China Stock Picks Are No Road Map to U.S. Domination

Sorry, the Chinese government doesn’t appear to own any shares of Google.

For China watchers expecting some big revelations from China Investment Corp.’s first public disclosure of its U.S. stock portfolio, the filing must be disappointing. CIC’s $9.6 billion of holdings of U.S. stocks represent a plain-vanilla swath of companies rather than a road map for a Chinese take-over of certain U.S. industries.

Still, there are some notable picks. Remember how China National Offshore Oil Corp., or Cnooc, felt forced to scuttle its 2005 bid for Unocal after regulators raised concerns about a Chinese company owning a U.S. energy company? Well, China is keeping a small hand in the U.S energy industry by owning stakes, for example, in energy companies Chesapeake Energy Corp, Valero and U.S. Oil Fund, an exchange traded fund that is one of the biggest players in the oil market.

In a similar vein, China’s Huawei Technologies was rebuffed in its bid to acquire telecommunications concern 3Com in a join venture with Bain Capital in 2008 because of national security concerns. CIC now owns small stakes in Motorola and Sprint-Nextel (valued at $3.8 million and $1.4 million respectively).

The CIC has made some big bets on the financial industry, buying stakes in Morgan Stanley (valued at $1.7 billion), Black Rock ($713 million) and Citigroup (9 million shares valued at $29.7 million). The filing doesn’t reveal when these investments were made or at what prices the shares were bought, so it is difficult to gauge how the investments have fared.

Commentators have picked up on the fact that CIC’s $3 billion investment in Blackstone Group, made shortly before the private-equity firm’s mid-2007 IPO, isn’t mentioned in the filing. Blackstone’s shares are down 64% from the IPO price.

The CIC report, filed Friday, marks the first time the fund—one of the world’s most-watched investors—has listed its holdings in such detail, but as this WSJ article notes, it isn’t clear why CIC made the filing now or why the list isn’t complete. It quotes at a CIC spokeswoman as saying only that it made the disclosure “according to SEC requirements.”

So, questions abound. Why, for instance, did China buy into such tech staples as Apple and Research in Motion, but not Google, the company threatening to pull out of China to protest censorship.

Maybe there is still room for intrigue after all.


Tracking Bank Failures: Regulators Close Third Minnesota Bank This Year

Regulators shuttered just one bank Friday, after closing 11 the previous two weeks.

1st American State Bank of Minnesota in Hancock, Minn., became the 16th bank to fail this year.
The two-branch bank had $18.2 million of assets, making the it the fourth smallest bank to fail since 2008. The FDIC sold all of the bank’s deposits and most of its assets to Community Development Bank in Ogema, Minn.

The FDIC estimates that the bank’s failure would cost its deposit insurance fund $3.1 million.

Since 2008, regulators have seized 181 banks. The bank is also Minnesota’s third bank failure of the year.

Click on the image below to see the WSJ’s graphic tracking bank failures:

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Pay Czar Feinberg Gloats Over Blankfein’s Bonus

Lloyd Blankfein’s mere $9 million bonus is getting some rave reviews, even from Goldman Sachs Group’s frequent critics.

“This is a great move by Goldman,” writes Reuters blogger Felix Salmon. “….maybe, just maybe, Goldman Sachs is coming to the realization that its senior executives won’t leave after all if their bonuses are cut to the merely enormous from the utterly obscene.” Deal Journal noted the public-relations savvy of the $9 million figure, which is small enough not to be dubbed double digit, but not too small to make it seem as though Blankfein was cowed by public pressure.

So, who is behind Goldman’s smooth move? Judging from an interview with Kenneth Feinberg on Bloomberg T.V. today, the federal government’s pay czar is taking at least a little bit of the credit.

“Clearly Goldman is following the prescriptions I’ve laid out,” said Feinberg, who added that he didn’t have an official say over Blankfein’s bonus. “Lloyd Blankfein is getting a very low base cash salary. His total comp is again tied up in long-term stock, the value of which cannot be determined or transferred for about five years. That is the type of compensation we’re looking for, where value is tied to the total performance of the company itself.”

That said, Feinberg finds Blankfein’s total bonus still too large: “The overall compensation again points out the necessity of doing something with the total compensation,” he says.

Feinberg says he consulted with Blankfein and other Goldman officials about their compensation decision making: “Yes, [we] had a number of conversations,’’ he says, according to a transcript of the interview provided by Bloomberg. “What the Treasury has recommended in terms of structuring, and size, I would like to think we had some influence on what Mr. Lloyd Blankfein finally decided.”

When a political figure claims credit for something, it probably is safe to say it is proving successful.

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Deals of the Day: Did Goldman Push AIG to the Brink?

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Mergers & Acquisitions

Kirin and Suntory: The Japanese drink makers scrapped ambitious plans to merge and create one of the world’s biggest brewers after failing to resolve deep-rooted differences over who would own and manage the future company despite months of talks. [WSJ]

Xerox: The company’s CEO said her company will keep doing acquisitions, but not as large as the recent $5.6 billion takeover of business process outsourcing firm ACS. [WSJ]

Lionsgate: The movie studio intends to submit an “aggressive” offer for Miramax even as it advances to the second round of bidding for MGM. [NY Post]

Hershey-Cadbury: Hershey’s failure to find a way to combine with Cadbury is the story of two men — Hershey CEO David West and Hersehy Trust President Robert Resse — who stood in each other’s way. [Bloomberg]

Lloyds Banking: The U.K. bank is in talks with PE firms interested in buying a controlling stake in its Integrated Finance unit. [Reuters]

Financial Institutions

AIG vs. Goldman: The standoff between A.I.G. and Goldman would become one of the most momentous in Wall Street history, as Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position. [NY Times]

Buyside

Guy Hands vs. Citi: Terra Firma’s buyout of EMI offers yet another example of the kind of promiscuous lending that forced the government to rescue Citi the next year. [NY Times]

Private equity: The industry is again being threatened with higher taxes. [Reuters]

Capital Markets

Santander: A possible — though unconfirmed — initial public offering of Santander’s U.K. business would give a boost to London’s IPO market. But bankers and analysts said questions on capital requirements and expansion plans need to be answered. [WSJ]
Related: Santander’s decision to float a minority stake in its Brazilian subsidiary last year was a smart move. But a similar initial public offering of Santander’s U.K. banking operations is unlikely to yield such benefits. [WSJ]

The IPO market: Investors hoping for a turnaround deal that will jump-start the IPO market will have to search hard this week. [WSJ]

People & Players

John Thain: CIT Group will name former Merrill Lynch chief John Thain as chairman and CEO, uniting two casualties of the credit crisis. [WSJ]

Kevin Quinn: Goldman Sachs’s No. 2 investment banker in Japan is moving back to the U.S., the latest in a series of high-level departures from foreign banks in Japan. [WSJ]

Francois Trahan: The top-ranked stock-market forecasters will join Wolfe Research, the boutique research firm run by former Bear Stearns Cos. colleague Edward M. Wolfe. [WSJ]


Air Products v. Airgas: Shields Up?

Air Products & Chemical wants Airgas. That much is clear.

The maker of industrial gases has bid three times for its rival. The latest–its first public offer, for $60 a share–follows two private ones that Airgas rejected.

The question now, if today’s hostile offer is rejected, is how badly does Air Products want Airgas? If Airgas remains reticent about a deal, Air Products could face an uphill battle to claim its prize. That is because Airgas has very strong corporate defenses. The company’s directors’s terms are staggered, which means that Air Products can’t nominate a big enough slate of directors that could deliver the company to Air Products. Airgas also has an antitakeover defense known as a poison bill. Only 8% of the Standard & Poor’s 500 members have both defenses, according to FactSet SharkRepellent. (Only 31% of S&P 500 companies have what is called a classified board and only 16% have a poison pill.) For that reason, FactSet SharkRepellent gives Airgas a “Bullet Proof Rating” of 8.75 on a scale of 1-10 with 10 being the strongest. We should note also that insiders own almost 10% of the company.

According to FactSet SharkRepellent, Airgas doesn’t allow shareholders to take action by written consent and requires a 33% shareholders to call a special meeting.

What does this all mean? Taking the offer directly to Airgas’s shareholders isn’t likely an option. Instead, Air Products will likely have to go the proxy fight route. It is a fair guess that this is the reason Air Products made its offer public now. Air Products’s best chance may be to nominate directors ahead of the Airgas’s annual meeting. The hope would be that those few directors could persuade the majority of the board to look move favorably on a deal. Nominations for the board can be submitted from April 20 though May 20.

By making its offer public now, Air Products ramps up the pressure on Airgas while giving it at least two months to strike friendly deal. If that fails, we might have a board battle on our hands.


Perception vs. Reality: Is ‘Government Motors’ Picking on Toyota?

Laboring under $50 billion in debts owed to the U.S. Treasury, General Motors is already working for the government. But that’s precisely why some people are wondering: Is the government working for General Motors?

By one line of conspiracy-minded thinking, the Obama administration is cracking down on Toyota to enhance the value of the U.S. government’s 60% ownership of GM. Right-leaning newspaper, the Washington Examiner went so far as to suggest: “Gangster government targets Toyota”

Whether fair or not, the sentiment highlights the primary problem with government-ownership of companies –- conflicts of interest. Can the government serve as a regulator of a company with which it is a putative competitor? Might a government, perhaps even unconsciously, tilt the regulatory environment in favor of a company it owned?

At the time of GM’s bankruptcy, such issues were already under discussion. It’s why the White House laid out broad principles for its handling of GM and other companies in which the U.S. took an equity stake. Those guidelines state that the government would manage its stake “in a hands-off, commercial manner” and not get involved in issuing day-to-day directives to GM. But these prinicples do not directly address the conflict of interest issue.

Of course, perception can trump reality. And that can be enhanced by the actions of Congress, which predictably, is planning hearings on the Toyota recalls. Lawmakers and regulators have demanded more information. And U.S. Transportation Secretary Ray LaHood advised people “stop driving” their Toyotas and “take it to the Toyota dealer because they believe they have the fix for it.” (He later said the comments were a mistatement.)

It’s easy to see why claims of a “Government Motors” conspiracy have gained ground.

Take this pair of editorials from two Canadian papers:

The Canada’s National Post wrote:

“While it may be technically true that President Obama’s team didn’t explicitly reach a decision to target Toyota, nobody in this crowd needs a presidential order to turn the Japanese auto giant’s Sudden Unintended Acceleration (SUA) problem into a national industrial advantage for the United States. The owners of union-dominated Government Motors can spot a strategic economic opportunity without waiting for the memo from head office.”

The Toronto Star weighed in, too

“Dare we also point out that Obama’s administration invested $80 billion (U.S.) of public funds to save General Motors and Chrysler Group? Should we not wonder if any investor who buys 61 per cent of a company — which is what the U.S. owns of GM — is being totally impartial or dispassionate about a rival company?”

White House Deputy Spokesman Bill Burton said the administration’s involvement with GM, “of course, would not have any impact on this administration’s commitment to making sure that Americans are kept safe on our roads.”

There’s no reason to doubt the government’s statement. But it’s clear the Obama administration has some work cut out for it in the weeks ahead, fighting the PR battle to keep GM as General Motors, and not Generally Manipulated.


Blankfein’s $9 Million Bonus Is PR Genius

Is that all?

The WSJ’s Sue Craig reported this evening that Goldman CEO Lloyd Blankfein is taking a mere $9 million bonus for 2009, in all stock and no cash.

This comes after a year in which the Wall Street firm reported massive profits and compares with the $70 million in compensation that Blankfein collected for 2007.

It seemed likely that Blankfein was going to take a small bonus given all the criticism that Goldman has faced for its role in the financial crisis and the fact that many of its profits have been earned through government intervention in the capital markets. In addition, Goldman’s rank and file employees have had to take smaller bonuses, as the company reduces its overall compensation ratios to the lowest levels since Goldman went public.

Still, $9 million seems perfectly calibrated: Not large enough to be dubbed a “double digit” bonus. But not so small as to seem that Blankfein capitulated completely to political pressures.

Consider that Blankfein’s bonus is nearly half that of JPMorgan Chase boss Jamie Dimon . It’s also smaller than far less-well known figures in finance. Would you believe that Blankfein is now officially paid less than the CEO of Jefferies, Richard Handler, who is expected to earn a $12 million bonus in cash and stock.

What about Richard Fairbank? Do you even know who he is? He’s the CEO of Capital One, and was recently paid $9.5 million despite the fact that his bank earned a $884 million profit last year, compared with Goldman’s $13.9 billion.

At this point, who knows whether Blakfein’s bonus will quiet Goldman’s many critics. But it’s hard not to view the figure as a classic bit of Goldman jujitsu. Goldman has made a lot of PR gaffes in recent months. Perhaps $9 million will be the company’s lucky number.


Suspicious Trading in Airgas Options Before Air Products Deal

Perhaps some traders haven’t noticed, but the stock market involves highly trained computers that record every trade and the precise second they are made.

But you probably didn’t need a super computer to pick up the unusual trading activity that occurred in the days before today’s announcement that Air Products & Chemicals had made a bid to buy rival Airgas.

On Thursday, traders scooped up far more options in Airgas than normal, which show a profit as the price of Airgas shares climbed higher, according to Tennille Tracy of Dow Jones Newswires.

That day, the activity in Airgas jumped to nine times the normal level, with traders picking up a total of about 5,000 “call” options and only 200 “put” options, according to Trade Alert. Calls convey the right to buy a stock at a set price, while puts convey the right to sell it.

Airgas shares have rallied 44% since this morning’s news of Air Products’ hostile offer to buy Airgas for $60 a share. Spokesmen for both companies didn’t comment.

The options activity “definitely looks pretty dicey,’’ said Henry Schwartz, president of Trade Alert.

This is the third deal in the past six months that has been accompanied by unusual trading. In September, the Securities and Exchange Commission charged Reza Saleh with fraud for buying options in Perot Systems shortly before Dell announced it was buying the company. A former employee at Perot’s investment firm, Saleh agreed to return $8.6 million of his profits.

In November, there was a large spike in trading in 3Com in the days before Hewlett Packard made its bid.

There has been plenty of lead time for the rumors to leak out an Airgas-Air Products deals. The two companies have been talking about a possible deal since October.

One investor who missed out on the Airgas trade is the company’s CEO, Peter McCausland. He sold one million shares in late December, though the price of the sale could not be learned because it wasn’t done on the open market, according to Edgar Online. McCausland still owns 9.5% of the company’s shares.


Bank CEO Scorecard: Who’s Making the Most Dough

Stephen Grocer and Michael Corkery report:

The bonuses for Wall Street CEOs are rolling in.

J.P. Morgan Chase is the latest bank to report its CEO’s compensation, announcing today that Jamie Dimon will be paid a $17 million bonus in restricted stock and options for 2009. Goldman Sachs reported late Friday that CEO Lloyd Blankfein would receive a $9 million bonus.

There are some notable discrepancies among compensation being paid to the firms’ top bankers. The CEO of the investment firm Jefferies, for example, was paid more (a $12 million bonus) than John Mack, the former CEO and chairman of Morgan Stanley, which posted an annual net loss last year. Jefferies reported a record $280 million profit and took no government assistance. Morgan Stanley was one of the original recipients of the Troubled Asset Relief Fund. Mack took no bonus and earned a relatively paltry salary of $800,000 in 2009.

Below look is look at some of top executives and what they got paid in 2009.

Jamie Dimon, J.P. Morgan CEO

Dimon received a bonus of about $17 million in restricted stock and options for 2009. Dimon was paid $1 million in salary. Dimon received just his $1 million salary in 2008. Last year’s pay day pales next to Dimon’s total compensation of $27.8 million in 2007 and $39.1 million in 2006.

James Gorman, Morgan Stanley CEO

Gorman received no cash bonus for 2009, but could still walk away with stock-based compensation worth nearly $9 million, thanks to deferred and performance-based stock he received for 2009. Gorman got an $800,000 annual salary for 2009. Gorman took over as CEO on Jan. 1 so much of his compensation was likely based on his previous job running the firm’s global wealth management business.

Brian Moynihan, Bank of America CEO

Moynihan will receive a salary of $950,000, a 19% rise from his 2008 base pay. His predecessor, Ken Lewis, typically received a base salary of $1.5 million. Directors decided not to award Mr. Moynihan a bonus for 2009. He spent most of last year running BofA’s retail bank.

Kenneth I. Chenault, American Express CEO

Ken Chenaualt received a 60% salary increase, effective Feb. 1, with his base salary rising to $2 million, according to a Securities and Exchange Commission filing. Chenault also was awarded options to buy 650,918 shares of American Express at $38.10. The stock is trading this afternoon at $37.35

Richard Fairbank, Capital One CEO

For 2010, Fairbank’s pay package will be comprised stock-based compensation valued at $9.75 million, and stock options, but no cash bonus or salary.

Richard Handler, Jefferies CEO

Richard Handler, chief executive of investment firm Jefferies, received $12 million cash and restricted stock bonus in 2009. Jefferies has also released what Handler could earn in 2010. Handler could be paid up to $26 million, depending on whether he can achieve certain performance goals and whether the board signs off on it.


Deals of Day: Dimon’s 2009 Payday Reportedly $15 Million or More

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Mergers & Acquisitions

Comcast-NBCU: Lawmakers questioned the impact on consumers from Comcast’s proposed deal to acquire control of NBC Universal, although they didn’t suggest regulators should reject the deal. [WSJ]

Air Products & Chemicals: The industrial-gas supplier made an unsolicited $5.1 billion bid for rival Airgas. [WSJ]

Cnooc: The Chinese oil company agreed to buy a stake in the Ugandan oil assets of Tullow Oil for $2.5 billion. [WSJ]

Financial Institutions

Cuomo, BofA and Lewis: Cuomo accused former BofA CEO Lewis and another official in a civil complaint of duping investors over mounting losses at Merrill Lynch before the takeover. [WSJ]

Jamie Dimon: J.P. Morgan’s Dimon acquired shares in the bank worth about $10.1 million after exercising expiring options, according to a filing with the SEC. [Reuters]
Related: Dimon is due to be granted a 2009 pay package estimated at $15 million to $20 million. [FT.com]

UBS: The Swiss bank plans to reorganize the U.S. retail brokerage into two divisions from the existing three regions. [Dow Jones]

Galleon

Probation: Mark Lenowitz was sentenced to three years of probation after prosecutors said the former hedge-fund trader’s cooperation indirectly led to arrests in the Galleon insider-trading case. [WSJ]

Buyside

iPad: A pair of Internet entrepreneurs announced have launched a fund for developers creating applications for Apple’s much-hyped tablet device, the iPad. [VentureBeat]

RBS: Resolution Group and Blackstone may join National Australia Bank in a potential bid for the 318 branches being sold by Royal Bank of Scotland. [FT.com]

The Abu Dhabi Investment Authority: The world’s largest sovereign wealth fund is to buy a £125 million stake in Gatwick as the airport’s new owner seeks to bring in additional investors. [Times of London]

Capital Markets

T-Mobile: The cellphone operator’s parent Deutsche Telekom is exploring an IPO or spinoff of the business, the fourth-largest U.S. wireless carrier. [WSJ]

Berkshire and Kraft: Berkshire Hathaway joined Kraft in offering a multibillion-dollar bond, and both found plenty of buyers even as disappointing economic news sent investors fleeing from stocks, commodities and other assets. [WSJ]

People & Players

Mystery Men of the Financial Crisis: William D. Cohan writes: “Until people such as Warren Spector, the former co-president and head of the fixed-income division at Bear Stearns, and Dan Jester, a mysterious former Goldman Sachs banker turned Treasury official — among many others — come forward and share with us the roles they played before, during and after the crisis, there is little hope that the members of Congress working on financial reform legislation will be able to craft a bill that will succeed in its mission.” [NY Times]


Evening Reading: Is the SEC Betting Judge Rakoff Is Getting Senile?

Will Judge Rakoff Approve This BofA/SEC Deal? That’s the question our Deal Journal Colleague Ashby Jones poses over at Law Blog. After all Rakoff rejected the previous BofA-SEC deal. Well, Looks like the deal could be in trouble. As one expert tells Law Blog: “Either I’m hopelessly ignorant, or this doesn’t address Rakoff’s concerns at all. Maybe they think Rakoff is getting senile in his old age. But I wouldn’t count on that.”

Wall Street and bonuses: From CFO.com: “More Wall Street professionals are getting bonuses for 2009 than did for 2008, according to the survey of about 850 registered users of eFinancialCareers… Employees at investment banks generally received the biggest payouts, with those at private-equity and venture-capital firms coming in next and those at fund managers (including hedge funds) coming in third.

Too big to fail: In a speech this week, Kevin Warsh signaled a major change in Fed thinking regarding “too big to fail.” Simon Johnson writes: “The Fed is apparently, at last, moving the right direction on the issue of “too big to fail”. But how long will it take to get there?”

The problem with Europe: Floyd Norris writes: “The euro block may be solid at the core — France, Germany, the Netherlands — but it is vulnerable at the fringes.” So can the world’s economic recovery continue with a stumbling Europe? Norris thinks so.

Good news for MBA students: Career services directors are hopeful that 2010 may be the year the job market for newly minted MBAs turns around. An MBA CSC survey reports that 34% of schools reported an increase in full-time postings this fall. Fewer schools, meanwhile, are reporting declines, with 48% of schools seeing a reduction in full-time postings, as compared with 70% of schools last year, reports BusinessWeek.


The Cuomo Report: John Thain — Golden Boy Again?

John Thain gets exonerated again.

Getty Images

A perusal of N.Y. Attorney General Andrew Cuomo’s complaint against former Bank of America CEO Kenneth Lewis and former finance chief Joe Price seems to support Thain’s version of the events surrounding BofA’s troubled acquisition of Merrill Lynch. (It’s almost glowing in describing how upfront Merrill was.)

In January 2009, as BofA groaned under the weight of Merrill’s losses and bonuses, Thain made an easy scapegoat. He had asked for a $10 million bonus; he spent $1.2 million of Merrill’s money renovating his office, including that $35,000 commode; he had lobbied for the top job; and more importantly, he allegedly kept BofA in the dark about the $3.6 billion in bonuses Merrill paid out and the mounting losses at his securities firm. Just three weeks after BofA closed the Merrill deal, Lewis ousted Thain, quite a comedown for a man who just months earlier had been hailed as hero for selling Merrill to BofA.

Since being forced out, Thain has maintained that BofA lied about its role in the giant bonuses and losses at Merrill. Cuomo’s complaint is silent about the Thain bonus request and the commode, but it supports many of his other contention. Here are a few excerpts that shed light on one of the most disastrous mergers in recent years.

The Losses

In January 2009, when news of the Merrill losses and the government rescue were announced, BofA maintained it hadn’t learned of the losses until Dec. 5, 2008. According to today’s complaint, Merrill forwarded preliminary October results to BofA indicating a loss of $6.1 billion on Nov. 4, 2008. Five days later, Merrill informed Bofa the losses had widened to $7.5 billion.

The complaint goes even further:

“From the moment the merger was announced, Merrill was transparent with BoA management about the losses Merrill was incurring. The Bank’s management embedded employees at Merrill’s offices, and received real-time updates as Merrill’s losses compounded. The Bank’s top management received regular updates on Merrill’s deteriorating condition. Price in particular was intimately familiar with the losses, and had a practice of reviewing and commenting on real time reports of actual losses from Merrill’s internal systems.”

Bonuses

Deal Journal reported a year ago that BofA knew what Merrill would pay in bonuses, as Thain had contented. That conclusion was drawn from a review of the bonus agreement the two firms signed as part of the merger agreement. The agreement called for the variable incentive compensation pool, also known as the discretionary bonus pool, shouldn’t exceed $5.8 billion, and that 60% of it should be awarded in cash and 40% either in terms of equity or long-term cash awards. Those were the same guidelines Merrill followed in paying out bonuses.

Cuomo’s complaint says: 

“BoA knew that Merrill would take these steps, and acquiesced in them…The Bank never told shareholders, first, that the agreed cap on Merrill bonuses was $5.8 billion for the year, even though this was agreed when the merger contract was signed in September. Nor did the Bank tell its shareholders that Merrill decided to pay bonuses within the 2008 calendar year, even though that decision was made as early as November 11, weeks before the shareholder vote. Lastly, the Bank did not tell its shareholders that Merrill had switched from a performance-based to a market-based compensation scheme, though it knew of this change as well.”

Striking a Deal

The complaint gives Thain much credit for striking the deal he did. “Thain and his subordinates managed to extract an enormous, unwarranted premium for the stricken firm. The parties agreed to a stock-swap transaction at the price of $29 per share of Merrill stock, which represented a 70 percent premium to the firm’s closing price of $17.05 per share on September 12.”

Maybe Thain was worth that $10 million bonus, after all.


BofA Treasurer Feared Jail Time Over Merrill Deal

After more than a year of investigations, congressional hearings and newspaper articles about Bank of America’s fateful purchase of Merrill Lynch in the fall of 2008, we wondered what possibly new details could be learned about this deal.

Well, New York Attorney General Andrew Cuomo included some interesting nuggets and colorful commentary in his civil fraud complaint against BofA. Here are a few examples:

We thought this kind of stuff only happened in movies: BofA Treasurer Jeffery Brown says he was worried about the impact of Merrill’s losses and told finance chief Joe Price that they should be disclosed to shareholders before they voted on the takeover. After Price allegedly dismissed his concerns, Brown says, “I stated to Mr. Price that I didn’t want to be talking through a glass wall over a Telephone,” according to the complaint. Price told Cuomo’s prosecutors he didn’t remember the exchange

Cuomo disses J.C. Flowers’s due diligence on Merrill: “After barely a day of due diligence, BofA agreed to buy the vast, immensely complex and dangerously weakened Merrill Lynch. Twenty-five hours was simply not enough time for BoA to understand Merrill’s true financial condition. BoA had retained the firm of J.C. Flowers, Inc., to aid with the Merrill due diligence and paid it $19 million to do so, on the rationale that Flowers had done diligence on Merrill in connection with a prior investment. The prior work, however, was performed during the fourth quarter of 2007, and done for a different purpose. “

Don’t Blame It on the Lawyers: Cuomo says BofA can’t blame Wachtell, Lipton, Rosen & Katz for deciding not to disclose the Merrill losses. The complaint says Wachtell originally said BofA should disclosed the losses. “However, the decision was reversed, Wachtell’s role was marginalized, and the Bank made its own decision not to disclose. Outside counsel was never again consulted about disclosure, even after the losses later doubled.”

John Thain is one nean Deal Maker: “Thain and his subordinates managed to extract an enormous, unwarranted premium for the stricken firm. The parties agreed to a stock-swap transaction at the price of $29 per share of Merrill stock, which represented a 70 percent premium to the firm’s closing price of $17.05 per share on September 12.”


BofA Treasurer Raises Specter of Jail Time Over Merrill Disclosure

After more than a year of investigations, congressional hearings and newspaper articles about Bank of America’s fateful purchase of Merrill Lynch in the fall of 2008, we wondered what possibly new details could be learned about this deal.

Well, New York Attorney General Andrew Cuomo included some interesting nuggets and colorful commentary in his civil fraud complaint against BofA. Here are a few examples:

We thought this kind of stuff only happened in movies: BofA Treasurer Jeffery Brown says he was worried about the impact of Merrill’s losses and told finance chief Joe Price that they should be disclosed to shareholders before they voted on the takeover. After Price allegedly dismissed his concerns, Brown says, “I stated to Mr. Price that I didn’t want to be talking through a glass wall over a Telephone,” according to the complaint. Price told Cuomo’s prosecutors he didn’t remember the exchange

Cuomo disses J.C. Flowers’s due diligence on Merrill: “After barely a day of due diligence, BofA agreed to buy the vast, immensely complex and dangerously weakened Merrill Lynch. Twenty-five hours was simply not enough time for BoA to understand Merrill’s true financial condition. BoA had retained the firm of J.C. Flowers, Inc., to aid with the Merrill due diligence and paid it $19 million to do so, on the rationale that Flowers had done diligence on Merrill in connection with a prior investment. The prior work, however, was performed during the fourth quarter of 2007, and done for a different purpose. “

Don’t Blame it on the Lawyers: Cuomo says BofA can’t blame Wachtell, Lipton, Rosen & Katz for deciding not to disclose the Merrill losses. The complaint says Wachtell originally said BofA should disclosed the losses. “However, the decision was reversed, Wachtell’s role was marginalized, and the Bank made its own decision not to disclose. Outside counsel was never again consulted about disclosure, even after the losses later doubled.”

John Thain is one Mean Deal Maker: “Thain and his subordinates managed to extract an enormous, unwarranted premium for the stricken firm. The parties agreed to a stock-swap transaction at the price of $29 per share of Merrill stock, which represented a 70 percent premium to the firm’s closing price of $17.05 per share on September 12.”


Andrew Cuomo and the Real Power of the Martin Act

Andrew Cuomo better get to work.

The New York attorney general now has just 10 months to build a case against one of the nation’s largest banks and schedule a trial before he conceivably wins a new job. Cuomo , of course, is believed by many to be a leading candidate to become governor of New York in November.

Unless a trial isn’t really in the cards for Cuomo, who this afternoon filed civil fraud charges against Bank of America and former CEO Ken Lewis and former finance chief Joe Price for failing to disclose to shareholders the losses at Merrill Lynch, the troubled firm it agreed to acquire in September 2008. The bank’s lawyer says the charges are without merit.

Cuomo is charging Bofa and its former executives under the Martin Act, a broad New York state law against financial fraud that was enacted during the Great Depression. The Martin Act enables the state’s prosecutors to go after just about any attempt to hide financial information from investors. In some cases, the AG’s office, which is smaller than the Securities & Exchange Commission or the US Attorney’s office, doesn’t have the man power to litigate the cases it files and is aiming instead for a high profile settlement.

“It’s the legal version of street theater,’’ said one former federal prosecutor, who now teaches law.

Elliot Spitzer dusted off the 70-year statute when he took over as attorney general in 1999 and used it aggressively against Wall Street, over issues ranging from compensation practices at the New York Stock Exchange to stock analysts who were publishing positive research about companies while disparaging them privately.

Peter Pope, who was a prosecutor in Sptizer’s office, says they built cases against Wall Street using the Martin Act in the same manner that they used to litigate racketeering cases in the Manhattan District Attorney’s office, where both he and Spitzer worked. “You analyze each individual person’s financial incentive to cheat,’’ says Pope, who is now a lawyer at Arkin Kaplan Rice LLP.

Indeed, one thing that stands out about this case is that Cuomo filed civil charges against Bofa executives, something the Securities and Exchange Commission declined to do in its case against the bank. (At nearly the same minute that Cuomo announced his charges late this morning the SEC announced a $150 million settlement with BofA over the Merrill disclosure issue, much higher than the $30 million settlement for which the SEC took so much heat for last year.)

And in targeting Lewis and Price, Cuomo looks much tougher than the SEC did when it was chided by federal Judge Jed Rakoff last fall for not prosecuting any bank executives.

In that regard, Cuomo may have already won the perception and political battle, regardless of the outcome of any trial that could come long after he has moved on to a higher office.


Lewis Rebuffs Cuomo’s BofA Lawsuit: It Is ‘Badly Misguided’

New York Attorney General Andrew Cuomo filed civil securities fraud charges against former BofA CEO Ken Lewis and former CFO Joseph Price, alleging they decided not to disclose mounting losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.

Below is the statement by Mary Jo White of Debevoise & Plimpton with respect to Cuomo’s lawsuit against Ken Lewis.

* * *

STATEMENT BY MARY JO WHITE OF DEBEVOISE & PLIMPTON ON N.Y. ATTORNEY GENERAL LAWSUIT AGAINST BANK OF AMERICA, FORMER CEO KEN LEWIS AND ANOTHER BOFA EXECUTIVE

New York NY - February 4, 2010 - In response to the lawsuit filed today by Andrew Cuomo, currently New York’s Attorney General, against Bank of America, Kenneth D. Lewis, former CEO, and another BofA executive, the following statement was issued by Mary Jo White of Debevoise & Plimpton LLP, who is representing Mr. Lewis.

“The decision by Mr. Cuomo to sue Bank of America, Mr. Lewis and other executives in connection with BofA’s acquisition of Merrill Lynch is a badly misguided decision without support in the facts or the law. As the SEC correctly concluded recently based on the very same evidence,* there simply is no basis for any case against Mr. Lewis or any other individual.

“There is not a shred of objective evidence to support the allegations by the Attorney General. ‘Mr. Lewis and other BofA employees acted in good faith in the Merrill Lynch transaction, following the expert legal advice of counsel and in the best interests of BofA shareholders. The Merrill Lynch transaction — undertaken at a time of significant danger to our financial system — has also proven to be an unmitigated success for BofA shareholders. Mr. Lewis has been unfairly vilified by the political search for accountability for the financial meltdown.** This suit is not fair, it is without factual or legal basis and we look forward to prevailing in a court where the facts and law do matter.”

* * *

* ln Litigation Release No. 21371 filed by the U.S. Securities and Exchange Commission (”SEC”) on January I1,2010, the SEC noted the following: According to the SEC’s proposed complaint, Bank of America executives at various times discussed the firm’s disclosure obligations with internal and external counsel. These executives are not alleged to have deliberately concealed information from counsel or otherwise acted with scienter or intent to mislead. Nor is any counsel alleged to have acted with scienter or intent to mislead. For these reasons, the SEC’s proposed complaint does not seek charges against any individual officers, directors or attorneys. SEC staff has advised the Commission that, after a careful assessment of the evidence and all of the relevant circumstances, it has determined that charges against individuals for their roles in connection with proxy disclosure are not appropriate.”

** On December 9,2009, while Mr. Lewis was still CEO and President of Bank of America, the Company sent the U.S. Treasury $45 billion, including accrued dividends, to repay the U.S. taxpayers’ entire investment in the company as part of the Troubled Asset Relief Program (TARP).


Price Reacts To Cuomo Lawsuit: Allegations ‘Utterly False’

New York Attorney General Andrew Cuomo filed civil securities fraud charges against former BofA CEO Ken Lewis and former CFO Joseph Price, alleging they decided not to disclose mounting losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.

Below is the statement from Bill Jeffress, Jr., the Baker Botts attorney representing Price.

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STATEMENT OF COUNSEL FOR JOE PRICE REGARDING LAWSUIT FILED BY NEW YORK ATTORNEY GENERAL

The allegation that Mr. Price deliberately caused Bank of America to withhold from shareholders information they were entitled to know is utterly false. In truth, he did exactly what a responsible regulator would want and expect from a chief financial officer. He raised with the bank’s counsel, and with management both at the bank and Merrill Lynch, a concern whether existing public disclosures were adequate in light of what he leamed about projected losses for the fourth quarter at Menill Lynch. He made available to counsel all information believed by him or by them to be relevant to the issue. He listened to counsel’s advice, found it to be convincing, and followed it.

The complaint filed by the New York Attomey General makes allegations that are flatly contrary to the evidence and contrary to the conclusions of the Securities and Exchange Commission based on the same evidence. The Attorney General has misrepresented facts; he has selectively refened to facts thought to support his theory, while ignoring facts that contradict his theory; and he has drawn conclusions that a fair-minded regulator could not responsibly draw. Mr. Price denies the charges against him and will vigorously defend the lawsuit.


Price Reacts To Cuomo BofA Lawsuit: Allegations ‘Utterly False’

New York Attorney General Andrew Cuomo filed civil securities fraud charges against former BofA CEO Ken Lewis and former CFO Joseph Price, alleging they decided not to disclose mounting losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.

Below is the statement from Bill Jeffress, Jr., the Baker Botts attorney representing Price.

* * *

STATEMENT OF COUNSEL FOR JOE PRICE REGARDING LAWSUIT FILED BY NEW YORK ATTORNEY GENERAL

The allegation that Mr. Price deliberately caused Bank of America to withhold from shareholders information they were entitled to know is utterly false. In truth, he did exactly what a responsible regulator would want and expect from a chief financial officer. He raised with the bank’s counsel, and with management both at the bank and Merrill Lynch, a concern whether existing public disclosures were adequate in light of what he learned about projected losses for the fourth quarter at Merrill Lynch. He made available to counsel all information believed by him or by them to be relevant to the issue. He listened to counsel’s advice, found it to be convincing, and followed it.

The complaint filed by the New York Attorney General makes allegations that are flatly contrary to the evidence and contrary to the conclusions of the Securities and Exchange Commission based on the same evidence. The Attorney General has misrepresented facts; he has selectively referred to facts thought to support his theory, while ignoring facts that contradict his theory; and he has drawn conclusions that a fair-minded regulator could not responsibly draw. Mr. Price denies the charges against him and will vigorously defend the lawsuit.


Amazon Gets Touchy-Feely with Touchco Deal

Don’t get mad, get even. That seems to be Amazon’s response to the iPad. While investors and analysts have been debating the real impact of Apple’s new mobile reader will have on Amazon’s Kindle sales, Amazon has just acquired a new technology to improve the Kindle’s touch screen technology.

According to the New York Times, Amazon has bought Touchco, the New York start-up producer of an inexpensive touch screen that can detect an unlimited number of touch points. The article doesn’t include a price or other terms of the deal , and says Amazon didn’t reply to a request for comment, while Ilya Rosenberg, a Touchco co-founder, declined to comment.

Still, the move signals that Amazon is taking the iPad threat seriously, since one advantage the iPad is believed to have over the Kindle is a more-colorful screen and easier navigation. It also is less-costly to make than the touch screens used for the iPhone and iPhone.

The Times article quotes Colin Sebastian, an analyst at Lazard Capital to the effect that “The acquisition ‘would suggest Amazon is looking to expand its platform perhaps beyond e-readers to encompass more functionality and more content….It also could help them address some of the form-factor issues with the Kindle,” allowing it to, say, replace the physical keyboard with a virtual one.

But is Amazon fighting a battle it can’t win? Analysts at investment firm Cowen & Co. think so, estimating that Amazon’s share of the so-called e-book market could slump to 30% in the next five years from 80% now.

The competition is coming from Google’s e-bookstore and Apple, which not only has the iPad, but also has persuaded five big publishers to back the creation of a new e-bookstore with higher prices for bestsellers than Kindle charges. That threatens to freeze out Kindle, which has angered publishers with its cut-rate prices for best-sellers.

Cowen analyst Jim Friendland estimates that the erosion of Kindle’s market share would reduce Amazon’s net present value by $12 a share over the next five years. On the bright side, the e-book market continues to grow as traditional hard-cover book sales decline. In that case, Kindle could lose its overwhelming market dominance, but still gain e-readers.