Glimpses of Financial Crisis Deals in E-Mails

As ProPublica has been detailing for two years, Wall Street banks and the hedge fund Magnetar worked together to build mortgage-backed deals that the hedge fund also bet against. The more than $40 billion of deals helped fuel the crash of 2008.

Now, recently collected emails from bankers and a Magnetar executive involved in some of the deals appear to shed new light on how they did it.

civil lawsuit against Magnetar filed in New York's Southern District Court in late June. (Our reporting is also cited in the complaint.)

The suit was brought by Italian bank Intesa San Paolo, which lost $180 million on an investment linked to a mortgage bond deal put together by Magnetar and French bank Calyon. The deal was "built to fail," in the words of the complaint.

Boston-based Putnam was the manager on the deal, called Pyxis 2006, which involved the creation of a $1 billion collateralized debt obligation. The managers in such deals were supposed to be independent and looking out for all investors' interests.

Intesa is suing all three players, Magnetar, Calyon and Putnam. Intesa, which is seeking unspecified damages, accuses Calyon and Putnam of misrepresenting the deal and Magnetar of acting in a conspiracy with Calyon and Putnam to aid and abet fraud. (Much of the information cited in the suit comes from an earlier case involving many of the same players that was settled.)

As with all partial document trails, the emails are open to a variety of interpretations. Magnetar says they have been selectively excerpted and that the more complete email chains don't show what the plaintiff alleges.

The firms involved in the deal - Magnetar, Putnam and Calyon - filed motions to dismiss the suit last month.

A Putnam spokesman said, "The lawsuit is completely without merit and will be defended vigorously." A Calyon spokeswoman declined to comment.

Magnetar is reportedly under SEC investigation. The hedge fund says it has not received a formal notice of possible charges from the SEC and calls the lawsuit "meritless." The hedge fund reiterated that it "did not control" what went into the deals, known as collateralized debt obligations. (Read their full response.)

Here are some excerpts from the emails, with our captions: 

On June 14, 2006, an executive from Calyon wonders if Magnetar's participation should be hidden, that is, remain "behind the scenes and outside of the docs" in "exactly the same way we did" with another Magnetar CDO:

 

Magnetar's Jim Prusko responds: "No, not at all. What's your number?" Magnetar points to that response as exculpatory.

Yet a week later, Calyon, Magnetar and Deutsche Bank (which was also investing in the deal and playing a similar role as Magnetar), discussed creating a side agreement giving Deutsche Bank and Magnetar veto power over assets that were to go into the deal. Such side agreements were rare and would have left some investors unaware of important details of the deal.

 

Ultimately, that side deal was never consummated, according to Magnetar. But Magnetar made sure it knew about the asset selection for the CDO, which Intesa charges is an example of its secret control. Neither Magnetar's influence in the deal nor the hedge fund's bet against it were clearly disclosed to investors:

 

As the linchpin investor on the CDO, Magnetar needed to know what went into the investment, the hedge fund says. This does not indicate it ultimately controlled what went into the deal. Magnetar points out that Prusko, the Magnetar executive, wrote to the manager in an earlier email that the hedge fund will buy assets "of your choosing":

 

Though Calyon, which created and marketed the deal, told Intesa that it would select some better-quality, "prime" assets, none got in there, according to the complaint:

 

A key issue is who exactly knew whether Magnetar was betting against, or shorting, the deals in which it was investing. In one of the email exchanges, from September 2006, executives from Calyon and Putnam discuss who is shorting. The Putnam executive says: "It is definitely Magnetar." In other words, the manager who was supposedly looking out for investors' interests claimed to know that Magnetar was betting against the deal:

 

Other emails refer to a CDO manager, the Dutch-owned NIBC, which was involved in another Magnetar deal. (As we reported in 2010, NIBC once pushed back against perceived pressure from Magnetar to make a deal riskier.)

Regarding another Magnetar deal, Calyon's Alex Rekeda writes in November 2006 that NIBC is concerned that it is ceding too much power to Magnetar and Deutsche, which was again partnering with Magnetar on the deal. He also relays another concern: "They feel very strongly that the older vintage bonds that they have in the portfolio have by far superior credit characteristics compared to the bonds they can pick up in the market now." Translated: NIBC was feeling pressure to buy riskier bonds and didn't think doing so would benefit investors.

(Last month, the Securities and Exchange Commission settled securities law charges against one of the players, the former Calyon banker Rekeda, accused of violating securities laws in conjunction with another Magnetar CDO. Rekeda did not admit or deny wrongdoing.)

 

Deutsche's Michael Henriques replies that the original investors - which include Magnetar and Deutsche Bank - are taking "execution, credit and manager risk." That suggests Magnetar and Deutsche viewed themselves as the real managers of the CDO, not the supposedly independent NIBC. Henriques, who later went to work for Magnetar, also complains that NIBC is treating Deutsche Bank and Magnetar poorly, lacking "a spirit of partnership."

 

That same day, Deutsche's Henriques threatens to withdraw a lucrative line of business from NIBC:

 

In another deal from a few months earlier, Magnetar's Prusko had also threatened to withhold business from the manager, Putnam, if it did not "play ball":

 

Magnetar says Prusko's email solely refers to the fees on the deal, and not about controlling asset selection or any other issue.

In a statement, Magnetar said: "Intesa's decision to amend this complaint appears to be little more than a transparent effort to sensationalize a baseless case in which each defendant has already moved for dismissal.

"As the Plaintiff is well aware from the motion to dismiss we filed some time ago, no Magnetar entity was a party to the credit default swap at issue in the case, and we were not even aware of that transaction until this complaint was filed.

"We continue to believe that Intesa's accusations are meritless, and that the case should be dismissed.

"And, as we have stated numerous times in the past: Magnetar did not control the asset-selection process and our Mortgage CDO investment strategy was designed and implemented to maintain a market-neutral portfolio."

Standard Chartered Accused of Hiding Iranian Transfers

Thwarting controls against money laundering, Standard Chartered Bank enabled Iranian banks and corporations to hide roughly 60,000 transactions worth at least $250 billion within the bank, New York state's banking regulator charged Monday.

The New York State Department of Financial Services accused the British bank, which it called a “rogue institution” of hiding the transactions in order to gain hundreds of millions of dollars in fees from January 2001 through 2010.

Under United States law, transactions with Iranian banks are strictly monitored and subject to sanctions because of government concerns about the use of the nation's banks to finance 's nuclear programs and terrorist organizations.

The bank “left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes,” the agency said in an order sent to the bank Monday. At the most extreme, the agency's enforcement actions against the bank could include the revocation of its license to operate in New York.

 Beyond the dealings with Iran, the department said it discovered evidence that Standard Chartered operated “similar schemes” to do business with other countries, sanctioned by the United States, including Burma, Libya and Sudan.

The department, led by Benjamin M. Lawsky, said that it reviewed more than 30,000 bank documents, including internal e-mails, and that it investigated the bank because it routed the transactions through its New York operations. Under the order, Standard Chartered will have to pay for an independent monitor to ensure its operations comply with state law.  

In an e-mailed statement, a spokesman for Standard Chartered said the bank was reviewing its “historical U.S. sanctions compliance and is discussing that review with U.S. enforcement agencies and regulators.” He added that the bank “cannot predict when this review and these discussions will be completed or what the outcome will be.”

The department alleges that Standard Chartered systematically scrubbed any identifying information from the transactions for powerful Iranian institutions, including the Central Bank of Iran and Bank Saderat, that are legally subject to sanctions under United States law.

The department accused the bank of undermining the safety of New York's financial system through a range of violations including “falsifying business records” and “obstructing governmental administration,” according to the order.

Suspecting that Iranian banks were using their financial institutions to finance its program, the United States Treasury Department banned certain transactions between Iranian banks and United States financial institutions in 2008. The regulator said the bank engaged in so-called “U-turn” transactions, where a foreign institution routs money to an American bank, which then transfers the money immediately to a separate foreign institution.

 The accusations are the latest to strike British banks. In July, a United States Senate panel found that HSBC was used by Iranians looking to evade sanctions and by to funnel money back into the United States. 

Together, the allegations raise concerns that there is a broader pattern of illegal money freely flowing into the United States through international financial institutions.

 In the Standard Chartered investigation, the order said that the bank's management created a formalized operating manual that showed staff members how to strip off any information from the transactions that might tie them to the sanctioned Iranian institution.

 The order says that executives at Standard Chartered sidelined concerns raised by its management in the United States, company e-mails show. 

How a Best Buy Takeover Might Work

Best Buy‘s founder, Richard Schulze, finally confirmed on Monday that he is pursuing a takeover of the electronics retailer, one that might be worth as much as $8.8 billion.

That's a tall order for any leveraged buyout these days, let alone one for a troubled retailer besieged by Wal-Mart Stores on one hand and Amazon.com on another.

But Mr. Schulze and his advisers at Credit Suisse and the law firm Shearman & Sterling appear willing to give it a shot. Here's how it might work.

In his letter to Best Buy's directors, he said that he has had discussions with several “premier private equity firms” with experience in retail deal-making about joining him in his bid.

In total, Mr. Schulze will likely need to raise $2 billion in additional equity financing, to go along with the $1 billion worth of Best Buy shares that he is willing to contribute to a deal. He currently owns about 20 percent of the company.

That means that Mr. Schulze and any gr oup he forms must raise about $7 billion in debt to cover the rest of a leveraged buyout. Given that Best Buy is currently rated Baa2 by Moody's Investors Service, two levels above junk status, such financing may be relatively expensive to maintain. And as of May 5, the company already had about $1.7 billion worth of debt on its books. It also had close to $1.4 billion in cash and equivalents during that time.

Mr. Schulze wrote that Credit Suisse is “highly confident” that it can arrange the debt.

In some ways, the situation is a little reminiscent of Coty's failed attempt to buy Avon Products Inc.: A much smaller entity tried unsuccessfully to entice its target into merger talks, and then goes public with its offer. Then and now, the unsolicited suitor proposes a deal backed only by a highly confident letter, rather than fully committed financing.

It's unclear how many partners Mr. Schulze would eventually work with. So-called “club deals,” in whic h several buyout shops team up, have proved unpopular since the end of the private equity boom in 2007. Limited partners, most of whom are invested in multiple funds, have increasingly balked at the practice, arguing that it increases their exposure to investments and reduces any claims to uniqueness on the firms' parts.

Mr. Schulze may ultimately end up working with one firm, though that shop would then likely bring on a number of its limited partners as co-investors in the deal, according to a person briefed on the matter.

Monday's disclosure followed weeks of efforts by Mr. Schulze to engage with the Best Buy board and begin performing due diligence, this person said. Minnesota law dictates that any shareholder who acquires a big stake in a company must wait four years before seeking any sort of business transaction. Since any members of a Schulze-led consortium would be new investors, they would be subject to the law - unless Best Buy gives them permission to begin talks.

That's why Mr. Schulze has been fairly careful about not formally aligning himself with a buyout firm and saying only that he has been “discussing” bringing back two former Best Buy executives if his deal should succeed.

Over the weekend, however, Best Buy's directors said that they needed about three more weeks to respond to his request, this person said.

The company said in a statement that it will “review and consider the letter in due course.” It has retained Goldman Sachs, JPMorgan Chase and the law firm Simpson Thacher & Bartlett as advisers.

It's not quite clear that Best Buy shareholders believe a deal could happen. While shares in the company are up 9 percent as of midmorning on Monday, at $19.24 they remain well below the range that Mr. Schulze is proposing.

S.E.C. Gets Encouragement, but Needs Something More

When you are unable to win a prize playing a carnival game, the attendant usually says, “Better luck next time!” as you pony up for another round. That is pretty much what a federal jury told the Securities and Exchange Commission when it urged the government to continue to pursue financial fraud cases involving Wall Street while finding the agency had not proven that a former Citigroup banker, Brian H. Stoker, had violated securities laws.

The S.E.C. sued Mr. Stoker and Citigroup, accusing them of misleading investors in the sale of a collateralized debt obligation, or C.D.O., based on subprime mortgages in 2007. The bank bet against its own security, which lost most of its value in only a few months and had been described by one of the bank's own traders as the equivalent of dog excrement and “possibly the best short EVER!”

Citigroup reached a settlement with the S.E.C. to resolve civil charges, agreeing to pay a $285 million penalty, but Mr. Stoke r successfully fought the case in a trial before Judge Jed S. Rakoff of the Federal District Court in Manhattan. The judge had already drawn the S.E.C.'s ire by refusing to accept the settlement with the bank, a decision that is being appealed.

The S.E.C. did not pull out its biggest securities fraud weapon â€" Rule 10b-5 â€" against Mr. Stoker, which would have required proving he acted intentionally or at least recklessly. Instead, it accused Mr. Stoker of breaching Section 17(a)(2) and (3) of the Securities Act of 1933, which only require showing negligence in making misleading statements.

Mr. Stoker was a director in Citigroup's C.D.O. structuring group, responsible for putting together the offering materials for the security. He operated well below senior management, however, and can hardly be described as having significant authority over the transaction.

Although it had to show only that Mr. Stoker knew or should have known the statements in the o ffering documents were misleading, the S.E.C. could not prove even that minimal level of intent for a violation.

Mr. Stoker's lead lawyer, John W. Keker, offered what will forever be known in the securities field as the “Where's Waldo?” defense by arguing that his client should not be the only one held responsible when he was a minor player in a much larger process.

The defense appeared to have convinced the jury. In an interview with DealBook's Peter Lattman, the jury foreman, Beau Bendler, said, “I wanted to know why the bank's C.E.O. wasn't on trial. Citigroup's behavior was appalling.”

This is likely to become a featured defense for others who operated below the senior management level when they are accused of misconduct, pointing the finger at others up the corporate ladder as the ones truly responsible for any misconduct.

The obvious beneficiary of this approach would be Fabrice Tourre, accused of securities fraud for putting together a similar C.D.O. at Goldman Sachs. Like Mr. Stoker, he had little real authority at the firm, so do not be surprised to hear “Where's Waldo?” asked at his trial. And the S.E.C. has accused him of violating Rule 10b-5, so it will have to show the higher level of intent for that violation, posing an additional challenge to winning its case.

While finding in favor of Mr. Stoker, the jurors added a note to their verdict that stated, “This verdict should not deter the S.E.C. from continuing to investigate the financial industry, review current regulations and modify existing regulations as necessary.”

According to Mr. Bendler, “We were afraid that we would send a message to Wall Street that a jury made up of regular American folks could not understand their complicated transactions and so they could get away with their outrageous conduct.”

Although the jury's statement is a nice gesture, and perhaps made the S.E.C. feel better about the outcome, it does not address the real issue of trying to hold individuals accountable for misconduct in large corporations. The perennial problem is proving who was responsible for a violation when any decision is made through multiple layers of an organization so that no one can be held accountable for the final decision.

For lower-level workers who might be accused of misconduct, asking “Where's Waldo?” can be employed to deflect charges by claiming they were not primarily responsible for the violation. This should not be confused with the so-called Sgt. Schultz defense, named after a character from the “Hogan's Heroes” television show who claims to know and see nothing going on around him.

The “Where's Waldo?” defense does not rely on ignorance because it admits to some participation in the transaction but seeks absolution based on the person's limited authority within an organization. This works best when no one from senior management is accused of a violat ion, much like the cases against Mr. Stoker and Mr. Tourre, because it buttresses the argument that the person has been made the scapegoat for corporate wrongdoing.

Proving cases against senior managers, especially chief executives, can be equally challenging because they rarely get involved in the day-to-day operation of a complex business. There is a measure of truth to a claim of ignorance about a particular transaction, and it is often difficult to find a paper trail showing more than tangential involvement in the misconduct.

In the Citigroup case, it is unlikely the bank's former chief executive at the time of the transaction, Charles O. Prince, had any knowledge of the C.D.O. And its current chief executive, Vikram S. Pandit, had only just joined the company when the sale was made.

So the lower-level workers point the finger up the chain, and the senior managers disclaim responsibility for the misconduct of those beneath them. And even when there i s misconduct, like what occurred at Barclays in the manipulation of the London interbank offering rate, or Libor, any involvement by senior officers can be sloughed off as a mere “miscommunication.”

Holding only the organization responsible for misconduct is unsatisfying because the result is the payment of a monetary penalty â€" which comes out of the pockets of shareholders â€" that can be viewed simply as a cost of doing business.

The jury telling the S.E.C. that it should not be discouraged from pursuing financial fraud is a nice sentiment, but actually winning cases against individuals for cases arising from the financial crisis has proven to be an almost insurmountable barrier.

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

John Phelan, N.Y.S.E. Chief Who Ushered In New Technology, Is Dead at 81

John J. Phelan Jr., a former chairman of the New York Stock Exchange who introduced computer technology to the Big Board in the 1980s, died on Saturday. He was 81.

His death was announced in a statement by Duncan L. Niederauer, chief executive of NYSE Euronext.

Mr. Phelan, a staff sergeant in the Marine Corps who worked as a trader before rising through the ranks at the stock exchange, was known for keeping a cool head following the stock market crash of October 1987, which shook investors' confidence in financial markets. He famously kept the exchange open that day, in spite of widespread fears.

“He deserves eternal credit for that,” Felix G. Rohatyn, a longtime investment banker who helped save New York from bankruptcy in the 1970s, told The New York Times on Mr. Phelan's retirement in 1990. “That was his shining hour.”

In a letter to Mr. Phelan several days after the crash, President Ronald Reagan praised the functioning of the exchange d uring the panic. Mr. Phelan read the letter aloud to his staff from the podium overlooking the trading floor.

“The calm, professional manner of dedicated men and women striving to meet unprecedented challenges undoubtedly helped assure investors of the soundness of the institution,” Mr. Reagan wrote.

Mr. Phelan, known as a soft-spoken and private man, oversaw the Big Board throughout the 1980s, first as president from 1980 to 1984 and then as chairman from 1984 to 1990.

“John was an extremely generous and caring individual, and as chairman and C.E.O. of the New York Stock Exchange and throughout his career John served our capital markets, investors and all market participants with outstanding professionalism, commitment and integrity,” Mr. Niederauer said in the statement.

As trading volume exploded in the 1980s, Mr. Phelan introduced new technologies to the once-stodgy exchange. Under his leadership, the exchange spent millions of dollars to implement systems to handle huge volumes of orders.

Mr. Phelan considered this investment in technology his proudest achievement. A line from Machiavelli's “The Prince” stood framed outside his office in 1987: “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.”

The technological changes helped usher in a new era on Wall Street. Computerized trading lowered costs for small investors and helped make markets more liquid.

In recent years, new technologies have also introduced new risks. Those risks were on display last week with a glitch at the Knight Capital Group, and earlier this year with the botched initial offering of BATS Global Markets and the disappointing debut of Facebook on the Nasdaq market.

In an interview with The New York Times after the 1987 crash, Mr. Phelan outlined his concerns about financial advanceme nts.

“The markets are not for individual professionals to make money in. They are really for corporations to raise capital so you can invest in this country and get a better standard of living,” he said. “If we destroy the markets by too much volatility, too much professional trading, too much leverage, we ruin their credibility and we ruin the function for which they are supposed to exist.”

Those who knew him said Mr. Phelan had a steady judgment and a warm sense of humor, despite his quiet exterior.

“He had a reputation for being a standup personality,” said Arthur Cashin, UBS Financial Services director of floor operations at the N.Y.S.E.

Mr. Phelan is survived by his wife, Joyce, and three sons John, Peter and David.

Middle East Journal: I\'ll Stick With Our Model (as Long as I Can)

By PAUL DOWNS

This is my last post on my trip to the Middle East. It's going to be a while before I see any return on my investment, but the cost has not been outrageous. The trip cost about $4,100, including the two Gold Key fees. I'll be reimbursed for about half of that by the State of Pennsylvania. We are in the process of putting together printed materials, and I'm mulling another trip in the fall to present them.

For me, the most interesting part of the trip was getting to see the factory I wrote about in my previous post - a factory that may well compete with us for a project. It gave me a fresh perspective on the global competition among manufacturers.

I know nothing about the financial performance of the factory, but I do know its manager intends to charge about $33,000 for the very large boardroom table that we are both bidding on. Based on the size and features that I had seen, we could make something the same size for about $45,000 - but it would be a very different product. Ours would go together much better because all of the parts would be cut precisely. And we would be able to cut the openings for the audio-visual equipment perfectly, so that the installation would be faster. His shop will have trouble matching the same level of precision.

But he could throw a whole lot of workers at the project, as many as needed to do the fussy final fitting. The last time we made a big table like that without the use of our computerized cutting machine, we spent more time fitting the top pieces together than we spent on the rest of the project combined. With the cutting machine, our time for making complex table tops dropped by more than 40 percent. The addition of a sophisticated sanding machine dropped the time another 20 percent.

If I were running the factory in Dubai, I would identify the most productive workers, triple their wages, fire the rest, and spend two-thirds of the money saved on better machinery. That sounds brutal, but it is what has happened in every factory in America - the ones still operating, that is. In many cases, that happened over a long time, and in other cases it happened abruptly. The alternative path for American managers was to take production overseas, where labor is so inexpensive that low productivity doesn't matter. And many of them did just that.

Is our model actually better for us as a country? It has worked fairly well so far - so long as the displaced factory workers could find work in other parts of the economy. But the endpoint of our path is pretty much the elimination of people in factories.

My biggest marketing struggle is convincing people that our product, which incorporates a lot of hand labor, is worth the extra money I need to pay that workforce. I could come up with a different table, one that requires less labor, and sell it for less money. But it would be crummy and che ap. And because a lot of companies took that route before me, I'd be entering a mature market where my product would be a commodity.

Without deep pockets, which I do not have, I can't compete that way. I'll keep my current model operating as long as I can.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside of Philadelphia.

Best Buy Founder Offers $8.8 Billion to Buy Out Company

Richard Schulze, the founder of Best Buy, offered to buy the electronics retailer on Monday for as much as $8.8 billion.

Mr. Schulze, who resigned from the company's board in June, said he would offer Best Buy shareholders between $24 and $26 for each of their shares in the electronics company, according to a letter sent to the board that he made public.

The offer represents a premium of 36 percent on the low end of his offer and a premium of 47 percent on the high end from the company's closing share price on Friday. In pre-market trading on Monday, Best Buy shares were up 24 percent, to $22.

“There is no question that now is the moment of truth for Best Buy and that immediate and substantial changes are needed for the company to return to its market-leading ways,” Mr. Schulze said in a statement. “I am deeply concerned that further delay and indecision will cause additional loss of both value and talented leaders who are now uncertain of the com pany's future.”

With a 20.1 percent stake in the company, the Best Buy founder is the company's largest shareholder.

In his letter, Mr. Schulze said he had held discussions with several private equity firms interested in participating in the deal, as well as with former Best Buy senior executives, including Brad Anderson and Allen Lenzmeier.

“Bold and extensive changes are needed for Best Buy to return to market leadership,” Mr. Schulz wrote. “The company's best chance for renewed success will be to implement these changes under a different ownership structure.”

The Best Buy founder said he planned to fund the acquisition by contributing $1 billion of his own money, securing investments from private equity firms as well as debt financing.

In his letter, Mr. Schulz that “Credit Suisse, who I have retained as my financial adviser, is highly confident that it can arrange the necessary debt financing.”

Best Buy has $2.2 billion in debt and $1.1 billion in cash on hand, according to Capital IQ data.

In addition to Credit Suisse, the law firm Shearman & Sterling is advising Mr. Schulze.

Knight Capital Confirms Lifeline, Loses Market Making Duties

Knight Capital confirmed on Monday that it struck a rescue deal with a group of investors, staving off collapse after a recent trading mishap, even as the New York Stock Exchange temporarily revoked its market making responsibilities.

In a regulatory filing, Knight Capital said several investors agreed to purchase $400 million of the brokerage firm's preferred stock. The investment could provide the investors with more than 260 million new shares of the firm.

The deal will hugely dilute existing shareholders of the company. In pre-market trading, shares of Knight Capital were down 34 percent.

The filing did not name the backers â€" or the exact terms of the deal. But people with direct knowledge of the matter said on Sunday that the investor group included TD Ameritrade and the Blackstone Group, Getco, and Stifel, Nicolaus & Company. The securities will afford the investors the right to buy new shares in Knight at roughly $1.50 a piece, according to the p eople.

The deal will hugely dilute existing shareholders of the company. In pre-market trading, shares of Knight Capital were down 34 percent.

The lifeline was assembled in the wake of Knight Capital disclosing a $440 million trading loss. The loss stemmed from a technology error that occurred on Wednesday when the firm unveiled new trading software, a glitch that generated erroneous orders to buy shares of major stocks. The orders affected the shares of 148 companies, including Ford Motor, RadioShack and American Airlines, sending the markets into upheaval.

Knight said it reached the deal on Sunday, and it expected to close the transaction on Monday.

But on Monday, the New York Stock Exchange said it “temporarily” reassigned the firm's market making responsibilities for more than 600 securities to Getco, a high-speed trading firms.

The move, the exchange said in a statement on Monday, was a stop gap measure needed until the investor deal wa s completed. Once the recapitalization plan is complete, Knight will resume its duties.

“We believe this interim transition is in the best interests of investors, our listed issuers, market stability and efficiency, as well as Knight, as the firm finalizes its equity financing transaction,” aid Larry Leibowitz, Chief Operating Officer of NYSE Euronext., said in the statement.

Morning Take-Out

TOP STORIES

Knight Capital Reaches Rescue Deal With Investor Group  |  The Knight Capital Group reached a deal on Sunday to secure a financial lifeline from an investor group that included TD Ameritrade and the Blackstone Group, capping its efforts to stay alive, people with direct knowledge of the matter said.

The lifeline came together days after the trading firm disclosed a $440 million trading loss tied to a glitch in its software that sent shares in 148 companies gyrating on Wednesday.

Under the terms of the plan, the new investors - which also include the trading firm Getco, and Stifel, Nicolaus & Company, a financial services company - would receive securities that give them the right to buy new shares in Knight at a price of roughly $1.50 each, these people said. On Friday, the shares closed at $4.05.

The rescue package, w hich was arranged by the Jefferies Group and is worth about $400 million, will significantly dilute the holdings of existing shareholders, with the new investors owning roughly 70 percent of the firm, one of these people said. But it will leave Knight alive and independent, averting a potentially messy bankruptcy. (The company confirmed the deal in a filing on Monday morning.)
DealBook '

As Libor Fault-Finding Grows, It Is Now Every Bank for Itself  |  Major banks, which often band together when facing government scrutiny, are now turning on one another as an international investigation into the manipulation of interest rates gains momentum.

With billions of dollars and their reputations on the line, financial institutions have been spreading the blame in recent meetings with authorities, according to government and bank officials with knowledge of the matter. While acknowledging their own wrongdoing, institutions are pointing out actions at other banks that they believe are worse - and in some cases, extend to top executives.

One official involved in the case said that banks are emphasizing that “we're not as bad as the next guy.”

The Swiss bank UBS, which has a history of regulatory run-ins, has shared e-mails, instant messages and other information suggesting it had colluded with traders at Deutsche Bank, HSBC and the Royal Bank of Scotland to manipulate key interest rates, according to court documents and bank employees. In talks with authorities, HSBC is providing its own account of the activities, according to a lawyer briefed on the matter. Citigroup has also detailed rate manipulation with other banks.
DealBook '

DEAL NOTES

Stock Exchange Head Who Ushered in Modern Era Has Died  |  John Phelan, who rose to become chairman of the New York Stock Exchange during a tenure stretching from 1975 to 1990, has died at 81, Bloomberg News reports. He was known for maintaining a confident tone during the crash of 1987.
BLOOMBERG NEWS

Techies Show Off Their Louboutins  |  In Silicon Valley, a place not known for its fashion sense, “a growing group of women is bucking convention not only by being women in a male-dominated industry, but also by unabashedly embracing fashion,” The New York Times re ports.
NEW YORK TIMES

Optimism Emerges From Greek Talks With Lenders  |  In separate statements, inspectors for Greece's international creditors and Greek government officials said they had made progress in discussions over mandatory budget cuts, The New York Times reports.
NEW YORK TIMES

Mergers & Acquisitions '

Advent to Buy Control of Maker of Serta and Simmons Bedding  |  Advent International said on Sunday that it has agreed to buy a majority stake in the parent company of Serta and Simmons bedding, taking control of one of the country's biggest makers of mattresses.
DealBook '

Lawmakers Raise Concerns Over Universal-EMI Deal  |  The two ranking members of the Senate's subcommittee for antitrust issues, a Democrat and a Republican, said in a letter to the Federal Trade Commission that the proposed tie-up between Universal and EMI “presents significant competition issues that merit careful FTC review,” The Wall Street Journal reports.
WALL STREET JOURNAL

Silver Lake Resources to Buy Integra Mining  |  Silver Lake Resources, the Australian mining firm, has agreed to buy Integra Mining for about $450 million, Reuters reports.
REUTERS

BC Partners to Buy German Drug Maker  |  The private equity firm BC Partners is buying Aenova, a German company t hat makes vitamins and generic prescription drugs, for a price that was said to be about $617 million, Reuters reports.
REUTERS

Taiwan Semiconductor to Invest in European Firm  |  Taiwan Semiconductor Manufacturing is investing 1.11 billion euros ($1.4 billion) in ASML Holding, a European company that makes computer chip equipment, and taking a 5 percent stake, Bloomberg News reports.
BLOOMBERG NEWS

National Bank of Greece Said to Eye Credit Agricole Unit  |  National Bank, the Greek lender, is planning to bid for Emporiki, the struggling Greek unit of Credit Agricole, Reuters reports, citing unidentified “banking sources.”
REUTERS

INVESTMENT BANKING '

European Bond Traders Deal in Fear  |  The New York Times reports that some traders of European bonds “confessed to being fearful and confused. They now juggle astonishing levels of risk and wealth for investors - some 6.7 trillion euros, or $8.3 trillion, in euro zone government debt, according to the European Central Bank.”
NEW YORK TIMES

Eyeing Europe, Wall Street Battens Down the Hatches  |  The Financial Times writes: “Wall Street banks are increasingly telling counterparties and borrowers to restructure contracts or find another bank as they prepare for the potential exit of a country from the eurozone.”
FINANCIAL TIMES

Euronext Said to Plan an Exchange for Smaller Companies  |  The Financial Times reports: “A new pan-European stock exchange for entrepreneurs is being planned by NYSE Euronext to plug the gap in funding for small companies and help them raise money from investors more easily.”
FINANCIAL TIMES

Berkshire Hathaway's Profit Falls 9 Percent in 2nd Quarter  |  Berkshire's second-quarter results were affected by bigger paper losses on derivatives, but the company said but many of its subsidiaries performed well, The Associated Press reports.
ASSOCIATED PRESS

Rise of the Machines on Wall Street  |  Joe Nocera writes about the debacle at Knight Capital in his column in The New York Times : “Wall Street is now as blindly reliant on computers, on algorithms, on high-frequency trading, as it was once blindly reliant on the risk models that allowed ‘toxic bonds' to be rated Triple A. Wall Street has created its own Frankenstein. The machines are now in charge.”
NEW YORK TIMES

Tax Evasion Crackdown May Prompt Withdrawals From Swiss Banks  |  As authorities in the United States and Europe pursue tax dodgers, financial industry officials are saying Swiss banks could lose a significant portion of their assets, Bloomberg News reports.
BLOOMBERG NEWS

Small Banks Are Vocal in Distaste for New Rules  |  A public outburst by a bank official on a conference call with regulators highlighted the small banking ind ustry's “extreme anxiety and agitation over forthcoming rules,” The Wall Street Journal writes.
WALL STREET JOURNAL

PRIVATE EQUITY '

A Bain Deal Remains Controversial in Italy  |  A deal that Bain Capital did in Italy during Mitt Romney's tenure atop the private equity firm has led to “at least three books, separate legal and regulatory probes and newspaper columns alleging investors made a fortune at the expense of Italian taxpayers,” Bloomberg News reports.
BLOOMBERG NEWS

Boston Private Equity Boss Steps Aside  |  Kevin Landry is retiring after 45 years at the Boston-based private equity firm TA Associates, The Boston Globe reports. The newspaper write s: “Few in private equity can imagine the business without Landry, known as its straightest shooter and a big-hearted mensch.”
BOSTON GLOBE

Apollo Looks to Invest in Asian Real Estate  |  The private equity firm Apollo Global Management is raising $750 million for two funds to invest in commercial real estate in Asia, Bloomberg News reports.
BLOOMBERG NEWS

Brazilian Mogul Said to Plan to Take Companies Private  |  The Brazilian billionaire Eike Batista “plans to delist one or more companies of his empire EBX Group, according to two sources familiar with the situation,” The Wall Street Journal reports.
WALL STREET JOURNAL

HEDGE FUNDS '

Smaller Hedge Funds Show Up Their Big Rivals  |  In a year of lackluster returns for the hedge fund industry, some upstart firms are doing remarkably well, Reuters reports.
REUTERS

Funds Focused on the Big Picture Have a Hard Time  |  The Wall Street Journal writes, “even those who made the correct calls are finding it nearly impossible to time the frequent ups and downs of jittery, fast-moving markets where swings are often driven by pronouncements from politicians or central bankers.”
WALL STREET JOURNAL

Commodities Firm to Invest in Financial Stocks  |  Armajaro Asset Management, a $1.5 billion commoditi es hedge fund firm, is starting a new fund in October to invest in financial stocks, The Financial Times reports.
FINANCIAL TIMES

I.P.O./OFFERINGS '

Zynga Makes an Uncertain Push Into Mobile  |  The social games company is wrestling with how to charge customers for mobile games, as it tries to capture an audience of players that has shifted away from personal computers, The Wall Street Journal reports.
WALL STREET JOURNAL

Zynga Accused of Copying Game Traits  |  The video games company Electronic Arts sued Zynga, saying the social games maker copied elements of the Sims Social game for its own title, The Ville, Reuters reports.
REUT ERS

The Long-Term Value of Internet Companies  |  Bill George, a Harvard business professor, argues that investors should be focusing on Facebook's future instead of wondering why it had lost so much of its I.P.O. value.
DealBook '

I.P.O. Market Set for Biggest Week Since Facebook  |  Among the companies set to go public this week are Manchester United and the operator of Outback Steakhouse.
WALL STREET JOURNAL

VENTURE CAPITAL '

Security Start-Ups Strike Investors' Fancy  |  The New York Times reports: “In the last 12 months, the initial public offerings of once o bscure security start-ups have outperformed offerings from household names like Facebook and Zynga.”
NEW YORK TIMES

Can Internet Pirates Be Defeated?  |  Nick Bilton writes in an op-ed piece in The New York Times: “Stopping online piracy is like playing the world's largest game of Whac-A-Mole. Hit one, countless others appear. Quickly. And the mallet is heavy and slow.”
NEW YORK TIMES

Start-Up Tries to Make a Business in Comparisons  |  A Web site called FindTheBest.com, which attracted $6 million from Kleiner Perkins Caufield & Byers, offers an online comparison engine not for a single product or service but for a broad range, the Bits blog reports.
NEW YORK TIMES BITS

LEGAL/REGULATORY '

S.E.C. Gets Encouragement From Jury That Ruled Against It  |  The jury that acquitted a former Citigroup executive in the Securities and Exchange Commission's case against him included with the verdict a statement supporting financial investigations.
DealBook '

New York Fed Faces New Scrutiny on Rate-Rigging Scandal  |  In a letter to the New York Fed and the Federal Reserve Board in Washington, Senator Sherrod Brown challenged the regulators to defend their response to the rate-rigging s candal.
DealBook '

UBS Said to Dismiss Traders Over Libor  |  The Swiss bank “has dismissed about two dozen traders and managers in connection with an investigation of manipulation of the London interbank offered rates, Der Sonntag reported,” according to Bloomberg News.
BLOOMBERG NEWS

Investigation Into Silver Market May Be Dropped  |  The Financial Times reports: “A four-year investigation into the possible manipulation of the silver market looks increasingly likely to be dropped after US regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation.”
FINANCIAL TIMES

Treasury to Reduce Stake in A.I.G.  |  The Treasury Department said it planned to raise $5 billion from a sale of shares of A.I.G. that would cut the government's stake to 55 percent from 61 percent, Reuters reports.
REUTERS

Insider Trading Case Reveals a Dubious Scheme  |  According to a complaint filed by the Securities and Exchange Commission, an employee of Bristol-Myers Squibb did little to cover his tracks when he engaged in an insider trading scheme that generated over $300,000 in profits, Peter J. Henning writes in the White Collar Watch column.
DealBook '

Study Questions How a Revolving Door Hurts Regulation  |  The New York Times reports, “a group of accounting profess ors has produced a study showing that the revolving door actually toughens enforcement results at the Securities and Exchange Commission - the opposite of what government critics have long maintained.”
NEW YORK TIMES

Municipal Issuers Could Use Police Protection  |  Gretchen Morgenson writes in her column in The New York Times that the Securities and Exchange Commission may have protected municipal bond investors from deceptive practices, but “it has been less inclined to take action on behalf of issuers against financial firms that underwrite these bonds.”
NEW YORK TIMES

Few Luxury Toys for Peregrine Chief  |  Russell Wasendorf Sr., who confessed last month to stealing more than $100 million from customers of the Peregrine Financial Group, was not prone to ostentatious spending, suggesting that “recouping money for Peregrine's former clients will not be easy,” Reuters reports.
REUTERS

Zaoui Brothers Establish New Firm

LONDON â€" The brothers Michael and Yoël Zaoui, two of the most prominent London-based investment bankers of the last two decades, have created a new company called Zaoui Capital, according to British regulatory documents.

The news comes after Yoël Zaoui stepped down as co-head of global mergers and acquisitions at Goldman Sachs earlier this year. His brother, Michael, retired from his position as Morgan Stanley's chief European dealmaker in 2008.

Born in Morocco and educated in France and the United States, Yoël Zaoui had joined Goldman Sachs in 1988, and moved to London in 1989 to help build the firm's operations in Europe, with a focus on mergers. His brother joined Morgan Stanley in 1986, and moved to London four years later.

Over the last two decades, the Zaoui brothers had been part of many of Europe's largest deals. The two bankers, for example, were on opposing sides of Mittal's contentious hostile bid in 2006 for the rival steelmaker Arcelor, with Michael advising Arcelor and Yoël advising Mittal.

The new company, Zaoui Capital, was established in late July, and names the two brothers as officers of the firm. Details about the company's activities were not disclosed.

A representative for Zaoui Capital was not immediately available for comment. The news was earlier reported by Financial News.

This Week in Small Business: Introducing the Cashtag

By GENE MARKS

Dashboard

A weekly roundup of small-business developments.

What's affecting me, my clients and other small-business owners this week.

The Big Story: The Olympics and Small Business

London's games are a “disaster” for small businesses. Sports fans attending the games were told on Sunday to avoid nonurgent text messages and Twitter posts during the events because overloading of data networks was affecting television coverage. These were the 25 most absurd moments of the opening ceremony. Brent Rose says that technology is making the Olympics worse. Jason Fell learned three social media lessons from the Olympics. This blogger learned a lot about business from the British. Gwen Moran offers some Olympic training tips to coach your employees to greatness. London's mayor gets stuck on a zipline. Aly Raisman's paren ts are awesome. City Hall workers in Los Angeles are urged to watch less of the games. This infographic sums up the games' finances.

The Economy 1: Doing Just Fine

Texas factory activity (pdf) continued to increase in July. Personal and disposable income also increased, and although consumer spending was flat, consumer confidence rose. Chrysler reported a healthy second-quarter profit; General Motors did not. Home prices are going up. June construction spending rose. Weekly unemployment claims increased to 365,000, but companies added 163,000 more jobs in July and 200,000 trucking jobs are still vacant. An economics student says the United States is clearly one of the best countries in which to do business. A study finds that recessions lead to increased entrepreneurship. American manufacturers are more upbeat about the domestic economy than the global economy. Some economists feel that Washington may be inching back from the cliff. Ami Kassar celebrates those h elping small businesses. Mark Perry says the private sector really is doing just fine. And it's official: Americans love small businesses!

The Economy 2: Not Doing So Fine

Kathleen Madigan concludes that 2012 has been a big disappointment. Corporate profits are stagnating. A key manufacturing index “remains terrible.” Global manufacturing weakens further but the Federal Reserve decides to take no action (for now). The government's debt now exceeds our gross domestic product, and euro zone debt hits record highs. An index shows the economic confidence of entrepreneurs slipping. And with weak employment and compensation growth, many small-business owners are holding back on hiring.

Social Media: Introducing the Cashtag

Jay Bauer says that not tracking social media return on investment is your fault. Ever wonder what makes something go viral on the Internet? (It's anger!) Twitter introduces the “cashtag” and passes 5 00 million users (with Jakarta the world's “biggest tweeting” city). An Internet prankster wages a successful campaign to draw a rap star to Alaska. A plastic surgeon drives his business with social media. Stephanie Sammons suggests seven ways to build blog traffic using LinkedIn.

Management: Credibility Killers

Curt Schilling tries to explain what went wrong. Tim Berry names three  credibility killers in business plans. When it comes to referrals, Yvonne DiVita says there are a few things you should never do. Alyson Stanfield says to beware of saying, “I am not.” A research firm finds that small businesses often choose not to grow. Emily Suess says there are five ways to inspire trust in your customers, including, give them “something for nothing.” An entrepreneur turns wedding photos from smartphones into a business. Abigail Tracy explains how to beat the retail giants. The Economist reports on the challenges of the shipping industry. These are the best food and beverage ideas this year. These are the worst franchises to buy in 2012. And here are five legal mistakes to avoid. Chick-fil-A got a lot of free publicity.

Your People: Why Aren't You Delegating?

J.C. Penney plans to get rid of its checkout counters and clerks. Amy Gallo asks, Why aren't you delegating? Steve Cooper believes you will make more money if you make your employees happy. This infographic shows how Etsy turns artists into entrepreneurs and outsourcer Elance reports an upswing in the “creative economy.” Levi Newman explains how being a Debbie Downer can hurt your career. Employee ranking systems fall out of favor at many companies.

Marketing: Collecting Leads

Here are 12 simple ways to collect leads online, 10 niche social platforms to generate new leads and six creative small-business promotional items. Small businesses are using more gaming principles to help their marketing. Frank Reed explains how mobile marketing ca n add to consumer trust and warns: “Until marketers think about mobile as a regularly used and effective channel they will continue to silo it.” Here are five defenses against poor word-of-mouth. Matthew Needham says to get more clients you have to keep existing customers engaged.

Sales: 50 Reasons to Buy From You

These six things will kill your next sale. David Newman offers 50 reasons people should buy from you. Marcus Sheridan says there are 50 benefits to blogging, including: “You'll find those in sales become much better at their job when they blog. Don't believe me? Write about a subject for the next hour and then go explain that subject to a friend or client and see just how easily the words and thoughts flow.” Justin Beck offers five tips for selling to the new power generation.

Start-Ups: The Older Crowd Jumps In

Start-ups run by the 55-and-older crowd increase, and AARP wants even more. Here are the six personalities every start-up needs to thrive. A new film production company is seeking money. The Internal Revenue Service gives tips for start-ups. Small-business borrowing falls in June but Chase is ranked among the top small-business lenders. Box, an enterprise cloud storage company, nets $125 million in financing.

Around the Country: Disaster Area

Half of the United States' counties are now drought disaster areas, and the Mississippi River's low-water levels are affecting the economy. San Bernardino, Calif., files for bankruptcy and a court lets Stockton, Calif., cut its retiree health care payments. Zombies run amok in New York City. In Philadelphia, two entrepreneurs offer a cheaper way to send money to Latin America, the city government looks to spend $120 million on technology and a distracted talker falls onto the subway tracks. Tech start-ups sprout in “Silicon Prairie.” Rob Pitingolo says the  small-business culture in Portland, Ore., is “just out-of-control good.” San Fr ancisco is embracing the pop-up for neighborhood revitalization. A Detroit boy sells snacks to save the Motor City.

Around the World: Lights Out

More than 670 million people lose power in India but (phew!) the call centers stay open. And these are the people who keep the lights on here. Japanese industrial production falls for the third consecutive month. The Economist says Europe has a “chronic failure to encourage ambitious entrepreneurs.” Twenty-three crucial days lie ahead for Greece. The euro zone's retail sales sink for the ninth month, and euro-area economic confidence drops more than expected. The citizens of Warsaw freeze for 60 seconds. A “Silicon Valley” emerges on the West Bank (somebody tell Mitt Romney). An Australian billionaire plans a real-life Jurassic Park.

Red Tape: Stiffed by the Candidates

The United States government wants your comments on burdensome regulations. This chart shows the growth of the Federal Register. The H ouse passes the Red Tape Reduction and Small Business Job Creation Act and votes to extend the Bush-era tax rates. The Postal Service is set to default on retiree payments. A bunch of former presidential candidates stiff their small-business customers. Small-business owners slam Mitt Romney! Small-business owners slam Barack Obama! A webinar on Aug. 8 will explain what the JOBS Act means for your business.

Technology: Mobile Payments

Apple's iPad owns 85 percent of the tablet market. Android's smartphone market share declines. Square is winning the mobile payments race. Dropbox is hacked. These are nine of the best low-cost or free alternatives to Microsoft Office. Microsoft revamps Hotmail. A new company helps translate apps for a worldwide audience. These are the best ultraportable laptops of 2012.

Tweets of the Week

@BillStainton
Your competitors love it when you tell a customer, “I can't do that.”

@A_Conscience
Som e companies don't need competitors. They have themselves.

This Week's Bests

Rosabeth Moss Kanter says there are 10 reasons that winners keep winning, including a “positive culture of mutual respect”: “For anyone who plays on a team, winning makes it easier to respect and listen to one another, because after all, if you win together, then the presumption is that everyone is a good player. Winners can maintain high aspirations and act generously toward others. Losers are more likely to blame others and disdain them as mediocre, creating a culture of finger-pointing and infighting.”

Hannah Betts says that to succeed in business you should try being a feminist and a flirt: “Elizabeth I ensured that flirtation became her reign's chief metaphor, creating a language within which her authority could flourish. In remaining single, she at once maintained control over her throne and created a situation in which she could be paid court to as everybody's mistr ess, in Britain and beyond. For almost 50 years she ruled with this winning conflation of charm and policy, continuing to camp up her faerie queen femininity until the end. At the age of 64, she could be found ginger-wigged, gauzy-frocked, flashing her snowy bosom at the French ambassador, poised despite her ‘very aged' face and tombstone teeth.”

Jeff Esposito suggests three things your small business can learn from a petting zoo, including: “Engagement Is key. If you've ever been to a petting zoo, you probably know that customers are very interactive with the attraction and the employees. This type of personal engagement helps keep these establishments in their customers' memories. The question is, how can you continue this level of engagement with your customers? … Making your customers feel like they are valued and wanted will let them know you care.”

Today's Question: Will Chick-fil-A sell more or fewer sandwiches because of the controversy?

G ene Marks owns the Marks Group, a Bala Cynwyd, Pa., consulting firm that helps clients with customer relationship management. You can follow him on Twitter.

As Libor Fault-Finding Grows, It Is Now Every Bank for Itself

Major banks, which often band together when facing government scrutiny, are now turning on one another as an international investigation into the manipulation of interest rates gains momentum.

With billions of dollars and their reputations on the line, financial institutions have been spreading the blame in recent meetings with authorities, according to government and bank officials with knowledge of the matter. While acknowledging their own wrongdoing, institutions are pointing out actions at other banks that they believe are worse - and in some cases, extend to top executives.

One official involved in the case said that banks are emphasizing that “we're not as bad as the next guy.”

The Swiss bank UBS, which has a history of regulatory run-ins, has shared e-mails, instant messages and other information suggesting it had colluded with traders at Deutsche Bank, HSBC and the Royal Bank of Scotland to manipulate key interest rates, according to court doc uments and bank employees. In talks with authorities, HSBC is providing its own account of the activities, according to a lawyer briefed on the matter. Citigroup has also detailed rate manipulation with other banks.

When the British bank Barclays recently negotiated a settlement with authorities, it highlighted that other European institutions took part in the rate-rigging scheme, said officials close to the case. Like UBS, Barclays has provided information on activities involving HSBC and Deutsche Bank.

Several banks are using Barclays' $450 million settlement as a guidepost in preliminary discussions with authorities. JPMorgan Chase and Citigroup are each emphasizing to authorities that their chief executives were not implicated in the wrongdoing as in the case of Barclays, and therefore the banks deserve to be treated less severely, according to the officials.

A Deutsche Bank manager who oversaw traders is facing scrutiny, according to a person involved in the case. However, a Deutsche Bank spokesman said no managers or top executives had been aware of any rate manipulation, adding that the investigation was continuing.

JPMorgan, Deutsche Bank, HSBC and Citigroup have said they are cooperating with officials.

Authorities around the world are investigating more than 10 big banks for their roles in setting global interest rates like the London interbank offered rate, or Libor. Such benchmarks underpin trillions of dollars of financial products, including mortgages and student loans.

Regulators are examining whether banks colluded to move the rates up or down to get extra profits and limit losses on their trading positions. Some banks are also under investigation for reporting artificially low rates to make themselves appear financially healthier.

When banks first started conducting internal investigations at the behest of regulators two years ago, they figured the potential penalties would be manageab le, according to bank officials.

But the size of the Barclays settlement and the growing public outcry have left banks scrambling to limit their culpability as the threat of criminal actions increases. Part of the banks' problem is that their internal investigations have created a road map that authorities are using to pursue criminal and civil cases.

Those findings provide a detailed portrait of the wrongdoing.

Interviews with dozens of government and bank officials who spoke on the condition of anonymity because the investigation is developing, and a review of court documents and regulatory filings show varying degrees of exposure. Banks like UBS, Deutsche Bank and Citigroup uncovered that employees had worked with traders at other firms to influence rates, according to government and bank officials. A small number of institutions, including Credit Suisse and Bank of America, found more limited actions.

The extent of the evidence has created an ever y-bank-for-itself attitude.

The financial industry often tries to negotiate a common deal to avoid getting singled out for bad behavior. This year, five banks collectively struck a multibillion-dollar agreement with federal authorities to address foreclosure abuses.

With the rate investigation, institutions are not sharing information or even discussing the case with rivals, according to lawyers involved in the matter. In part, they do not want to appear to have close ties with their rivals, since such cozy relationships are part of the government's inquiry.

“There is no information-sharing among banks unlike the past 15 years of federal investigations,” said a lawyer involved in the case.

So far, Barclays has borne the brunt of the fallout. In June, the British bank settled with British and American authorities for reporting false rates to bolster its profits and project a rosier picture of its financial position. The settlement prompted the resi gnation of top executives, including the chief executive Robert E. Diamond Jr., and helped to erase more than $3 billion of the bank's market value.

At first, Barclays rejected a settlement offer by the Commodity Futures Trading Commission, the regulator leading the investigation, according to officials close to the case. The bank believed the terms were unfavorable, said a lawyer involved in the matter. As the agency prepared to take the case to court, negotiations resumed. While Barclays secured a modestly smaller penalty, the bank still paid record fines.

In trying to work out a deal, the British bank offered information on the multiyear scheme with Deutsche Bank, HSBC, Société Générale and Crédit Agricole, according to government and bank officials. Also, a senior trader at Barclays tried to manipulate the Euro interbank offered rate, or Euribor.

Other cases are expected to follow. The Justice Department is aiming to file criminal actions against t wo banks before the end of the year and is preparing to arrest former traders at Barclays and other banks, according to government officials. In addition, state attorneys general and local district attorneys have approached the Justice Department in recent weeks, seeking a role in the case.

Since the Barclays settlement, banks have been reassessing their defense strategies and reaching out to authorities. Officials warn that all talks with the banks are preliminary, and no settlement deals are imminent.

After targeting Barclays for rate manipulation four years ago, regulators gradually turned their attention to a wide swath of banks.

In a 2010 letter, the Commodity Futures Trading Commission contacted a small group of banks, including UBS. The regulator quickly expanded the list, sending a memo to all 16 institutions that helped set Libor rates at the time. The agency ordered the firms to hire outside attorneys to conduct an investigation into suspected rat e manipulation, according to bank and regulatory officials.

After examining the extent of its wrongdoing, UBS moved swiftly to strike an immunity deal with government authorities. In its inquiry, the Swiss bank uncovered that one of its former traders, Thomas Hayes, had apparently worked with employees at Deutsche Bank, HSBC and the Royal Bank of Scotland to influence rates and make profits, according to bank officials and court documents. At times, the traders communicated via instant messages on Bloomberg machines, the court documents show.

UBS was eager to cooperate in part because the government typically only grants immunity to the first party to step forward in a case. The Swiss bank also wanted to avoid the harsh spotlight of a prosecution or a settlement, according to a bank official. The bank has been at the center of several financial scandals, including a rogue trader and an illegal tax shelter scheme.

Citigroup has been forthcoming with regulato rs, as well. After leaving UBS, Mr. Hayes moved to Citigroup where the problems continued, according to bank officials with knowledge of the case. The bank has handed over documents on that rate-rigging group.

Citigroup is emphasizing to authorities that the wrongdoing did not reach the upper levels of management, as it did at Barclays. Based on its internal investigation, the bank told regulators and its audit committee that neither its chief executive, Vikram S. Pandit, nor its chief financial officer, John Gerspach, was implicated, according to a bank official and a lawyer with knowledge of the matter. The bank's investigation showed that its wrongdoing is mainly centered on another key benchmark, the Tokyo interbank offered rate.

In contrast, Deutsche Bank is facing heavier scrutiny in the United States. The German institution has been named in the rate conspiracies outlined by Barclays and UBS, as has HSBC. In working with regulators, HSBC is making employee s available to government investigators and turning over e-mails and other information, according to one person with knowledge of the matter.

Ian Austen contributed reporting.