DealBook: Failing Stress Test Is Another Stumble for Citigroup

Something didn't quite seem right to Citigroup earlier this week.

The banking behemoth could show that it had enough capital to ride out an economic storm, but a regulator was refusing to approve its plan to increase dividends and stock buybacks, steps intended to please shareholders and build confidence in the bank's turnaround.

Inside Citigroup, board members and senior executives expressed bafflement and anger as they prepared for the rejection to be announced by the Federal Reserve Wednesday afternoon, people briefed on the matter said.

Was the Fed punishing Citigroup for a costly fraud last month at its Mexican unit? Was the regulator trying to look tough? Or was the Fed subtly pressing for a breakup of the bank — a goal of some regulators, investors and analysts for years? A day after Citigroup's capital plan failed the Fed's stress test for the second time in three years, bank executives were still struggling to understand the decision and how best to respond, these people said.

Yet the regulator's displeasure shouldn't have been a total surprise. In its report, the Fed noted that Citigroup had failed to sufficiently correct deficiencies that the regulator had flagged to the bank previously. And it was the only one of the nation's five top banks that failed to persuade the Fed to bless its capital plan. Upon passing their tests, Citigroup's rivals JPMorgan Chase and Bank of America swiftly announced plans to increase dividends and buy back shares.

Since the rejection, some analysts and investors have been pushing for a management shake-up, specifically calling for a new chief financial officer. After all, the Fed criticized the "reliability" of the bank's financial projections under hypothetical situations aimed at testing the bank's resilience during times of financial stress. Investors were quick to register their disappointment, and Citigroup's shares tumbled 5.4 percent on Thursday.

The broader question hanging over Citigroup is the one that has dogged it since Sanford I. Weill created the sprawling global conglomerate in a burst of merger and deregulation fervor nearly two decades ago: that the bank may be simply too big to manage.

"It is a huge challenge at a company that is as big and as everywhere as Citigroup," said Fred Cannon, a banking analyst with Keefe, Bruyette & Woods.

In its rebuff of Citigroup's capital plan, the Fed singled out shortfalls in the bank's financial projections in "material parts of the firm's global operations."

While most of the nation's largest banks operate globally, few banks have the reach of Citigroup. The bank has a physical presence in more than 100 countries, drawing roughly half of its total revenue from countries outside the United States. By comparison, Bank of America operates in 40 countries, but draws only about 14 percent of its revenue from overseas.

More than many of its peers, Citigroup also lends directly to consumers and homegrown companies outside the United States. That strategy may have contributed to Citigroup's recent stumbles in Mexico, where bank officials said they uncovered a fraud involving a local oil services company called Oceanografía.

The $400 million fraud forced Citigroup to adjust its earnings and raised questions about whether the bank had consistent risk controls across its many global business lines.

Citigroup also runs a payment business in which the bank transfers money between different nations on behalf of large companies. That business can pose risks that could be hard to quantify for the Fed, former financial regulators say.

Federal prosecutors are looking into a Citigroup unit that was involved in transferring money between the United States and Mexico. Regulators have previously said Citigroup lacked effective governance and internal controls to oversee compliance against money laundering at the particular unit, Banamex USA.

Over all, the Fed said in its report that "Citigroup had made some considerable progress in improving its general risk management and control practices over the past several years, but its 2014 capital plan reflected a number of deficiencies."

The drumbeat from analysts seeking a breakup of the large bank is likely to grow louder now that Citigroup has failed another stress test. Since the financial crisis, Citigroup has shed about $600 billion of assets and exited undesirable businesses, but some read the Fed's ruling as a signal that the bank needs to sell more units.

Michael Mayo, an analyst with CLSA, said that Citigroup should sell Banamex, its highly profitable Mexican unit that until recently has been considered a crown jewel. But carving out other distinct business for sale is difficult in a company assembled through multiple, disparate acquisitions.

"There are a lot of pieces to the puzzle," said Mr. Cannon of Keefe, Bruyette.

As if to illustrate the sprawl of Citigroup's international operations, Michael L. Corbat, the chief executive of Citigroup, was in a hotel room in South Korea when he learned that the Fed had rejected the bank's capital plan again. Fed officials called Mr. Corbat before dawn on Wednesday to break the news.

It was a personal blow to Mr. Corbat, who has been lauded for improving the bank's relations with regulators. He came to the helm of the bank, not long after his predecessor, Vikram S. Pandit, failed to pass the stress test in 2012.

Mr. Corbat has vowed to restructure the bank by cutting costs and shedding unwanted businesses. This year, the bank submitted what Mr. Corbat called a "modest" capital plan, which included a dividend increase to 5 cents a quarter, from the current penny.

Even after paying that proposed dividend and buying back $6.4 billion in shares, Citi would still have had a comfortable capital cushion, according to the test. But the Fed objected to the bank's plans on "qualitative" grounds.

In South Korea, Mr. Corbat cut short the next leg of his trip and immediately flew back to New York, arriving in Citigroup's Park Avenue headquarters a few hours before the Fed released the results on Wednesday.

After discussing the results with Citigroup's board by phone, the chief executive traveled downtown to the Federal Reserve Bank of New York, people briefed on the matter said. He wanted to talk over the results with the New York Fed president, William C. Dudley, who did not vote on the stress test rejections.

The decision came from all four Fed governors in Washington, including the new chairwoman, Janet L. Yellen. It was the first time the Fed governors voted on any "qualitative" objections to banks' capital plans.

This year, Citigroup was one of five banks that failed to receive the Fed's blessing to increase dividends and buy back stock. The Fed governors' vote was unanimous. Three of the other rejected banks were American units of large foreign banks — HSBC, Royal Bank of Scotland and Santander — taking part in the test for the first time.

In the next few weeks, the Fed plans to send Citi a letter detailing the deficiencies cited in its report, a person close to the process said. But until then, the regulator doesn't have much more to say to the bank on the matter, the person said.

A version of this article appears in print on 03/28/2014, on page B1 of the NewYork edition with the headline: The Bigger They Are ... .

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DealBook: I.R.S. Takes a Position on Bitcoin: It’s Property

Updated, 8:53 p.m. | The Internal Revenue Service may have just taken some of the fun out of Bitcoin. But that may mean that the virtual currency is growing up.

The I.R.S. announced on Tuesday that it would treat Bitcoin, the computer-driven online money system, as property rather than currency for tax purposes, a move that forces users who have grown accustomed to operating under the government's radar to deal with new tax issues and reporting requirements.

While that may seem like an expensive headache, some financial experts view the move as a way to push Bitcoin further away from the fringes and into the mainstream financial system.

"It's getting legitimacy, which it didn't have previously," said Ajay Vinze, the associate dean at at Arizona State University's business school. The ruling, he said, "puts Bitcoin on a track to becoming a true financial asset."

While many users already treat Bitcoin like a currency, the I.R.S. made it very clear that "it does not have legal tender status in any jurisdiction."

The industry had been expecting the government to come out with some sort of guidance on Bitcoin, so the announcement on Tuesday did not come as much of a surprise. But some users worry that treating it as an investment could discourage the use of Bitcoin as a payment method. If a user buys a product or service with Bitcoin, for example, the I.R.S. will expect the individual to calculate the change in value from the date the user acquired Bitcoin to the date it was spent. That would give the person a basis to calculate the gains — or losses — on what the I.R.S. is now calling property.

"People might just be tempted to hoard rather than spend, because as soon as they spend they would be liable to incur capital gains taxes," said Pamir Gelenbe, the co-founder of the CoinSummit conference and a partner at Hummingbird Ventures, a venture capital firm that recently invested in the online Bitcoin exchange Kraken.

The I.R.S.'s decision would treat Bitcoin as property subject to capital gains taxes. Long-term capital gains taxes are capped at 20 percent, a more favorable rate than the top rate of 39.6 percent on federal income taxes. Individual traders in the currency markets — the British pound, for example — are expected to treat gains or losses as regular income for tax purposes.

"From a tax perspective, this is really the best possible outcome," said Barry Silbert, the chief executive of SecondMarket, which is planning to introduce a new Bitcoin exchange.

Up until now, Bitcoin enthusiasts have been able to buy, sell and trade on their gains with few fees and little oversight, since the currency has no central bank and no government regulator. Over the years, the price of Bitcoin has also fluctuated wildly, from just a few cents to more than $1,000 to its current price of nearly $600.

At the same time, an increasing number of merchants, including Virgin Galactic and Overstock.com, have begun accepting Bitcoin, supported by a growing cottage industry of companies who will exchange Bitcoins for dollars for a small fee.

Created by an anonymous computer programmer, or group of computer programmers, Bitcoin has largely been the realm of technology enthusiasts and anti-establishment hobbyists, who often buy and sell Bitcoin on online exchanges. Programmers are also able to obtain them by "mining," or figuring out obscure algorithms to "unlock" new coins.

The I.R.S. now, however, says that these miners must report the fair market value of the virtual currency as part of their income.

The new guidelines also mean that online exchanges that buy and sell Bitcoin will now have to provide customers with annual reports of their transactions, just as stock brokerages and other investment firms do.

But some efforts may already be underway to ensure that the new reporting requirements will not discourage users from trading with Bitcoin.

"I can assure you that there are a number of companies that have come up with software to automate this entire process," Mr. Silbert said.

The Bitcoin start-up Coinbase also said it supported the new guidelines.

"Exciting to see clarity from the I.R.S. Coinbase will help both consumers and merchants to meet the guidelines," the company said in a Twitter message.

In the last year or two, however, the industry has attracted backing from venture capital and other investment firms who anticipate a wider adoption of virtual currency. But at the same time, regulators have become increasingly worried that online marketplaces could be used to facilitate drug deals and other illicit transactions.

All that has put more pressure on governments around the world to figure out some way to regulate the industry. That pressure only increased last month with the collapse of one of Bitcoin's largest virtual exchanges, Mt. Gox. The company filed for bankruptcy in Japan and the United States, leaving few options for users who had lost money with the exchange.

Mt. Gox claimed to have lost nearly all its 850,000 coins, although it announced last week that it found about 200,000. The I.R.S.'s guidelines might mean that users in the United States who lost money could now treat that as a capital loss on their tax forms.

Bitcoin has attracted many of its users precisely because it operated outside the established financial system and offered the promise of cheaper transactions. But many Bitcoin advocates and experts have said that regulation is necessary to make Bitcoin a viable currency.

"The people that feel ideologically that Bitcoin should be free of all regulation aren't going to be happy," said Gil Luria, a managing director at Wedbush Securities who has written about virtual currency. "If you're trying to replace an existing financial system, then you need to have all the features that are required of that financial system."

The few employers who pay in Bitcoin will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes, the I.R.S. said.

Shortly after the announcement, Senator Tom Carper, Democrat of Delaware, praised the agency's decision. The guidance "provides clarity for taxpayers who want to ensure that they're doing the right thing and playing by the rules when utilizing Bitcoin and other digital currencies," he said.

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DealBook: Five Former Madoff Aides Found Guilty of Fraud

Updated, 9:13 p.m. | A federal jury on Monday found five associates of the convicted swindler Bernard L. Madoff guilty of 31 counts of aiding one of the largest Ponzi schemes in history.

With that verdict, the jurors rejected the former employees' central defense: that only Mr. Madoff had known the evil purpose behind the chores he told them to carry out, while they had simply trusted for decades in the honesty of a man widely known and respected on Wall Street.

"There's really no dispute here that there was a massive criminal conspiracy," John T. Zach, an assistant United States attorney, told the jury early this month, in the closing weeks of a trial that had lasted more than five months.

The only question, he said, was whether the defendants knowingly committed fraud to help Mr. Madoff sustain that criminal enterprise. "So let me state it to you as clearly as I can," he said: "The defendants knew that fraud was going on at Madoff Securities."

Prosecutors said that the two portfolio managers on trial, JoAnn Crupi and Annette Bongiorno, as well as the firm's operations director, Daniel Bonventre, conspired in various ways to lie to customers, cheat on taxes and falsify records at Bernard L. Madoff Investment Securities, the firm Mr. Madoff founded in the early 1960s. The government also accused two computer programmers, Jerome O'Hara and George Perez, of helping sustain the $17 billion Ponzi scheme by knowingly creating computer programs that could create fake trades and records.

Each of the five defendants faces decades in prison, although the ultimate sentences will be the decision of Judge Laura Taylor Swain of Federal District Court in Lower Manhattan, who presided over the complex trial.

"These convictions, along with the prior guilty pleas of nine other defendants, demonstrate what we have believed from the earliest stages of the investigation: This largest-ever Ponzi scheme could not have been the work of one person," said Preet Bharara, the United States attorney in Manhattan, whose office brought the case.

"The trial established that the Madoff fraud began at least as far back as the early 1970s, decades before it came to light," Mr. Bharara said. "These defendants each played an important role in carrying out the charade, propping it up and concealing it from regulators, auditors, taxing authorities, lenders and investors."

While lawyers for the defense claimed that their clients did not knowingly participate in any of the deception, their arguments were challenged by testimony from Frank DiPascali Jr., Mr. Madoff's closest ally and co-conspirator in the long-running fraud. Mr. DiPascali pleaded guilty in August 2009 and has been cooperating since then with federal prosecutors in hopes of reducing the 125-year prison term he faces for his own pivotal role in the Ponzi scheme.

Mr. DiPascali's testimony last December provided some of the most riveting hours of the lengthy trial, held in the stately ceremonial courtroom where Mr. Madoff was sentenced in June 2009.

A fluent witness, Mr. DiPascali gave the jury simple explanations for the arcane paperwork involved in the fraud and gave riveting accounts of moments of crisis the conspirators faced over the years.

On one occasion, he told the jury, a visiting auditor asked to see a trading ledger that would back up the firm's claims about the securities it owned for the auditor's client. There was no such ledger — there were no securities in the client's account, Mr. DiPascali said.

By his account, he kept the auditor diverted through the afternoon while several defendants created the fake ledger. When it came hot off the office printer, they cooled it in the office refrigerator and then tossed it around "like a medicine ball" to give it the well-worn look that a legitimate ledger would have, he said.

He also claimed that the defendants were well aware that Mr. Madoff's firm was providing a "second set of books and records" to the Securities and Exchange Commission and routinely backdating the fictitious trades that showed up on customer accounts — a practice that he said had been going on at least since the late 1970s.

Lawyers for the five former employees had argued that Mr. DiPascali's self-interest — he hopes for a more lenient sentence — undermined his credibility. In his closing remarks, Larry H. Krantz, one of the defense lawyers, said that Mr. DiPascali lied to Mr. Perez and Mr. O'Hara "over and over again in order to trick them into working on the projects that he needed them to work on," according to court records.

Gordon Mehler, the lawyer for Mr. O'Hara, said on Monday, "The jury has spoken, but we are very disappointed, of course." Mr. Mehler said he planned to appeal.

Eric R. Breslin, who defended Ms. Crupi, had a similar reaction. "While we understand and respect the jury's verdict, we are obviously extremely disappointed by it," he said. "We believe there is and remains compelling evidence in Ms. Crupi's favor and we will continue to press her case forward."

Mr. Krantz, the lawyer for Mr. Perez, said in an email, "We will continue to fight as hard as we can on George Perez's behalf through sentencing and appeal."

And Andrew Frisch, who represented Mr. Bonventre, said in an email that "We are disappointed and will appeal. The list of Bernard Madoff's victims now includes these five former employees."

Roland G. Riopelle, who represented Ms. Bongiorno, declined to comment.

Mr. Madoff's brother, Peter B. Madoff, who worked alongside his brother for nearly four decades, pleaded guilty in June 2012 to tax and securities fraud charges, but was not accused of knowing about the Ponzi scheme. In December 2012, he was sentenced to 10 years in prison.

Counting the Madoff brothers and Mr. DiPascali, nine defendants have pleaded guilty to charges related to the fraud. Monday's verdict adds five more names to the roster of those convicted in the five-year-old investigation, for a total of 14.

The trial of the five longtime staff members gave the government its first opportunity to lay out all the evidence it collected in the years after the collapse of Madoff Securities. Madoff Securities failed in 2008 after Mr. Madoff confessed to his sons about the swindle. He is currently serving 150 years in prison.

The day Mr. Madoff was arrested, his customers believed their accounts contained a total of $64.8 billion.

According to the bankruptcy trustee, Irvin H. Picard, investors actually lost about $17.3 billion in cash principal — money put in their Madoff accounts and never withdrawn. Through civil litigation and government forfeiture settlements, Mr. Picard and federal prosecutors have recovered about $11 billion to compensate eligible victims.

Mr. Madoff's clients included individual investors as well as a number of philanthropic institutions, including the foundation started by the Nobel Peace Prize winner Elie Wiesel, which lost more than $15 million.

Although the five aides could face extended prison sentences, Samuel W. Buell, a professor of law at Duke University, said he would be "very surprised if a federal judge thought it was appropriate to sentence somebody like this to several decades in prison."

A federal jury on Monday found five associates of the convicted swindler Bernard L. Madoff guilty of 31 counts of aiding one of the largest Ponzi schemes in history.

With that verdict, the jurors rejected the former employees' central defense: that only Mr. Madoff had known the evil purpose behind the chores he told them to carry out, while they had simply trusted for decades in the honesty of a man widely known and respected on Wall Street.

"There's really no dispute here that there was a massive criminal conspiracy," John T. Zach, an assistant United States attorney, told the jury early this month, in the closing weeks of a trial that had lasted more than five months.

The only question, he said, was whether the defendants knowingly committed fraud to help Mr. Madoff sustain that criminal enterprise. "So let me state it to you as clearly as I can," he said: "The defendants knew that fraud was going on at Madoff Securities."

Prosecutors said that the two portfolio managers on trial, JoAnn Crupi and Annette Bongiorno, as well as the firm's operations director, Daniel Bonventre, conspired in various ways to lie to customers, cheat on taxes and falsify records at Bernard L. Madoff Investment Securities, the firm Mr. Madoff founded in the early 1960s. The government also accused two computer programmers, Jerome O'Hara and George Perez, of helping sustain the $17 billion Ponzi scheme by knowingly creating computer programs that could create fake trades and records.

Each of the five defendants faces decades in prison, although the ultimate sentences will be the decision of Judge Laura Taylor Swain of Federal District Court in Lower Manhattan, who presided over the complex trial.

"These convictions, along with the prior guilty pleas of nine other defendants, demonstrate what we have believed from the earliest stages of the investigation: This largest-ever Ponzi scheme could not have been the work of one person," said Preet Bharara, the United States attorney in Manhattan, whose office brought the case.

"The trial established that the Madoff fraud began at least as far back as the early 1970s, decades before it came to light," Mr. Bharara said. "These defendants each played an important role in carrying out the charade, propping it up and concealing it from regulators, auditors, taxing authorities, lenders and investors."

A version of this article appears in print on 03/25/2014, on page B1 of the NewYork edition with the headline: Jury Decides 5 Employees Of Madoff Knew Score .

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DealBook: $80 Million for 6 Weeks for Cable Chief

Updated, 8:55 p.m. | Robert D. Marcus became chief executive of Time Warner Cable at the start of the year. Less than two months later, he agreed to sell the company to its largest rival, Comcast, for $45 billion.

For that work, he will receive nearly $80 million if the deal closes, a severance payment that amounts to more than $1 million a day for the six weeks he ran the company before agreeing to sell.

"It's not unprecedented, but it is rare and troubling," said Robert Jackson Jr., an associate professor at Columbia Law School. "There's something stunning about such big paydays for such a small amount of work."

The extraordinarily large exit package is just one more example of corporate America rewarding executives with outsize sums for sometimes minimal amounts of work, and it comes despite the growing debate over income inequality in America.

"The numbers are already big now between executives and regular people," said David F. Larcker, a professor at Stanford Law School. "This exacerbates those comparisons."

So-called golden parachutes are common features in the employment contracts for public company executives, and they often reach stratospheric heights. And though Mr. Marcus is in line to receive a huge sum, his payout will not be anywhere close to the largest golden parachutes of all time.

When John Welch left General Electric in 2001, he reaped rewards of more than $417 million, according to GMI Ratings, a corporate governance research firm.

Dozens of executives have received exit packages larger than $150 million, including Lee R. Raymond, who received $321 million when he left Exxon Mobil in 2005, and William McGuire, who took home $286 million upon leaving the UnitedHealth Group in 2006.

But the payment to Mr. Marcus, 48, which was disclosed in a regulatory filing on Thursday, is nonetheless spectacular because he was chief executive for such a short period, while Mr. Welch, Mr. Raymond and Mr. McGuire had been at their companies for years.

Most of the payment due Mr. Marcus is part of the so-called change of control clause in his contract, which is set off when a company is sold. Such golden parachutes can be among the biggest paydays for executives.

Perhaps the largest package was the $214 million John A. Kanas received after selling North Fork Bancorporation to Capital One Financial in 2006. That same year, James M. Kilts, chief executive of Gillette, received $185 million when Procter & Gamble bought his company. And in 2011, Sanjay Jha, chief executive of Motorola Mobility, was in line for $65.7 million after he sold his company to Google.

Other change of control clauses, which have not yet been invoked, are even bigger.

The chief executive of the mall developer the Simon Property Group would receive $245 million should his company change hands on his watch, according to the Standard & Poor's ExecuComp database. Steve Wynn of Wynn Resorts would receive $239 million if his casino company were sold. And David M. Zaslav, chief executive of Discovery Communications, would get $232 million if his collection of cable networks found a buyer.

Compensation experts contend that golden parachutes can be in the best interests of shareholders. Without one, a chief executive might not want to sell the company and lose his salary.

What is more, many golden parachutes are structured to reflect the total value of salary, bonuses and stock options that executives would receive over the duration of their employment.

But critics see the packages as distorting influences that create incentives for chief executives to sell their companies.

"I don't understand how these payments can be thought to align the interests of C.E.O.s with shareholders," Mr. Jackson said.

Executives can receive golden parachutes not only when they sell their companies, but also when they retire, and even when they are fired.

In January, Henrique de Castro was ousted as chief operating officer of Yahoo after clashing with the chief executive, Marissa Mayer. Despite his subpar performance during his 15-month tenure, Mr. de Castro walked away with at least $88 million and as much as $109 million.

Golden parachutes first appeared in the 1970s and proliferated in the 1980s. And while recent regulation has given shareholders a voice through say-on-pay votes, it has not damped executives' enthusiasm for big paydays.

Time Warner Cable shareholders can express their displeasure with the package when they vote on the deal, which they are almost certain to approve. But even if they voice their disapproval of the golden parachutes, it will not change a thing. Such votes are nonbinding.

Time Warner Cable and Comcast both declined to comment on the matter.

Should the deal close, Mr. Marcus will receive $56.5 million in stock, $20.5 million in cash and a $2.5 million bonus if Time Warner Cable meets its performance targets by the time of the deal's completion.

Mr. Marcus could argue that he did not go looking for a deal. Charter Communications began pursuing Time Warner Cable last year, when Mr. Marcus was the chief operating officer of the company. He earned $10.1 million in that job in 2012.

But in a rapid series of developments in January and February, Mr. Marcus negotiated to sell Time Warner Cable to Comcast, the largest cable operator in the country.

Mr. Marcus will not be the only Time Warner Cable executive in line for a big payday. Arthur T. Minson Jr., the chief financial officer, will receive severance pay of $27 million. Michael L. LaJoie, the chief technology officer, will receive $16.3 million. And Philip G. Meeks, the chief operating officer, will take home $11.7 million.

Left off the list of golden parachute recipients is Glenn Britt, who ran Time Warner Cable after its spinoff from Time Warner in 2009. Mr. Britt stepped down at the end of 2013, partly because of health issues, but not before he told Brian L. Roberts, the chief executive of Comcast, that combining their companies one day would be a "dream deal."

Executive compensation experts said that there were few ways to curb the practice of awarding golden parachutes, but that shareholders should voice their opinions nonetheless.

"If Time Warner Cable shareholders are sufficiently outraged, they can vote against it, and if executives are sufficiently embarrassed, it might discourage other C.E.O.s from doing the same thing," said Mr. Jackson. "But I'm not optimistic."

 

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DealBook: In Hong Kong, Betting Big on Bitcoin

HONG KONG — By day, David Shin is an investment banker at a major financial firm. By night and in pretty much every other free minute, he is an entrepreneur looking to break into Hong Kong's growing Bitcoin scene.

Even as concerns swirl about the long-term viability of the virtual currency, Mr. Shin is raising money, courting clients and hiring staff to build a sort of stock exchange for Bitcoin-oriented companies. Mr. Shin, 38, plans to start his venture, CryptoMex, at the end of April.

"I believe Bitcoin will bring about a brave new world of money," he said. "The Internet started out as a revolutionary protocol, became more easy to use over time, and saw an explosive growth rate. The same is happening with Bitcoin."

Mr. Shin joins a growing field of technology experts, financial players and crypto-geeks who are betting that an unfavorable regulatory environment in mainland China has put this special administrative region — with its more laissez-faire attitude — on the edge of something big.

Bitcoin, digital money backed by no government and "mined" by computers performing complex algorithms, have been largely unregulated, creating a virtual Wild West of programmers and speculators. But as Bitcoin tries to gain greater mainstream acceptance, authorities around the world have begun eyeing it more cautiously, as they might a currency. The spectacular collapse of Mt. Gox, the Tokyo-based Bitcoin exchange, has only fanned regulators' concerns.

Regulatory moves in China have been among the more aggressive to date. In December, the Chinese authorities curtailed the use of Bitcoin by banks and payment processors, which helped halve the value of the virtual currency in two weeks. While the government said the general public was free to trade Bitcoin online, the broad fear is that China may eventually impose a sweeping ban on its use offline, as it did in 2009 to Q Coin, a virtual currency issued by Tencent.

But Hong Kong has so far remained relatively passive on the regulatory front. The former British colony has retained a separate political and economic system since it returned to Chinese rule, and the Hong Kong Monetary Authority, the city's de facto central bank, says it is not directly regulating Bitcoin, at least for now.

Entrepreneurs in Hong Kong are essentially playing regulatory arbitrage. Although firm data is scarce, China is widely seen as the world's second-largest market for Bitcoin, after the United States, and the restrictions have cooled its nascent Bitcoin scene. By virtue of proximity, businesses in Hong Kong are hoping to capture some of the demand.

"Like water, Bitcoin may take the path of least resistance and find its way into Hong Kong," said Michael Chau, a business professor at the University of Hong Kong. "Because of the city's proximity to China — and because it has become part of the country since 1997 — Hong Kong has the potential to absorb part of China's Bitcoin market."

The Chinese customer base of Laser Yuan, the founder of the Hong Kong-based exchange BitCashOut, doubled after the December notice. Three weeks ago, ANX, Hong Kong's largest Bitcoin exchange, opened what it said was the world's first brick-and-mortar store for the virtual currency, where customers can buy Bitcoin over the counter. It also set up a Bitcoin vending machine last week. Robocoin, a maker of Bitcoin automated teller machines, will set up its first A.T.M. in Hong Kong this spring, and plans 100 more around the world, none in China, said the company's chief executive, Jordan Kelley.

"We have hundreds and hundreds of Chinese businessmen and entrepreneurs contact us with the purpose of becoming Robocoin operators," Mr. Kelley said, adding that if China gave him the green light, the company would "have 200 A.T.M.s in China before the end of the year, if not more."

Mr. Shin said he first saw the promise of Bitcoin last year, when the coins were worth $25 apiece, compared with about $620 now. After raising $2.5 million, he and his business partners built IceDrill, an operation in Montreal where racks of speedy computers race to generate Bitcoin.

But he is now selling part of his stake in the Canadian mine and focusing on his start-up in Hong Kong, which he said could be "the capital of Bitcoin in Asia." Mr. Shin recently hired Jake Smith, a well-connected Bitcoin enthusiast who worked for Li Xiaolai — a Chinese investor who reportedly holds 100,000 coins — to get Chinese to buy into the companies listed on his platform.

"When the government comes out and puts constraints on Bitcoin in China, investors naturally look at Hong Kong — not Singapore, not Korea — for substitution," Mr. Shin said.

Hong Kong operates in a type of regulatory limbo, so uncertainty reigns as much as opportunity. If China clamps down further, Hong Kong may be forced to rethink its stance.

John Greenwood, chief economist at Invesco and architect of Hong Kong's exchange-rate system, said that whether the Chinese authorities would toughen measures depended on whether Bitcoin became so prevalent that it undermined China's capital controls.

"China's mainland residents can buy things with Bitcoin from Europe or North America or anywhere else in the world, or make transfers," Mr. Greenwood said. "It's a hole in the dike, a leakage from China's system of foreign-exchange control."

Entrepreneurs like Mr. Shin also face a legacy of past ventures that have proved problematic.

Two once-prominent Bitcoin crowdfunding platforms, BTCST and Bitfunder, are now defunct. BTCST, which offered Bitcoin-denominated securities that claimed to return up to 7 percent a week, has been charged by the United States Securities and Exchange Commission with fraud and with running a Ponzi scheme.

"The operating environment is much clearer," Mr. Shin said. "The Hong Kong government has acknowledged Bitcoin as a commodity, so we have clarity on both fronts here as well."

Then there is the need for better basic infrastructure and consumer awareness, a challenge for Bitcoin around the world.

For example, few businesses let customers make payments with the currency. In Hong Kong, they largely amount to a boutique hotel, a flower shop, a tailor, a music teacher and a Beijing-style crepe restaurant.

On the eve of the Chinese New Year in January, the three co-founders of the Bitcoin exchange ANX took to the bustling streets of the Lan Kwai Fong entertainment district to hand out 50,000 red envelopes, each carrying a little more than a dollar's worth of Bitcoin.

"I use Bitcoin to buy stuff online all the time," Ben Lau, an online marketer, said as he stood on the sidewalk using his smartphone to scan the QR code — an image that works like a bar code — on the voucher he had just received.

But Mr. Lau was in the minority. Even months after Bitcoin leapt into the limelight, most passers-by had little idea about what it does, and some associated it with drugs and fauds.

When the after-work crowd diminished, the co-founders went to a nearby bar to check on rumors that it had recently started accepting Bitcoin. A few beers later, Ken Lo, managing director of ANX, waved for the bill and asked to pay in the virtual currency.

"A customer's friend thought our bar had a matching name — Bit Point — with Bitcoin, so he helped us set this up," said Gaga Lam, the bar's manager. "We haven't really tried it out yet."

Her iPad Mini displayed the website of BitPay, the Bitcoin payment processor in which Asian billionaire Li Ka-shing was an early investor. But the group ended up paying with a credit card after a few unsuccessful tries.

"We can do better than that," Mr. Lo said, referring to his company's Bitcoin payment solution. "We clear faster than the banks, our transaction fee is lower than credit card companies, and there would be no chargebacks. And Bitcoin fans will flock to your bar in droves."

12.07 | 0 komentar | Read More

DealBook: Fortress, Benchmark and Ribbit Buy Stake in Pantera Bitcoin

Several prominent investment firms are joining forces to buy stakes in one of the biggest Bitcoin operations in the world.

The publicly traded New York private equity and hedge fund firm Fortress Investment Group and two other investors are buying a stake in Pantera Bitcoin Partners, a San Francisco-based hedge fund operator that buys and sells virtual currencies.

The creation of the partnership represents a significant step in the push to move Bitcoin into the financial mainstream at a time when several well-publicized claims of theft have pointed to potential weaknesses in the digital currency economy.

Pantera Capital, the parent of Pantera Bitcoin, was founded in 2003 by Dan Morehead, a veteran of the hedge fund giant Tiger Management. For most of its existence, Pantera was a macro hedge fund. But since 2011, Mr. Morehead has grown increasingly fascinated with Bitcoin, he said in an interview on Tuesday. In recent months, he said, the firm's staff of 16 has shifted its attention to work full time on investments in the virtual currency world.

"We're very excited about the promise of Bitcoin and how it can transform the way we move money," Mr. Morehead said. "The promise and possibilities here are very broad."

When Pantera made its first regulatory filing in December, its Bitcoin fund was worth $147 million. That is significantly larger than the Bitcoin Investment Trust, a $55 million fund run by the New York firm SecondMarket that holds virtual currencies on behalf of investors.

The big venture capital firms Benchmark Capital and Ribbit Capital are taking stakes in Pantera Bitcoin Partners, along with Fortress. All are committing to buy and sell Bitcoin and other virtual currencies through Pantera.

Michael E. Novogratz, an executive at Fortress, had previously talked about his interest in Bitcoin, but until now it has been unclear how the firm was approaching digital money as an investment. Moving forward, Fortress said that it would make all of its Bitcoin purchases through Pantera."This partnership brings together leading companies with a range of relevant expertise, well positioned to lead and capitalize on a potentially transformative evolution," Mr. Novogratz said.

In the years after the Bitcoin program was released by an anonymous founder known as Satoshi Nakamoto in 2009, most of the dominant players were small start-ups with few links to the traditional financial world. Part of the allure of Bitcoin was that it allowed users to move and store money outside the banking system.

Recently, however, a number of pioneers, like the Japanese exchange Mt. Gox, have run into trouble, shaking confidence in the entire Bitcoin network.

At the same time, investors and financial firms with more established credentials have been expressing their growing interest in Bitcoin. Last week, Goldman Sachs became the latest Wall Street firm to issue a research report on Bitcoin's potential to shake up different parts of the financial system.

Much of the research has been focused on Bitcoin not just as a form of digital money, but also as a new payment system, buttressed by the computers linked into the Bitcoin network. The system is run according to a prewritten set of rules, which determines how the coins are created and moved between digital wallets.

Mr. Morehead's management firm is giving up some of its ownership in Pantera Bitcoin Partners, which manages the Bitcoin fund. But all of the companies involved in Pantera Bitcoin Partners will continue to make their own investments in virtual currency start-up companies.

Earlier this week, all four firms teamed up to make a $20 million investment in Xapo, a start-up that offers to secure the information needed to unlock Bitcoins in guarded vaults so that they cannot be reached by hackers.

A version of this article appears in print on 03/19/2014, on page B3 of the NewYork edition with the headline: Investors Buy Stakes in Bitcoin Firm .

12.08 | 0 komentar | Read More

ArtsBeat: Technical Problem Silences Ending of Met’s Live Simulcast of ‘Werther’

It is one of the most wrenching endings in opera: the lingering death of the title character in Massenet's "Werther." But it was an accidentally, and frustratingly, silent ending for opera fans who went to movie theaters across the country on Saturday afternoon to see the celebrated tenor Jonas Kaufmann perform the title role in the Metropolitan Opera's live high-definition simulcast.

A technical problem kept the majority of theaters silent for the last seven minutes, the Met said.

Some angry operagoers took to Twitter to vent their frustrations. "Werther is dying a slow silent death!" one user said. Another lamented, "Missed quite possibly the most beautiful part of Werther." A third described the scene as "surreal," and added, "People in movie theater try to listen along with radio simulcast on phones."

The Met said the trouble stemmed from its satellite.

"The Metropolitan Opera regrets that due to a technical problem with the satellite carrying the audio feed, the sound in today's transmission of 'Werther' was interrupted for the last seven minutes of the performance, which affected the majority of U.S. theaters," the Met said in a statement.

The Met said the ending would be posted on its website on Sunday evening, and the audio would be fixed for the encore presentation on Wednesday.

12.07 | 0 komentar | Read More

Well: To Keep Teenagers Alert, Schools Let Them Sleep In

COLUMBIA, Mo. – Jilly Dos Santos really did try to get to school on time. She set three successive alarms on her phone. Skipped breakfast. Hastily applied makeup while her fuming father drove. But last year she rarely made it into the frantic scrum at the doors of Rock Bridge High School here by the first bell, at 7:50 a.m.

Then she heard that the school board was about to make the day start even earlier, at 7:20 a.m.

"I thought, if that happens, I will die," recalled Jilly, 17. "I will drop out of school!"

That was when the sleep-deprived teenager turned into a sleep activist. She was determined to convince the board of a truth she knew in the core of her tired, lanky body: Teenagers are developmentally driven to be late to bed, late to rise. Could the board realign the first bell with that biological reality?

The sputtering, nearly 20-year movement to start high schools later has recently gained momentum in communities like this one, as hundreds of schools in dozens of districts across the country have bowed to the accumulating research on the adolescent body clock.

In just the last two years, high schools in Long Beach, Calif.; Stillwater, Okla.; Decatur, Ga.;, and Glens Falls, N.Y., have pushed back their first bells, joining early adopters in Connecticut, North Carolina, Kentucky and Minnesota. The Seattle school board will vote this month on whether to pursue the issue. The superintendent of Montgomery County, Md., supports the shift, and the school board for Fairfax County, Va., is working with consultants to develop options for starts after 8 a.m.

New evidence suggests that later high school starts have widespread benefits. Researchers at the University of Minnesota, funded by the Centers for Disease Control and Prevention, studied eight high schools in three states before and after they moved to later start times in recent years. In results released Wednesday they found that the later a school's start time, the better off the students were on many measures, including mental health, car crash rates, attendance and, in some schools, grades and standardized test scores.

Dr. Elizabeth Miller, chief of adolescent medicine at Children's Hospital of Pittsburgh, who was not involved in the research, noted that the study was not a randomized controlled trial, which would have compared schools that had changed times with similar schools that had not. But she said its methods were pragmatic and its findings promising.

"Even schools with limited resources can make this one policy change with what appears to be benefits for their students," Dr. Miller said.

Researchers have found that during adolescence, as hormones surge and the brain develops, teenagers who regularly sleep eight to nine hours a night learn better and are less likely to be tardy, get in fights or sustain athletic injuries. Sleeping well can also help moderate their tendency toward impulsive or risky decision-making.

During puberty, teenagers have a later release of the "sleep" hormone melatonin, which means they tend not to feel drowsy until around 11 p.m. That inclination can be further delayed by the stimulating blue light from electronic devices, which tricks the brain into sensing wakeful daylight, slowing the release of melatonin and the onset of sleep. The Minnesota study noted that 88 percent of the students kept a cellphone in their bedroom.

But many parents, and some students, object to shifting the start of the day later. They say doing so makes sports practices end late, jeopardizes student jobs, bites into time for homework and extracurricular activities, and upsets the morning routine for working parents and younger children.

At heart, though, experts say, the resistance is driven by skepticism about the primacy of sleep.

"It's still a badge of honor to get five hours of sleep," said Dr. Judith Owens, a sleep expert at the Children's National Medical Center in Washington. "It supposedly means you're working harder, and that's a good thing. So there has to be a cultural shift around sleep."

Last January, Jilly decided she would try to make that change happen in the Columbia school district, which sprawls across 300 square miles of flatland, with 18,000 students and 458 bus routes. But before she could make the case for a later bell, she had to show why an earlier one just would not do.

She got the idea in her team-taught Advanced Placement world history class, which explores the role of leadership. Students were urged to find a contemporary topic that ignited their passion. One morning, the teachers mentioned that a school board committee had recommended an earlier start time to solve logistical problems in scheduling bus routes. The issue would be discussed at a school board hearing in five days. If you do not like it, the teachers said, do something.

Jilly did the ugly math: A first bell at 7:20 a.m. meant she would have to wake up at 6 a.m.

She had found her passion.

She seemed an unlikely choice to halt what was almost a done deal. She was just a sophomore, and did not particularly relish conflict. But Jilly, the youngest of seven children, had learned to be independent early on: Her mother died when she was 9.

And she is energetic and forthright. That year, she had interned on a voter turnout drive for Missouri Democrats, volunteered in a French-immersion prekindergarten class, written for the student newspaper, worked at a fast-food pizza restaurant and maintained an A average in French, Spanish and Latin.

"It's about time management," she explained one recent afternoon, curled up in an armchair at home.

That Wednesday, she pulled an all-nighter. She created a Facebook page and set up a Twitter account, alerting hundreds of students about the school board meeting: "Be there to have a say in your school district's decisions on school start times!"

She then got in touch with Start School Later, a nonprofit group that provided her with scientific ammunition. She recruited friends and divided up sleep-research topics. With a blast of emails, she tried to enlist the help of every high school teacher in the district. She started an online petition.

The students she organized made hundreds of posters and fliers, and posted advice on Twitter: "If you are going to be attending the board meeting tomorrow we recommend that you dress up!"

The testy school board meeting that Monday was packed. Jilly, wearing a demure, ruffled white blouse and skirt, addressed the board, blinking owl-like. The dignitaries' faces were a blur to her because while nervously rubbing her eyes, she had removed her contact lenses. But she spoke coolly about the adolescent sleep cycle: "You know, kids don't want to get up," she said. "I know I don't. Biologically, we've looked into that."

The board heatedly debated the issue and decided against the earlier start time.

The next day Jilly turned to campaigning for a later start time, joining a movement that has been gaining support. A 2011 report by the Brookings Institution recommended later start times for high schools, and last summer Arne Duncan, the secretary of education, posted his endorsement of the idea on Twitter.

The University of Minnesota study tracked 9,000 high school students in five districts in Colorado, Wyoming and Minnesota before and after schools shifted start times. In those that originally started at 7:30 a.m., only a third of students said they were able to get eight or more hours of sleep. Students who got less than that reported significantly more symptoms of depression, and greater use of caffeine, alcohol and illegal drugs than better-rested peers.

"It's biological — the mental health outcomes were identical from inner-city kids and affluent kids," said Kyla Wahlstrom, a professor of educational research at the University of Minnesota and the lead author of the study.

In schools that now start at 8:35 a.m., nearly 60 percent of students reported getting eight hours of sleep nightly.

In 2012, the high school in Jackson, Wyo., moved the first bell to 8:55 a.m. from 7:35 a.m. During that academic year, car crashes by drivers 16 to 18 years old dropped to seven from 23 the year before. Academic results improved, though not across the board.

After high schools in the South Washington County district, outside Minneapolis, switched to an 8:35 a.m. start, grades in some first- and third-period classes rose between half a point and a full grade point. And the study found that composite scores on national tests such as the ACT rose significantly in two of the five districts.

Many researchers say that quality sleep directly affects learning because people store new facts during deep-sleep cycles. During the rapid-eye-movement phases, the brain is wildly active, sorting and categorizing the day's data. The more sleep a teenager gets, the better the information is absorbed.

"Without enough sleep," said Jessica Payne, a sleep researcher and assistant professor of psychology at the University of Notre Dame, "teenagers are losing the ability not only to solidify information but to transform and restructure it, extracting inferences and insights into problems."

Last February, the school board in Columbia met to consider later start times. "It is really reassuring to know that students can have a say in the matter," Jilly told them. "So thank you, guys, for that."

The moment of decision arrived at the board's next meeting in March. Jilly sat in the front row, posting on Twitter, and addressed the board one last time. "I know it's not the most conventional thing and it's going to get some pushback," she said, referring to the later time. "But it is the right decision."

The board voted, 6 to 1, to push back the high school start time to 9 a.m. "Jilly kicked it over the edge for us," said Chris Belcher, the superintendent.

It is now seven months into the new normal. At Rock Bridge High School, the later end to the day, at 4:05 p.m., is problematic for some, including athletes who often miss the last period to make their away games.

"After doing homework, it gets to be 11:30 p.m. pretty quickly," said Brayden Parker, a senior varsity football player. "I would prefer to get home by dark and have more time to chill out."

The high schools in the district have tried to adjust, for example by adding Wi-Fi access to buses so athletes can do homework on the road. Some classes meet only one or two days a week, and are supplemented with online instruction. More sports practices and clubs convene before school.

Some parents and first-period teachers are seeing a payoff in students who are more rested and alert.

At 7:45 a.m. on a recent school day, Rock Bridge High, a long, one-story building with skylights and wide hallways, was sun-drenched and almost silent.

Then, like an orchestra tuning up, students gradually started arriving, some for debate club and choir, others to meet in the cafeteria for breakfast and gossip. Laughter crackled across the lobby, as buses dropped off more students, and others drifted in from the parking lots. The growing crowds could almost be described as civilized.

At 8:53 a.m., Jilly burst through the north entrance door, long hair uncombed and flyaway, wearing no makeup, lugging her backpack.

"Even when I am late to school now," she said, dashing down a corridor to make that 8:55 bell, "it's only by three or four minutes."

12.07 | 0 komentar | Read More

DealBook: F.T.C. Inquiry Into Herbalife Prompts Big Share Selloff

The Federal Trade Commission said on Wednesday that it had opened an official inquiry into Herbalife, the nutritional supplement company that has been the focus of a 15-month crusade by the hedge fund billionaire William A. Ackman.

The commission's move, after more than a year of lobbying by Mr. Ackman, politicians and civil rights groups, could be a boon for Mr. Ackman's $1 billion bet against the company after a series of setbacks, in particular a strong run-up in Herbalife's share price.

The news of the investigation on Wednesday prompted a sell-off in the stock, which dropped more than 15 percent before recovering somewhat. It closed down 7.4 percent, at $60.57. The success of Mr. Ackman's wager depends on a collapse of Herbalife's stock price, and he gains ground when other investors sell their shares because they fear the consequences of a regulatory crackdown on the company.

Mr. Ackman began his public assault with a presentation in December 2012, contending that Herbalife is a pyramid scheme, which the company has repeatedly denied. He has lobbied members of Congress to press state and federal regulators, specifically the F.T.C., to investigate Herbalife.

While investigators at the Securities and Exchange Commission moved quickly, opening an inquiry into Herbalife just a month after Mr. Ackman's public presentation, the F.T.C. remained quiet until Wednesday. The commission confirmed the investigation only after Herbalife said it had received a letter from the agency.

The company issued a statement on Wednesday after The Financial Times called to ask about the letter. Herbalife said it welcomed the inquiry and would cooperate fully with the investigation. "We are confident that Herbalife is in compliance with all applicable laws and regulations," it said.

A spokesman for Herbalife declined to disclose the specific nature of the investigation but said the company's lawyers were notified on Tuesday afternoon that they would be receiving a letter from the F.T.C. on Wednesday.

In a memo sent around to Herbalife employees Wednesday afternoon, the company's chief executive, Michael O. Johnson, said the inquiry was a "positive development."

The commission acted after receiving letters from members of Congress urging it to investigate the company, as well as scores of civil rights and Latino advocacy groups, some of which have received financial donations from Mr. Ackman's team.

Mr. Ackman declined to comment on Wednesday.

Both Mr. Ackman and the advocacy groups have called on the F.T.C. to investigate Herbalife for what they say is a pyramid scheme that preys on lower-income Latinos and African Americans.

The F.T.C. has experience in spotting pyramid schemes that disguise themselves as legitimate multilevel marketers, the industry term for companies that sell through networks of sales representatives. These schemes operate by constantly bringing in new sales representatives who are required to buy products that are difficult to sell outside the network.

The commission has moved to close down several such schemes in recent years, asserting that they misled new recruits and existed to enrich a small number of senior sales representatives.

One key to deciding whether a company is operating a pyramid scheme is to assess what proportion of overall sales are made to people outside the network. If a company makes most of its sales to consumers out of its network — as Tupperware has said is the case with its business — it is a sign that real demand exists for the product.

In such companies, sales representatives stand a reasonable chance of making money. But if only a small amount of sales are made to people outside the network, regulators may see that as a strong indication that sales representatives are being coaxed into buying products that are almost impossible to resell. Such a company is a pyramid because it makes money only by recruiting unwitting sales representatives with empty promises.

Ana Arias, a resident of Scottsdale, Ariz., who said she was part of Herbalife's network from 2009 until 2012, asserted that new members did not stay in the network for long. "It was a revolving door," she said. "I recruited hundreds of people into the business, and they all eventually separated from the business."

It is hard from the outside to determine who actually buys Herbalife's products. Last year, Herbalife, citing an Internet survey, said more than 90 percent of its products were sold to "nondistributors." But the survey did not use Herbalife's actual sales data to reach that conclusion.

At the same time, Herbalife has said that many members of its network also consume its products. These people may join the network, the company says, to obtain a discount on the small amounts of Herbalife's products — shakes and vitamins — that they buy for personal use. In other words, if a large amount of sales are within Herbalife's network, that does not necessarily indicate it is a pyramid scheme.

Mr. Ackman's battle against the company has gained momentum in recent weeks. The most recent politician to join the fray was Senator Edward J. Markey, Democrat of Massachusetts, who sent a letter to the F.T.C. on Jan. 23 asking the agency to look into Herbalife's business practices. News of his letter sent Herbalife shares tumbling by more than 10 percent.

In a reply to Mr. Markey's request two weeks ago, Edith Ramirez, the chairwoman of the F.T.C., wrote that she could not disclose whether the commission had taken any measures to look into the company. "I can assure you, however, that the information you provided and the concerns you express are being carefully considered," she added.

Just one month ago, there was little indication that the F.T.C. would open an investigation. In early February, a group of about 30 people affiliated with advocacy and church groups flew to Washington to meet with Ms. Ramirez. In a sign of how Wall Street's interests have spilled over into the political realm, one of those groups paid for flights using money that Mr. Ackman had donated to help identify people who said they were victims of Herbalife.

The commission has held its cards so close to the vest that one participant at the February meeting said he had been unsure what to make of Ms. Ramirez's reaction to the group's complaints.

"From our meeting she didn't, in any way shape or form, give me any indication that she found any sympathy to what we said," said Horace Small, the executive director of the Union of Minority Neighborhoods, a civil rights group based in Boston.

12.07 | 0 komentar | Read More

Bits Blog: Snowden Urges Tech Industry to Protect Customers

Michael Buckner/Getty Images for SXSW

AUSTIN, Tex. — Edward J. Snowden wants the technology industry to get serious about protecting the privacy of its users and customers.

"When we think about what is happening at the N.S.A. for the last decade, the result has been an adversarial Internet," Mr. Snowden told a crowd of developers and entrepreneurs at the South by Southwest conference here on Monday, speaking by videoconference.

"They are setting fire to the future of the Internet," he added. "You guys are all the firefighters. We need you to help us fix this."

Mr. Snowden, the former National Security Agency contractor who leaked classified documents that revealed a vast network of government surveillance, told the audience that they "can enforce our rights for technical standards."

Mr. Snowden said he chose the conference, known as SXSW, to speak directly to people with the skills to make mass surveillance significantly more expensive for government agencies — if not impossible. For the past decade, Mr. Snowden said, the N.S.A. had been given free rein to make the Internet less secure by engaging in large-scale sweeps of data.

Mr. Snowden fled the United States last summer and is living at an undisclosed location in Russia, where he has been granted temporary asylum. He faces charges in the United States of violating the Espionage Act.

Mr. Snowden appeared remotely at the conference with Christopher Soghoian, the principal technologist of the American Civil Liberties Union, and Ben Wizner, director of the A.C.L.U.'s Speech, Privacy and Technology Project and Mr. Snowden's legal adviser, both of whom were on site in Austin. The event was a rare live interview for Mr. Snowden, conducted by Mr. Wizner.

Using technology to mask his whereabouts, Mr. Snowden appeared through a Google Plus videoconference — the irony of which was not lost on Mr. Snowden or others, who joked about the fact that Google was involved in many of Mr. Snowden's revelations.

Appearing before a green screen that had been programmed to display the American Constitution, Mr. Snowden addressed a rapt audience that often broke into applause and cheers. Hundreds packed into an exhibition hall to hear him speak and those who could not find seats stood along the wall or sat on the floor.

At various points during the event, the Internet access in the convention center buckled under the burden of all the people trying to use their devices to tweet or go online. And at times, Mr. Snowden's connection dropped, in part because of the anonymity software he used to mask his location.

Mr. Snowden said he hoped to raise a call to arms to developers, cryptographers and privacy activists to build better tools to protect the privacy of technology users. The goal, he said, was that encryption would ultimately be considered as a necessary, basic protection, and not something easily dismissed as an "arcane black art."

Ultimately, Mr. Snowden said, that will "allow us to reclaim the open and trusted Internet."

He was referring to the many digital encryption protections that are cheap and widely available, but exceedingly difficult for people to use properly.

Mr. Snowden noted that encryption services like Pretty Good Privacy, or PGP software, and anonymity services, like Tor, are available, but are not as easy to use as Google's Gmail service or Chrome browser.

He also praised services like Open WhisperSystems, a suite of applications that aims to make secure communications tools usable, and commonly use.

Ultimately, the tech industry can help fix the problem of security, Mr. Soghoian said. "Most regular people are not going to download some obscure security app," he said. "They're going to use the tools they already have," like Google, Facebook and Skype.

Mr. Snowden repeatedly emphasized that he didn't want to block government agencies from doing their job to protect citizens, but was instead concerned about unwarranted surveillance. He said that if the American government and its technology industry are not held accountable for unwarranted oversight, foreign companies and agencies might feel free to adopt similar mass surveillance tactics and policies.

When companies collect data, he said, they should only "hold it for as long as necessary."

Mr. Snowden's comments Monday echoed his testimony to members of the European Parliament, released Friday, in which he said targeted surveillance was acceptable.

At one point here in Austin, Mr. Snowden answered a question sent via Twitter about whether any data was ever truly safe, from a malicious hacker or an agency like the N.S.A.

"Let's put it this way," he said with a bit of a laugh. "The United States government has assembled a massive investigation team into me personally, into my work with journalists and they still have no idea you know what documents were provided to the journalists, what they have, what they don't have, because encryption works."

Conference attendees applauded and cheered as Mr. Snowden spoke, but the event also drew criticism. Some questioned the format; half the time was devoted to Mr. Soghoian's comments.

Leading up to the event, Representative Mike Pompeo, Republican of Kansas, wrote a letter to SXSW organizers calling for them to cancel the event altogether.

SXSW's conference organizers have made privacy and surveillance a cornerstone of the technology portion of the event. Over the weekend, Julian Assange, founder of WikiLeaks, also gave a talk by videoconference.

Mr. Snowden, who was dressed sharply in a white dress shirt and gray blazer for his talk, said he had no regrets about his actions, even though he now faces prosecution and is thought by many to be a traitor, or worse.

"I took an oath to support and defend the Constitution and it was violated on a massive scale," he said.

Jenna Wortham reported from Austin, Tex., and Nicole Perlroth from San Francisco.

A version of this article appears in print on 03/11/2014, on page B1 of the NewYork edition with the headline: Snowden Tries to Rally Tech Conference to Buttress Privacy Shields.

12.07 | 0 komentar | Read More

Weekend Kitchen

Robert Stolarik for The New York Times

At Alder in the East Village, Kevin Denton, the beverage director, makes three cocktails in two sizes, regular and "short."

Mini-cocktails, known by some as shorts, are offered at a few bars in the East Village.

12.07 | 0 komentar | Read More

 </span> The Men of Atalissa

Editors' Choice - Times Documentaries

By Kassie Bracken and John Woo March 8th, 2014

For decades, a group of men with intellectual disabilities seemed happy living in a small Iowa town. Then their neighbors found out the truth. This film is being shown in collaboration with POV.org.

12.07 | 0 komentar | Read More

DealBook: Former Leaders of Once-Mighty Law Firm Indicted

Updated, 9:07 p.m. | Several former leaders of the once-high-flying law firm Dewey & LeBoeuf apparently violated a cardinal rule that lawyers always tell their clients: Don't put anything incriminating into an email.

Yet four men, who were charged by New York prosecutors on Thursday with orchestrating a nearly four-year scheme to manipulate the firm's books to keep it afloat during the financial crisis, talked openly in emails about "fake income," "accounting tricks" and their ability to fool the firm's "clueless auditor," the prosecutors said.

The messages were included in a 106-count indictment against Steven Davis, Dewey's former chairman; Stephen DiCarmine, the firm's former executive director; Joel Sanders, the former chief financial officer; and Zachary Warren, a former client relations manager. They were charged with larceny and securities fraud. One of the men even used the phrase "cooking the books" to describe what they were doing to mislead the firm's lenders and creditors in setting the stage for a $150 million debt offering that was supposed to solve the firm's financial woes, according to the messages.

It is the kind of rogue language that one might expect to find in emails unearthed during a corporate fraud case from the Enron era, but not at a law firm that carried the name of Thomas Dewey, the former governor of New York, who began his legal career by prosecuting organized crime. The indictment is an unusual coda to the collapse of a firm that was created by the 2007 merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, and that filed for bankruptcy in May 2012.

"Those at the top of the firm directed employees to hide the firm's true financial condition from creditors, investors, auditors and even partners of the firm," the Manhattan district attorney, Cyrus R. Vance Jr., said at a news conference announcing the indictment.

The case is also surprising in that it stems partly from a revolt within the firm itself. Lawyers at Dewey ousted Mr. Davis, an architect of the merger, as chairman just as the firm was preparing to file for bankruptcy. Soon afterward, several of them went to Mr. Vance, urging him to investigate Mr. Davis and his administrative team.

Through their lawyers, all of the men denied the charges.

The indictment paints a portrait of a law firm being run like a criminal enterprise. Mr. Vance said his office had already secured guilty pleas from seven other people who once worked for Dewey. A person briefed on the investigation said several were cooperating with the two-year-old investigation.

"I can't say whether this is the Enron" of the legal world, Mr. Vance said. "Clearly this is the largest law firm bankruptcy that we know of in history."

At its peak, the combined firm had 26 offices around the globe and employed more than 1,300 people. The $550 million in claims against the firm's estate made it the largest bankruptcy filing by a law firm on record.

The bankruptcy revealed that while Dewey was a brand-name operation, it failed to generate sufficient revenue to pay the big contracts of its star lawyers and meet its expensive overhead. The firm struggled to keep up with loan payments during the worst of the financial crisis.

But the indictment and a parallel civil complaint filed by the Securities and Exchange Commission surprised even some who had worked at Dewey.

"If the allegations are true, then once again we see a cover-up giving rise to a crime, when the same people had the option of speaking up and being heroes for helping to solve a sympathetic debt problem at the height of the Great Recession," said Martin Bienenstock, a former Dewey lawyer and now chairman of the bankruptcy and restructuring practice at Proskauer Rose.

Roy D. Simon, a professor at the Hofstra University School of Law, who specializes in legal ethics, said it was ironic that far too many lawyers at Dewey were "uncurious about the management of their firm," until it was too late.

Prosecutors contend that the accounting games at Dewey began in November 2008, not long after the merger was completed, and continued until March 7, 2012, a little before Dewey filed for bankruptcy two months later. The firm found it could not meet provisions in bank loans that required it to meet certain cash-flow projections. To make it appear as though Dewey was meeting those conditions, the top executives schemed to make a series of fraudulent accounting entries that either increased revenue, decreased expenses or appeared to rein in distribution payments to partners, prosecutors said.

The authorities said the accounting scheme was laid out in a document called the "Master Plan."

Mr. Davis and his team had hoped that the firm's revenue would eventually increase as the economy recovered. But by the end of 2009, Dewey owed its bank lenders about $206 million, needed to make payments totaling $240 million to its partners, yet had just $119 million in cash.

The S.E.C. case centers on a 2010 private debt offering in which Dewey raised $150 million from 13 insurers and an additional $100 million from a line of credit placed with several large banks. The firm used the offering to refinance its existing credit lines and buy itself more time.

But the S.E.C. and prosecutors contend the offering document for the debt deal misrepresented the firm's financial situation.

The S.E.C. complaint charged Mr. Davis, Mr. DiCarmine and Mr. Sanders with making material misrepresentations. The commission charged two other former top executives — Frank Canellas, the director of finance, and Thomas Mullikin, the controller. Mr. Warren was not named as a defendant in the S.E.C. suit.

If the case goes to trial, defense lawyers are expected to attack the prosecution's reliance on emails. Legal experts said that email evidence was strongest when coupled with testimony from a cooperating witness who can bolster what is in writing.

That said, the emails in the indictment and S.E.C. complaint appear powerful on their face.

In an exchange in December 2008 among Mr. Davis, Mr. Sanders and Mr. DiCarmine, the men discuss the need to come up with $50 million to meet a loan provision. Mr. Davis responds "ugh" in one message. The answer to problems, the indictment suggests, was to devise the "Master Plan" for fudging the firm's accounting entries.

In another exchange in June 2009, Mr. Sanders and Mr. Canellas joke about the law firm's outside auditor, who was fired by his company for reasons unrelated to his auditing assignments. Mr. Sanders remarks to Mr. Canellas, "Can you find another clueless auditor for next year?" Mr. Canellas responded: "That's the plan. Worked perfect this year."

Even agents with the Federal Bureau of Investigation, which worked with Mr. Vance's office, were surprised by the brazenness with which Mr. Davis and his team discussed their plan in emails, a person briefed on the investigation said.

Elkan Abramowitz, the lawyer for Mr. Davis, 60, said that his client acted in "good faith in an effort to make the firm a success" and that the charges were "simply wrong."

Edward Little, the lawyer for Mr. Sanders, 55, said that his client broke no laws and that "despite what the district attorney's office apparently believes, the public does not need a scapegoat every time a financial disaster is reported in the media."

Austin Campriello, the lawyer for Mr. DiCarmine, 57, said that his client "did not commit any crimes" and that the district attorney's office "spins some inartful emails into crimes."

Of the indictments, Mr. Warren's was most surprising, partly because he is just 29 and was a rather low-level employee. Steven Hyman, the lawyer for Mr. Warren, said that Dewey was his client's first job after college and that the charges were a "travesty" because "he did nothing wrong."

William Alden and Floyd Norris contributed reporting

New York v. Davis, et al

S.E.C. v. Davis, et al

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DealBook: Bank of England Suspends Worker as Currency Inquiry Expands

Updated, 8:00 p.m. | The Bank of England said on Wednesday that it had suspended an employee as it escalated a review into whether bank officials had known about or condoned potential manipulation of the currency markets.

The British central bank also released minutes of meetings between officials and industry representatives that indicated that there were concerns about possible manipulation for rates like the 4 p.m. fix for the pound to the United States dollar as early as July 2006.

As regulators in Britain, the United States and other countries investigate whether traders at the world's largest banks colluded to manipulate foreign exchange rates, questions are being raised about the Bank of England's role as a watchdog. Two years ago, the Bank of England and other regulators were criticized by British lawmakers for failing to recognize the manipulation of the London interbank offer rate, or Libor, and taking steps to stop it.

"Alarm bells should be ringing when a central bank suspends staff in connection with market rigging," said Simon Morris, a partner at the law firm CMS Cameron McKenna in London. "This is serious because the whole basis of regulation is based on trust and integrity."

On Wednesday, the bank said that its oversight committee had begun an investigation to determine whether bank officials were involved in or knew about attempted or actual manipulation of the currency markets or any other improper behavior in the foreign exchange markets.

The law firm Travers Smith has been appointed legal counsel to the committee and will prepare a report on the investigation. The report "will be published in due course," the central bank said.

"The Bank of England does not condone any form of market manipulation in any context whatsoever," the bank said in a statement. "The bank has today reiterated its guidance to staff regarding management of records and escalation of important information."

The central bank said an extensive internal review of documents, emails and other records that began in October had found no evidence that Bank of England employees colluded to manipulate the currency market or share confidential client information.

"The bank requires its staff to follow rigorous internal control processes and has today suspended a member of staff, pending investigation by the bank into compliance with those processes," the bank said.

The employee was not identified, and the Bank of England declined to provide more details about the employee's role.

The central bank said it had examined about 15,000 emails, 21,000 chat room records and more than 40 hours of recorded telephone calls as part of its internal review.

"No decision has been taken on disciplinary action against any member of bank staff," it said.

The Bank of England has faced questions in recent months about communications between its staff members and traders who were part of an industry subcommittee that discussed issues affecting the currency markets.

In the minutes of a July 2006 subcommittee meeting that were released on Wednesday, "It was noted that there was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix."

The subcommittee, which was made up of bank officials, industry leaders and trade group members, met three or four times a year to discuss developments in the markets.

Several traders who served on the subcommittee are among more than a dozen currency traders who have been placed on leave or fired as a result of internal investigations at several large participants in the foreign exchange markets, including Citigroup and UBS.

The last time the subcommittee met was in February 2013.

The $5 trillion-a-day currency markets are lightly regulated and have been seen as difficult to manipulate.

Many of the world's largest banks, including JPMorgan Chase, Barclays and the Royal Bank of Scotland, have acknowledged that they are facing regulatory inquiries into potential manipulation of the currency markets. Deutsche Bank, the largest player in the foreign exchange market, with a share of about 15.2 percent, and Citigroup have both fired employees as a result of their own investigations into the matter.

None of the banks and none of the traders who have been suspended or fired have been accused of wrongdoing.

Before last year, the Bank of England had no formal oversight role for the currency trading markets. It only provided input into voluntary guidelines on conduct adopted by the industry.

Instead, the companies participating in the foreign exchange markets and those companies' conduct were regulated by Britain's Financial Services Authority, which was split in two last year.

One of its successors, the Prudential Regulation Authority, falls under the Bank of England and oversees the safety and security of banks, which participate in the currency markets.

The other successor, the Financial Conduct Authority, now regulates the industry's conduct and is undertaking a separate investigation into the potential manipulation.

Martin Wheatley, the chief executive of the Financial Conduct Authority, has said the currency manipulation accusations are "every bit as bad as they have been with Libor."

Mark J. Carney, governor of the Bank of England, is expected to appear before the Treasury Select Committee next week, and British lawmakers have vowed to ask him about the currency trading investigation.

 

12.08 | 0 komentar | Read More

DealBook: A Standoff of Lawyers Veils Madoff’s Ties to JPMorgan Chase

It remains one of Wall Street's most puzzling mysteries: What exactly did JPMorgan Chase bankers know about Bernard L. Madoff's Ponzi scheme?

A newly obtained government document explains why — five years after Mr. Madoff's arrest spotlighted his ties to JPMorgan and later led the bank to reach a $2 billion settlement with federal authorities — the picture is still so clouded.

The document, obtained through a Freedom of Information Act request, reveals a behind-the-scenes dispute that tested the limits of JPMorgan's legal rights and raised alarming yet unsubstantiated accusations of perjury at the bank. More broadly, the document highlights the legal hurdles federal authorities can face when investigating a Wall Street giant.

That dispute, which positioned JPMorgan against the government and ultimately one government agency against another, traced to the point after Mr. Madoff's arrest in December 2008. Around that time, JPMorgan's lawyers interviewed dozens of bank employees who potentially crossed paths with Mr. Madoff's company.

Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers' interview notes, the government document and other records show, hoping they would open a window into the bank's actions. The issue gained urgency in 2012, according to the records, when the comptroller's office conducted its own interviews with JPMorgan employees and discovered a "pattern of forgetfulness."

Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan's lawyers.

But JPMorgan, which produced other materials and made witnesses available to the comptroller's office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege, a sacrosanct legal protection that essentially prevents an outsider from gaining access to private communications between a lawyer and a client.

Even after the comptroller's office referred the issue to the Treasury Department's inspector general, which sided with the regulator, the fight dragged on for months. Invoking a rare exception to attorney-client privilege, the inspector general argued that the lawyers' interviews were essentially "made for the purpose of getting advice for the commission of a fraud or crime."

In other words, if the accusations were true, JPMorgan employees either duped lawyers into covering up wrongdoing, or, worse, the lawyers themselves helped obstruct the investigation.

The accusation, the government document showed, led to a debate in Washington over how far to press JPMorgan when the bank was sure to fight and a judge would be free to set a harmful precedent for future cases.

Those concerns, and skepticism about the Treasury inspector general's accusations, drove the Justice Department to reject the move to revoke attorney-client privilege. In the government document — a letter to the Treasury inspector general, or O.I.G., dated Sept. 12, 2013 — the civil division ruled that "unfortunately, O.I.G. has provided no basis — and we have not independently uncovered any basis — for suggesting that" the interview notes were "made for the purpose of facilitating a crime or a fraud."

While the ruling applied to the Madoff case alone, it could have broader implications as regulators weigh the costs of future fights and the likelihood of passing muster with the Justice Department. And despite being an exceptional case — banks and their regulators typically settle disputes over attorney-client privilege without the Justice Department getting involved — the ruling illustrated a persistent tension over the privilege that continues to shape the government's pursuit of financial fraud.

Even though the Justice Department is loath to undermine the privilege between a bank and its lawyers, a move that could prompt a reprimand from Congress and the courts, it also wants to appear tough on crime after the financial crisis. In the letter to the Treasury Department's inspector general, the civil division's leader declared that "I share your commitment to using all available tools to combat financial fraud," noting that the division had sued Standard & Poor's and Bank of America over their roles in the crisis.

And federal authorities worry that Wall Street might take the privilege too far — particularly in an era when banks facing a torrent of federal scrutiny are hiring dozens of law firms to conduct internal investigations alongside the government. As those investigations proceed, banks have invoked a number of protective firewalls, including attorney-client privilege and the work product doctrine, which shields interview notes and other documents that bank lawyers drafted in anticipation of litigation.

"Why hire a lawyer to do an internal investigation? It's because you get the privileges," said Bruce A. Green, a former federal prosecutor who is now a professor at Fordham Law School, where he directs the Louis Stein Center for Law and Ethics. "Otherwise, you'd save a little money and hire a consultant or accountant."

In a statement, a spokesman for the Treasury Department's inspector general said the office was "still considering if additional steps are warranted."

The Justice Department's civil division, which last year helped reach a record $13 billion settlement over JPMorgan's sale of questionable mortgage securities, said in the Madoff letter that it stood "ready to work with you to develop an alternative that might better address the relevant regulatory concerns."

JPMorgan, which served as the primary bank for Mr. Madoff's company, declined to comment for this article.

In the past, a JPMorgan spokesman, Joe Evangelisti, has noted that the bank poured significant resources into bolstering its controls since Mr. Madoff's arrest. He also remarked that "we do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme," which was an "unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses."

The Madoff case is not the only one on Wall Street to raise questions about attorney-client privilege. Bank of America and Citigroup have had their own run-ins with authorities over whether to waive the privilege in a limited way during litigation, though those matters were resolved without the Justice Department intervening. And in an investigation into JPMorgan's potential manipulation of energy markets, the Federal Energy Regulatory Commission challenged the bank's assertion that attorney-client privilege protected certain emails.

Regulators also have pushed for access to handwritten interview notes and other findings that arose from an internal investigation conducted by a bank's lawyers. While that push raises concerns about undermining the work product doctrine — and some bank lawyers have already reported a growing reluctance to be candid in private correspondence with bank employees — regulators say they are often unsatisfied with only a summary of the lawyers' findings.

"We remind the banks that we're your supervisor, you're not our supervisor," Thomas C. Baxter Jr., general counsel of the Federal Reserve Bank of New York, said at a recent panel discussion on attorney-client privilege held by Fordham Law School and the Cardozo School of Law.

Mr. Baxter added, however, that "we're reasonable people."

There are limits on what regulators can do if a bank balks at a demand for documents. If a fight ensues, the decision to challenge the privilege rests with the Justice Department.

In organized crime and terrorism cases, legal experts say, the Justice Department often exercises the so-called crime-fraud exception to the privilege. To do so, the Justice Department must show facts at the outset "to support a good faith belief by a reasonable person" that a judge's review of the communications in question might establish that the crime-fraud exception would apply.

The JPMorgan case was not so clear cut. When the inspector general argued for the crime-fraud exception to invalidate the privilege, the Justice Department concluded that the evidence did "not suffice to justify" pursuing that claim.

In the letter outlining its decision, the Justice Department noted that memory lapses among JPMorgan employees "occurred in only a handful of the dozens of interviews conducted" by the comptroller's office. The interviews, according to the letter, were conducted three-plus years after the events in question occurred. It is unclear why it took the comptroller's office so long to interview bank employees.

The letter further says that the inspector general "has not identified any evidence affirmatively suggesting that the lapses in memory resulted from perjury," adding that the "accusation of criminal collaboration depends entirely on speculation." If the Justice Department were to pursue the subpoena, the letter said, the action would "risk developing negative precedent that could result in harm to the long-term institutional interests of the United States."

Although the decision limited the view inside JPMorgan, the comptroller's office and federal prosecutors in Manhattan still penalized the bank for its failure to sound the alarms about Mr. Madoff. The settlements, announced in January, amounted to roughly $2 billion.

Peter J. Henning contributed reporting.

A version of this article appears in print on 03/05/2014, on page B1 of the NewYork edition with the headline: A Standoff Of Lawyers Veils Madoff Ties to Bank .

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DealBook: Citi Affiliate’s Troubles Multiply as Money-Laundering Subpoenas Follow Fraud

Updated, 9:16 p.m. | A headache is growing for Citigroup as a banking affiliate involved in money transfers across the Mexican border has become ensnared in a criminal investigation.

The disclosure of the inquiry on Monday follows the bank's admission on Friday that it had been defrauded of $400 million in a scheme involving a financially shaky oil services company in Mexico.

A Citigroup affiliate based in Los Angeles received a grand jury subpoena from federal prosecutors in Massachusetts related to anti-money-laundering compliance, the bank said in a securities filing on Monday. The focus of the subpoenas is unclear. The affiliate has also received a subpoena from the Federal Deposit Insurance Corporation related to its anti-money-laundering program and the Bank Secrecy Act.

The affiliate, Banamex USA, provides banking services to individuals and small businesses in the United States and Mexico. Until recently, it was a large player in transferring money across the border between family members, industry experts say.

In public statements on Friday detailing the purported fraud at Banamex in Mexico, Citigroup's chief executive, Michael L. Corbat, did not mention the inquiries involving the Banamex affiliate in the United States.

People briefed on the matter say that the two issues — one involving fraud and the other involving money-laundering compliance — are unrelated. But together they show the perils of building a large banking business in and around a country that has wrestled with drug trafficking and corruption. Mexico accounts for some 13 percent of Citigroup's total revenue.

In recent years, federal regulators have been pressuring many United States banks to bolster their surveillance of suspicious transactions in an effort to thwart terrorists and other criminals from laundering money.

Regulators have previously said that Citigroup lacked effective governance and internal controls to oversee anti-money-laundering compliance at Banamex USA.

In 2012, Banamex USA entered into a consent order with the F.D.I.C. and California Department of Financial Institutions to improve its oversight and tracking systems. A year later, Citigroup entered into another consent order with another regulator, the Federal Reserve, and agreed to take companywide actions also intended to bolster its compliance efforts.

Citigroup's chief compliance officer at the time of last year's consent order has since stepped down from that role, but is still at the bank, according to two people briefed on the matter.

Long known for its sprawling operations, Citigroup has struggled for years to improve its controls, working to centralize its compliance and audit functions.

One of the bank's recent run-ins with regulators stemmed in part from improvements gone awry, several current and former executives with the bank said. In 2006, during an overhaul of the business units that process some of Citi's foreign transactions, an error in one of the bank's computer systems isolated the system from the anti-money-laundering operations that scrutinize the money flowing into the bank, the executives said. Once Citi discovered the problem in 2010, the bank immediately alerted regulators, but while the error was in effect, some payments were not completely vetted.

Regulators called for extensive change at Banamex USA, like more compliance training for senior executives and tellers and holding monthly meetings to review the company's progress in adhering to the 2012 consent order. The affiliate was also ordered to retroactively review a year's worth of wire transfers between $10,000 and $50,000.

The Federal Reserve noted in its consent order last year that the bank had made some progress toward improving its anti-money-laundering controls.

Separately, regulators in the United States are also looking into whether compliance and oversight problems may have contributed to the fraud at Banamex in Mexico. Bank officials suspect at least one Banamex employee may have enabled the fraud, which centered on the oil services company Oceanografía.

Banamex advanced $585 million to Oceanografía, which supplies marine services to the Mexican government oil monopoly. The bank also lent $33 million to the company directly. The fraud forced Citigroup to restate last year's earnings.

In an effort to strengthen oversight at the Mexican banking affiliate, Citigroup last month appointed Michael Helfer, the company's departing general counsel, to the Banamex board, a person briefed on the matter said.

But strengthening compliance can collide with another of Citigroup's major goals: cutting costs. Bank officials have been on a mission since the financial crisis to make the large bank more efficient and less expensive to run.

Banamex USA underwent a downsizing last year. The company had a sizable business in taking money from third-party agents in the United States and then remitting the money back to an extensive network of Banamex bank branches in Mexico, industry experts say.

But now Banamex USA will transfer money from the United States to Mexico only from its own customers, a spokeswoman said. Last year, Banamex USA also reduced the number of its branches in California, Arizona and Texas, three states with large Mexican immigrant communities, to three from 11.

Citigroup said the changes at Banamex USA are part of the bank's global restructuring of branches and businesses. But industry participants suspect that the moves may have more to do with avoiding the costs and risks of trying to meet anti-money-laundering regulations.

"It's very unfortunate," said Mario Trujillo, chief executive of DolEx Dollar Express, a large money transfer company operating between the United States and Latin America. "The majority of family remittances are sending money at low amounts. That has not been proven to be the major source of money laundering at the large banks."

12.07 | 0 komentar | Read More

DealBook: Citigroup Says Mexican Subsidiary Was Defrauded of as Much as $400 Million

Updated, 8:56 p.m. | At the helm of Citigroup for just a year and a half, Michael L. Corbat has been trying to transform into a boring bank a global giant that has been plagued in the past by blowups and bailouts.

Now a scandal at the bank's Mexican subsidiary shows that the chief executive still has work to do, as the development revives some familiar concerns about the sprawling bank's ability to manage risk.

Citigroup said on Friday that it had recently uncovered fraud in its Mexican banking unit, Banamex, forcing the bank to restate its 2013 earnings.

Citigroup said as much as $400 million was misappropriated in the fraud. In a harshly worded memo to employees, Mr. Corbat said it was unclear how many people were involved in the activity, which centered on the oil services company Oceanografía.

People briefed on the matter said that at least one Banamex employee was suspected of enabling the fraud. Citigroup said it was working with investigators in Mexico to "initiate criminal actions" that might yield "just penalties on the responsible parties" and could allow the bank to recover damages.

The Mexican government seized control of Oceanografía's assets Friday morning, a move that the attorney general, Jesús Murillo Karam, said at news conference in Mexico City was meant "to preserve jobs" and "the company's documents."

A big question is why Citigroup was doing business with Oceanografía in the first place.

The company is well known among Mexican investors as politically connected but financially shaky. It supplies marine engineering services and derives nearly all of its business from Pemex, Mexico's government-owned oil monopoly.

"This company has been toxic for a long time," said Luis Maizel, senior managing director of LM Capital Group, which invests in emerging market debt.

The United States ratings firm Fitch warned about Oceanografía's high leverage and poor cash flow generation in 2009. The next year, Fitch eventually withdrew its ratings because the company was not supplying enough information. In 2008, Standard & Poor's noted that Mexico's congress had investigated allegations of improper deals between Oceanografía and Pemex, though no wrongdoing was proved.

The latest scandal comes at an awkward time, as Mexico is getting ready to open its closed energy industry to outside private investors.

Citigroup, through Banamex, provided credit to Oceanografía in several ways. It extended $585 million of short-term credit through an accounts receivable financing program.

The program typically worked like this: Banamex would advance money to Oceanografía to provide services to Pemex. The oil giant would then pay back Banamex, verifying invoices provided by Oceanografía to confirm that the work was completed.

In theory, Banamex was relying on Pemex's rock-solid ability to pay back the bank, which made the transaction the equivalent of a government-guaranteed loan.

But Banamex also lent $33 million directly to Oceanografía in the form of loans and standby letters of credit.

"When you have a company getting contracts from the government, it looks like a very attractive credit to a bank," Mr. Maizel said. "But in Latin America, you are lending to the people running the companies, not just the companies."

Mr. Corbat's reputation rests, in part, on his ability to lead Citigroup into an era when it is free from damaging incidents. But Citigroup's far-flung operations could complicate his efforts to keep a tight lid on employee misconduct. And the Mexican market is an important one for the bank, accounting for about 13 percent of its revenue, according to a Credit Suisse analysis.

In the Mexico case, analysts and even some regulators privately praised Mr. Corbat's public response. He vowed to hold accountable the people behind the fraud.

"I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it," Mr. Corbat said in a memo to employees. "All will be held equally responsible, and we will make sure that the punishment sends a crystal-clear message about the consequences of such actions."

Federal authorities in the United States are also scrutinizing what happened in Mexico. According to one person briefed on the matter, the bank has provided briefings for federal regulators in New York and Washington, who are examining whether lax controls allowed the scheme to unfold.

The Securities and Exchange Commission and the F.B.I. in New York are also preliminarily reviewing the conduct, another person said.

Citigroup has been in Mexico since 1929, and it has been a favorite institution of the Mexican elite. When the country nationalized the banks in 1982, Citigroup was allowed to remain in Mexico even while most foreign banks had to leave. In 2001, it acquired Banamex in a $12.5 billion deal.

The situation in Mexico is an echo of past problems in Latin America that saddled Citigroup with huge losses. In the 1980s, the bank was crippled by bad loans in the region.

The recent scheme began to unravel, according to Citigroup and Mexican officials, when Pemex found irregularities in the bonds that Oceanografía was required to put up to guarantee the completion of its contracts.

In response, Mexico's federal comptroller suspended Oceanografía on Feb. 11 from entering into new government contracts for 20 months.

That move led Banamex to review its $585 million financing program to Oceanografía. During that review, the bank determined that a significant portion of the accounts receivable were fraudulent.

The bank said it appeared that invoices from Oceanografía were falsified to represent that Pemex had approved them. The Banamex employee who processed them is suspected of being involved in the fraud, people briefed on the matter said.

Citigroup is not the only major lender doing business with Oceanografía. The company has borrowed hundreds of millions of dollars from the capital markets in recent years.

A $335 million bond issue in 2008 helped finance the acquisition of new vessels, and the company now owns the largest offshore construction fleet in Mexico, with 69 ships.

The company does not have a track record of treating bondholders very well, said Mariela Anguiano, an analyst who follows the company for BCP Securities in Greenwich, Conn. They tended to pay coupon payments on the last possible day, she said, and did not provide much information.

In a prospectus issued late last year for the sale of $160 million in bonds, the company stated: "The group is from time to time subject to various accusations, including accusations of corrupt practices."

"When the underwriter came by my office trying to sell me on the bonds, I said, 'How dare you offer this to me?' " said Carlos Legaspy, president and chief executive of InSight Securities, which invests in corporate and distressed debt in Latin America.

For years, the rapid growth of Oceanografía and other well-connected local contractors has raised concerns about the cozy relationship between the government oil monopoly and its long-term suppliers.

Pemex's chief executive, Emilio Lozoya Austin, a close associate of President Enrique Peña Nieto's, has promised a widespread sweep of corruption in the company, ahead of forcing it to compete or ally with private investors.

Pemex said on Friday that Oceanografía's alleged irregularities were "an isolated case" and that it was continuing business as usual.

Ben Protess and Peter Eavis contributed reporting.

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