from Grand Central Publishing, but the book sold fewer than 20,000 copies in hardcover, according to Nielsen BookScan, which tracks about 85 percent of print sales.

Another publishing executive said that while there was an increasing tmptation to scout for potential projects on social media â€" the best-selling book “---- My Dad Says” was born as a Twitter feed â€" making bets on online performance art and parody is fraught with risk.

Late Tuesday, Kevin Roose, a writer for New York magazine (and former reporter for The New York Times) who has written extensively about @GSElevator, added a possible new twist to the imbroglio, writing that he had “credible proof” that the Twitter account was controlled by more than one author.

While Simon & Schuster is hardly the first publisher to face the uncomfortable question of whether to defend the integrity of one of its authors, the contou! rs of the! @GSElevator case seemed to defy simple comparisons.

Mr. Lefevre is not like Jonah Lehrer, whose pop-science books contained fabricated quotes by Bob Dylan, plagiarized passages and sloppy sourcing. The publisher of those books, Houghton Mifflin Harcourt, hurriedly pulled them from the shelves after Mr. Lehrer admitted his wrongs.

Mr. Lefevre was no Margaret Seltzer, the writer of a 2008 memoir that described her harrowing experiences running drugs for gang members in South-Central Los Angeles. She later confessed that she grew up in the Sherman Oaks section of Los Angeles and attended a private Episcopal day school. The book was pulped.

And unlike Dlan Davies, the author of last year’s “The Embassy House,” Mr. Lefevre had not concocted a fake account of the Benghazi raid, a book that was recalled in October serving as the basis for a since-discredited “60 Minutes” report.

Touchstone declined to say whether it knew at the time of the acquisition that the author had never worked for Goldman. Before being exposed, Mr. Lefevre had originally planned to write the book under the pseudonym J. T. Stone.

At least one competing publisher appeared to be relieved to not be involved.

Will Weisser, an associate publisher at Portfolio, a division of Penguin, wrote o! n Twitter on Tuesday, “Nothing personal, @GSElevator, but I’m relieved that @portfoliobooks isn’t publishing your book.”

David Kuhn, a literary agent, suggested an alternative approach for Mr. Lefevre â€" a fictional exposé of high finance along the lines of other scathing romans à clef about Manhattan professional life like “Mergers and Acquisitions,” by Dana Vachon; “The Nanny Diaries” by Emma McLaughlin and Nicola Kraus; or “The Devil Wears Prada” by Lauren Weisberger.

“If I were him,” Mr. Kuhn said, “I would write a brilliant Wall Street novel.”

Argentina Takes Its Debt Case to the U.S. Supreme Court

Argentina has now staked the future of its debt, and perhaps its financial fate, with the United States Supreme Court. Yes, you read that right. Argentina wants the nine justices to weigh in on a case involving its obligations to holders of its government bonds and to resolve the mess created by a handful of federal judges.

The roots of the case go back to 2001, when Argentina, in the midst of a severe economic downturn, defaulted on $80 billion of government bonds. Now, Argentina is asking the Supreme Court to throw out a lower-court ruling forcing the South American country to pay up on these bonds.

How did the Supreme Court find itself dealing with this drama?

It started in the wake of Argentina’s default. There is no bankruptcy regime for sovereign countries (at least not yet). So back in 2005 and then again in 2010, Argentina forced the debt holders into a deal offering them new bonds at 25 to 29 cents on the dollar. More than 90 percent of the bondholders accepted, given the alternative of getting nothing for the bonds.

But there were holdouts, including thousands of Italian pensioners, and more important, some hedge funds, which have been trying to get Argentina to pay the bonds in full. Since then, a number of entities, led by Elliott Management and Aurelius Capital Management, have sought to compel Argentina to pay up. This has led to some odd situations. In 2012, the hedge funds won a court order to seize an Argentine Navy ship in Ghana. And the president of Argentina, Cristina Fernández de Kirchner, no longer flies abroad on Argentine-owned planes for fear the jets will be seized.

The hedge funds have a strong incentive to take any property they can, since the bonds held by the holdouts are now worth on paper about $15 billion, with accrued interest. But it’s not so easy to collect against a sovereign nation. Most countries have “sovereign immunity laws,” which prevent lawsuits against them, as well as seizing their property.

It’s here where the United States federal judges come in.

The hedge funds also sued in federal court in New York to collect on these bonds. Normally, sovereign immunity would protect Argentina. In fact, in the United States, there is also a statute, the Foreign Sovereign Immunities Act, that would prevent the hedge funds from seizing Argentine property to collect on the bonds.

The hedge funds have argued in court that they are not seeking to seize Argentine property. Instead, they argue, when Argentina pays money through the United States financial system on its new bonds, the agents transferring that money can be ordered to simply pay the holdouts first. Since there is no attachment of Argentine funds, the Foreign Sovereign Immunities Act is not implicated. Voilà.

The lower federal courts have thought this to be a captivating argument. In a series of rulings, the federal courts in New York first held that the bond document’s pari passu clause â€" pari passu is Latin for equal footing and is common language in such documents to mean that investors cannot be treated differently â€" required that if Argentina paid any money on its new bonds, it also had to pay the old defaulted holders. Then, the courts held that if Argentina tried to pay its old bondholders first, the banks in the United States that were transferring that money would have an obligation to pay the hedge funds first.

The American judges have acknowledged that they could not order Argentina to do this, but they justified the ruling on the ground that it is affecting the conduct of the parties in the United States that are transferring the money.

Argentina has reacted with a fury to the rulings, stating in its petition to the Supreme Court that “no sovereign nation would stand idly by while a foreign court takes its citizens and other third parties hostage in order to commandeer the public fisc.” A number of Argentine officials have stated that the country will default on its current bonds if it is required to first pay the old holders.

Last week, Argentina filed a certiorari petition with the Supreme Court, asking the court to review the rulings of the lower courts. The petition is intended to garner as much outside support as possible to push the Supreme Court to consider the case. Argentina asks two big questions in the petition. First, it is asking whether under the sovereign immunities act, Argentina’s payments to its new bondholders can effectively be seized to make payments on the defaulted debt. Second, Argentina is asking the court to certify the interpretation of the pari passu clause to the New York Court of Appeals, the highest court in the state.

The second argument is a clever one. The Argentine bond documents were written under New York State law and the federal courts were interpreting that law. But the judge’s ruling was a novel interpretation and a New York State court could feel differently. Argentina is basically saying, “Look, this really should have been decided by New York State all along, and let’s just see what they say. What could be the harm?”

Furthermore, Argentina is saying to the Supreme Court that this argument may give the court an easy way out of having to decide the harder question of whether Argentina can be sued in the United States. After all, the real problem with this case is that a few judges have been upsetting settled ways of doing business in the financial markets.

What is ultimately driving the case, though, is the sovereignty argument. Given the novelty of the lower court’s ruling, the Supreme Court could step in and not only ask the New York State court what it thinks, but also look at the sovereign immunity issue if it has to.

The Supreme Court takes few cases. If it denies the certiorari petition, this would effectively turn the United States federal courts into collection agents for the hedge funds.

Knowing this, Argentina may simply live up to its word and refuse to pay the new bondholders. The result will be default yet again, where no one gets paid.

A default would be a mess. It would penalize the new bondholders, many of whom have already taken a hit. It would push Argentina out of the global financial system. It might also have an impact on the rest of the sovereign markets, though Argentina’s situation is a bit peculiar in that it is the most recalcitrant of sovereign debtors. Whether it would then bring Argentina to the table, as the funds hope, is anyone’s guess.

There is always the possibility that Argentina is bluffing. A negotiated settlement certainly makes the most sense right now, and the hedge funds have repeatedly said they are willing to negotiate. That point was made by Jay Newman, senior portfolio management at Elliott Management, in a statement. “As we have stated many times, if Argentina were willing to talk to its creditors, this dispute could be resolved quickly.”

But let’s face it, the courts in the United States have led us here, and so we await the Supreme Court to decide if the federal courts should be in the business of running Argentina’s financial affairs.

S.&P., in Lawsuit Defense, Seeks Documents About Obama-Geithner Meetings

For Timothy F. Geithner, the former Treasury secretary, meetings with President Obama were nothing out of the ordinary.
But one such meeting has taken on outsize significance for Standard & Poor’s, the ratings agency that is defending itself against the government’s claims of fraud.

S.&P. has argued that the fraud lawsuit was “retaliation” for its downgrade of United States long-term debt in August 2011, when the country lost its sterling AAA rating for the first time.

The ratings firm is now seeking any documents detailing a meeting between Mr. Geithner and Mr. Obama that occurred shortly before Mr. Geithner had an angry phone call with the chairman of S.&P.’s parent company, according to court filings on Monday.

The firm, using records of Mr. Geithner’s calendar, is zeroing in on a meeting that took place from 9:30 to 10:10 a.m. on Aug. 8, 2011, just days after the downgrade, according to the documents filed in United States District Court for the Central District of California. Five minutes after that meeting ended, S.&P. says, Mr. Geithner called Harold W. McGraw III, the chairman of McGraw Hill Financial, to express his displeasure with the downgrade.

S.&P. says that if it obtains documents about this meeting, as well as about two similar meetings surrounding it, the information might help the company bolster its defense.

The meeting on the morning of Aug. 8 came shortly before Mr. Geithner told Mr. McGraw that the conduct of S.&P. would be “looked at very carefully,” according to the latest filings and an affidavit by Mr. McGraw in January. The Treasury secretary told Mr. McGraw that S.&P. had made an error in its assessment and that “you are accountable for that,” according to the affidavit.

The government has previously rejected S.&P.’s line of argument as “preposterous.” A spokeswoman for the Justice Department did not immediately have a comment on Tuesday.

A spokeswoman for Mr. Geithner, Jenni R. LeCompte, referred on Tuesday to an earlier statement, in which she said: “The allegation that former Secretary Geithner threatened or took any action to prompt retaliatory government action against S.&P. is false.”

S.&P. says it is being unfairly singled out by the government, which claimed in 2013 that the company had inflated the ratings of mortgage investments, setting them up for a crash when the financial crisis struck. S.&P. introduced its “retaliation” defense after trying unsuccessfully to get the lawsuit dismissed.

In its latest filing, S.&P. is seeking more than just documents about the meetings. It also wants a preview of Mr. Geithner’s forthcoming memoirs.

The company said it wanted “any documents, including manuscripts, notes, drafts, audio or video recordings, interviews or transcripts of interviews, relating to or constituting all or any portion of Mr. Geithner’s forthcoming book” relating to a discussion of S.&P. or a downgrade of United States debt.

A Buyout Offer That Raises Questions of Board Fairness and Duty

If you happen to control a public company and want to buy out the remaining shareholders, avoid the mistakes made by the American Financial Group in its attempt to squeeze out the minority at the National Interstate Corporation.

The American Financial Group owns 51.7 percent of the National Interstate Corporation, a specialty property-casualty insurer. On Feb. 5, the American Financial Group, known in the Midwest by its Great American Insurance brand, started a tender offer at $28 a share to acquire the remaining shares in National Interstate that it does not already own.

These types of buyouts are perilous for minority shareholders, because the majority can use its control to force minority shareholders to receive a lower price. Because of this, there is now a well-worn procedure for tender offers of this type dictated by Delaware laws designed to protect minority shareholders from being coerced.

Typically, a controlling company will begin the tender offer and condition it on getting the majority of the minority of shareholders to agree to sell their shares. The controlling company is also required to make no threats that it will use its control to harm the minority shareholders, since such threats would otherwise be seen as pushing minority shareholders into accepting the offer.

In addition, the board of the target company sets up an independent committee with independent advisers who will make a recommendation as to whether the tender offer should be accepted. If the controlling firm does this, then the courts in Delaware - where many publicly traded companies are incorporated â€" will not interfere with the tender offer since it will be viewed as being noncoercive toward minority shareholders.

None of this was done in the case of American Financial’s buyout offer.

Instead, American Financial began its offer without a majority of minority condition. To boot, the group has arguably made those troublesome threats, including stating that it might buy shares at a lower price, change its dividend policy or remove protections for minority shareholders. These are threats that appear specifically designed to push National Interstate shareholders into tendering.

As for the National Interstate board, six of the 10 members are affiliated with American Financial and therefore not independent. These directors control the National Interstate board, and they have refused to set up an independent committee.

Instead, the National Interstate board voted to arrange to have management hire an investment banker: Duff & Phelps (another no-no, this should be done by the independent directors to ensure there is no conflict).

What happened next can only be put in the bizarre realm of corporate shenanigans. At a Feb. 17 board meeting, Duff & Phelps told the board that it could not provide a fairness opinion at the original offer of $28 a share, and that the price was indeed too low.

According to The Wall Street Journal, a board member, Jeff Consolino, who is also the chief financial officer of American Financial, then offered $30 a share. He then asked Duff & Phelps if that higher price was appropriate. When the investment bank declined to opine on that, the meeting ended.

Duff & Phelps subsequently resigned. Thereafter American Financial raised its offer to $30 a share calling it its “best and final” offer. On Feb. 18, the board â€" without Duff & Phelps’s opinion â€" voted 6 to 4 to remain neutral with respect to the offer. I should note that before the tender offer was made public, National Interstate was trading at $22 to $23 a share. Today, its stock is above $30 a share.

There was no response to a request to National Interstate for comment.

Let’s be clear: if this were litigated in Delaware, the lawyers would be having a field day. At a minimum, the board’s actions in considering the offer from American Financial appear deeply flawed. In particular, the failure of the board to receive proper financial advice would not only cause Delaware judges to halt the transaction in its tracks, but also subject the directors to liability.

More telling, in Delaware, the board would arguably have a duty to fend off this “hostile” tender offer since it appears underpriced as Duff & Phelps determined (albeit at $28 a share).

In a number of cases Delaware courts have implied that boards have an affirmative duty to adopt a poison pill to ward off an offer by a controlling shareholder who undervalues the company. The board in iBasis did just such a thing back in 2009 to fight off a squeeze-out offer by the Dutch telecom company KPN.

But National Interstate is an Ohio company. The law is different there (full disclosure, I’m a professor at Ohio State University and love Ohio for all its good and bad corporate law).

For starters, it’s unclear whether controlling companies have any special duties in squeeze-out transactions under Ohio law. There are a few lower court cases from more than a decade ago, which ruled that there are none.

More specifically, the cases state that where the injury is to all shareholders and is solely over an unfair price, there are always appraisal rights, the right of a shareholder to have the court determine the value of their shares. It’s also unclear whether the Ohio Supreme Court would rule in the same manner, but there is law sustaining this at the lower court level.

In addition, American Financial has stated it may close its offer even if it does not get to the 90 percent threshold at which it can squeeze out the minority in a merger automatically without a vote, triggering appraisal rights. If American Financial only reaches 89 percent for example, then appraisal rights wouldn’t be available.

As for the board’s obligations, there is not a lot of Ohio law on this either. But Ohio sets forth the duties of directors in its corporate law. The statute specifically states that a director has not breached these duties unless “the director has not acted in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation.”

A breach of these duties should be grounds for an injunction, an order by the court halting American Financial’s offer. Given the facts here, there appears to be a possible claim for an injunction.

This type of conduct - acting in the interest of the controlling entity rather than the public shareholders â€" is exactly the type of conduct meant to be addressed. Particularly problematic is the failure of the directors to act to defend the company, something Ohio law is quite clear on.

Given the uncertainties, you would have thought that the board here would have done a better job in setting up the buyout procedures, and American Financial Group would have been more careful to at least appear neutral. No doubt they are relying on Ohio law to get them through, but there is a sloppiness and amateurism here.

Building on this, the mutual fund firm T. Rowe Price, which owns about 8 percent of the company, filed an open letter to the six directors on Tuesday, complaining that the process here was “appalling” and that it would not participate in the offer. Without that support, it looks as though there is no way that American Financial will reach that 90 percent threshold.

Despite all of the problems with this deal, the intricacies and lack of certainty have scared away the plaintiffs’ lawyers. While you normally see oodles of suits around this, to date there are only two actions in local Ohio courts in two different counties: Summit and Hamilton counties (Hamilton is Cincinnati. Summit is Akron).

There was a hearing Tuesday morning in Ohio state court in Summit County. The judge ordered further briefing on a jurisdictional issue, namely whether this case should be dismissed in favor of the first-filed Hamilton County case.

If that occurs, then the action will shift to Cincinnati. We’ll then hopefully see what Ohio law really says about these actions. But before that happens, given T. Rowe Price’s actions, it may be that shareholders push this to a head first.

Morgan Stanley Reaches Agreement With S.E.C. on Mortgage Bonds

Morgan Stanley has tentatively agreed to pay $275 million to resolve a federal securities investigation related to subprime mortgage bonds the investment firm underwrote in 2007.

In a filing late Tuesday, Morgan Stanley said it had reached an “agreement in principle” with the staff of the Securities and Exchange Commission to settle the case. As part of the agreement, the investment firm would be charged with violating certain securities rules, but the company did not disclose the details of the S.E.C.’s case.

The firm said it would not admit any wrongdoing in the matter, which represents one of the final cases that the agency was building against a Wall Street firm over its activities leading up to the financial crisis.

Overall, the firm said its litigation expenses in 2013 rose to $1.9 billion from $513 million in 2012 and $151 million in 2011.

SAC Capital to Hire a Trading Monitor

Steven A. Cohen, the billionaire investor, is looking to hire a former prosecutor or securities regulator to monitor trading at his investment firm in the wake of the federal government’s insider trading investigation.

Mr. Cohen’s SAC Capital Advisors hedge fund, which pleaded guilty to securities fraud in November, is in the process of converting to a family office that will manage mainly $9 billion of his personal wealth. The firm announced its intention to hire a chief surveillance officer to monitor trading in a letter to employees on Tuesday. The firm expects to fill the newly created position in the spring.

The announcement of the new post comes a few weeks before United States Judge Laura Taylor Swain has said she will decide whether to approve or reject SAC’s guilty plea. The firm also agreed to pay a $1.2 billion penalty to resolve charges arising from the insider trading probe and to stop managing money for outside investors.

The letter to employees also described how SAC, after converting to a family office, would consolidate several operating divisions and would announce a new name for the firm sometime in April. The firm, the letter said, has shrunk from 1,000 employees in early 2013 to about 850 people today. The firm said it finished returning most of the outside money it managed for private investors in January.

Mr. Cohen, 57, is taking steps to show federal prosecutors that he is committed to reforming the way his once $14 billion firm operated. In the letter, Mr. Cohen and SAC president, Tom Conheeney, said they “are committed to doing everything in our power to ensure we never go through again what we have experienced over the last few years.”

Federal prosecutors labeled SAC a breeding ground for illegal traders when it indicted the firm last summer. Eight employees of SAC have either pleaded guilty to insider trading or been convicted at trial.

The most recent verdict came on Feb. 6 when a federal jury in New York convicted Mathew Martoma, a former SAC portfolio manager, of participating in the most lucrative insider trading scheme on record. The evidence during trial put an uncomfortable spotlight on the SAC owner, after a key government witness testified that an agent with the Federal Bureau of Investigation told him that the primary target of the investigation was Mr. Cohen.

Federal prosecutors have not charged Mr. Cohen with any wrongdoing, but the Securities and Exchange Commission has a pending administrative failure to supervise action against him. Federal authorities continue to investigate SAC, but a person briefed on the matter said the inquiry is winding down and it is unlikely there will be a criminal prosecution of Mr. Cohen. Jonathan Gasthalter, a spokesman for SAC, declined to comment.

A person briefed on the matter said the firm intended to hire either a former federal prosecutor or a securities regulator for the new surveillance monitoring position. The person tapped will report to Mr. Conheeney.

The new surveillance monitor will bolster the firm’s compliance operation. SAC’s longtime chief of compliance, Steve Kessler, is leaving the firm at the end of February.

SAC began shrinking its staff by laying off much of its investor relations and marketing staff and closing its office in London in the fall. A number of traders and analysts also have left the firm for other hedge funds.

In the letter to employees, Mr. Cohen and Mr. Conheeney showed no indication that the new firm intended to fade into Wall Street history. They said the changes SAC is making “will make us a stronger firm as we move forward together.”

Credit Suisse Helped U.S. Clients Hide Assets, Senate Report Says

WASHINGTON â€" Credit Suisse, a Zurich-based bank, actively helped its American customers hide billions of dollars of assets from American tax authorities, a report released on Tuesday by the Senate Permanent Subcommittee on Investigations contends.

The subcommittee will hold a hearing on Wednesday on the report, the product of a two-year investigation. Brady W. Dougan, the chief executive of Credit Suisse, and other top bank officials are scheduled to appear along with two Justice Department officials.

“It’s time to ramp up the collection of taxes due from tax evaders on the billions of dollars hidden offshore,” Senator Carl Levin of Michigan, the subcommittee’s chairman, said in a statement.

The report is scathing both to the financial institution and to American law enforcement, which the subcommittee accuses of dragging its feet in holding the bank and the relevant taxpayers accountable.

The 176-page report charges that from at least 2001 through 2008, the Swiss bank helped its American customers evade taxes through a variety of means, including opening accounts in the name of “shell” companies and sending Swiss bankers to the United States to “secretly” recruit new clients and avoid creating a paper trail.

The report describes one instance in which a Credit Suisse banker “traveled to the United States to meet with the customer at the Mandarin Oriental Hotel and, over breakfast, handed the customer bank statements hidden in a Sports Illustrated magazine.”

The bank’s New York office also “kept a document listing ‘important phone numbers’ of intermediaries that formed offshore shell entities for some of the bank’s U.S. customers” and urged American customers to come to Switzerland to do their banking, opening a full-service office in the Zurich airport, the report said.

That office even had a code name, “SIOA5.” Mr. Dougan told the Senate investigators that the airport office was for the convenience of clients heading to and from Swiss ski resorts, so that they would not have to go out of their way to Zurich.

Another American client with an undisclosed Swiss account received a gift of gold from the bank, the report said. (The customer kept the gold in the bank’s custody, the report notes.)

One client also recalled, when visiting a Credit Suisse office, taking an elevator with “no buttons” that was “controlled remotely.”

“Financial institutions like Credit Suisse have profited from their offshore tax haven schemes while depriving the U.S. economy of billions of dollars in tax revenues,” Senator John McCain of Arizona, the subcommittee’s Republican member, said in a statement.

“As federal regulators begin to crack down on these banks’ illicit practices, it is imperative that they use every legal tool at their disposal to hold these banks fully accountable,” he said.

The Senate report may put additional pressure on the Justice Department to prosecute or settle with the Swiss banks and bankers it has investigated for aiding tax avoidance.

The Justice Department indicted seven Credit Suisse bankers on charges of aiding tax evasion in 2011, and it is also investigating the bank itself. Credit Suisse is expected to settle with the Justice Department this year.

“The prospect of U.S. prosecution has been forceful enough to cause 43,000 taxpayers to self-report and pay nearly $6 billion in taxes and penalties,” said a Justice Department spokeswoman. “Since 2009, the department has publicly charged 73 account holders and 35 bankers and advisers with offenses related to offshore tax evasion. And we have acknowledged that as many as 14 Swiss financial institutions are currently under investigation, and we won’t hesitate to indict if and when circumstances merit.”

Five years ago, the United States charged the largest Swiss bank, UBS, with aiding tax evasion. UBS admitted guilt and paid $780 million in fines and other costs.

Earlier this month, Credit Suisse said that legal costs were weighing on its bottom line. It reported net income of 267 million Swiss francs, or about $300 million, in the fourth quarter of 2013. It has set aside 514 million francs for legal costs, much related to its American mortgage business.

Last week, the bank paid a $196 million fine to the Securities and Exchange Commission for failing to properly register with the agency before advising American clients. The Swiss firm also admitted wrongdoing in the settlement.

According to the report, Credit Suisse held Swiss accounts for over 22,000 American customers. The assets in those accounts were worth $10 billion to $12 billion at their peak. Over the last five years, the bank has shut down accounts held by 18,900 United States clients.

Brazil Real Estate Start-Up Draws U.S. Investment

RIO DE JANEIRO â€" Amid continuing concerns about Brazil’s sputtering economy, the Dragoneer Investment Group of San Francisco has made its first investment in an Internet company here, leading a $12.75 million round in VivaReal, an online real estate classifieds start-up, the companies said on Tuesday.

The financing, which was negotiated this month, is Dragoneer’s first investment in Brazil, Latin America’s largest economy, said Marc Stad, the firm’s founder. The growing fears about disappointing growth and even a possible recession here seem to only have emboldened Mr. Stad.

“I’d rather invest in companies and countries at a time when they are out of favor with investors,” he said.

Earlier VivaReal investors including Kaszek Ventures, Monashees Capital and Valiant Capital, the investment firm started by Chris Hansen, also participated in the round, which included $8.75 million in cash and a call option for $4 million, according to Brian Requarth, the chief executive and co-founder of VivaReal.

Mr. Requarth, who is an American and graduate of San Diego State University, said his company had raised more than $28 million so far.

The start-up, which was started in 2010 in Sao Paulo, is looking to cash in on the lucrative online real estate advertising market, estimated at 4.1 billion reais, or $1.7 billion, in 2013, according to the Brazilian research firm Ibope.

Competitors include Zap, backed by Brazilian media giant Globo and Immovelweb, owned by Navent, whose investors include New York investment firms Tiger Global Management and Riverwood Capital.

For Dragoneer, which oversees more than $200 million in holdings, the VivaReal investment represents a continuation of its search for global Internet companies. The firm invested in Facebook when it was still private as well India’s Flipkart, and China’s Alibaba.

Even as many United States venture capital and investment firms became enamored by Internet start-ups in South America, Dragoneer has been inactive here in recent years. Mr. Stad said that was in part because his firm was focused on other geographies and also because the Brazilian companies he saw lacked strong financial models.

Yet he now expects to make additional investments here. Despite almost daily concerns here about the economy, he said that over the long term, “Brazil is one of the most attractive markets in which to invest.”

Apollo’s Co-Founder Sees Opportunities to Invest in Distressed Debt

BERLIN - Despite a frenetic period of sales and spin-offs, Leon Black, the co-founder of Apollo Global Management, said Tuesday that there were still attractive opportunities for private equity firms to invest in distressed debt.

Speaking at SuperReturn International in Berlin, Mr. Black said the difference was today’s investments take more time to identify and were “not like shooting ducks in a barrel as in 2009.” The firm has raised $18.4 billion for its latest fund, which pursues both equity and debt investments.

Private equity firms don’t have to have a “global recession to have good distressed opportunities,” Mr. Black said.

The last few years have been hectic for Apollo, which has engaged in a series of big sales and initial public offerings of companies within its portfolio.

Last May, Mr. Black famously said that Apollo was “selling everything that is not nailed down” and it was a biblical time in the cycle to realize returns on investments made when others feared to invest in the aftermath of the financial crisis.

On Tuesday, Mr. Black said Apollo has sold about $24 billion in portfolio company holdings, while only investing about $2 billion in the last two years. The firm also has used the opportunity to refinance debt and deleverage the companies in which it holds stakes, he said.

The recent sellers’ market has raised concerns about the multiples that are being paid for companies, he said.

But those may be debt investment opportunities for Apollo in the future, he said.

Bonderman Says TPG Is Considering Going Public

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BlackBerry Chief Demurs on Sale of Messenger Service, for Now

BlackBerry has had a rough couple of years. But the prospect of a deal for its messaging service, on the heels of Facebook’s blockbuster takeover of WhatsApp, has helped buoy the ailing smartphone maker’s fortunes.

On Tuesday, the company’s chief executive hinted that a sale or spinoff may happen, though not quite yet.

“Running a public company, anything to help our shareholders I need to take a very serious look at,” the executive, John S. Chen, told Bloomberg Television in an interview on Tuesday.

The statement was clearly a placeholder â€" Mr. Chen added that “it is a bit too early to think about getting our $19 billion” â€" but the prospect of a giant payout is something clearly weighing on his mind. Even as BlackBerry’s devices have fallen out of fashion, overtaken by the iPhone and Google’s army of Android phones, its messaging service has been held up as one of the few bright spots in company’s portfolio.

Even with the rise of messaging services like WhatsApp, BlackBerry Messenger (or BBM to aficionados) has held on to its share of users, some 85 million by Mr. Chen’s reckoning. That’s far from the 450 million users that WhatsApp claims, but BlackBerry has contended that its offering is fast, secure and more feature-filled than competitors’.

Shareholders clearly have hopes that a sale of BBM will eventually come. BlackBerry’s stock was up 7.4 percent by midday on Tuesday, at $10.56, and has leaped 17 percent since the WhatsApp deal was announced last week.

But investors may want to temper their expectations. The $16 billion that Facebook paid for WhatsApp, which doesn’t include restricted stock units that will vest over time, comes out to about $35 per user. For BlackBerry, a similar payout would value its service at close to $3 billion.

Going with the full $19 billion purchase price values WhatsApp at about $42 per user. Applying that to BBM’s user base would translate to $3.6 billion.

BlackBerry is working to expand that potential price tag by increasing its service’s numbers, however. Over the past few months, the company has even taken the once-unthinkable step of opening up its crown jewel to users of other smartphones. BBM has been available for iOS and Android since late last year, and will soon be headed to Windows Phone as well.

“The potential is going to be huge,” Mr. Chen told Bloomberg.

No Bailout for Bitcoin Holders

Imagine that the leading stockbroker in a country closed its doors without giving any reason. Its clients would be in a panic and customers of rival firms would be very nervous. That is exactly what has happened to Bitcoin, the leading pseudo-currency.

The website of the Mt. Gox Bitcoin exchange in Tokyo disappeared from cyberspace on Tuesday morning, with no explanation provided. The exchange had previously admitted to problems with “transaction malleability,” a Bitcoin-world euphemism for susceptibility to hacking.

Internet chat was intense. What looks like an internal memo from the company was circulating the web, stating that there had been thefts from accounts that Mt. Gox customers had assumed were perfectly safe. It is not clear whether the document is genuine. The price of Bitcoin on other exchanges dropped 8 percent, down 55 percent from last November’s all-time high, according to bitcoinaverage.com.

If Mt. Gox were an officially licensed broker, the government would be the first port of call. The relevant authorities would investigate and might even make good on some losses under a taxpayer- or industry-funded compensation scheme. Of course, if Mt. Gox had to meet government-mandated security standards, it might not have been allowed to operate without correcting a software vulnerability identified as far back as 2011.

But Bitcoin’s central appeal is that it is free from government interference. That is not quite true, since Bitcoin cannot make illegal activity legal. Bitcoin entrepreneur Charlie Shrem was an industry leader until his January indictment on charges  that he used the techno-currency to launder money.

Still, the distance from the official world is great enough that Mt. Gox customers are almost totally on their own. The purported internal memo suggests that other Bitcoin fans might help out, so as to salvage the would-be financial asset’s reputation. That’s a thin reed to cling to.

The expensive regulation and political backstops of conventional money are far from foolproof - look at the recently released Federal Reserve minutes from 2008 to see dysfunction in action. But the system is better than any known alternative, including one based on sophisticated software algorithms.

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

Kravis Says Private Equity Does Poor Job of Discussing Its Benefits

BERLIN - Henry Kravis, the co-founder of the private equity firm Kohlberg Kravis Roberts, and other industry leaders think the private equity sector has a bit of an image problem.

Speaking at SuperReturn International in Berlin, Mr. Kravis said that the industry failed to properly explain to the public what it does when a private equity firm takes over a company and how it helps those businesses and the economy, including investors like pension funds and sovereign wealth funds.

“I think as an industry, we do a lousy job of telling our story,” Mr. Kravis.

As a result, private equity firms are often confused with hedge funds, Mr. Kravis said.

Initiatives, like forming the Private Equity Growth Capital Council, an industry group, have helped educate the public and politicians alike, Mr. Kravis said. But more can be done, he said.

For example, several years ago, a German politician, in the midst of a heated campaign, described foreign buyout firms as “locusts.”

Steve Koltes, co-founder of the European private equity firm CVC Capital Partners, said the industry needed to come up with a similar but positive catchphrase to describe its actions.

He said one industry executive had suggested a “honeybee,” bringing honey back to the hive and “sharing it with pensioners.”

“I’m not sure that works, either,” Mr. Koltes said.

At Private Equity Conference, a Debate Over the Benefits of Going Public

BERLIN - The benefits of going public remained a hotly debated topic among private equity leaders as they gathered at SuperReturn International, the private equity gathering in Berlin.

On Tuesday, David Bonderman, the co-founder of TPG Capital, let slip that the firm was contemplating an initial public offering, a move that many of its rivals have undertaken in recent years. But he was coy about whether TPG would actually go through with it.

Other industry leaders said they weren’t convinced a public offering was necessary for them at this stage of the game.

Joseph C. Schull, the head of Europe at Warburg Pincus, said on Tuesday that the private equity firm would only consider a public float if its ability to raise capital was limited because it wasn’t publicly listed.

The Blackstone Group, Kohlberg Kravis Roberts, Carlyle Group and Apollo Global Management have all listed their shares publicly in recent years.

The move has been controversial as some in the industry have expressed fears that sovereign wealth funds, pension funds and others might limit their investments with publicly traded firms - namely because of the difficult balance in achieving long-term returns while meeting the quarterly expectations of shareholders.

But Johannes P. Huth, the head of Europe, the Middle East and Africa at K.K.R., said being public had allowed the firm to invest in new areas like oil and gas and to expand in its operations when competitors were contracting in the years following the financial crisis.

“Going public allowed us to do a number of things,” he said.

Defending Bitcoin, Andreessen Says Mt. Gox Is ‘Like MF Global’

The apparent collapse on Monday of Mt. Gox, the most prominent exchange for Bitcoin, spooked many holders of the virtual currency, as they tried to determine whether the problems pointed to larger flaws in the Bitcoin system.

But as Mt. Gox remained closed on Tuesday morning, one of Bitcoin’s most vocal cheerleaders portrayed the turmoil as an isolated problem.

The venture capitalist Marc Andreessen, whose firm has invested millions of dollars in Bitcoin-related start-ups, drew a comparison to MF Global, the brokerage firm that filed for bankruptcy in 2011.

“This is like MF Global, not some huge breakdown of the underlying technology or other exchanges,” Mr. Andreessen said on CNBC on Tuesday morning. “Bitcoin protocol is unchanged and other Bitcoin exchanges and companies are doing fine.”

The price of Bitcoin extended its decline on Tuesday, hitting a low of about $419 before recovering somewhat to around $510, according to CoinDesk, news provider for virtual currencies. On Monday, it dipped below $500 for the first time since November, when it began a rally that it took it above $1,200.

A number of leading Bitcoin companies said on Monday that Mt. Gox, which handles about 6 percent of all Bitcoins in circulation, planned to file for bankruptcy after months of problems. A document circling widely in the Bitcoin world pointed to a theft of nearly all of Mt. Gox’s 744,000 Bitcoins, although the legitimacy of the document or its claim has not yet been verified.

“In the event of recent news reports and the potential repercussions on Mt. Gox’s operations and the market, a decision was taken to close all transactions for the time being in order to protect the site and our users,” said a statement on the Mt. Gox website on Tuesday. “We will be closely monitoring the situation and will react accordingly.”

Technology issues forced Mt. Gox to suspend withdrawals earlier this month, and many investors took to the online message board Reddit on Monday night to share how much they thought they had lost. “As much as I kick myself for not getting it out, I’m also patting myself on the back for getting most of my holdings out in time, when the writing on the wall became clearer,” said one user, whose claims could not be confirmed.

In his comments on television, Mr. Andreessen said Mt. Gox “has been obviously broken and possibly outright crooked for months.”

But his comparison to MF Global struck some observers as less than comforting. The saga surrounding MF Global, which collapsed when investors and ratings agencies became unnerved by its large position in European sovereign debt, raised broader questions about the safety of customer funds.

In MF Global’s case, $1.6 billion of customer money went missing, and clients questioned the oversight of the firm.

Legendary entrepreneur Marc Andreessen @pmarca tells @beckyquick why he is defending #bitcoin http://t.co/hDcQQVqoj5

â€" Squawk Box (@SquawkCNBC) 25 Feb 14

@SquawkCNBC @odoudin @pmarca @BeckyQuick not sure MF Global is a comforting comp you’d want to make…

â€" Sam H (@SamHam7) 25 Feb 14

Mt. Gox Appears on Verge of Collapse

The most prominent Bitcoin exchange appeared to be on the verge of collapse late Monday, raising questions about the future of a volatile marketplace.

On Monday night, a number of leading Bitcoin companies jointly announced that Mt. Gox, the largest exchange for most of Bitcoin’s existence, was planning to file for bankruptcy after months of technological problems and what appeared to have been a major theft. A document circulating widely in the Bitcoin world said the company had lost 744,000 Bitcoins in a theft that had gone unnoticed for years. That would be about 6 percent of the 12.4 million Bitcoins in circulation.

While Mt. Gox did not respond to numeous requests for comments, and the companies issuing the statement scrambled to determine the exact situation at Mt. Gox, which is based in Japan, the news helped push the price of a single Bitcoin below $500 for the first time since November, when it began a spike that took it above $1,200.

But at the same time that the news about Mt. Gox was emerging, a New York firm announced plans to create an exchange that could draw the world’s largest banks into the virtual currency market for the first time.

The new exchange is being put together by SecondMarket, which rose to fame a few years ago after creating a platform for buying and selling shares of companies like and Facebook before they went public.

Without the trouble at Mt. Gox, the SecondMarket plans would have been seen as a major boon for virtual currencies, providing a potential entry point into the Bitcoin market for large banks, which have so far avoided virtual currencies as their price has skyrocketed.

Barry Silbert, SecondMarket’s chief executive, said that he had already talked with several banks and financial companies about joining the new exchange, along with financial regulators, and that he hoped to have it in operation this summer.

But plans for any new venture will be tested by the collapse of Mt. Gox, which could shake the faith of early Bitcoin adopters. Ryan Galt, a blogger who writes frequently about Bitcoin and was one of the first to circulate the news about Mt. Gox, < title="Mr. Galts post on the blog The Two-Bit Idiot." href="http://two-bit-idiot.tumblr.com/post/77745633839/bitcoins-apocalyptic-moment-mt-gox-may-have-lost">wrote on Monday: “I do believe that this is one of the existential threats to Bitcoin that many have feared and have personally sold all of my Bitcoin holdings.”

On Monday, Mt. Gox took down all of its previous posts on Twitter, one day after its chief executive, Mark Karpeles, resigned from the board of the Bitcoin Foundation, a nonprofit that advocates for virtual currencies.

A statement from the chief executives of Bitcoin companies like Coinbase, Circle, Blockchain.info and Payward, said t! hat the â! €œtragic violation of the trust of users of Mt. Gox was the result of one company’s abhorrent actions and does not reflect the resilience or value of Bitcoin and the digital currency industry.”

The events are in keeping with the stark ups and downs of Bitcoin’s short existence.

Released in 2009 by an anonymous creator known as Satoshi Nakamoto, the Bitcoin program runs on the computers of anyone who joins in, and it is set to release only 21 million coins in regular increments. The coins can be moved between digital wallets using secret passwords.

While Bitcoin fans have said the technology could provide a revolutionary new way of moving money around the world, skeptic have viewed it variously as a or an investment susceptible to fraud and theft.

Many leading names in the Bitcoin community were still trying to determine the scope and potential consequences of the troubles at Mt. Gox. A document detailing the purported theft, labeled “Crisis Strategy Draft,” appeared to come from Mt. Gox.

While officials at the Bitcoin Foundation could not verify the origins of the document, they were preparing for the closure of Mt. Gox.

Patrick Murck, the foundation’s general counsel, said that “this incident just demonstrates the need for initiatives by responsible individuals and responsible members of the Bitco! in commun! ity like what’s being described” in SecondMarket’s initiative.

Mt. Gox’s difficulties this week are only the latest in a long line of problems at the Tokyo-based exchange. Created in 2010, Mt. Gox quickly became the most popular place to buy and sell Bitcoins. But the firm has suffered several intrusions and technological mishaps, which have led to steep declines in the currency’s price. A few weeks ago the company stopped allowing its customers to withdraw Bitcoins after it said it had discovered a flaw in some of the basic Bitcoin computer code.

While other exchanges were briefly hit by problems, they came back online. Mt. Gox never opened up again, prompting speculation about its future.

Until now, the major Bitcoin exchanges have all allowed anyone from the public to buy and sell virtual currency. SecondMarket’s plan is to create a platform more like the New York Stock Exchange, where only large institutions can join and trade.

Mr. Silbert says he will only open the exchange once they have several regulated financial institutions signed on as members. His hope, he says, is to give them partial ownership so that they have an incentive to trade there.

For much of Bitcoin’s life, banks have viewed the virtual currency with either derision or dismissiveness.

Recently, though, a number of banks have released research reports! that hav! e been less negative. A December report from Bank of America said that virtual currencies could become an important new part of the payment system, allowing money to move more cheaply than it does with credit cards and money transmitters like Western Union.

The statement from the Bitcoin companies on Monday night, which was not signed by Mr. Silbert, said that “in order to re-establish the trust squandered by the failings of Mt. Gox, responsible Bitcoin exchanges are working together and are committed to the future of Bitcoin and the security of all customer funds.”