DealBook: In Hedge Fund, Argentina Finds Relentless Foe

Photo Paul Singer of the hedge fund Elliott Management, which won the backing of a federal court in its push to be paid.Credit John Minchillo/Associated Press

The hedge fund firm of billionaire Paul E. Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender.

Argentina on Wednesday failed to make scheduled payments on its government bonds. The country has the money to pay the bonds. But a federal court in Manhattan has ruled that unless Argentina settles its debt dispute with Mr. Singer's firm, Elliott Management, it is barred from paying its main bondholders.

After more than five hours of meetings on Wednesday, the sides failed to reach an agreement and the court-appointed mediator said that Argentina would "imminently be in default." Because a $539 million interest payment was not made, the ratings agency Standard & Poor's said that Argentina was in default on those bonds.

The government of Argentina now faces a stark choice: Try to restart negotiations with investors it has repeatedly called "vultures," who have for years refused to accept anything other than full repayment. Or it can remain ensnared in a default that could weigh on the country's fragile economy and unsettle global markets.

After the talks collapsed, the economy minister of Argentina, Axel Kicillof, characterized the negotiations as extortion.

"We're not going to sign any deal which compromises the future of Argentines," he said at a news conference in Manhattan.

The campaign against Argentina shows how driven and deep-pocketed hedge funds can sometimes wield influence outside of the markets they bet in. George Soros's successful wager against the pound in 1992 affected Britain's relationship with Europe for years.

While Mr. Singer's firm has yet to collect any money from Argentina, some debt market experts say that the battle may already have shifted the balance of power toward creditors in the enormous debt markets that countries regularly tap to fund their deficits. Countries in crisis may now find it harder to gain relief from creditors after defaulting on their debt, they assert.

"We've had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system," said Joseph E. Stiglitz, the economist and professor at Columbia University. "We don't know how big the explosion will be — and it's not just about Argentina."

As a hedge fund, Elliott's pursuit of Argentina is motivated by a desire to make money. Having bought its Argentine bonds for well below their original value, the firm stands to make a killing if Argentina pays the bonds in full. Legal filings indicate that the face value of its Argentine government bonds was around $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest.

Still, there is also something of a crusade about the battle that reveals the worldview of Mr. Singer, who is 69. A Republican donor with libertarian leanings, he has spoken out when he thinks that governments and companies have damaged the rights of creditors.

"He doesn't get into fights for the sake of fighting. He believes deeply in the rule of law and that free markets and free societies depend on enforcing it," said a fellow hedge fund manager, Daniel S. Loeb.

That conviction has helped drive the creative legal assaults that have scored big financial gains for Elliott, which has nearly $25 billion of assets under management. Since the firm's founding in 1977, it has on average posted a return of almost 14 percent a year. At one point in the Argentina dispute, Elliott persuaded a court in Ghana to seize an Argentine naval vessel that was docking in the country. The boat was later released.

The origins of the Argentine dispute trace back to 2001, when Argentina, overwhelmed by its sovereign debt load, decided to default on its obligations. The country later offered to exchange their defaulted securities for new "exchange bonds," that were worth much less the original bonds. Most investors participated in these swaps, but some decided instead to fight the government for full repayment. These so-called holdouts included many individual investors as well as a unit of Elliott called NML Capital and other hedge funds including Aurelius Capital Management.

It is legally challenging for American investors to sue foreign governments in United States courts. But in 2012, Elliott achieved a stunning breakthrough in the Federal District Court in Manhattan. Judge Thomas P. Griesa ruled that whenever Argentina paid the exchange bonds, it also had to pay the holdouts. Argentina could not ignore the ruling and pay the exchange bondholders because Judge Griesa also ruled that any financial firm that distributed payments to the bondholders would be in contempt. Argentina placed $539 million with the Bank of New York Mellon in June to pay its bondholders, but the bank did not transfer it.

Last month, the United States Supreme Court rejected Argentina's appeal, setting the stage for Wednesday's default.

"Default cannot be allowed to lapse into a permanent condition," said Daniel A. Pollack, the lawyer that Judge Griesa appointed to oversee negotiations between Argentina and the holdouts. "Or the Republic of Argentina and the bondholders, both exchange and holdouts, will suffer increasingly grievous harm, and the ordinary Argentine citizen will be the real and ultimate victim."

Others saw less of an impact from a default.

"Argentina has been living in a default reality for over 10 years," said Estanislao Malic, an economist at the Center for Economic and Social Studies of Scalabrini Ortiz in Buenos Aires, referring to a lack of access to international borrowing markets after the country's 2001 financial crisis. "This default is not a drastic change. Nothing much will change."

It is not clear whether Elliott expected Argentina to meet its demands by now. The firm managed to obtain payments from Peru and Congo-Brazzaville in somewhat similar cases. Elliott's supporters assert that the bets that rely on suing governments and state-owned entities make up only a small proportion of its portfolio, and they add that the firm does not pursue countries that are clearly unable to pay their debts. Argentina, they say, is a particularly recalcitrant debtor that clearly has the wherewithal to pay the holdouts.

Mr. Singer, however, thinks that there are broader reasons to protect creditor rights. In particular, he has argued, doing so will help bolster a country's economy. "Imagine how much capital a country like Argentina might attract," Mr. Singer wrote in a 2005 article he wrote with Jay Newman, another Elliott employee. "If instead of defaulting seriatim and affecting a pose of anger toward creditors, it borrowed responsibly and honored its obligations."

The big question, however, is whether Argentina will ever pay Elliott what it wants. If the firm fails to collect, that would underscore the limits of its legal strategy. There is no international bankruptcy court for sovereign debt that can help resolve the matter. Argentina may use the next few months to try to devise ways to evade the New York court. Debt market experts, however, do not see how any such schemes could avoid using global firms that would not want to fall afoul of Judge Griesa's ruling.

But some debt market experts say that credit market idealists are going too far when applying their worldview to sovereign bond markets. In dire economic crises, they say, countries need to be able to slash their debt loads. The legal victories of the holdouts may embolden creditors to drive harder bargains after future defaults, these people say.

Professor Stiglitz says that this could prolong or postpone debt restructurings and extend the economic misery of over-indebted countries. "Singer and Elliott have already done a lot of damage," he said.

In Buenos Aires, some were resigned to the consequence.

"It doesn't matter if it is a judge in New York City or a president in Argentina, I feel that neither cares about people, and about the future of this country," said Sol Bodnar, 31, a film producer. "It's as if these people who have power were laughing in the face of us common citizens."

Simon Romero, Irene Caselli and William Alden contributed reporting.

A version of this article appears in print on 07/31/2014, on page A1 of the NewYork edition with the headline: In Hedge Fund, Argentina Finds A Relentless Foe .

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Well: A Vasectomy May Increase Prostate Cancer Risk

Men with vasectomies may be at an increased risk for the most lethal form of prostate cancer, researchers have found. But aggressive cancer nonetheless remains rare in these patients.

Earlier studies had hinted at a connection between vasectomies and prostate cancer. Many experts have dismissed the idea of a link: Men who have vasectomies may receive more medical attention, they said, and therefore may be more likely to receive a diagnosis. The new study, published this month in The Journal of Clinical Oncology, sought to account for that possibility and for other variables.

Researchers at Harvard reviewed data on 49,405 men ages 40 to 75, of whom 12,321 had had vasectomies. They found 6,023 cases of prostate cancer among those men from 1986 to 2010.

The researchers found no association between a vasectomy and low-grade cancers. But men who had had a vasectomy were about 20 percent more likely to develop lethal prostate cancer, compared with those who had not. The incidence was 19 in 1,000 cases, compared with 16 in 1,000, over the 24-year period.

The reason for the increase is unclear, but some experts have speculated that immunological changes, abnormal cell growth or hormonal imbalances following a vasectomy may also affect prostate cancer risk.

Dr. James M. McKiernan, interim chairman of the department of urology at Columbia, said the lack of a clear causal mechanism was a drawback of the new research.

"If someone asked for a vasectomy, I would have to tell them that there is this new data in this regard, but it's not enough for me to change the standard of care," he said. "I would not say that you should avoid vasectomy."

The lead author, Lorelei A. Mucci, an associate professor of epidemiology at the Harvard School of Public Health, emphasized that a vasectomy does not increase the risk for prostate cancer over all. "We're really seeing the association only for advanced state and lethal cancers," she said.

She agreed with Dr. McKiernan that the new data are not a reason to avoid a vasectomy. "Having a vasectomy is a highly personal decision that men should make with their families and discuss with their physicians," she said. "This is one piece of evidence that should be considered."

A version of this article appears in print on 07/18/2014, on page A13 of the NewYork edition with the headline: Study Links Vasectomies to Lethal Cancer Risk .

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DealBook: Rupert Murdoch Puts Time Warner on His Wish List

Updated, 10:13 p.m. | If content is still king in a media business challenged by new technologies and nimble upstarts, Rupert Murdoch hungers to wear the crown.

His biggest and boldest bid yet emerged on Wednesday: an $80 billion takeover offer for Time Warner Inc., which would be the biggest media deal in more than a decade.

While Time Warner has rebuffed his effort and no talks are underway, Mr. Murdoch is determined and unlikely to walk away anytime soon, people briefed on the matter said. And he has a track record of pursuing companies that first said no before giving in.

His pursuit is likely to set off a wave of takeover battles elsewhere in the industry as others race to keep up. By bidding for Time Warner, Mr. Murdoch's 21st Century Fox is seeking to create a colossus in the television and film industries at a time when both face pressure from the growing power of cable companies like Comcast and online video giants like Google.

Combining 21st Century Fox and Time Warner would bring under one roof some of the biggest sources of content: HBO, one of the most lucrative cable channels; Fox Broadcasting; and the movie studios Warner Bros. and 20th Century Fox. It would unite "Game of Thrones" and televising Nascar, as well as "The Lord of the Rings" and "Dawn of the Planet of the Apes."

But it would not include CNN, which Fox plans to sell to allay concerns from antitrust regulators.

Recalling the swashbuckling empire-building of the 1980s, the Time Warner bid is one of the largest yet in a year full of big mergers. Both Comcast and AT&T are pursuing enormous takeovers aimed at giving them more heft in fee negotiations with the likes of 21st Century Fox, Time Warner, Viacom and CBS.

Looming large over these deals is the competitive threat from Silicon Valley. Internet giants like Google, Amazon, Netflix and others are pouring resources into original content and developing the next-generation TV companies.

Analysts have predicted that content producers would need to fight back by merging.  Indeed, programming executives have expressed concern behind the scenes that they will lose their leverage and have a tougher time negotiating fee increases should the Comcast and AT&T deals go through. Several have knocked on the doors of the pay-television operators seeking to renegotiate programming distribution deals before the mergers close.

Photo Rupert Murdoch is said to have planned the deal with his son James and other close advisers.Credit Rick Wilking/Reuters

"In our view, the media industry in recent months has felt like a tinderbox waiting for the match to strike," David Bank, an analyst with RBC Capital Markets, said in a research note on Wednesday. "Regardless of the outcome of this potential combination, we believe it will be tough to put the toothpaste back in the tube and sentiment-wise, the game of consolidation will now be afoot."

While it is unclear how people will consume media in the coming years, one thing is certain, media executives say privately: Size matters.

Already, companies like Discovery Communications have weighed takeovers, while 21st Century Fox itself has considered smaller acquisitions like Scripps, the owner of HGTV and Food Network, and Univision.

"If you're not looking at consolidation yet, you have to reconsider," said Tony Wible, an analyst with Janney Montgomery Scott.

In Time Warner, 21st Century Fox has determined that its assets would yield the most benefits. Owning so many content creators and outlets would give 21st Century Fox enormous heft, from securing the best new programming and movies to blanketing it through an unrivaled number of prominent channels, both on traditional services like cable and online.

A deal would also give Fox Sports crucial broadcasting rights that Time Warner owns for professional and college basketball and Major League Baseball, important ammunition as the division seeks to challenge the power of ESPN.

Time Warner, confirming on Wednesday that it had spurned the offer, said that the company would fare better on its own. "Our business plans will create significantly more value for the company and our shareholders, and that's superior to any proposal that Fox is in a position to offer," argued Jeffrey L. Bewkes, the chief executive of Time Warner, in a video for employees that was made public.

People close to Time Warner say that now is a poor time to sell given that other prospective partners, like Comcast or AT&T, are tied up with their mergers.

They also criticized 21st Century Fox's proposal to pay Time Warner shareholders in nonvoting stock, contending that such a move would essentially disenfranchise investors. (The Murdoch family controls 21st Century Fox with 39.4 percent of the voting rights.)

And the people close to Time Warner raised the possibility of rigorous antitrust scrutiny, particularly at a time when the Obama administration is already warily examining the Comcast megamerger with Time Warner Cable, which split off from Time Warner.

Still, Time Warner shareholders on Wednesday appeared to think a deal, whether with 21st Century Fox or another buyer, is inevitable. Shares of the company jumped 17 percent on Wednesday, to $83.13.

Potentially helping the cause of 21st Century Fox is the fact that both companies share many of the same stockholders, particularly large mutual funds like Wellington Capital Management and T. Rowe Price. A deal that would benefit both funds could lead them to put pressure on the Time Warner chief executive and his board to enter into talks.

Mr. Bewkes, who is 62, is in some ways the opposite of Mr. Murdoch, 83, in temperament and philosophy. Since taking the helm of Time Warner six years ago, Mr. Bewkes has shed the media conglomerate's trappings of empire, spinning off AOL, the cable business and the legacy print publications that once defined the company.

Photo Jeff Bewkes, left, the chief of Time Warner, met privately with Chase Carey, the president of 21st Century Fox.Credit Lionel Cironneau/Associated Press and Kevin Winter/Getty Images

At the same time, however, that plan of focusing on Time Warner's core entertainment offerings helped leave it vulnerable for a takeover approach by 21st Century Fox.

Shares of 21st Century Fox tumbled 6 percent on Wednesday, to $33, partially on fears that Mr. Murdoch will risk overpaying to acquire what would be his crowning acquisition. Several analysts, including Mr. Wible, believe that a fairer price for Time Warner would be closer to $100 a share.

When Mr. Murdoch pursued Dow Jones in 2007, he immediately offered a rich $5 billion for the publisher of The Wall Street Journal, a price many analysts criticized as too high. But for the mogul, winning was everything, and his knockout bid succeeded. (His empire has since split off slower-growing businesses like The Wall Street Journal, The New York Post and the publisher HarperCollins into the News Corporation.)

Indeed, the pursuit of Time Warner returns Mr. Murdoch to his classic daring deal-making ways, after contending with difficulties recently, from the British phone-hacking scandal to a prominent, gossip-dogged divorce.

But people close to 21st Century Fox insist that he and his lieutenants — including its president, Chase Carey; its chief financial officer, John Nallen; and Mr. Murdoch's son James — will be disciplined in their bidding, though they also made clear that they are focused on winning.

Twenty-First Century Fox estimates that a merger would create $1 billion in cost savings and possibly more, primarily by cutting sales staff and back-office functions.  And together, the companies would report $65 billion in revenue annually.

As additional enticement to its intended target, 21st Century Fox said that it planned to keep Time Warner's most successful managers and creative executives, as well as its various channels and studios.

The sole exception would be CNN, which Mr. Murdoch and his team would be willing to part with, given that it competes with the much more successful Fox News. Putting CNN on the auction block would most likely stir up a bidding war for the news channel; both CBS and ABC, a unit of the Walt Disney Company, have long been viewed as interested suitors. Benjamin Swinburne, an analyst at Morgan Stanley, said that CNN could fetch around $10 billion in a sale.

Both 21st Century Fox and Time Warner have enlisted battalions of advisers. On 21st Century Fox's side are the investment banks Goldman Sachs, Centerview Partners and JPMorgan Chase. Time Warner has drafted Citigroup.

Several analysts and people close to 21st Century Fox said that they believe few competitors could emerge, unless a technology giant like Google or Apple decides to make a big push into content.

"It's the best strategic and financial fit you could possibly come up with in the media space," Mr. Wible said of a possible merger with 21st Century Fox.

A version of this article appears in print on 07/17/2014, on page A1 of the NewYork edition with the headline: Murdoch Puts Time Warner On Wish List .

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DealBook: Citi Settles Mortgage Securities Inquiry for $7 Billion

Credit Pablo Martinez Monsivais/Associated Press

Updated, 8:29 p.m. | The $7 billion deal that Citigroup agreed to strike with the Justice Department involves one of the largest cash penalties ever paid to settle a federal inquiry into a bank suspected of mortgage misdeeds.

But another major component of the settlement has little to do with troubled mortgages. As part of the deal, Citigroup has also agreed to provide $180 million in financing to build affordable rental housing.

The unusual arrangement, which was outlined in the deal on Monday, underscores how difficult it remains for Citigroup to shed its rocky past and how federal prosecutors are getting creative in holding the nation's big banks accountable for losses that crippled the global financial system in 2008.

Like other settlements the federal government has signed with Wall Street, Citigroup's deal also requires the bank to modify mortgages of struggling homeowners. But Citigroup's mortgage business has shrunk appreciably since the financial crisis, and the bank doesn't service enough troubled mortgages to satisfy the monetary settlement terms for homeowner relief. So the bank agreed to finance affordable rental housing in unspecified "high cost of living areas."

Wall Street watchdog groups and housing advocates said the terms of the $7 billion settlement highlight how the federal government has fallen short in its effort to hold banks accountable, noting that neither Citigroup nor any of its executives have been criminally charged for the bank's mortgage problems.

In announcing the deal on Monday, Attorney General Eric H. Holder Jr. said the hard-fought settlement did not absolve the bank or its employees from facing criminal charges. "The bank's misconduct was egregious," he said. "As a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits."

The Justice Department said Citigroup routinely ignored warnings that a significant portion of the mortgages it was packaging and selling to investors in 2006 and 2007 had underwriting defects. In one internal email cited by prosecutors, a Citigroup trader wrote "went thru Diligence Reports and think that we should start praying … I would not be surprised if half of these loans went down." But the bank securitized the loans anyway.

The Justice Department said it was this type of evidence that enabled prosecutors to extract a $4 billion cash penalty from Citigroup — the largest payment of its kind. That money will go into the United States Treasury's general fund and is not earmarked for any particular use.

The deal also includes $2.5 billion in so-called soft dollars designated for the financing of rental housing, mortgage modifications, down payment assistance and donations to legal aid groups, among other measures intended to provide relief to consumers.

The Federal Deposit Insurance Corporation's portion of the settlement — about $208 million — will reimburse creditors in three failed banks that owned large mortgage security portfolios — Citizens National Bank in Illinois, Strategic Capital Bank in Illinois and Colonial Bank in Alabama.

State attorneys general in California, Illinois, Massachusetts, New York and Delaware will receive a total of $291 million. California, for example, will reimburse its two largest public pension funds for mortgage-related losses they suffered during the financial crisis.

The payments to the states are tax-deductible, but the federal penalty is not.

In a boon for Citigroup, the deal with the Justice Department forgoes any potential cases against the bank related to collateralized debt obligations, or C.D.O.s, which were often tied to mortgages. While Citi was a relatively small player in the mortgage securities market, it was a leader on Wall Street in C.D.O.s.

As part of its rental housing commitment, Citigroup will provide financing to projects that may result in a loss to the bank. The Justice Department said the bank's involvement would help fill a gap left by cities and states that cut funding for affordable housing because of the recession.

"We hope this measure will bring relief to families who were pushed into the rental market after losing their homes in the wake of the financial crisis," said Tony West, the Justice Department's lead negotiator with the bank. But for many borrowers who have already gone through foreclosures, the settlement comes too late, consumer advocates say.

"Seven billion sounds like a lot. But compared to the number of families that lost their homes, it is not very much at all," said Isaac Simon Hodes, a community organizer with Lynn United for Change, a group that advocates on behalf of Boston-area residents facing foreclosure.

The bank must complete the consumer relief measures by the end of 2018.

In a call with reporters on Monday, Citigroup's chief financial officer, John C. Gerspach, declined to say how much it would cost the bank to satisfy the consumer relief portions of the settlement. "These are hard-dollar costs," Mr. Gerspach said.

Legal costs associated with the settlement dealt an immediate hit to Citigroup's financial results. The bank took a $3.8 billion charge in the second quarter, leading profits to tumble 96 percent from a year ago.

Including the charge and one-time items, Citigroup earned $181 million, or 3 cents a share, compared with $4.18 billion, or $1.34 a share, in the second quarter of 2013.

Still, investors drove Citigroup's shares up 3 percent on Monday, relieved that a settlement had been completed and heartened that the bank's latest results were better than expected.

Excluding the mortgage settlement charge, Citigroup beat Wall Street's analysts' profit expectations, as its slumping trading revenue recovered slightly.

But much of that good news was overshadowed by the mortgage deal, which came after months of wrangling between prosecutors and the bank's lawyers.

At the outset, the bank had expected to pay a fraction of that $7 billion. Citigroup's first offer to settle the case was $363 million in April, revealing a wide disparity between what prosecutors and bank officials thought was an appropriate penalty.

That disparity stemmed largely from a disagreement over how to calculate the suspected harm that Citigroup's mortgage securities caused investors. Citigroup linked its initial offer to the bank's relatively small share of the market for mortgage securities, people briefed on the talks said. The Justice Department, however, rejected that argument, emphasizing instead what it saw as Citigroup's level of culpability based on emails and other evidence it had uncovered.

The jockeying seemed to continue to the very end. In announcing the settlement, the Justice Department held a news conference in Washington at exactly the same time as bank executives discussed second-quarter results with Wall Street analysts.

A version of this article appears in print on 07/15/2014, on page B1 of the NewYork edition with the headline: Citi Settles Mortgage Securities Inquiry for $7 Billion .

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DealBook: From Benghazi to the Boardroom: The Road to the $7 Billion Citigroup Settlement

Photo Tony West, the Justice Department's lead negotiator in the Citigroup case, used the threat of a lawsuit to raise the bank's offer from $363 million to $7 billion.Credit Susan Walsh/Associated Press

Updated, 8:23 p.m. | The stage was set for another public shaming of a Wall Street bank.

The Justice Department flew in a prosecutor from Colorado and planned for a news conference in Washington to announce a lawsuit against Citigroup over mortgage securities that had imploded during the financial crisis.

But an event a world away unexpectedly changed the Justice Department's plans that day in June. The capture of a suspect in the deadly attack on the United States Mission in Benghazi, Libya, led federal prosecutors to conclude that those headlines would overshadow the Citigroup case. The prosecutors, knowing that the Citigroup case represented one of their last chances to send a public message that the government was holding Wall Street accountable for the crisis, were loath to squander that opportunity.

"We've got a lot going on right now, so we're putting the lawsuit temporarily on hold," Tony West, the government's lead negotiator and the Justice Department's No. 3 official, said to the bank's lawyers in a phone call just hours after he told them that a lawsuit was coming, according to people briefed on the matter.

That twist of fate — which some bank officials viewed as the Justice Department looking to escape its own costly legal battle — opened the door to last-minute negotiations that have now culminated in a $7 billion settlement the government expects to announce on Monday, the people briefed on the matter said.

The deal caps months of heated talks that began with a $363 million offer by Citigroup followed by a $12 billion demand from the Justice Department, the people said, a yawning gap that stemmed from the radically divergent methods used to calculate the cost of the settlement. Citigroup linked its initial offer to the bank's relatively small share of the market for mortgage securities, the people said. The Justice Department, however, rejected that argument, emphasizing instead what it saw as Citigroup's level of culpability based on emails and other evidence it had uncovered.

A behind-the-scenes account of the negotiations, based on interviews with the people briefed on the matter, shows that the government's bargaining position in mortgage cases often hinges on a desire to destroy Wall Street's argument that market share should dictate punishment.

The dollars and cents of the final Citigroup settlement reflect that strategy. Citigroup had already raised its offer to $7 billion — the same size as the final settlement — when the Justice Department planned to announce the lawsuit last month. The main breakthrough toward a settlement took a simple feat of accounting: The bank agreed to shift a portion of the settlement from state attorneys general to the Justice Department, preventing Citigroup from claiming a tax deduction on the settlement. More important for the Justice Department, that move meant that the bank would pay a far heftier sum than one based entirely on its share of the market for mortgage securities.

The mortgage cases, interviews show, often boil down to a game of showmanship. For the Justice Department, criticized for never indicting a Wall Street chief executive and under pressure from Congress to crack down, the cases support a broader effort to project the image of a tough enforcer.

The Citigroup settlement also raises the stakes for the Justice Department's next largest target, Bank of America. Talks between prosecutors and Bank of America are expected to ramp up now that the Citigroup settlement is finished. The Justice Department is also likely to seek mortgage deals from banks like Goldman Sachs and Wells Fargo.

The mortgage settlements are one item of unfinished business left from the financial crisis. Since 2008, the housing market has rebounded, the economy has improved and Congress has passed new laws to rein in Wall Street excess. Yet the Justice Department's investigations into whether banks duped investors into buying defective mortgage securities have stalled the banks' efforts to move on and ignited tensions with the government.

The Citigroup case includes a $4 billion cash penalty to the Justice Department as well as $2.5 billion in so-called soft dollars earmarked for aiding struggling consumers and $500 million to state attorneys general and the Federal Deposit Insurance Corporation. The deal also requires Citigroup to hire an independent monitor — Thomas J. Perrelli, a lawyer at Jenner & Block and former Justice Department official — who will keep an eye on the bank to ensure it follows the terms of the settlement.

At the outset, the bank expected to pay a fraction of that $7 billion.

The two sides met for the first time in November at the library in the office of the United States attorney for the Eastern District of New York, in Brooklyn, which was investigating the case along with the United States attorney's office in Colorado and the Justice Department in Washington.

The meeting, which took place on the same day the Justice Department announced its record $13 billion settlement with JPMorgan Chase over that bank's sale of mortgage securities, exemplified the debate over market share. Using the JPMorgan settlement as a template, Citigroup's lawyers, from Paul, Weiss, Rifkind, Wharton & Garrison, argued that their client faced a far smaller settlement. After all, Citigroup had sold roughly half as many mortgage securities as JPMorgan had through its various subsidiaries.

But Geoffrey Graber, who runs a Justice Department task force that handled the cases against Citigroup and JPMorgan as well as a suit against the ratings agency Standard & Poor's, warned the lawyers not to draw too close a parallel, the people said.

"There's no way you'll get anywhere with us if you are only going to make the market share argument," he told one Citigroup lawyer.

By April, Citigroup had made its first settlement offer. But the bank's opening bid of $363 million was swiftly rebuffed. The government did not even bother to make a counteroffer, the people said, telling the bank to come back with something better.

After balking, Citigroup raised its offer to $700 million, again basing that figure largely on an analysis of its market share.

That only aggravated the situation. On the last weekend of May, lawyers from Paul Weiss and Citigroup's general counsel were all in Cambridge, Mass., attending Harvard graduations, when they received an email from Mr. West. The Justice Department, Mr. West said in the email, was demanding a settlement of $12 billion, including a mix of cash penalties and relief for consumers.

Inside the bank, frustrations grew. Executives grumbled that prosecutors were making unfair and arbitrary demands. Citigroup raised its offer, but only slightly, to $1 billion.

Time was running out. Prosecutors had set a deadline of June 13 for Citigroup to present its best offer. Although Theodore Wells Jr. and Brad Karp, two of the bank's lawyers at Paul Weiss, sought an extension, Mr. West and Mr. Graber said no.

With only hours to go, Citigroup was dealt a rude shock. News reports indicated that the Justice Department was planning to sue the bank.

To Citigroup, the message from the Justice Department was clear: Ratchet up the offer or face a long and bruising court battle. That evening, with the threat looming, Mr. Wells phoned Mr. West to raise the prospect of a broader settlement that would include state attorneys general from California and elsewhere, as well as the F.D.I.C. Mr. West — whose sister-in-law happens to be the attorney general of California — suggested an extra $900 million payment for the states and the F.D.I.C.

The proposal, while theoretical, gave Citigroup some extra time. And so over Father's Day weekend, its board met to consider the Justice Department's demands, even as it prepared to defend against a lawsuit.

Then, as the next week began, Citigroup raised its offer to $3.6 billion in cash to the Justice Department, $2.5 billion in consumer relief and $900 million to the states and the F.D.I.C.

But the offer came with a catch: In exchange for the extra payouts, the bank wanted the Justice Department to forgo any potential cases against Citigroup over collateralized debt obligations, complex financial instruments the bank sold in the years before the crisis. Paul Weiss relayed the offer to Mr. West, who struck an optimistic tone — but also demanded more cash.

When the bank declined to raise its offer further, the people briefed on the matter said, Mr. West met with Attorney General Eric H. Holder Jr. to discuss the Justice Department's options. Rather than lower the demands, Mr. Holder authorized the lawsuit. The decision prompted a lead prosecutor in the case, John Walsh, the United States attorney in Colorado, to fly out to Washington. Mr. West then called Paul Weiss to say that the case was going to be filed the next day.

But just a few hours later, after another Citigroup board meeting, Mr. West's number reappeared on Mr. Wells's cellphone. Mr. West was calling to say that an arrest had been made in Libya, and the Justice Department was temporarily postponing the suit.

"It looks like Citi got a reprieve," Mr. West said, according to the people briefed on the matter, while adding that he was "always open to talk."

Within weeks, Mr. West agreed to Citigroup's request to forgo cases related to collateralized debt obligations and offered to shift $400 million from the state attorneys general and the F.D.I.C. to the Justice Department, forming the basis of the current settlement.

"That's tough," Mr. Wells said, "but if it buys us global peace, then I think we can get this done."

Correction: July 13, 2014
Because of an editing error, an earlier version of this article misattributed a refusal by the Justice Department to grant an extension to Citigroup. The denial came from Tony West and Geoffrey Graber, not Theodore Wells Jr. and Mr. Graber.

A version of this article appears in print on 07/14/2014, on page B1 of the NewYork edition with the headline: From Benghazi to the Boardroom: The Road to the Citigroup Settlement.

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DealBook: Reynolds in Talks to Acquire Lorillard in Merger of Tobacco Rivals

Photo Reynolds American is the parent company of R.J. Reynolds, the maker of Pall Mall and Camel cigarettes.Credit Keith Srakocic/Associated Press

Updated, 10:17 p.m. | Hoping to combat a decades-long slump in smoking, two of the biggest American tobacco companies said on Friday that they were in talks to merge and create a $56 billion cigarette colossus.

A deal between the second-biggest tobacco company in the United States, Reynolds American, and the No. 3, Lorillard, would unite the makers of the Camel and Newport brands and reshape the industry by creating a more formidable rival to the Altria Group, home of Marlboro.

Perhaps more significant, it would give the combined company a leading position in two of the fastest-growing products in a challenged industry: e-cigarettes and menthols.

But a merger, which could be announced as soon as next week, faces a number of significant obstacles.

Antitrust regulators in Washington are certain to scrutinize a deal that would effectively leave cigarette sales — and pricing — in the hands of a duopoly.

A combined Lorillard-Reynolds would control 42 percent of the tobacco market in the United States, according to Credit Suisse research, while Altria has nearly half of the market. And public health advocates have already raised concerns, worried that a merger would increase the influence of cigarette brands that have marketed to children.

Still, a takeover of Lorillard by Reynolds would represent the industry's boldest response yet to a declining, if still profitable, market. A general drop in smoking rates and aggressive public health campaigns aimed at curbing smoking have cut into sales in the United States.

About 42 million people in the United States, or nearly 18 percent of the adult population, smoke cigarettes, according to the Centers for Disease Control and Prevention. That compares with about 21 percent of the adult population nearly a decade ago and 43 percent of the adult population in 1965, according to the C.D.C.

What remains of the traditional cigarette industry is dominated by Altria, whose Philip Morris arm sells one out of every two cigarettes in the United States.

Opportunity has beckoned in the new business of e-cigarettes. A deal by Reynolds to buy the leading purveyor of e-cigarettes could spur other mergers within the industry as manufacturers jockey for position.

"This transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst," Wells Fargo analysts wrote in a note.

At the same time, Reynolds has coveted Lorillard's strong share of the fast-growing market for menthol cigarettes, which have proved more popular among younger smokers than traditional cigarettes. Lorillard's Newport brand dominates that business and represents roughly 12 percent of the overall cigarette market.

Under the proposed terms of the deal, Reynolds American would buy Lorillard. It would then sell several billion dollars' worth of brands and other assets to the Imperial Tobacco Group, the British company that makes Gauloises cigarettes and Montecristo mini-cigars, lifting Imperial to the No. 3 position in the United States.

British American Tobacco, which owns 42 percent of Reynolds American, would invest several billion dollars to maintain the same level of ownership in the combined company and help finance the transaction.

Shares of Reynolds fell 0.8 percent, to $61.75, on Friday, while those of Lorillard surged 4.6 percent to $66.01. Altria shares rose 1.1 percent to $43.43.

A Reynolds and Lorillard deal would combine two of the oldest names in the American cigarette industry. Lorillard traces its corporate ancestry back to 1760 and remains the oldest continuously operating tobacco company in the United States.

And Reynolds was formed from the merger of R. J. Reynolds Tobacco and Brown & Williamson a decade ago.

Talks have been going on for more than a year, with different deal structures contemplated, people briefed on the matter said. The presence of four companies and their particular demands complicated matters. Talks paused about two months ago as the difficulties of negotiating a four-way transaction took their toll.

Still, the companies persisted. The return of Susan M. Cameron as Reynolds's chief executive helped smooth the process. She had led the company following the merger of Brown & Williamson and R. J. Reynolds in 2004, before retiring in 2011.

While none of the four companies disclosed financial terms for a transaction, Lorillard has a total enterprise value of $24.6 billion, according to Standard & Poor's Capital IQ.

Given the influence on the market that a combined Lorillard-Reynolds could exert, the companies have long planned to sell some assets to win approval from regulators.

Bringing in Imperial is meant to assuage those concerns. Currently the fourth-biggest player in the American tobacco market with a single-digit percentage of market share, the British company would become a more robust competitor through such a deal.

Antitrust regulators will not be the only source of potential opposition. Public health advocates pointed to what they said was a history of traditional brands like Camel and Newport and e-cigarette brands like Blu marketing to children.

"Regulators beware," Matthew Myers, the president of the Campaign for Tobacco-Free Kids, said in an interview. "The problem isn't just antitrust. It's the increased power of these companies to market to kids."

While Reynolds describes the United States in regulatory filings as a "mature market" that has declined since 1981, Imperial still sees it as one of the world's biggest and most profitable markets.

Instead, Reynolds sees opportunity in e-cigarettes, which already have about $2.5 billion in annual sales. Though that is a tiny fraction of the overall tobacco market, e-cigarettes sales are expected to grow quickly in the coming years.

Lorillard is the early leader in the market, having bought Blu eCigs for $135 million two years ago. It spent about $40 million marketing Blu e-cigarettes last year, driving sales up to more than $50 million per quarter and gaining the biggest share of sales at gas stations and convenience stores.

In October, Lorillard purchased Skycig, a British e-cigarette maker, and introduced the Blu brand to the British market.

A Reynolds subsidiary, R. J. Reynolds Vapor, began selling its e-cigarettes last month. Reynolds showed off its device, called Vuse, at the Consumer Electronics Show in Las Vegas and made it the official e-cigarette sponsor of the South by Southwest festival in Austin, Tex.

Altria is also getting into the e-cigarette market with its own subsidiary, NuMark.

In the first quarter, Lorillard, based in Greensboro, N.C., had net sales of $57 million from its e-cigarette business; that accounted for about 45 percent of all such sales in the United States. Lorillard had net sales of $1.59 billion in the first quarter and net sales of $6.95 billion in 2013.

 

David Gelles contributed reporting.

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DealBook: Prosecutors’ Winning Streak on Insider Trading Cases Ends

Photo Rengan Rajaratnam, left, with his lawyer Daniel Gitner.Credit Brendan McDermid/Reuters

The scene that played out over and over again in Lower Manhattan in recent years — federal prosecutors enter the courtroom with an insider trading case and leave with a conviction — all began in 2007 with a tip about a little-known hedge fund trader, Rengan Rajaratnam.

The tip ultimately set off a chain of events that led prosecutors to secure 85 insider trading convictions and guilty pleas without one defeat, including the 2011 victory over Mr. Rajaratnam's older brother, the hedge fund billionaire Raj Rajaratnam. So when prosecutors under Preet Bharara, the United States attorney for Manhattan, indicted the younger Mr. Rajaratnam last year, the case appeared to be coming full circle.

But on Tuesday, with that perfect record at stake, prosecutors suffered their first insider trading loss to — of all people — the younger Mr. Rajaratnam. After just under four hours of deliberation, a federal jury of eight women and four men found Mr. Rajaratnam, 43, not guilty of conspiracy to commit insider trading with his brother.

The verdict was a stunning turn of events for the government, given the cloak of invincibility Mr. Bharara had assumed in recent years. The case also underscored a broader whiff of skepticism about the crackdown on insider trading, as a federal appeals court in Manhattan weighs whether to toss out two other recent convictions.

Yet the wider significance of the verdict — prosecutors are expected to lose every now and again — remains unclear.

Photo Rengan Rajaratnam, left, and Daniel Gitner leaving court on Tuesday. The wider implications of the verdict are not yet clear.Credit Rachel Abrams/The New York Times

From the beginning, prosecutors saw the younger Mr. Rajaratnam as a particularly challenging target, said lawyers briefed on the matter who were not authorized to speak publicly. And the case was not considered a high priority when his brother, the co-founder of the Galleon Group hedge fund, was arrested in 2009. In fact, some prosecutors at the time were reluctant to file the case without additional evidence of wrongdoing on the part of the younger Mr. Rajaratnam, who worked under his brother at Galleon.

That evidence never emerged. And when prosecutors indicted the younger Mr. Rajaratnam, they did so near a five-year deadline for filing the case.

"They took their time and they had this evidence years ago," said Richard J. Holwell, a lawyer in private practice and the former federal judge who presided over the criminal trial of Mr. Rajaratnam's brother, whom he sentenced to 11 years in prison. "You can say that the government in the final analysis overreached, and that's what the jury is for."

Isabel Tirado, the forewoman for the jury in the trial that began about three weeks ago, said after the verdict that she was not impressed with the government's case. "There was no evidence, period," said Ms. Tirado, a history professor at William Paterson University in New Jersey.

The government, however, did offer some of the same wiretapped communications that were played for the jury during Raj Rajaratnam's trial. In one of those taped conversations, the younger Mr. Rajaratnam boasted to his brother that he had a friend who was a "little dirty" who had information about a stock.

Some lawyers chalked up the verdict to an unexpected reversal last week, when the judge overseeing the case dismissed two insider trading charges against Mr. Rajaratnam. The judge, Naomi Reice Buchwald, said that no reasonable jury could conclude that Mr. Rajaratnam had engaged in insider trading in the stock of Clearwire, a wireless broadband company. But the judge said that she would let the jury decide whether he had conspired with his brother to obtain confidential information on the stock of Advanced Micro Devices.

That decision, which could not be appealed, laid the groundwork for Mr. Rajaratnam's lawyer to chip away at the case even further. The lawyer, Daniel M. Gitner, asked that prosecutors not be allowed to present evidence involving Clearwire to bolster the conspiracy charge.

In a letter to the judge over the weekend, prosecutors called the request "not only completely unprecedented, it is singularly unfair." But the judge, who at one point outside the presence of the jury told prosecutors that some of their legal arguments "don't make any sense," sided with Mr. Rajaratnam.

On Monday, in a sign of just how concerned prosecutors were about the case, Mr. Bharara attended a portion of the closing argument in the case — something he rarely does in white-collar cases. Richard B. Zabel, the deputy United States attorney, also visited the courtroom at times.

Mr. Bharara noted in a statement that his office was "disappointed with the verdict on the sole count that the jury was permitted to consider," but he added that "we respect the jury trial system whatever the outcome."

Judge Buchwald narrowed a case that was already pared down when the trial began. A year ago, prosecutors initially filed seven criminal charges, but then dropped four counts without explanation.

In dismissing the remaining insider trading charges, the judge said that prosecutors had not produced sufficient evidence that Mr. Rajaratnam knew his brother possessed inside information about shares of Clearwire in 2008. Nor did prosecutors, she said, prove that the younger Mr. Rajaratnam knew whether the people passing on that information to his brother had gotten any benefit for doing so.

The mid-trial ruling by Judge Buchwald echoed the concerns of the United States Court of Appeals for the Second Circuit, which recently signaled that it might overturn the convictions of two other hedge fund traders. The appellate court seemed receptive to a defense argument that a trader cannot be guilty without knowing whether the person providing the inside information has received some benefit for the leak.

Some lawyers and prosecutors, speaking on the condition of anonymity, doubted that the Rajaratnam case would have an impact when the United States attorney's office pursues other insider trading cases. But depending on the outcome of the appellate court decision, some cases could fall by the wayside.

Reed Brodsky, the federal prosecutor who tried Mr. Rajaratnam's older brother and is now a lawyer in private practice, said that until the appellate court ruled, he expected his former office to proceed more cautiously in bringing certain insider trading cases. He said the court's ruling could have a bearing on investigations involving so-called downstream tippees — traders who get inside information second- or third-hand.

"Federal prosecutors and the F.B.I. will likely be very careful about charging downstream tippees where evidence of the tippee's knowledge of the illicit benefit to the tipper is ambiguous or uncertain," said Mr. Brodsky, a partner with Gibson Dunn in New York.

For the younger Mr. Rajaratnam, the acquittal was a moment to relish after a year of having a cloud hang over his head. As the verdict was read, Mr. Rajaratnam, wearing a dark gray suit and dark blue tie, sat stone-faced in the courtroom. His lawyers patted him on the back. But later, he was seen giving an exuberant high-five to a colleague.

"In my experience, juries are extremely smart," said Mr. Gitner, the lawyer for Mr. Rajaratnam. "We were hopeful that the jury would see the case the same way that we did and recognize the lack of evidence."

A version of this article appears in print on 07/09/2014, on page B1 of the NewYork edition with the headline: A Winning Streak on Insider Cases Ends .

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DealBook: U.S. Scrutiny for Banks Shifts to Commerzbank and Germany

Photo American authorities have begun settlement talks with Germany's second-largest lender, Commerzbank, based in Frankfurt.Credit Michael Probst/Associated Press

A trail of illicit money led the American government on a hunt through the European financial system, generating criminal cases against banks in Britain, Switzerland and most recently, France.

Now the crackdown is bound for another European financial center: Germany.

State and federal authorities have begun settlement talks with Commerzbank, Germany's second-largest lender, over the bank's dealings with Iran and other countries blacklisted by the United States, according to people briefed on the matter. The bank, which is suspected of transferring money through its American operations on behalf of companies in Iran and Sudan, could strike a settlement deal with the state and federal authorities as soon as this summer, said the people briefed on the matter, who were not authorized to speak publicly.

The contours of a settlement, which the authorities have only begun to sketch out, are expected to include at least $500 million in penalties for Commerzbank, the people added. Although prosecutors were still weighing punishments, the people briefed on the matter said that the bank would most likely face a so-called deferred prosecution agreement, which would suspend criminal charges in exchange for the financial penalty and other concessions.

A potential deal with Commerzbank — which is expected to pave the way for a separate settlement with Deutsche Bank, Germany's largest bank — would pale in comparison to the case announced last week against France's biggest bank, BNP Paribas. The French bank agreed to pay a record $8.9 billion penalty and plead guilty to criminal charges for processing transactions on behalf of Sudan and other countries that America has hit with sanctions, a rare criminal action against a financial giant.

BNP is not the only French bank under the spotlight. Crédit Agricole and Société Générale also face investigations into whether they violated United States sanctions.

But those investigations are not expected to be completed until after the anticipated settlement with Commerzbank, the people briefed on the matter said. Commerzbank and Deutsche Bank, which have both previously disclosed the existence of the investigations but not the status or terms of settlement talks, declined to comment on Monday.

Collectively, the deals will provide a capstone to the decade-long investigation into banks that opened the American financial system to tainted money. The investigations into the European banks, which funneled billions of dollars through their New York offices on behalf of foreign clients, underscored the reach of the United States sanctions laws as well as the global demand to do business in dollars.

The investigations have involved both state and federal authorities. In the Commerzbank investigation, the Manhattan district attorney's office and New York State's banking regulator, Benjamin M. Lawsky, are collaborating with the Justice Department's criminal division in Washington, the United States attorney's office for the District of Columbia and the Federal Reserve, the people briefed on the matter said.

The BNP case involved Preet Bharara, the United States attorney in Manhattan, rather than the prosecutor for the District of Columbia.

Photo The headquarters of Commerzbank in Frankfurt, Germany.Credit Lisi Niesner/Reuters

The Commerzbank investigation features an added twist: The bank is 17 percent owned by the German government. It is unclear whether — as in the BNP case, which led French authorities to intervene on the bank's behalf — the settlement talks could inflame diplomatic tensions between Washington and Berlin.

Some critics have questioned why American authorities have set their eye on European banks. The answer, authorities say, is that American banks by and large avoided processing transactions for Iran and Sudan.

But American banks are not immune from touching dirty money. Citigroup's Banamex unit is under investigation for processing money linked to a drug cartel. And in January, JPMorgan Chase reached a roughly $2 billion deal with the authorities over ignoring signs of the Ponzi scheme orchestrated by Bernard L. Madoff, who held accounts at the bank for over two decades.

The criminal sanctions cases spreading through Europe began in 2009, when the British bank Lloyds struck a deferred prosecution agreement. Credit Suisse came months later. And by the end of 2012, HSBC, Standard Chartered and Barclays of Britain, as well as ING of the Netherlands, had struck settlements of their own.

The $8.9 billion penalty for BNP was by far the largest. It was more than triple the amount that the six other banks had collectively paid to resolve their sanctions cases.

The BNP deal also carried some added sting, as the bank was forced to plead guilty, unlike the other banks that reached deferred prosecution agreements. In addition, Mr. Lawsky took aim at a core business for BNP, partly suspending its ability to process payments in dollar denominations, an important function known as dollar clearing.

The extra punishments, authorities say, reflected the amount of wrongdoing at BNP.

"Together, we have helped to hold accountable France's largest bank for perpetrating what was truly a Tour de Fraud," Mr. Bharara said at a news conference announcing the deal last week, adding that BNP had done business with Sudan, Cuba and Iran, "a hat trick of sanctions violations."

A version of this article appears in print on 07/08/2014, on page B1 of the NewYork edition with the headline: Scrutiny For Banks Is Shifting To Germany .

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DealBook: U.S. Banks Curtail International Money Transfers

Photo A Viamericas CD Mega in Virginia. Viamericas is a money transfer company with a large focus on Mexico.Credit Drew Angerer for The New York Times

As government regulators crack down on the financing of terrorists and drug traffickers, many big banks are abandoning the business of transferring money from the United States to other countries, moves that are expected to reverse years of declines in the cost of immigrants sending money home to their families.

While Mexico may be most affected — nearly half of the $51.1 billion in remittances sent from the United States in 2012 ended up in that country — the banks' broad retreat over the last year is affecting other countries in Latin America and parts of Africa as well. The banks are being held accountable not only for the customers who directly use their money transfer services but also for their role in collecting remittances from money transmitting companies and wiring them abroad.

"This is transforming the business and may increase the costs of international money transfers," said Manuel Orozco, a senior fellow at the Inter-American Dialogue, a research group in Washington.

JPMorgan Chase and Bank of America have scrapped low-cost services that allowed Mexican immigrants to send money to their families across the border. The Spanish bank BBVA is reportedly exploring the sale of its unit that wires money to Mexico and across Latin America. And in perhaps the deepest retrenchment by a bank, Citigroup's Banamex USA unit has now closed many of its branches in Texas, California and Arizona that catered to Mexicans living in the United States and stopped most remittances to Mexico as it faces a federal investigation related to money laundering controls.

Regulators say the banking system was being exploited by terrorists and drug lords seeking to launder money. While they have not banned banks from engaging in higher-risk businesses like money transfers to certain countries, they acknowledge that banks must now invest significantly more to monitor the money moving through their systems or face substantial penalties.

But the government's efforts to root out illicit activity have effectively put the banks into a law enforcement role, industry experts say. And the result is undercutting another public policy goal — helping immigrants, who are primarily low income, move into mainstream banking. Even with the current relatively low remittance fees, the costs can still add up. Some Latin American immigrants say they regularly send three remittances a week to pay for last-minute school supplies or rent.

Manuel Santiago, a 48-year-old Mexican living in Queens, said he sometimes pays $4 to send as little as $20 at a time to his son and daughter in Mexico. "I am supporting my family and things come up irregularly," he said.

The pendulum has swung so far, participants in the industry say, that regulators are pushing banks out of some activities considered beneficial to the broader economy.

"The money transfer business has become the whipping boy of regulators who want to show how tough they are," said Paul S. Dwyer Jr., chief executive of Viamericas, a money transfer company based in Maryland with a large focus on Mexico.

Shut out by many large banks, more of Mr. Dwyer's customers are turning to large retailers in Mexico to pick up money sent from the United States, and some of those retailers charge money transfer companies as much as double the banks' fees, he said. Mr. Dwyer's company is recouping the additional costs by increasing the difference — or the spread — between what customers pay in dollars and what their family members receive in Mexican pesos.

A World Bank report on remittances found that the costs had been steadily falling over the last five years. But industry experts are expecting that trend to reverse.

A spokesman for Western Union, one of the largest remittance players, said the company was among those capturing business from the banks.

While immigrants say they have not noticed broad price increases from companies like Western Union, industry experts say higher costs are inevitable with fewer banks acting as middlemen for money transmitters.

"If you are the only game in town, you may be able to charge a premium," said Daniel Ayala, head of global remittance services at Wells Fargo, adding that the bank has not passed increased regulatory costs to customers, leading to a decline in profits.

Many banks had considered remittances an attractive business because they generated steady fees and required little capital. In some cases, remittances could satisfy Community Reinvestment Act requirements to serve a certain percentage of low-income customers.

But the regulatory pressures and increased costs of compliance have started to outweigh the potential profits.

JPMorgan stopped its Rapid Cash program in November, partly because the bank grew concerned about some of the risks, a spokeswoman said. As part of its program, JPMorgan had teamed up with the large Mexican bank Banorte. Many people picking up remittances in Mexico sent from Chase branches in the United States were not customers of Banorte, making it more difficult to monitor them.

Last year, Bank of America canceled its SafeSend product, regarded as one of the least expensive ways for immigrants to send money to Mexico. A spokeswoman said the bank canceled the product because of "limited demand" and would not elaborate. A BBVA spokesman declined to comment on the possible sale of its Bancomer Transfer Services unit.

Some banks still make certain wire transfers to Mexico, but the costs of such services can be five times as high as a typical remittance, making it prohibitive for many immigrants.

Even if banks invested in new software to screen for worrisome transactions, they would still have to manually investigate many suspicious activities and report them to regulators. Banks fear that a single mistake could lead to costly penalties like the $1.9 billion settlement that the British bank HSBC agreed to pay over money laundering issues in 2012. HSBC has stopped paying out remittances at its Mexican branches.

And the heightened diligence can slow, or even stop, vital payments.

Domingo Garcia, a 36-year-old limousine driver in Los Angeles, said he grew frustrated with Wells Fargo when one of his family's remittances totaling roughly $1,500 failed to clear. In the same week, he said, family members had tried to send another large remittance. His mother needed the money to pay for her chemotherapy treatment in Mexico. "The hospital was saying it would not give her the medicine until they were paid," Mr. Garcia said.

Wells Fargo declined to comment on a specific customer's transaction, but said there could be a number of causes for delays, including efforts to screen for fraud and the bank's limits on the amount of transfers allowed each month. While the bank remains committed to Mexico, it has slowed the expansion of its money transfer network to other high-risk countries.

Citigroup's Banamex USA, which has been ensnared in a criminal investigation related to money laundering, is an example of how compliance problems at an obscure affiliate can have serious consequences for a global bank like Citigroup. The New York parent has removed many of the veteran managers at Banamex USA and installed a "cleanup team" of executives to improve its compliance systems, according to a person briefed on the matter.

Citigroup inherited the small California bank when it acquired Banamex, Mexico's second-largest bank after BBVA Bancomer, in 2001. Because Banamex USA was overseen by executives at Banamex's headquarters in Mexico, it did not come under the same compliance systems as Citigroup's units in the United States, this person said. It also wired cash on behalf of money transfer companies in the United States to Banamex accounts in Mexico, people in the remittance industry say.

In reality, it may be nearly impossible to fully monitor money flowing through some parts of the world. Regulators worry, in particular, about remittances to Somalia, a haven for terrorist groups with no formal banking system. Banks in the United States have had to wire money to banks in Dubai. Much of the money is then moved into Somalia through a network of traders.

One of the few banks willing to take that risk is Merchants Bank of California. But in the face of scrutiny from regulators, the bank has told some money transfer companies in cities with large Somali enclaves like Minneapolis that it may no longer be able to provide them with banking services.

Merchants Bank's exit could be a big blow to Somalia, where remittances are a major source of income for a country that has suffered from recent famine, according to the antipoverty group Oxfam.

"We're looking for alternatives," said Abdulaziz Sugule, president of the Olympic Financial Group, a money transfer company in Minneapolis that Merchants Bank may drop, "but it's going to be tough."

Jessica Silver-Greenberg and Elisabeth Malkin contributed reporting.

A version of this article appears in print on 07/07/2014, on page A1 of the NewYork edition with the headline: Banks Curtailing Cash Transfers .

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DealBook: Jamie Dimon of JPMorgan Is Told He Has Throat Cancer

Photo Jamie Dimon, the chairman and chief executive of JPMorgan Chase, in Detroit in May.Credit Charley Tines/Detroit News, via Associated Press

Jamie Dimon, the chief executive of JPMorgan Chase, has throat cancer and will begin treatment shortly at Memorial Sloan Kettering Cancer Center, he said in a note to the bank's employees and shareholders late Tuesday.

Doctors discovered the cancer at an early stage, Mr. Dimon, 58, said, noting that his condition was "curable."

After a series of tests, he said the doctors confirmed that the cancer had not spread beyond the "original site" and the adjacent lymph nodes on the right side of his neck.

Mr. Dimon assured employees at JPMorgan, the nation's largest bank, that the prognosis from the doctors was "excellent."

Mr. Dimon, who has held the dual roles of chief executive and chairman at the bank since 2006, has been atop JPMorgan longer than any other bank chief.

The announcement of his diagnosis came on Mr. Dimon's 10-year anniversary at JPMorgan. That tenure, which began when JPMorgan acquired Bank One, has been marked by triumph — the bank emerged from the financial crisis in better shape than its rivals — and by tumult.

The bank has worked to mend its frayed relationships with regulators — a painful reconciliation that cost it roughly $20 billion. In November, JPMorgan reached a record $13 billion settlement with a range of government authorities over its sale of questionable mortgage-backed securities in the lead-up to the financial crisis. The bank also reached a $2 billion settlement over accusations that it failed to sound alarms about Bernard L. Madoff's Ponzi scheme.

JPMorgan has also been buffeted by the departure of several top executives. In the last two years alone, at least 10 senior executives have left JPMorgan.

Most recently, Michael J. Cavanagh, once considered an heir to Mr. Dimon, left the bank to join the Carlyle Group, a private equity firm.

And like its rivals, JPMorgan, which will report second-quarter earnings on July 15, is grappling with a slowdown in its trading business.

It has been a particularly grueling stretch for trading units across Wall Street. The sluggish trading revenue traces, in part, to a spate of rules passed in the aftermath of the financial crisis.

In the past, banks made some of their riskiest wagers — bets that sometimes translated into rich profits — through trading complex derivatives, bonds and commodities. In the new banking landscape, where interest rates remain persistently low, the role of those businesses has been diminished.

In his annual letter to shareholders in April, Mr. Dimon stressed that despite the "constant and intense pressure," he was proud of the bank's resiliency and its resolve. Last year, JPMorgan earned $17.9 billion in profit despite the legal costs.

Mr. Dimon reiterated his faith in the leadership of the bank on Tuesday. He did not outline any plans to cede the reins of the bank while he has treatment — a process that he said should last about eight weeks.

In his note, Mr. Dimon emphasized that the company would "continue to deliver first-class results for our customers."

The illness of any chief executive naturally prompts questions about who is prepared to take over, at least for a little while. But Mr. Dimon emphasized in his note that he would remain immersed in the day-to-day operations of the bank.

JPMorgan's board has remained firmly behind Mr. Dimon, redoubling support for him. The board awarded Mr. Dimon $20 million in annual compensation for his work in 2013. The raise came one year after the board had cut his compensation to $11.5 million.

Even before Mr. Dimon's diagnosis the board agreed on various succession plans.

"The board had already established a short-term, medium-term and longer-term succession plan," said a JPMorgan spokesman, Joseph Evangelisti.

Among the potential successors, people briefed on the matter said, are Gordon Smith, the head of JPMorgan's consumer bank, and Mary Erdoes, who runs the asset management business.

The inclusion of Mr. Smith and Ms. Erdoes reflected the changing fortunes of banking. JPMorgan's consumer business, for example, has taken on more prominence as the bank shifts its focus to credit cards and auto loans and away from intricate deal-making and trades that once were the hallmark of Wall Street.

A version of this article appears in print on 07/02/2014, on page B1 of the NewYork edition with the headline: Dimon Has Throat Cancer That He Calls 'Curable' .

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DealBook: BNP Paribas Admits Guilt and Agrees to Pay $8.9 Billion Fine to U.S.

Updated, 9:07 p.m. |

After months of heated negotiations, state and federal authorities on Monday announced a criminal case against BNP Paribas, taking aim at France's biggest bank for transferring billions of dollars on behalf of Sudan and other countries blacklisted by the United States.

BNP agreed to plead guilty to criminal charges and pay an $8.9 billion penalty, a record sum for a bank accused of doing business with countries that face United States sanctions. State and federal authorities portrayed BNP, the seventh bank to settle a criminal sanctions violation case but the first to plead guilty, as the worst offender.

Like other banks, BNP hid the names of Sudanese and Iranian clients when sending transactions through its New York operations and the broader American financial system. But the wrongdoing was more pervasive at BNP, the authorities found, stretching from at least 2002 into 2012, by which time the investigation was already in full swing.

"This conspiracy was known and condoned at the highest levels of BNP," Edward Starishevsky, an assistant district attorney in Manhattan, said in court on Monday when the bank pleaded guilty to one count of falsifying business records and one count of conspiracy.

The rebuke — from the Justice Department's criminal division in Washington, the United States attorney's office and district attorney's office in Manhattan, as well as the Federal Reserve, Treasury Department and New York's financial regulator, Benjamin M. Lawsky — provides a template for prosecuting other financial misdeeds. In the coming months, the focus will shift to a number of big banks suspected of manipulating foreign currencies.

In the BNP case, the authorities sought to send a message that no bank is immune from criminal charges, despite lingering concerns that financial institutions have grown so large and interconnected that they are "too big to jail." The decision to require BNP's parent company to plead guilty, coming six weeks after Credit Suisse pleaded guilty to helping American clients evade taxes, reflects a broader policy shift after decades of civil settlements and so-called deferred prosecution agreements.

"This outcome should send a strong message to any institution — any institution anywhere in the world — that does business in the United States: that illegal conduct will simply not be tolerated," United States Attorney General Eric H. Holder Jr. said at a news conference on Monday.

Preet Bharara, the United States attorney in Manhattan who accused BNP of "perpetrating what was truly a tour de fraud," has argued that no bank is too big to charge.

Still, criminal pleas could prompt regulators to revoke the license of a bank, the Wall Street equivalent of the death penalty. To prevent that outcome, prosecutors and regulators coordinated their actions months in advance.

Unlike Credit Suisse, which paid fines but faced few practical implications from pleading guilty, BNP was required to temporarily forfeit a core business operation in New York.

Mr. Lawsky announced on Monday that he would suspend its ability to process payments in dollar denominations, a function known as dollar clearing, which is essential to doing business with international clients. The deal with BNP will prevent certain units within the bank's headquarters in Paris, as well as its offices in Geneva, Rome, Milan and Singapore, from clearing dollar transactions for one year beginning in January 2015.

Mr. Lawsky also required the bank to part ways with 13 employees, including one of its chief operating officers. "It is important to remember that banks do not commit misconduct — bankers do," he said in a statement.

Still, not one BNP employee was criminally charged. And prosecutors have yet to demonstrate that their newfound enforcement muscle applies equally to American banks.

"Though we appreciate the magnitude of the BNP guilty plea, we believe this does not signify the end of 'too big to jail,' " Public Citizen, a nonprofit watchdog group, said in a statement.

In its own statement, BNP emphasized that it had "designed new robust compliance" measures to prevent a repeat of the wrongdoing. "We deeply regret the past misconduct that led to this settlement," said the bank's chief executive, Jean-Laurent Bonnafé.

BNP had initially hoped to fend off a guilty plea. It had proposed creating an entirely new subsidiary to plead guilty, according to people briefed on the matter.

When prosecutors rebuffed that idea, the bank enlisted help in the highest rungs of French government. President François Hollande made unusually direct and personal appeals to President Obama, while French financial officials questioned Mr. Lawsky about the dollar-clearing suspension.

Ultimately, Mr. Lawsky focused the suspension on the specific units that processed transactions at the heart of the case, a move that will most likely generate a logistical headache for the bank and undercut its revenue as it has to outsource the business to another bank. The bank's oil and gas units in Paris and elsewhere, for example, are subject to the suspension.

Some units tried to cover up the transactions, the authorities said. In the bank's Geneva office, "there was policy to strip, amend and omit" information identifying Sudanese clients.

At the time, Sudan was operating a genocidal regime. And as Mr. Holder noted, citing the words of a BNP compliance manager, the country "hosted Osama bin Laden."

Some BNP employees sounded the alarms. But at a September 2005 meeting, one of the bank's chief operating officers "dismissed the concerns of the compliance officials," Mr. Lawsky said, and requested that no minutes of the meeting be taken.

The bank's compliance staff in New York also failed to thwart the wrongdoing, the authorities said. When another bank settled a sanctions violations case, BNP's head of ethics for North America wrote in an email to a colleague, "The dirty little secret isn't so secret anymore, oui?"

William Alden contributed reporting.

A version of this article appears in print on 07/01/2014, on page B1 of the NewYork edition with the headline: BNP Admits Guilt and Agrees to Pay $8.9 Billion Fine to U.S..

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Bits Blog: Supreme Court Rejects Google’s Street View Appeal

The United States Supreme Court on Monday allowed a case accusing Google of wiretapping to proceed, undermining the search company's efforts to put a troublesome episode to rest even as it plans to become more deeply embedded in consumers' lives.

Google's annual developers' conference last week showcased the company's wide-ranging agenda to expand its technology from desktop computers and mobile devices to the home, the body and vehicles. Google's new devices will communicate and share data, requiring a great deal of trust by users that all this information will not be used in unauthorized or unexpected ways.

The prospect of a long-running case in which Google is accused of exploiting that trust and misappropriating data will work against this ambitious program. Google was sued for breaking federal laws by secretly collecting people's email, passwords and other personal information as part of its Street View mapping project, which began in 2007. The data was drawn from unencrypted household computer networks.

Google maintains it was not wiretapping as part of Street View. Its failure to persuade the Supreme Court to hear its appeal means the case will go forward in the lower court.

Following its usual practice, the Supreme Court gave no reasons for declining to take the case. Coming after the ruling this month that cellphone searches require a warrant, the decision adds to the court's developing reputation as a defender of privacy against technological intrusion.

The Street View decision "protects Americans' homes and private correspondence from intrusion for commercial gain," said Elizabeth J. Cabraser, a lawyer for the plaintiffs, in the same way that the cellphone ruling protects "the constitutional rights of those accused or under suspicion of crime from warrantless searches of the 21st-century equivalent of private papers and effects."

The Street View case was brought as a class action but has not been formally certified as such in court. That will be the next hurdle the plaintiffs face. A trial will not take place until late next year, at the earliest, Ms. Cabraser said.

A Google spokeswoman said, "We're disappointed that the Supreme Court has declined to hear the case." The company declined further comment.

Street View began as the usual ultra-ambitious Google project, an attempt to chart the inhabited world. The public face of Street View involved special cars that photographed streetscapes. But the cars were collecting wireless data too. Google said that part of the program was an unauthorized project by a rogue engineer, an assertion that regulators challenged.

The biggest investigation, by 38 state attorneys general, resulted in a modest fine of $7 million for Google as well as promises that the company would more aggressively monitor its employees. Google said the data collected was never used commercially.

Legally, Google contends it was in the clear. It said people were transmitting data on their home Wi-Fi networks as a form of radio communication, which is not governed by the wiretapping laws. An appeals court sharply rejected that notion last year.

"In common parlance, watching a television show does not entail 'radio communication,' " Judge Jay Bybee wrote. "Nor does sending an email or viewing a bank statement while connected to a Wi-Fi network."

Marc Rotenberg of the Electronic Privacy Information Center, which filed a brief in the appeals court supporting the plaintiffs, said Monday's decision was "a significant victory for Internet users," adding, "The Supreme Court left in place a decision that protects private residential networks from snooping by Google and others."

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DealBook: A Grieving Father Pulls a Thread That Unravels Illegal Bank Deals

A bus bombing two decades ago — and a New Jersey father's quest for justice — inadvertently set off a chain of events that led American prosecutors to accuse some of the world's biggest banks of transferring money for nations like Iran.

On Monday, that crackdown culminated with the guilty plea of BNP Paribas, which admitted to doing billions of dollars in deals with Iran and other countries blacklisted by the United States and agreed to pay a record $8.9 billion penalty to state and federal authorities.

The trail that ultimately led to BNP began in 2006, when the Manhattan district attorney's office came upon a lawsuit filed by the father, who blamed Iran for financing the Gaza bus bombing that killed his 20-year-old daughter. Buried in the court filings, prosecutors found a stunning accusation: a charity that owned a gleaming office tower on Fifth Avenue was actually a "front" for the Iranian government, a claim that the prosecutors ultimately verified.

The prosecutors soon discovered that Credit Suisse and Lloyds, two of the world's most prestigious banks, had acted as Iran's portal to the United States financial system. To disguise the illicit transactions — the United States is closed for business to Iran — Credit Suisse and Lloyds stripped out the Iranian clients' names from wire transfers to the Fifth Avenue charity and affiliated entities. The findings led the Manhattan prosecutors and the Justice Department in Washington to announce criminal cases against both banks.

As those cases were coming to light in 2009, a whistle-blower stepped forward to point the finger at BNP, France's biggest bank. That tip has now materialized in a landmark criminal settlement, with BNP pleading guilty to criminal charges, capping a sweeping investigation into how the bank processed billions of dollars on behalf of Sudan and Iran.

The twists and turns leading to the BNP case — a series of whistle-blower tips and fortuitous discoveries recounted in interviews with current and former prosecutors — open a window into the interconnected yet shadowy world of global finance. At its center is New York City, the heart of American capitalism where banks process billions of dollars in payments on behalf of international clients.

It is a cautionary tale of how European banks, spotting a lucrative business opportunity that American rivals shunned, opened their doors to countries under sanctions and ultimately exposed their reputations to the stain of criminal cases. The interviews with prosecutors, some who spoke freely and others anonymously, also tell a story of how a local prosecutor's office in New York, perhaps better known for crackdowns on drugs and organized crime, landed in the middle of an international investigation into terrorist bombings and foreign banks.

"We're often asked why a local prosecutor is getting involved in a case of global financial crime, and my answer is how could we not," Cyrus R. Vance Jr., the Manhattan district attorney, said in an interview. "We're situated in the finance capital of the world. We just had to know where to look to connect the dots."

The district attorney's role in the case, which began under Mr. Vance's predecessor, Robert M. Morgenthau, was not always clear. Adam Kaufmann, a prosecutor who helped lead the investigations, once traveled to Washington to meet with officials from the Treasury Department's Office of Foreign Assets Control, the primary enforcer of American sanctions against Iran. The Treasury Department, he recalled, was baffled as to why a Manhattan prosecutor was investigating the case at all.

The investigation, Mr. Kaufmann explained, began in earnest back in January 2006. At the time, in a cramped office cubicle in lower Manhattan, a 32-year-old analyst for the Manhattan district attorney's office pored over the New Jersey father's lawsuit against Iran. The father, Stephen Flatow of West Orange, N.J., accused Iran of funding the terrorist group responsible for the suicide bombing in Gaza that killed his daughter, Alisa, in 1995.

A federal judge awarded Mr. Flatow, a lawyer at a title company, $250 million in damages. Iran never paid. And so Mr. Flatow sought to collect from the Alavi Foundation, the charity that he claimed was a front for the Iranian government.

The analyst at the district attorney's office, Eitan Arusy, took a keen interest in the father's accusations. Before joining the office, he was an Israeli soldier who happened to have responded to the scene of that very same bus bombing.

And the Alavi Foundation, it turned out, was in the heart of the district attorney's jurisdiction. It held an ownership stake in a Fifth Avenue skyscraper just steps from Rockefeller Center and the Museum of Modern Art. The 36-story tower, formerly known as the Piaget Building, was built in the late 1970s by a non-profit tied to the Shah of Iran.

One day in 2006, Laura Billings, a prosecutor in the district attorney's office who helped lead the Alavi Foundation investigation, visited the tower to see for herself whether anything suspicious was unfolding inside. But the building, which has housed the offices of Ivan F. Boesky, the famed Wall Street speculator who was convicted as part of the 1980s insider trading scandal, and is currently home to Godiva, the chocolate maker, was an ordinary office tower.

The prosecutors reached a breakthrough, however, during a visit to a Persian rug shop owner who had ties to Iran. Gathered around a table, picking at watermelon and pistachios, the shop owner and prosecutors discussed politics and family. At the end of the conversation came a revelation: the Alavi Foundation, the shop owner declared, was completely under the control of Iran.

Another confidential informant provided additional clues, specifically that the Alavi Foundation had received millions of dollars from Bank Melli, an Iranian state-owned bank. Get the payment records, the informant explained, and prosecutors would find the trail to Iran.

But when the prosecutors and the F.B.I. pulled the charity's bank records, Bank Melli was nowhere to be found. Credit Suisse and Lloyds were there instead.

The evidence against the Alavi Foundation was extensive, former prosecutors say, but pointed to a federal case rather than a local one. The district attorney's office ceded its Alavi investigation to the United States attorney's office in Manhattan. Under United States attorney Preet Bharara, federal prosecutors filed a civil complaint accusing the Alavi Foundation of "providing numerous services to the Iranian government." That action led to Mr. Bharara announcing a settlement agreement that forced the Alavi Foundation to forfeit its holdings in the office tower. When the government sells the building, the proceeds will flow to the families and estates of victims of terrorism.

With the Alavi Foundation case off its plate, the district attorney's office turned its focus to Credit Suisse and Lloyds. The prosecutors offered the banks a choice: turn over records related to Iranian banks or face a criminal case.

The banks chose to cooperate, producing reams of records that laid bare a scheme to disguise how Bank Melli was funneling money into the United States. To avoid detection, the records showed, Credit Suisse and Lloyds falsified money-transfer paperwork, replacing Bank Melli's name with their own.

"Please do not mention our name to any bank in the USA," Bank Melli wrote to Lloyds in one of the documents obtained by prosecutors.

Unbeknown to the prosecutors in Manhattan, the Justice Department's criminal division in Washington had its own investigation into Credit Suisse. The inquiry from the division's asset forfeiture and money laundering section, now led by Jaikumar Ramaswamy, began with a tip from an I.R.S. agent who had spotted a suspicious transaction.

The parallel investigations merged at a legal conference in 2007, when Mr. Kaufmann from the district attorney's office lunched with a Justice Department official. Out of the meeting came a plan to pursue not only Credit Suisse and Lloyds, but other foreign banks suspected of flouting United States sanctions. When Mr. Kaufmann left the office in 2013, he handed the cases to his successor, David Szuchman, and a senior prosecutor, Polly Greenberg.

The cases benefited from a trove of internal emails from Credit Suisse that showed how bank executives strategized ways to capture business from Iran once Lloyds left the market. If Credit Suisse did not act fast, the emails warned, it might lose out to other European banks.

In 2009, prosecutors kicked off a string of cases, first taking aim at Lloyds and then Credit Suisse. Barclays settled in 2010, laying the groundwork for ING, Standard Chartered and HSBC to strike their own deals in 2012.

"I felt strongly that banks should not be used as vehicles for transferring illicit funds or contraband on behalf of sanctioned countries," Mr. Morgenthau, who at 94 is now of counsel to the law firm Wachtell, Lipton, Rosen & Katz said in an interview.

The BNP case announced on Monday traces to these deals. As the deals were being negotiated, a whistle-blower approached a rank-and-file prosecutor at the Manhattan district attorney's office about BNP's ties to Iran. BNP was also doing business with Sudan at a time that the nation was operating a genocidal regime. The whistle-blower is not expected to receive any compensation for assisting the case.

The case — a collaboration among the Justice Department in Washington, the United States attorney's office and the district attorney's office in Manhattan, as well as the Federal Reserve, Treasury Department and Benjamin M. Lawsky, New York State's financial regulator — stood apart from the others. The volume of transactions reached tens of billions of dollars. And the $8.9 billion penalty is more than triple the amount that the six other banks collectively paid to resolve sanctions cases.

For Mr. Flatow, who ultimately received $25 million, the actions are vindicating.

"The fact that our case laid the groundwork for these actions is really a tribute to Alisa who would be 40 this year," he said.

Alain Delaqueriere contributed research.

A version of this article appears in print on 07/01/2014, on page A1 of the NewYork edition with the headline: Grieving Father Pulls a Thread That Unravels Illegal Bank Deals .

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