Welcoming Higher Taxes, but Not That High

Paris - A little over a year ago, some of the most prominent and wealthy executives in France signed a petition seeking higher taxes on themselves. Yes, higher taxes.

“We are conscious of having benefited from a French system and a European environment that we are attached to and which we hope to help maintain,” wrote the group, which included the chief executives of Air France-KLM and Société Générale, and the billionaire heiress to the L'Oréal fortune, among others. “When the public finances deficit and the prospects of a worsening state debt threaten the future of France and Europe and when the government is asking everybody for solidarity, it seems necessary for us to contribute.”

You may know what happened next: François Hollande, the country's socialist president, proposed a 75 percent marginal tax rate on all income over $1.3 million. (The highest marginal tax rate on the first $1.3 million would be 45 percent, up from 41 percent.) Marginal tax rates on capital gains would rise to as much as about 60 percent.

Now many of the nation's wealthiest executives - including some who signed the original petition - and entrepreneurs, private equity managers and others who are millionaires, or want to become millionaires, are crying foul. In a sign that executives are moving, or threatening to move, to lower-taxed countries, high-end real estate in Paris is being thrown on the market.

Jean-Paul Agon, chairman and chief executive of L'Oréal, who signed the original petition, has been decrying the new tax rates, saying they are significantly higher than he expected and would damage the country's economy. Stephane Richard, the chief executive of France Télécom, who also signed the petition, and François-Henri Pinault, the chairman and chief executive of PPR, which owns brands like Gucci and Yves Saint Laurent, sounded off against the tax, too.

Last week, Pierre Chappaz, a French entrepreneur, wrote on line, “I do not know a single start-up founder who accept the idea that creating a company, in which it will invest all his savings and years of effort often without a salary, must then give to the State 60.5 percent of gain when he sells his company if he succeeds.” The statement went viral. An online group calling itself Les Pigeons - slang for sucker - has more than 63,000 “likes” on its Facebook page.

The private equity industry is similarly up in arms. The 60.5 percent rate would help perpetuate “the image of a country that does not like achievement and success, and that strikes a confiscatory tax,” an industry group said in a statement.

And then there is Bernard Arnault, the chief executive of LVMH, one of France's wealthiest men. He recently said he was applying for citizenship in Belgium, setting off a firestorm, including a headline in the left-leaning newspaper, Liberation, that mildly translated as, “Get lost, you rich idiot!”

Mr. Arnault, who is suing the newspaper for “extreme vulgarity and the violence of the headline,” has insisted he is not leaving the country over the new tax regime. He said he would “fulfill my fiscal obligations” to France as a resident, saying that “Our country must count on everyone to do their bit to face a deep economic crisis amid strict budgetary constraints.”

Still, all the anger and angst appears to be pushing Mr. Hollande and his administration to back down, at least slightly. The 75 percent tax will now be effective for only the next two years. And last week, a budget minister, Jérôme Cahuzac, perhaps bowing to pressure from Les Pigeons, said the capital gains treatment on start-ups was “a mistake” and said the government would seek a remedy.

The purpose of the tax is more populist than mathematical: the marginal income tax increase is estimated to raise only about $300 million.

The debate in France raises an important question am id the election campaign in the United States about whether the wealthy should pay more - and by how much. The American billionaire Warren E. Buffett, like some of the French, called for higher taxes on the rich, but he never sought rates at the levels being discussed here in France.

Under President Obama's proposed Buffett Rule, the wealthiest Americans would have paid no less than 30 percent of all income.

Marginal tax rates in the United States were as high as 94 percent during World War II in 1944 and 1945, but there were so many loopholes that few people paid anything close to that rate. For now, it is capped at 35 percent, unless the Bush tax cuts expire.

So where is the line?

The reality in Europe is that moving from Paris to London may not be that big of a deal, so extreme tax rates could be a deciding factor in where a person or business decides to locate.

But Thomas Piketty and Emmanuel Saez, two French economists who influenced Mr. Ho llande, have said that the country's economic growth won't be hurt unless the marginal rates on the highest incomes exceed 83 percent.

The idea of soaking the rich is often a popular one. But if there is lesson in the French experience, despite the economic models, it is that there are limits.

Allied World Assurance Buys Stake in MatlinPatterson

Allied World Assurance, a publicly traded insurance company, has acquired a substantial minority interest in MatlinPatterson, the private equity and hedge fund firm, according to people briefed on the deal.

As part of the transaction, Allied World has also agreed to invest $500 million in MatlinPatterson's fund strategies, these people said.

Allied World's investment is the latest example of institutional investors like insurers or pension funds taking an ownership stake in a private investment firm, while also committing substantial money to the firm's funds. Last month, for instance, Florida's state pension fund acquired a minority interest in the private equity firm Providence Equity Partners. In 2011, the private equity firm TPG agreed to sell a small piece of itself to two sovereign wealth funds.

These deals benefit the institutional investor in several ways. They allow pensions and insurers searching for returns in difficult markets to tap the inves tment expertise of a money manager. Also, the institutional investor typically receives discounts on the funds in which they invest, as is the case with Allied World in its transaction with MatlinPatterson.

The New York-based MatlinPatterson is a decade-old firm run by David Matlin and Mark Patterson, former executives at Credit Suisse First Boston. The firm, with about $5.5 billion in assets under management, is best known for its investments in distressed assets. In recent years it has pushed into a variety of other strategies under the leadership of David Cody, the chief executive of MatlinPatterson's asset management unit.

MatlinPatterson's recent successes include the sale of its portfolio company, XLHealth, to the UnitedHealth Group last November for about $2 billion; and an investment in the homebuilder Standard Pacific. Yet the firm has struggled with its $1 billion stake in the Michigan bank Flagstar Bancorp.

Allied World, a property and casualty i nsurer with headquarters in Switzerland, was formed in 2001 with financial backing from the American International Group, Goldman Sachs and other investors. The company, run by Scott Carmilani, made headlines last year as one of the potential buyers in a bidding war lasting months for Transatlantic Holdings, the New York reinsurance company. It has an investment portfolio of more than $8 billion.

Insurers like Allied World are active players in the financial markets as they build up cash on their balance sheet through the collection of premiums and need somewhere to invest it. MatlinPatterson and Allied World have longstanding ties. Mr. Patterson of MatlinPatterson served on Allied World's board until earlier this year.

Ireland Plans Bold Measures to Lift Housing

DUBLIN - With its economy still reeling from the housing crash, Ireland is making a bold move to help tens of thousands of struggling homeowners.

The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale.

The initiative, which would lower a borrower's monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries.

Without the proposed law, Laura Crowley, a nurse who lives in a village 30 miles west of Dublin, figures she will lose her home. In 2007, Ms. Crowley and her husband bought a small home for the equivalent of $420,000. But they can no longer afford the $1,400 monthly payment. Her husband, a construction worker, is earning far less and her tak e-home pay has been cut by the country's new austerity measures, which include new taxes. “This bill is the only light at the end of the tunnel for us,” she said.

Most countries that have suffered housing busts, including the United States, have made limited use of so-called mortgage write-downs, the process of forgiving a portion of the principal on the loan. The worry has been that some borrowers who can afford their mortgages will stop making payments to take advantage of a bailout. Banks have also been reluctant since they could face unexpected losses.

Ireland is different from the United States and most countries. During the financial crisis, Ireland bailed out the banks, and the government still has large ownership stakes in some of the biggest mortgage lenders. So taxpayers are already responsible for mortgage losses. In other countries, the burden of principal forgiveness would largely fall on privately owned banks.

But the debate is the same: w hether to push lenders to take losses now, in hopes that things will get better faster, or wait for the housing market to heal on its own, which could cloud the economy for years to come.

Countries suffering from a housing hangover will most likely be watching Ireland closely to see how the law works. Spain, swamped with mortgage defaults, introduced a measure in March that allows for debt forgiveness, though under strict conditions.

In many ways, Ireland has to try something audacious. House prices are still 50 percent below their peak, compared with 30 percent in the United States. And more than half of Irish mortgages are underwater, meaning the house is worth less than the outstanding debt. While some of those borrowers can afford to keep making payments, more than a quarter of mortgage debt on first homes, roughly $39 billion, is in default or has been modified by lenders.

The housing market is now in a state of limbo as the government and the banks ha ve made little effort to clean up the mortgage mess.

Unlike in the United States, Irish banks have foreclosed on very few borrowers. While Ireland's leaders have considered it socially unacceptable for banks to seize large numbers of homes, they also feared the fiscal cost of foreclosures.

This approach creates doubt about the true level of bad mortgages at Irish banks. And borrowers, unsure of whether they will keep their homes, remain in a state of financial paralysis.

The new law aims to end this stalemate by overhauling Ireland's consumer debt and bankruptcy laws.

While banks aren't required to reduce the mortgage debt, the legislation gives them a powerful incentive to write down mortgages for troubled borrowers. Under the new rules, it will be less onerous to declare bankruptcy, making it easier for people to walk away from their homes altogether. As the threat rises, banks are more likely to reduce homeowners' debt, rather than risk losing the monthly income and getting stuck with the property.

“For the banks, where there are losses, they have to be recognized,” said Alan Shatter, Ireland's justice minister, who has sponsored the new law, called the Personal Insolvency Bill. “This legislation gives homeowners hope for their future.”

The legislation is intended, in part, to reach homeowners who are on the verge of running into trouble, as Geraldine Daly is.

A health care worker, Ms. Daly bought a home in 2009 in Belmayne, a new development in northern Dublin. Until last month, Ms. Daly said, she has been making her $1,200 payment. Then she fell behind after some unexpected expenses, including a car repair.

Ms. Daly estimates that her finances would become manageable if her monthly mortgage payments were cut to around $900. “Right now, I am a slave to this dog box.”

Critics contend the law could have unintended consequences.

One fear is that banks won't have the money to absorb the potential losses on the mortgages. A big mystery is the level of defaults on so-called buy-to-let mortgages, loans that many Irish people took out to buy second homes to rent. In theory, the insolvency bill allows for write-offs on this type of mortgage, and analysts expect defaults on such loans to be higher than on first homes. Ireland's central bank is expected to release the data soon.

To qualify, borrowers will have to prove that they are in a precarious financial position and cannot afford to pay. Analysts are concerned that the bill may actually be too restrictive and homeowners will continue to default. “There are so many layers that borrowers have to go through to get a write-down,” said Paul Joyce, senior policy researcher at Free Legal Advice Centers, a legal rights group that has supported moves to make Irish bankruptcy law more lenient. For instance, borrowers will most likely have to pay a big fee upfront to the person who handles their case.

John Chubb, a former construction worker who lives on a quiet cul-de-sac on the outskirts of Dublin, isn't too worried about the process right now. He just wants to save his home.

Since having an operation for colon cancer in 2004, Mr. Chubb has lived primarily on government disability payments, and the bank has allowed him to pay only mortgage interest. But the lender is in the process of deciding whether to foreclose.

“I am expecting the word any day now,” he said. “I don't know if I will be out on the front path before the bill passes.”

 

 

Investors\' Billion-Dollar Fraud Fighter

A few days after securing the largest shareholder recovery arising from the financial crisis - $2.43 billion from Bank of America - the plaintiffs' lawyer Max W. Berger was not taking a victory lap.

“It makes me sad that in all of these scandals, no matter how good a job we do of getting results and inflicting pain, the government doesn't seem to follow suit, and nobody learns, and it's business as usual,” he said in an interview.

After a pregnant pause, Mr. Berger broke into a sly smile. He had another thought: “It gives us a lot of business, but it still makes me sad.”

With last month's settlement with Bank of America, which resolved claims that the bank had misled shareholders about its acquisition of an ailing Merrill Lynch, Mr. Berger, 66, has now been responsible for six securities class-action settlements of more than $1 billion. His firm, Bernstein Litowitz Berger & Grossmann, based in Manhattan, has represented investors in five of the 10 largest securities-fraud recoveries. So far, it has recovered $4.5 billion for investors in cases connected to the subprime mortgage collapse.

“He is unquestionably one the giants of the plaintiffs' bar,” said Brad S. Karp, the managing partner at Paul, Weiss, Rifkind, Wharton & Garrison, who represented Bank of America and has faced off against Mr. Berger in several other cases. “And what sets Max apart, beyond his talents as a lawyer, is that he's a mensch, a person of real humility and integrity.”

There was a time, not too long ago, when the lions of the securities class-action bar were described in far less flattering terms. For decades, Melvyn I. Weiss and William S. Lerach, a pair of brash, crafty plaintiffs' lawyers, dominated this lucrative pocket of the legal industry. Their firm, Milberg Weiss, revolutionized shareholder class-action suits by filing streams of cases against corporations, accusing them of accounting fraud. Critics called their a ggressive tactics legalized blackmail. Congress passed laws aimed at reining in their practices.

The careers of Mr. Weiss and Mr. Lerach ended in disgrace in 2006, when their firm was indicted on charges that it had funneled illegal kickbacks to clients to induce them to sue. Mr. Weiss, Mr. Lerach and two other Milberg Weiss partners ultimately served prison terms. (It did not help the standing of the plaintiffs' bar that at about the same time, Richard F. Scruggs, the Mississippi class-action lawyer, was imprisoned for trying to bribe a judge.)

“To be tarred by those brushes was very upsetting, but it was even worse to have everyone presume that we operated in the same way,” Mr. Berger said. “After they were charged, I can't tell you how many people said, ‘Well, isn't that what all of you do?' “

Yet a half-decade after Milberg's downfall, there has been a shift in the public image and reputation of the securities class-action bar. The Bank of Ame rica settlement, which is still subject to judicial approval, comes at a moment when plaintiffs' lawyers are being praised for extracting stiff penalties from banks related to their actions during the housing boom and the subsequent economic collapse. At the same time, resource-constrained government regulators have been criticized for not being tough enough.

In several cases, private plaintiffs have settled lawsuits for amounts far greater than the government received in similar actions. Bank of America, for instance, paid the Securities and Exchange Commission just $150 million to settle the commission's lawsuit connected to the Merrill acquisition. Judge Jed S. Rakoff reluctantly approved the S.E.C. settlement, calling it “inadequate and misguided” and the dollar amount “paltry.”

“The securities class-action bar has come under relentless assault over the years,” said J. Robert Brown Jr., a corporate law professor at the University of Denver. “Yet these suits, especially the ones tied to the financial crisis, actually have had real value in the capital markets because companies need to know that there is a heavy price to pay for their misconduct.”

There are still detractors who scoff at that notion. These critics view securities class-action lawyers as bounty hunters who file nuisance lawsuits against deep-pocketed targets and then force them to settle rather than engage in costly litigation. They argue that the settlements have little deterrent effect because the payments almost always come from the corporations, not the executives and directors running the companies.

And questions have arisen over plaintiffs' lawyers' campaign contributions to local politicians who control the selection of legal counsel for shareholder lawsuits filed by public pension funds.

But even the most vocal opponents of securities-fraud class actions acknowledge that a variety of factors, including a combination of feder al legislation and court rulings, have curbed abuses in the system. Many of the weakest cases are now thrown out earlier, and large institutional shareholders like state pension funds and insurance companies have taken greater control of the lawsuits.

They are also reining in the lawyers' fees. In the past, plaintiffs' lawyers received 20 percent to one-third of the settlement amount. Today the average fee award as a percentage of the recovery is much lower. In Bank of America, for example, Bernstein Litowitz and two other firms - Kessler Topaz Meltzer & Check and Kaplan Fox & Kilsheimer - are expected to ask for about $150 million, or 6 percent of the settlement.

“Things have definitely improved,” said Theodore H. Frank, an adjunct fellow at the Manhattan Institute and a longtime critic of abusive class actions. “Is it perfect? No. Is it better? Yes.”

Legal experts say the class actions filed after the financial crisis highlight the improvements. T he lawsuits were far more risky and complex than the template “strike suits” that plaintiffs' firms once churned out every time a company's share price plummeted. And unlike large corporate scandals like Enron or WorldCom, there were no balance-sheet restatements or criminal convictions to use as evidence.

“We never viewed these cases as easy but felt we needed to be in them in a big way, so we really doubled down,” Mr. Berger said.

Bernstein Litowitz's recent settlements read like a who's who of the “too big to fail” era. Wachovia and its auditor paid its bondholders $627 million to resolve charges related to its mortgage holdings. Merrill Lynch settled claims that it had misled buyers of mortgage products for $315 million. Lehman Brothers' underwriters paid $426 million to end a lawsuit over its stock sales. Washington Mutual's underwriters and insurers paid $205 million to investors in the now-collapsed bank.

The big mortgage-related settleme nts are expected to add up to hundreds of millions in fees for Bernstein Litowitz, a 52-lawyer firm. Mr. Berger and his three founding partners started the firm in 1983 after splitting off from Kreindler & Kreindler, a plaintiffs' firm best known for its aviation-disaster litigation.

The Bank of America settlement is a boon for the firm, ending nearly four years of bruising litigation and coming less than a month before it was set for trial. The lawsuit accused Bank of America of concealing from its shareholders, who were voting on the Merrill acquisition, the billions of dollars in mounting losses at Merrill, as well as billions in bonuses being paid out to Merrill executives.

Bernstein Litowitz and two other firms represented five plaintiffs: two Ohio pension funds, a Texas pension fund and two European pensions. Working with Mr. Berger on the case were his partners Mark Lebovitch, Hannah Ross and Steven B. Singer.

“This case will now serve as Exhibit A for corporate directors tempted to withhold information from shareholders,” Mr. Berger said. “The message isn't complicated: Just tell the truth.”

New matters, meanwhile, are coming in. Bernstein Litowitz was appointed lead plaintiffs' counsel in a lawsuit against JPMorgan Chase related to the bank's multibillion-dollar trading loss out of a unit in London. And it is involved in the litigation against Facebook and Morgan Stanley over the social networking company's botched initial public offering of stock.

Mr. Berger said finding cases had rarely been a problem.

“I can't predict the next scandal,” Mr. Berger said. “But I know that fraud is a growth industry, and so is greed.”

Buyout Funds Lift Carlyle in 3rd Quarter

Since going public, the Carlyle Group has emphasized the breadth of its investment activities. But in the third quarter, its traditional business of buying and selling companies generated the most growth among its many funds.

Carlyle said on Monday that its leveraged buyout funds, along with its real estate funds, were its best performers, growing about 5 percent in the quarter each. Its global market strategies platform rose just 2 percent, while growth capital was unchanged.

The firm's energy funds shrank about 3 percent, in the worst showing among Carlyle's investment businesses for the quarter. (All the numbers are based on paper gains or losses, the firm cautioned.)

Over all, private equity has remained a strong performer for Carlyle. The firm has been busy conducting deals this year, which have ranged from the $3.3 billion takeover of Getty Images to an investment in the railroad operator Genesee & Wyoming.

For the last 12 months, leveraged bu yout funds ranked second overall among Carlyle's operations, posting a 21 percent gain. That trails only global market strategies, which jumped 23 percent. The worst performer was the growth capital business, which rose only 6 percent during the same time period.

By contrast, the Standard & Poor's 500-stock index grew nearly 27 percent during the same time period. And the MSCI All Country World Index rose 18 percent.

Shares in Carlyle have risen 16 percent since the firm went public in early May.

SolarCity Seeks Up to $201 Million in I.P.O.

The entrepreneur Elon Musk isn't a stranger to daunting business propositions, from electric cars to space travel. Now, a solar company that he chairs is attempting to take on another risky venture: going public.

SolarCity, a provider of solar power to retail customers, formally disclosed its initial public offering prospectus on Monday. The company said that it plans to raise up to $201.3 million, though it gave no price range.

SolarCity is looking to go public at a tough time.

Renewable energy companies in general have faced headwinds this year, as governments reduce their backing of technologies like solar and wind power. Rival BrightSource, which had been one of the year's most-anticipated stock sales, withdrew its offering in April, citing unfavorable market conditions.

SolarCity is betting that investors believe it can thrive. It reported $59.6 million in revenue last year, an 84 percent gain from the year-ago period.

But the company is struggling to turn a profit. It reported a $61 million operating loss last year. Stripping away losses born by joint venture partners, it earned $43.5 million for its stockholders. For the first six months of the year, SolarCity reported a $30.1 million operating loss, and a $23.1 million loss attributable to stockholders.

There are other potentially alarming disclosures as well. The company said that earlier this month the Internal Revenue Service had begun auditing two of its investment funds to determine whether solar power systems that are part of a government grant program were overvalued.

With its debut, SolarCity plans to take advantage of provisions in the Jumpstart Our Business Startups Act that allow for reduced disclosure. In this case, the company plans to provide reduced information about its executive compensation.

The offering is being led by Goldman Sachs, Credit Suisse, Bank of America Merrill Lynch, Needham & Company and Roth Capital Partn ers.

My 6 Biggest Complaints About Business Travel

By TOM SZAKY

Although TerraCycle still has less than $20 million a year in annual revenue, it operates in 21 countries now. That means that my intense domestic travel - Minneapolis to Racine, Wisconsin, to Chicago - has morphed into intense global travel - Newark to Bogotá, Colombia, to Tel Aviv.

No matter how you do it, travel is a strain - made worse, I believe, because airlines seem to have a hard time with customer service. Maybe it's just because there are always so many exhausted travelers complaining. Or maybe it's something more systemic. Who knows? But I continue to believe there are some easy fixes that airlines could make. Here are my top six.

Outlets: How often do you wander an airport looking desperately for an electrical outlet? When I find one, I will even sit on the floor, beside a smelly bathroom, if that's what it takes. But why is this necessary? Why not put them everywhere? Why don't the airlines and airports make it something they market: Never search for an outlet!

Nonreclining seats: This is almost insulting. The chair has a recline button built into it, but when you push that button and try to recline, it moves half an inch. And then the best part is when you are landing and the airline attendants make a fuss about moving your seat back into an upright position.

The cabin P.A.: The cabin public address system, I believe, should be reserved for truly important messages, and they should be made quickly. No banter, no talking slowly, no pressing the button and then not talking. I don't really care what the wind speed will be where we're landing in eight hours or even what the weather will be - it will be what it will be. Not only is the chatter annoying, it cuts off whatever entertainment you are trying to enjoy. I've had flights where my movie seemed to be interrupted by sales pitches every 10 minutes - in three languages.

Checking in: Depending on the airline and the destination, the cutoff time for check-in booths and kiosks to stop giving boarding passes is generally 30 minutes to 60 minutes before departure. Why? Honestly, just give me a chance to run to the gate and make it. I understand that the security and immigration lines are my obstacle â€" but let me try, especially if I have no bags to check. (Here's a tip: If you ask nicely, they will often call the gate and have the gate authorize a boarding pass.)

Lounge rules: Some airlines let you into the lounge only if you are flying internationally. But since when do Mexico and Canada (my homeland) belong to the United States? Most airlines apply domestic rules to destinations in Canada or Mexico regardless of the length of the flight (Miami to Vancouver, for example, is quite a bit longer than Miami to Bogotá). If you haven't been to an airport lounge, it's basically a bunch of nice couches, lots of outlets, free snacks and an open bar. Somet imes there are showers (but rarely). You can get in based on your loyalty-card status or with certain credit cards. But it's rarely clear. For example, with Star Alliance, if you have a gold status, you can get into the lounge (in certain airports) if you are flying international. And you can bring a guest, but the guest must be flying Star Alliance, as well. These strange policies are especially annoying because you just never know. And, really, what is the incremental cost of allowing one more person into a lounge?

Alcohol policy: Having a few drinks can be a nice way to knock yourself out on a long flight and ward off jet lag. But why is it that you can bring a sandwich and a Coke on board from an airport shop but you can't bring a beer?

I don't think I'm asking for a lot here - although a free snack every now and then would be nice. What would you like to see?

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.

How Pennies Add Up in a Securities Fraud Case

We are used to hearing big numbers thrown around in securities fraud cases, like the purported $64 billion in losses from the Ponzi scheme perpetrated by Bernard L. Madoff or $7 billion by R. Allen Stanford. What sometimes gets overlooked is how conduct involving relatively small amounts can add up to millions of dollars if allowed to go on long enough.

Charges filed by the Justice Department last week accuse two former brokers at the New York office of Linkbrokers Derivatives, Marek Leszczynski and Benjamin Chouchane, of securities fraud and conspiracy for secretly adding a few pennies to the cost of securities trades processed by the firm to generate $18.7 million in gains.

A sales trader and middle-office assistant at the firm, Henry A. Condron, entered a guilty plea and is cooperating in the government's case. The Securities and Exchange Commission also filed civil charges against the three men, and added another broker as a defendant who was not named in t he criminal case.

Linkbrokers, which was not named in the suit, executed high-volume trades on behalf of institutional customers, including hedge funds. The key is getting the best price for clients while quickly executing their orders.

Criminal complaints filed in Federal District Court in Manhattan accuse Mr. Leszczynski and Mr. Chouchane of charging a slightly higher price for a trade, or lowering the sale price, and then hiding the actual cost from the clients. According to the S.E.C., more than 36,000 trades from 2006 to 2010 involved pricing issues, with the amounts ranging from a few dollars to as much as $228,000 in one instance.

The tinkering came on days of higher volatility in the market because of greater price fluctuations. Institutional investors carefully scrutinize order executions and trading costs, so volatility helped provide cover for any mispricing.

“These brokers stole millions of dollars by overcharging customers for trades in volving stocks with high trading volumes and price volatility, which are characteristics they wrongly thought would conceal their illicit pricing scheme,” Robert Khuzami, the head of the S.E.C.'s enforcement division said in a statement.

Mr. Leszczynski's lawyer stated that his client was “astonished and shocked he was charged with a crime. He still doesn't know why.”

While the trading gains went to Linkbrokers, the defendants were accused of benefiting through higher bonuses based on the profits they generated. According to the criminal complaints, Mr. Chouchane received bonuses ranging from $1.2 million to $2 million from 2007 to 2009, while Mr. Leszczynski's bonuses ranged from $600,000 and $2.4 million during that period.

The transactions outlined in the criminal complaints generated modest profits. Mr. Leszczyncki is accused in one trade of marking up the purchase price of 20,000 shares by 1.2 cents a share, generating a profit of $240. A trans action involving Mr. Chouchane had a mark-up of 1.24 cents on an order for 43,000 shares that resulted in a profit of $533.20.

The S.E.C. complaint also indicates they took a slice of profitable trades. According to the agency, a client would submit a limit order, which specified the price at which the securities would be bought. If the price moved higher after the trade, they then sold off some of the shares at a profit and informed the client that the order could not be completely filled.

Proving the case will not be an easy task. With over 36,000 trades potentially at issue, the government will have to introduce records from all of them to establish the pattern showing a fraudulent scheme. Imagine trying to put together a puzzle with that many pieces.

Mr. Condron, who pleaded guilty to securities fraud and conspiracy, was in charge of entering the prices into the trading records, playing a crucial role by controlling the flow of information. His cooperat ion will be important since he was, in effect, the bookkeeper of the operation. He could give perspective to the mass of paper by explaining how trades were executed and how the system could be gamed.

To bolster their case, prosecutors tried to use Mr. Condron, while wearing a recording device, to entice Mr. Chouchane into making incriminating statements. According to the complaint, a few weeks ago Mr. Condron met with Mr. Chouchane and asked if his current employer engaged in marking up trades. Mr. Couchane replied, “No, you know, they used to do it when it was good, like us … Now you can have an investigation from the S.E.C., from the bank, from the hedge fund … I don't think it's worth taking the risk. You know, to be honest, it's annoying for me.”

Those comments are far from the kind of incriminating evidence presented at the recent insider trading trials, when jurors heard confidential information being passed from sources to traders. Trying to pull an admission out of someone two years after the fact is not easy. But having Mr. Condron wear a wire shows how much prosecutors now value recorded evidence in building a securities fraud case because it can show knowledge far better than a mass of trading records.

The prosecution of Mr. Leszczynski and Mr. Chouchane involves an area of the market largely hidden from public view. Like so much else on Wall Street, conduct involving even fractions of a penny can be significant if it is done often enough.

A Buyer\'s Market in M.&.A.

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BP to Sell Texas City Refinery to Marathon Petroleum

BP said on Monday that it will sell its Texas City refinery and other assets to Marathon Petroleum for as much as $2.5 billion, as the British oil company nearly completes its plan to pare back assets.

The company embarked on a $38 billion divestiture program after the Deepwater Horizon disaster of 2010, and has sold off properties from offshore holdings in the Gulf of Mexico to tracts of shale in Wyoming. With the closing of the Texas City sale, BP will have sold $35 billion worth of assets.

Under the terms of the deal, Marathon Petroleum will pay $598 million and include inventories worth about $1.2 billion. An “earn-out” provision could lead to an additional $700 million over six years if the facility meets certain performance targets.

As part of the deal, BP will also include some of its retail and logistics network, including four marketing terminals. The company will continue to own and operate facilities in the northern part of the country.

“Today's announcement is the second major milestone in the strategic refocusing of our U.S. fuels business,” Iain Conn, the head of BP's global refining and marketing business, said in a statement.

Shares in BP were flat at 436.68 pence. Shares in Marathon Petroleum leaped 7.5 percent, to $59.

Major oil companies have been pushing to divest their refining businesses, largely to focus on drilling for oil and gas in shale formations across the country. Refining is largely seen as a more volatile operation, one that also faces pressure from competitors in China and India.

The British company sold its refinery in Carson, Calif. and its Arco retail network to Tesoro in August for $2.5 billion. Marathon Petroleum itself was the product of Marathon Oil spinning off its refining and marketing operations, creating one of the nation's largest independent refiners.

The Texas City refinery, which BP inherited from its purchase of Amoco in 1998, is one of t he biggest refining facilities in the country, with a capacity of 475,000 barrels a day. The 78-year-old plant focuses on natural gas liquids, which have been resurgent amid the shale boom. It was the site of an explosion in 2005 that killed 15 workers, eventually leading to a record $87 million in fines against BP.

Gary R. Heminger, Marathon Petroleum's chief executive, said in a statement: “This world-scale refinery and related assets complement our current geographic footprint and align well with our strategic initiative of growing in existing and contiguous markets to enhance our portfolio.”

 

The Odd Couple: The S.E.C. and High-Frequency Traders  |  Regulators are getting help policing the rapid-fire markets from an unlikely source - the rapid-fire traders. Tradeworx, 45-person high-speed trading firm based in New Jersey, has designed a program that will allow the Securities and Exchange Commission to see every bid and offer on each of the nation's 13 public stock exchanges. “The system, akin to an X-ray machine for the stock market, could enable regulators to detect whether trading firms are overwhelming the market's plumbing when they rapidly submit and cancel orders,” Nathaniel Popper and Ben Protess write in The New York Times. While critics contend the program is akin to “the fox guarding the hen house,” the trading firm defends its partnership with regulators. “Where else are they going to be able to get these capabilities?” said Manoj Nar ang, the chief executive of Tradeworx.

 

Looking Ahead to a Twitter I.P.O.  |  While many social networking companies rushed to the public markets, Twitter seems to be taking the slow, methodical path. Insiders say the company is aiming to go public in 2014, and “after the Facebook fiasco,” the chief executive, Dick Costolo, “will have to persuade Wall Street that Twitter, and its share price, could keep rising,” Nick Bilton writes in The New York Times.

The I.P.O.'s of Facebook, Zynga and other companies hang like a cloud over the tech industry. There is even speculative chatter in Silicon Valley that Zynga's best hope might be to go private again.

Twitter's employees have reason to be wary of the public market. According to The Wall Street Journal, nonexecutive employees of four big Internet companies that went public in the past 16 months have collectiv ely lost about $9 billion in paper wealth since their I.P.O.'s. At Facebook, the average rank-and-file worker has lost about $2 million on paper since the I.P.O., The Journal says, citing calculations by Equilar.

 

Tech Titans Warm to Romney  |  President Obama has a Wall Street problem in Silicon Valley. In the start-up capital, Mitt Romney and the Republican party “have made clear inroads,” reports Somini Sengupta in The New York Times. Marc Andreessen, the venture capitalist and Facebook investor, has contributed more than $100,000 to Mr. Romney this year, after backing President Obama with a $4,600 donation in 2008. Some tech investors even seem to be echoing Wall Street's complaints. “There needs to be some reaffirmation through words and deeds that engines of innovation are valued,” said Robert Nelsen, the managing director of the Seattle-based Arch Ventures.

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UnitedHealth to Buy Brazilian Healthcare Company for $4.9 Billion  |  The UnitedHealth Group agreed on Monday to buy a 90 percent stake in Amil Participações for $4.9 billion, in a deal to expand in Brazil.

 

On the Agenda  |  The bond market is closed for Columbus Day. Earnings season kicks off this week, with Alcoa reporting on Tuesday. JPMorgan Chase and Wells Fargo announce results on Friday.

The founder of the Vanguard Group, John C. Bogle, is on CNBC at 12:30 p.m. Lee C. Buchheit, a top attorney at Cleary Gottlieb Steen & Hamilton who has been called “the philosopher king of sovereign debt lawyers,” is on CNBC at 3 p.m. Ben S. Bernanke is visiting India through Wednesday. The European Central Bank and the Federal Reserve are holding a joint conference in Frankfurt to discuss bank financing.

 

Preparing Europe's Bailout Bazooka  |  The board overseeing the European bailout fund is having its first meeting on Monday in Luxembourg to discuss how to deploy the $650 billion fund, referred to as a “bazooka.” It should be interesting, given that there is little consensus on the details. The New York Times writes: “Euro zone member states have not yet agreed on the circumstances under which the fund will be used directly to prop up a country's commercial banks - as Spain would like - to avoid piling even more debt onto national balance sheets. And until the fund starts selling bonds, there is no way of telling whether investors will buy them.”

The political tensions are weighing on the market. Stocks fell in Europe on Monday, and the euro fell against the dollar and the yen.

 

EADS and BAE Face a Wednesday Deadline  |  The two European aerospace giants are up against a Wednesday deadline to file a merger plan. But political wrangling continues. The governments of Britain, France and Germany are haggling over “the best way to balance state interests in the merged company, either through direct ownership of shares or through the granting of special voting rights to the governments, said the people close to the negotiations,” The New York Times reports. Germany is now said to be “holding out for more,” according to Bloomberg News.

 

Bernanke on the Nationals  |  The Fed chairman, Ben S. Bernanke, wrote an essay in Saturday's Wall Street Journal professing his devotion to the Washington Nationals, and arguing that politicians could learn something from the baseball team's strategy. As if to prove Mr. Be rnanke's thesis, the Nationals eked out a victory over the St. Louis Cardinals on Sunday.

 

 

 

Mergers & Acquisitions '

Corporate Leaders Report Little Appetite for Deals  |  A survey by Ernst & Young found that just 25 percent of a group of more than 1,500 executives expected to pursue an acquisition over the next six months, the most pessimistic result since 2009, Reuters reports. REUTERS

 

Chairwoman of Avon to Step Down  |  Andrea Jung, who resigned last year as chief executive of Avon Products, said she would step down as executive chairwoman at the end of the year, The New York Times reports. NEW YORK TIMES

 

Staples Seen as a Potential Takeover Target  |  The company is now “cheaper than 93 percent of similar-sized U.S. specialty retailers, according to data compiled by Bloomberg.” BLOOMBERG NEWS

 

Hutchison to Pitch Deal to European Regulators  |  In a private hearing with European regulators on Wednesday, Hutchison 3G will argue for its proposed takeover of Orange Austria, Reuters reports, citing an unidentified person familiar with the matter. REUTERS

 

INVESTMENT BANKING '

The Return of Neuberger Berman  |  After being dragged down in the collapse of Lehman Bro thers, Neuberger Berman is “freshly invigorated and focused on the essentials in the way disaster survivors tend to be,” Barron's writes in its cover story. BARRONS

 

Investors Flock to Below-Investment-Grade Bonds  |  The popularity of high-yield bonds has pushed yields to record lows, Floyd Norris writes in his column in The New York Times. NEW YORK TIMES

 

Spanish Bank Depositors Cry Foul  |  Some depositors in Spain, whose banks sold them unusual investments that have fallen in value, are claiming they were not given sufficient information about the securities, The Wall Street Journal reports. WALL STREET JOURNAL

 

New Methods in Hacking Attack on Banks  |  The hackers that recently targeted big American banks used “data centers around the world that had been infected with a sophisticated form of malware that can evade detection by antivirus solutions,” the Bits blog writes. NEW YORK TIMES BITS

 

Diverse Strategies Helped 3 Mutual Funds  |  Three of the better-performing mutual funds in the third quarter invested in sectors ranging from all-terrain vehicles to European banks, The New York Times writes. NEW YORK TIMES

 

Top Goldman and Morgan Stanley Executives Said to Join Firms in Qatar  |  The top executives of Goldman Sachs and Morgan Stanley in Qatar have departed for local firms, Reuters reports, citing three unidentified people. REUTERS

 

PRIVATE EQUITY '

Big Buyouts Remain in Private Equity Hands  |  Some of the biggest deals from the industry's “golden” years have yet to be sold, creating a situation that “could become problematic if not soon rectified,” Fortune's Dan Primack writes. FORTUNE

 

Allscripts Said to Attract Private Equity Bids  |  The Carlyle Group, the Blackstone Group and Silver Lake Management have submitted first-round bids for Allscripts Healthcare Solutions, which is considering a buyout, Bloomberg News reports, citing unidentified people familiar with the talks. BLOOMBERG NEWS

 

HHI Group to Be Sold for $750 Million  |  The private equity firm American Securities is paying cash for the HHI Group, an auto-parts supplier, The Wall Street Journal reports. WALL STREET JOURNAL

 

Britain Claims a Bigger Share of European Buyouts  | 
FINANCIAL TIMES

 

Terra Firma Said to Plan Fund for Renewable Energy  |  The private equity firm Terra Firma is working with the China Development Bank to raise up to $5 billion to invest in the renewable energy sector, Reuters reports, citing an unidentified person familiar with the situation. REUTERS

 

Zell to Name New Head of International Operations  | 
WALL STREET JOURNAL

 

HEDGE FUNDS '

An Activist Investor With a Quiet Style  |  Barry Rosenstein of Jana Partners told The Wall Street Journal: “I get a lot more out of these C.E.O.'s by not embarrassing them publicly, by not being viewed as trying to nail their scalp to the wall.” WALL STREET JOURNAL

 

Fund Reaches Deal With Wet Seal  |  The Clinton Group, which owns about 6.9 percent of Wet Seal, is installing four of its nominees on the retailer's board, The Wall Street Journal reports. WALL STREET JOURNAL < /p>

 

Hedge Funds Bid Up Commodity Prices  |  The increase in bullish bets ended a two-week rout, Bloomberg News reports. BLOOMBERG NEWS

 

I.P.O./OFFERINGS '

Chinese Telecom Giant Under Scrutiny  |  Huawei, which is said to be considering an I.P.O., is the subject of an investigation that has “raised concerns about national security, Chinese espionage, and Huawei's murky connections to the Chinese government,” reports CBS's “60 Minutes.” CBS NEWS

 

Solar Panel Company Aims to Raise $201 Million in I.P.O.  |  SolarCity, whose chairman is Elon Musk, is looking to challen ge investor skepticism about solar companies. BLOOMBERG NEWS

 

A Third of Prada Managers Depart After I.P.O.  | 
FINANCIAL TIMES

 

MegaFon of Russia May Announce I.P.O. This Week  | 
BLOOMBERG NEWS

 

VENTURE CAPITAL '

When Patents Are Used as Weapons  |  In the latest installment in the iEconomy series in The New York Times, Charles Duhigg and Steve Lohr report that the technology industry is said to have been “corrupted by software patents used as destructive weapons.” NEW YORK TIMES

 

Cash Flows Are Critical for Tesla  |  Mitt Romney recently referred to electric-car maker Tesla Motors as a loser. Sales of its sedan are strong, but a look at the company's cash flows suggests it isn't out of the woods just yet. DealBook '

 

Trinity Ventures Raising $325 Million Fund  | 
TECHCRUNCH

 

LEGAL/REGULATORY '

Lehman Units Settle $38 Billion of Claims  |  The deal was called a “cri tical milestone” by James Giddens, the trustee liquidating Lehman's brokerage unit, Reuters reports. REUTERS

 

Wall Street Regulator Ramps Up Enforcement  |  The Commodity Futures Trading Commission, once considered a toothless regulator, brought a record number of enforcement cases over the past year, as fines soared. DealBook '

 

Antitrust Questions in Apple's Use of Maps App  |  Apple's decision to go with its own maps technology in its iPhone seems like what is known as a tying arrangement, writes James B. Stewart in his column in The New York Times. “To the degree that tying arrangements extend the control of a dominant producer, they may violate antitrust laws.” NEW YORK TIMES

 

Law Firms Cut Costs From the Back Office  | 
WALL STREET JOURNAL

 

The Municipal Bond Market's Backward Ways  |  Despite attempts by regulators to force municipal bond issuers to disclose basic financial information, some “don't seem to have gotten the message. More disturbing, regulators don't seem to care,” writes Gretchen Morgenson in her column in The New York Times. NEW YORK TIMES

 

Outspoken Economist Takes an Indian Government Role  |  Raghuram G. Rajan, an economist who has criticized India's policy makers, was named chief economic adviser in the country's Finance Ministry, where he is looking to change India's financial system, The New York Times reports. NEW YORK TIMES

 

UnitedHealth to Buy Majority Stake in Brazilian Healthcare Company for $4.9 Billion

UnitedHealth Group agreed on Monday to buy a 90 percent stake in the Brazilian healthcare provider Amil Participações for $4.9 billion, as the American insurer looks to expand in the fast-growing emerging market.

Under the terms of the deal, UnitedHealth, based in Minnetonka, Minnesota, will first buy a 60 percent stake in Amil after receiving regulatory approval in Brazil, which is expected by the end of the year. UnitedHealth will then acquire a further 30 percent stake in the Brazilian healthcare provider during the first half of 2013, the company said in a statement.

After securing an estimated $600 million of Brazilian tax breaks, UnitedHealth said the proposed deal would cost around $4.3 billion.

Amil's founder, Edson Bueno, and business partner, Dulce Pugliese, which currently control around 70 percent of the business, will retain a 10 percent stake in the Brazilian company.

Mr. Bueno also will buy $470 million of UnitedHeath's shares and h old them for at least five years, according to a company statement. Mr. Bueno will continue to run Amil and will also join UnitedHealth's board.

The acquisition will allow UnitedHealth to expand into Brazil's fast-growing market. Amil is one of country's largest healthcare providers with more than five million customers.

“Brazil has emerged as a consistently growing and evolving market for private sector health benefits and services,” said UnitedHealth's chief excutive Stephen J. Hemsley, in a statement. “Combining Amil, the clear market leader serving an under-penetrated market of nearly 200 million people, with UnitedHealth Group's experiences and capabilities developed over the last three decades is the most compelling growth and value creation opportunity we have seen in years.”

This Week in Small Business: They\'re Talking About Us!

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 Debate: Small Businesses Front and Center

The first presidential debate favored Governor Romney, and small businesses were front and center. Stocks rallied the next day. Unfortunately, too many people were playing drinking games to pay attention. But these are five good takeaways from the night. And here's one issue the candidates missed.

The Fiscal Cliff: Fears Grow

Fears begin to build about the looming cliff, and some people are concerned it may impede job growth. Americans may see smaller paychecks next year as payroll tax breaks expire. Senate leaders

To Regulate Rapid Traders, S.E.C. Turns to One of Them

RED BANK, N.J. - As billions of shares course through the stock market each day, investors rely on the government to keep up with Wall Street's rapid-fire traders.

But in an acknowledgment that the has fallen behind the firms it regulates, the agency is turning to one of those high-frequency traders for help.

Tradeworx, a 45-person firm based in New Jersey, will dispatch its experts to Washington this month to tutor regulators on a sophisticated computer program that will give the S.E.C. its first real-time window into the stock market - something firms like Tradeworx have had for years. The S.E.C. program, designed by Tradeworx, is set to go into operation at the end of this year.

The program, called “Midas” by the S.E.C., is part of a broader effort at the agency to monitor the proliferation of new technologies and to crack down on practices that have given sophisticated traders an advantage over ordinary investors. The agency recently hosted public meetings on computerized trading to examine some of the recent failures in the market, like the malfunction at Knight Capital that wreaked havoc on stock prices in August. Last week, the Nasdaq exchange had to cancel errant trades after a technical problem caused shares of Kraft to soar.

The S.E.C.'s rudimentary technology has hobbled its ability to untangle these events and police the firms. With the Tradeworx program, the agency will gain access to every bid to buy stocks and every offer to sell shares on each of the nation's 13 public exchanges. The system, akin to an X-ray machine for the stock market, could enable regulators to detect whether trading firms are overwhelming the market's plumbing when they rapidly submit and cancel orders.

“The average person on the street thinks that the S.E.C. has these massive computers that all orders are going through,” said Gregg Berman, the agency official leading the effort. “That has not been the case, but we hope to now have that with this new system.”

Some industry experts have said that the Tradeworx program is the quickest and, at a cost of $2.5 million this year, the cheapest way for the agency to catch up with the high-speed trading industry, which has gone from being a niche player a decade ago to being responsible for more than half of all trading in American stocks today. But the initiative raises a new set of questions about whether the industry is the best source for unbiased information about the markets.

David Lauer, a former employee of other high-speed trading firms, wrote in recent testimony to a Senate subcommittee that the Tradeworx program was “reminiscent of the fox guarding the hen house.”

“You don't rely on the subject of your study to build the device you are going to be studying them with,” Mr. Lauer said in an interview after the hearing.

The S.E.C. said it sought out other bids and even considered building its own database, an effort that would have taken several years and cost millions of dollars more than the Tradeworx project. Mr. Berman added that the agency looked to Tradeworx only for data feeds that were the same no matter who provided them.

The chief executive of Tradeworx, Manoj Narang, argued that if he sold bogus data to the government, it would be obvious. More important, he said, the S.E.C. has few alternatives.

“Where else are they going to be able to get these capabilities?” Mr. Narang said. “They are not available from anywhere other than high-speed trading firms. We're the only ones who possess it.”

Today, the S.E.C. relies on the official trading record, known as the consolidated tape, which includes the price of every trade executed on any of the nation's stock exchanges. Most sophisticated trading firms bypass the official record by buying data directly from the exchanges. The firms compile a full record milliseconds before the consolidated tape is assembled and obtain a wider range of information, including orders that are submitted but never executed.

Mr. Berman said that data from Tradeworx would be used throughout the S.E.C., from the enforcement division looking to catch wrongdoing to the division of trading and markets that keeps daily watch over the markets. The data could allow the S.E.C. to analyze claims that some firms take advantage of their faster data feeds to jump in front of slower traders, and complaints that sophisticated traders can jam the system with so many orders that it slows down trading for others.

Mr. Berman, a former hedge fund co-manager and nuclear physicist, led the agency's examination of the flash crash of 2010, when the Dow Jones industrial average plunged 5 percent in five minutes and then mostly recovered. He is now leading the broader effort to bring the S.E.C. into the modern world of trading. As the agency falls further behind, he is helping to build a new Office of Research and Analytics, which is looking to hire people with experience on Wall Street and in computer programming. The agency is also moving closer to creating a so-called consolidated audit trail, which will allow regulators to see the identity of the firm behind every trade.

But any future efforts depend on the S.E.C. having access to the sort of basic data that Tradeworx will provide.