reputation

Buffett May No Longer Be Invincible

by on April 25, 2011

Huffington Post…

NEW YORK (Ben Berkowitz) – Aside from maybe the odd cheeseburger stain on his tie, nothing much sticks to Warren Buffett. Whether his underlings are convicted of helping insurance companies inflate results or a major company he helps oversee is sanctioned for accounting shenanigans, his admirers don’t seem to care. Or at least, they haven’t historically. But with a key Buffett lieutenant resigning under a cloud recently, some sophisticated investors are no longer willing to overlook the obvious. For all the shareholders who still consider Buffett the epitome of American capitalism, there are others who wonder whether the time may be near for Buffett to take a graceful bow and exit the stage. Some will clamor for that this weekend, when 40,000 of his shareholders prepare to descend on Nebraska for the annual meeting of Berkshire Hathaway, the ice-cream-to-insurance conglomerate he runs with absolute authority. “I want to hear more about Sokol, I want to hear more about how they’re going to outperform the markets. I want to hear about what (Buffett’s recent) trip to India leads us to believe about how the money is going to be invested in the future,” said Michael Yoshikami, chief executive of wealth management firm YCMNET Advisors and a widely quoted Berkshire shareholder. Investor disappointment reflects not just the revelation that David Sokol, once Buffett’s presumed successor as chief executive, bought stock in a company he then pushed Buffett to acquire. It is also because of Berkshire’s lackluster performance recently, and questions about the firm’s ability to thrive after its octogenarian chairman and chief executive moves on. Berkshire Hathaway has grown exponentially over decades, but many investors question how it can possibly do as well in the future. With the dozens of companies that Berkshire Hathaway owns having had relatively little oversight for years (by Buffett’s own proud admission), some wonder how much earnings power Berkshire actually has and whether future earnings can be as strong as past. “Obviously Berkshire has intrinsic value but now I have to question that intrinsic value,” said Janet Tavakoli, an expert on derivatives and author of “Dear Mr. Buffett,” a 2009 book laden with fulsome praise for the legendary investor. Tavakoli, like many others, has revised her thinking sharply in the intervening years. Yet she, like so many others, added an important caveat about Buffett: “(His) brand is so powerful you are reluctant to question.” SOKOL AFFAIR By now the details of Sokol affair have been told many times. Citigroup bankers pitched a long list of companies to Buffett’s presumed successor, and he told them he thought Lubrizol Corp, which makes lubricants and other chemicals, might make a good acquisition target. He started buying up shares for his own account, and after building up a $10 million position he pushed Buffett to buy the company. As Buffett put it, Sokol made only a “passing” mention that he owned some Lubrizol shares. Sokol made about $3 million on the trade, perhaps at Buffett’s expense. Buffett has been called to task for how he handled the matter. In a letter to investors, he announced Sokol’s resignation, explained the stock issue and offered a grant of absolution: “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” he wrote. Less than three weeks later, the first shareholder suit was filed, accusing Berkshire’s board of breaching its fiduciary responsibility. More are expected, particularly from bigger firms with a track record of winning large settlements for shareholders. Governance experts say Buffett blamed the sin but not the sinner. “The response wasn’t as strident as … I would have hoped for in suggesting that personal stock transactions that are related to corporate stock transactions are problematic and not the sort of thing that the company thinks is a good idea,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “And I would hope in these situations that you would be pretty tough on that in your response.” Some of Buffett’s biggest investors also say he should have chastised Sokol or told him to sell his stock. What is murkier, however, is the question of whether Buffett actually did anything wrong from a legal standpoint. “There’s a lot of very problematic behavior here that doesn’t easily find an explanation, so the question remains, what in fact was going on here?” said Harvey Pitt, chief executive of Kalorama Partners and the former chairman of the U.S. Securities and Exchange Commission. “Why would somebody be allowed and be deemed to have acted properly in profiting to the tune of $3 million based on his privileged position at the company?,” Pitt added. It wasn’t the first time that Buffett has been close to people behaving questionably. But few of his investors have cared, and the damage to his reputation seemed slight if at all. In 2008, for example, the government won convictions of four executives from his reinsurance business for helping other insurers inflate their results. The nearly uniform reaction from legions of Buffett fans around the world: yawn. And in 2005, the SEC sanctioned the Coca-Cola Co, whose audit committee Buffett sat on, for inflating earnings. His admirers barely batted an eyelash. ‘THAT’S MY GUY’ Buffett, of course, benefits mightily from his folksy image. After all, it’s tough to imagine how someone who drives himself to work and stops at McDonald’s for a bite on the way home can also be guilty of high crimes of finance. “Warren Buffett works very hard reflecting an image that 300 million Americans, six billion people around the world say, ‘That’s my guy. That’s the way I’d like to be like.’ And he works very hard at that — not every week or every month, but every day. And I think by working hard at it every day, he drives that image hard into people’s minds,” said Robert Dilenschneider, a public relations executive who heads the Dilenschneider Group in New York. The audience at the annual meeting is one of the tools he uses to burnish his reputation. There is no better financial television than footage of Buffett having an ice cream at (Berkshire-owned) Dairy Queen, with hordes of investors thronging him and hoping he might drop a stock tip on the floor with the crumbs of his vanilla cone. It is hard to interrupt that storyline. “With the cash that he was able to squeeze out of that dying textile business (Berkshire Hathaway) and astutely reallocating it year after year after year, the business grew from $18 a share to $120,000 a share,” said Roger Lowenstein, author of a well-regarded 1995 Buffett biography and a number of other finance books. “I have no doubt that he’ll be regarded as the investor and probably the financier of the era. This incident sort of tells people that he’s human.” PERFORMANCE UNDER FIRE While many would agree with Lowenstein on Buffett’s place in financial history, his returns of late have not necessarily matched his reputation. Berkshire shares have only barely matched the S&P 500 since September 2008, the depths of the crisis and the time Buffett made some of his most lucrative bets, like buying Goldman preferred shares that threw off more than $15 a second in dividends. Just this year, Berkshire has underperformed the S&P 500 by about 4 percent. Buffett has said returns will slow, so it does not necessarily come as a surprise. There is expected to be less reluctance to question him this year in Omaha. Author Tavakoli said shareholder dissatisfaction was already palpable at the last meeting she attended in 2009, as Buffett went on about his bet on Wells Fargo and investors grumbled that he was not talking about the “crony capitalism” they saw behind the crisis-era bailouts. “It seems as if Warren Buffett has sort of lost touch with the tone of the people who invest in Berkshire Hathaway and their sentiment,” she said. The Q&A session will again be moderated by financial journalists this year, so even if investors don’t ask tough questions, reporters may. Words like “contentious” and even “raucous” are being thrown around. And yet, some investors still do not expect much. “I don’t expect any great revelations but what I want is not necessarily what I’m going to get,” said YCMNET’s Yoshikami. Yet he still expects the annual meeting to be a “lovefest,” given the overwhelming number of shareholders who flock to Omaha annually for nothing more than pearls of Buffett’s wisdom (and perhaps some discount pearls from his jewelry business, one of a number of Buffett companies to offer steep shareholder discounts over the course of the weekend). Yoshikami said that if Buffett gets away from the Sokol episode unscathed, it will be because he has banked sufficient goodwill with investors in the past. “When you have an inventory of transparency that you can fall back on I think you get the benefit of the doubt,” he said. “I think when you self-disclose enough and you have a reputation for self disclosing it buys you some reputation credits.” But no matter what Buffett says or does in Omaha, there is a growing realization that the old days have slipped by. Buffett and his partner, Charlie Munger, are aging, the questions about the future of the conglomerate are getting louder and people are recognizing, as they do, that all good things have to come to an end. “The passage of time is hitting home. This year is the end of Berkshire as it used to be,” said Alice Schroeder, a former stock analyst who wrote what many view as the definitive biography of Buffett. “It will never be the same. Even if people think Buffett’s not going to address all these issues and the questions won’t be as tough as they should be, Berkshire as it used to be is over,” Schroeder said. (Additional reporting by Brett Gering of Reuters Insider; Editing by Jim Impoco) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Buffett May No Longer Be Invincible

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Gina Harman: Scaling Microfinance: An Economic Imperative

by on February 11, 2011

These are troubling times, as the spotlight on microfinance has recently led to unfortunate mischaracterizations and a rush to judgment. Emotions have been confused for facts and character assassination is used to negate the very real contributions in the fight against poverty. In the current media cycle, commercialization — rather than unsavory business practices — has been identified as the cause in the case to discredit microcredit. While the lives of hundreds of millions worldwide have been enriched by opportunity once unimaginable, the words of a few threaten to change the opinions of many — a dangerous situation, indeed. The achievements of microfinance on the international stage have been very real, with collective efforts bringing positive change to 150 million of the world’s poor and the industry as a whole aiming to reach the two billion people who lack access to basic financial services. As a recent article in The Guardian made clear : what’s hurting the reputation of the industry is “unscrupulous operators — wolves in sheep’s clothing flying the flag of microfinance, but employing the tactics of loan sharks.” The wholesale refutation of an entire nonprofit and social business sector that has helped millions worldwide is clearly not the answer. As my colleague Michael Schlein suggested in a recent New York Times letter to the editor , the solution is not to abolish microlending — but to demand sound and transparent regulation. As the microfinance industry has grown, approaches have also changed to reflect real opportunities, market differences, pressures, and real grievances. Some of these strategies include commercialization, IPOs and increased competition. Here in the U.S., domestic microlending strives to put the elements of that successful model to work in very different circumstances. From unregulated to highly regulated markets, domestic microlending has grappled with the enormous need — over 10 million small business lack access to fairly priced capital — to grow, sustain or start a business. That lack of access has resulted from many factors from business type, to risk profiles and to the very high cost of delivering both the dollars and the support services needed to improve success. For many years, much of the discussion surrounding U.S. microfinance has been about how different the model and the customers are from the international scene. Those comparisons have focused on the size of the loans made, the presence of banking institutions in the domestic market, loan default rates, and an underlying assumption that the land of opportunity simply provides for those willing to work hard. Though differences exist between domestic and international models, there is also great commonality. Broadly speaking, U.S. and international microlenders share an underpinning philosophy that sufficient access to small business capital can have lasting, positive change on communities and individuals, and be a source of larger social good. Domestic microfinance organizations have grappled with defining a delivery method that will dramatically increase the numbers of businesses they can serve. That means personal relationships that begin at the application and are sustained over the life of the loan, such as providing resources from coaching to networking and financial education. All of this adds costs, and can make scaling to meet that need very challenging. But scale we must because the rewards to the economy, communities, families, and individuals are simply too large for the country to ignore. A Bureau of Labor Statistics report issued in early January showed the economy added 103,000 jobs in December . While these figures were lower than several private surveys had predicted , it is worth noting from where those job gains originated. Local governments shed 10,000 workers in December, state employers neither added nor terminated workers, and corporations didn’t do much hiring, either. That means all of December’s modest gains came from private industry, with most of those new jobs coming from small and midsize businesses. With U.S. hiring making incremental inroads, small business owners and would-be entrepreneurs — many of whom live and work outside of the financial mainstream — will be looking for sources of capital in order to grow. These recent job trends only underscore the importance of domestic microfinance efforts — and suggest how it can play an enormous role in helping to bolster the nation’s economy, providing access to financial resources, education, and training.

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Gina Harman: Scaling Microfinance: An Economic Imperative

Yvette Kantrow: Polishing the Dimon

December 10, 2010

The media has always loved Jamie Dimon. After all, he turned around Bank One Corp., kept J.P. Morgan Chase & Co. profitable through one of the worst financial crises in history and helped the government save Bear Stearns Cos. and Washington Mutual from oblivion. And he did it all after being cast out of Citigroup by his longtime father figure and mentor, the now-reviled Sandy Weill. How wonderfully Shakespearean. These days, of course, loving a banker is no easy task — even one who might remind you of Hamlet and who started to sound the alarm on subprime mortgages before his rivals. After being severely chastised for failing to call the bubble because it was too busy cozying up to its pinstriped sources, the media now takes it on faith that pretty much all bankers — except those who toil at the Bailey-esque small bank down the street — are to blame for our economic woes. The profession’s notoriety is so complete that John Cassidy, writing in The New Yorker, deemed much of what investment bankers do as “socially worthless.” But Dimon’s reputation remains intact, perhaps even enhanced, as evidenced by his recent gracing of the cover of The New York Times Magazine, which dubbed him “America’s Least-Hated Banker.” That headline might be ambiguous, but the accompanying story, by Roger Lowenstein, is not. Like much of the Dimon hagiography that preceded it, the piece celebrates Dimon’s famous aversion to risk, his immersion in details, his passion for organization and his blunt-talking ways. And while it allows that Americans now display “a sort of Jacksonian animosity toward big financial institutions,” it notes that Dimon is the exception to this rule, mostly because he kept J.P. Morgan, and every business he has ever run, out of serious danger. But is it really that simple? Is what Lowenstein calls Dimon’s “radar for trouble” enough to keep him on the right side of a media that routinely calls for a Wall Street CEO perp walk? “The country is deeply divided over the proper role, and the size, of banks, and nothing epitomizes these tensions like the narrative of Jamie Dimon,” the piece intones. But Dimon doesn’t just epitomize these “tensions,” he epitomizes much of what the country dislikes about big banks. In fact, the very virtues the press constantly praises in Dimon — his cost cutting, his wonkiness, his blunt speech, his faith in the virtue of banking behemoths — we find reprehensible in everyone else, including, most strikingly, his old mentor, Weill. Indeed, in the Times piece, when Dimon spouts his Wal-Mart theory of banking — that just as people want to buy lettuce and TVs under one roof they want to visit one financial institution for credit cards and mortgages — an impressed Lowenstein writes that “few people think of banks this way.” Really? Weill thought about and talked about banks that way constantly, as did any number of proponents of so-called supermarket banking — an idea that, thanks to the crisis, has fallen into ill repute. But when uttered by Dimon, the concept is treated as not just novel, but fascinating. “It is an intriguing comparison,” Lowenstein writes of likening Chase to Wal-Mart. “This is how Dimon wants to be seen — as a retailer with 5,200 branches nationwide whose products happen to be financial services.” That’s also how Weill wanted to be seen, but it didn’t quite work out for him as Citi grew too large and discombobulated to be effectively managed. The story does not discuss that, however, choosing instead to boil down Citi’s myriad problems to “hubris” and to Weill’s failure to name a capable successor — someone like Dimon, we assume. So far, things are working out for Dimon, whom Lowenstein describes as “trim” and somewhat “boyish” with “a puckish, faintly suppressed grin” — features that surely help bolster his reputation almost as much as J.P. Morgan’s balance sheet. Contrast this to how Lowenstein portrayed Weill in an August 2000 cover story, also for the Times magazine: The then-Citi CEO was described as “superficially ordinary,” “moderately articulate,” “lacking in grace,” “exploding” and “screaming.” (The story was so unflattering to Weill, who was then at his peak, that it prompted The New York Observer to wonder about anti-Semitism.) But for all of Dimon’s success, is it still enough to grant him an exception to the media’s general disdain for big bank CEOs? After all, he’s not going to run J.P. Morgan forever. And, like any mere mortal, past performance is no guarantee of future success. Yvette Kantrow is executive editor of The Deal magazine.

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David Isenberg: A Rose by any Other Name Would Smell Like a "New Humanitarian"

November 29, 2010

Remember when in February 2009 Blackwater changed its name to Xe Services? Didn’t do much good, did it? Almost everyone still thinks of it as Blackwater, or shades of the other Prince, the PSC formerly known as Blackwater. It just goes to show you that not every attempt at rebranding works well. Sometimes, in fact, they are major disasters. For example, if the SciFi Channel had done more due diligence before it rolled out its new name it would have discovered that, in most parts of the world, “syfy” is a slang term for syphilis. And being associated with a sexually transmitted disease is never a good marketing tactic. Of course, rebranding is par for the course for private military and security contractors. The public debate is frequently shallow and sensationalist, and often outright demagogic, so it is hardly surprising that PMSC seek to change the terms of the debate, considering that its critics often seek to influence it by using inaccurate terminology like “mercenary, “dogs of war,” or “guns for hire.” Remember that the PMSC trade group, the International Peace Operations Association, which then changed its name to simply IPOA, recently renamed itself the International Stability Operations Association. I see the change as an attempt to broaden their market appeal. Offering an organization that is of use to companies that can lay claim to helping establish stability will, at least potentially, cast a far wider net, that just those involved in peace operations. As both a marketing move and an attempt to attract future member companies it is a smart move. The sad thing is that for many years PMSC have been notably bad at doing public relations, or, if you want to use military terminology, information operations. Partly it was because in their early years PMSC were, and to some degree, still are headed by former military officers whose initial reaction to the idea of talking with the media is to echo the famous comment, “Off with their heads!” from the Queen of Hearts in Alice in Wonderland. Another reason is that they were simply too cheap to pay for a fulltime public relations person or office. And when you are something on the order of DynCorp or KBR you definitely need a whole office. Or to paraphrase the old sports quote, image isn’t everything; it’s the only thing. Given that PMSC trade association have lobbied Congress to consider “best value” when awarding contracts, which involves weighing a company’s reputation among other factors, and not just its bid price, you can see why this is important. So, how’s that whole identity politics thing working out? This brings us to another paper presented at the presented at the SGIR 7th Pan-European International Relations Conference, in Stockholm, Sweden, September 9-11, 2010. This is ” New Humanitarians? Private Military and Security Companies ” by Jutta Joachim & Andrea Schneiker of the Institute of Political Science at Leibniz University Hannover, Germany. They start with the obvious, “Although Private Military and Security Companies (PMSCs) are gaining increasingly in importance, they still suffer from an image problem… Companies are therefore interested in presenting themselves as legitimate and acceptable contract parties.” And what do they find? Based on a discourse analysis of the homepages of select PMSCs and the industry association International Peace Operations Association (IPOA), we examine the ways in which they respond to negative labels. Drawing on the framing literature, we find that PMSCs present themselves as “new humanitarians.” Not only do they provide increasingly logistics or security for the staff of humanitarian organizations which are confronted with complex emergencies and ever-more dangerous missions, but the respective companies also appropriate the discourses of these organizations. The growing involvement of actors interested exclusively in profit is not without problems. Not only does it challenge the monopoly thus far enjoyed by non-profit organizations with respect to humanitarian assistance and the principles which guide their actions, but it contributes further to the normalization of privatized security. “Armed humanitarians” is also the title of Nathan Hodge’s book which I wrote about previously . Of course, such a rebranding has impact beyond that of image. It goes to furthering the legitimacy and staying power of the PMC industry. After all, who could possibly be against a humanitarian?. It would be like being against the Red Cross or Amnesty International. For PMSCs to present themselves as humanitarians has implications that go far beyond the humanitarian sector. It contributes to the normalization and power of PMSCs. By presenting themselves as do-gooders and others, including state militaries, international organizations, such as the United Nations, and even NGOs as incapable and less caring for the well-being of others, PMSCs enhance their legitimacy. Outsourcing of military and security-related tasks may, in turn, be more acceptable, easier to justify, and more difficult to resist, if not to say a moral obligation. In the view of the authors defining oneself as a humanitarian, which is generally considered to be an ethic of kindness, benevolence and sympathy extended universally and impartially to all human beings, is also smart business: In the case of PMSCs, presenting themselves as humanitarians may enhance their common acceptance and increase their pool of clients, such as NGOs, who might be less apprehensive in relying on their services, as the Chairman of the Board of Directors of RA International, a member company of the IPOA, explains: One should never underestimate the power of private companies who offer aid. Companies are almost always focused on efficiency, good negotiation, building their reputation (their brand) and getting things done on time and on budget. The basic rules of capitalism that work for the good of the communities they aid can in turn aid them in business and ultimately help post-conflict societies to recover and progress. So, in this view, someone like Adam Smith is really Mother Theresa in drag. And, as it turns out, for one of the few times in their history, PMSC are becoming rather deft and adroit in their public relations. PMSCs increasingly refer to themselves as “the New Humanitarian Agent[s]” emphasizing, like AECOM, that they “are committed … to make the world a better place”. Their humanitarian identity has evolved over time in response to scandals and crisis in the industry and is reflective of the post-Cold War kind in terms of the professed ambitions. Most indicative of a change in the industry is the way in which the IPOA more recently refers to it. PMSCs, according to the association, belong to the “Peace and Stability Operations Industry” of which the private security industry is only a “subset.” … The Journal of International Peace Operations of the IPOA is quite telling in this respect. Ads of companies quite frequently show sad looking girls (EODT), babies being fed (Blackwater), boys laughing and waving at one (IPOA), soldiers rescuing little kids (IPOA), or a globe (Blackwater, IPOA). Everyone is entitled to their own spin and it is true that in many cases PMSC are just as capable, if not more so that their traditional NGO counterparts such as Oxfam, Doctors Without Borders or the Red Cross. So, should we care whether IPOA et al is putting itself in the ranks of Nobel Peace prize winners? Well, the authors note a few problems. First, there is what we might politely call the hypocrisy factor: Analyzing the homepages of PMSCs and one of their associations–the IPOA–provides evidence that companies present themselves increasingly as “new humanitarians” interested in addressing the root causes of conflicts. On the one hand, they employ naming strategies, emphasizing their commitment to humanitarian aims and ethics. On the other hand, however, they paradoxically blame while at the same time align themselves with other humanitarian actors. As much as they consider the reluctance of Western states, international organizations, and NGOs to intervene in ongoing crisis as a problem, PMSCs also seek to benefit from and rent their legitimacy. Second, is the conflict of interest issue: First, PMSCs specialize in intelligence and risk assessments. In terms of effectiveness and efficiency, this may be an asset in situations of violent conflicts or humanitarian disasters and a comparative advantage vis-à-vis NGOs or international organizations. Given the kinds of information PMSCs can produce and have available, they may be in a better position to determine where help is most needed, coordinate the assistance and the logistics, or to estimate the effort or the danger involved. From a moral point of view, however, this capability can be problematic. Through their advice, PMSCs may shape and influence our understanding as to what constitutes a humanitarian crisis, who are the victims and who may deserve aid, and who is qualified to assist. Instead of political or humanitarian motives per se, the information companies provide is based on economic reasoning. Whether to intervene or not and offer assistance is, hence, no longer a question of duty or a certain ethics, but one of whether a crisis promises to be a lucrative market. Third, is the commitment issue: Similar to NGOs, most PMSCs operate transnationally and conceive of themselves as apolitical, neutral actors. Again, based on the criteria of efficiency and effectiveness, this makes their involvement appealing. Companies can be at site in a relatively short amount of time, are not be held back by cumbersome political debates, and may enjoy greater acceptance because they are not directly associated with the UN or any particular state. Judged in moral terms, however, their constitution may again be a problem. Compared to states, UN agencies or even NGOs which often have ties to countries other than those established during violent conflicts or natural disasters, companies do not have these kinds of relations. Consequently, they may feel less of a commitment beyond their assignment and ignore the long-term implications of their engagement or even the short-term consequences for ongoing conflicts. If problems arise, they may simply leave and set up shop elsewhere. While some might argue that the exit option is also available to NGOs, the implications are different for them than for PMSCs. Contrary to the former, which are forced to reflect whether their behaviour is in line with their ethics and are held accountable by their members and donors, companies, in comparison, evaluate their actions based on profits and the potential responses of their share-holders. And last, but hardly least: Finally, apart from moral concerns or those related to efficiency and effectiveness, there seems to be a further implication that has to be considered when PMSCs acquire a humanitarian identity. It contributes to their normalization and may, in the long-run, undermine the role of more traditional actors in the field. With PMSCs gaining in acceptance and legitimacy, international organizations and NGOs may either be increasingly be perceived as lacking the ability to take care of those in most need or may even feel less compelled to intervene.

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$12 Billion Hedge Fund Has Its Own Unofficial Golf Pro

November 18, 2010

NEW YORK (By Matthew Goldstein) – Sam Evans may not have the most powerful or lucrative position in the hedge fund world. But his job at SAC Capital Advisors is one a lot of people, and not just financial industry types, would die for. Unlike his co-workers, the hundreds of traders and analysts who work at Steven Cohen’s $12 billion hedge fund, Evans does not stare at computer screens, map out stock charts or work the phones for information on the markets all day. Rather, he spends much of his time negotiating the greens — quite literally. Evans, 49, who joined Cohen’s Stamford, Connecticut-based firm in August 2009 after more than 20 years as an institutional stock broker, is SAC Capital’s unofficial golf pro. Evans job isn’t so much helping SAC Capital portfolio managers and others at the fund with their strokes, as it is helping them gain a better understanding of some of the companies Cohen’s hedge fund puts money into. As part of the hedge fund’s business development group, he sets up dozens of golf outings for SAC Capital traders and analysts over the course of a year. Guests at these small gatherings are varied, say investment bank sources familiar with Evans’ job description. Invitees might be wealthy individuals from whom Cohen is trying to raise money. Or they might be corporate executives with companies about which the hedge fund is trying learn more. A handful of SAC Capital employees and Wall Street analysts may also tag along from time to time. An amateur golfer with a respectable 7-stroke handicap, Evans has found a unique way to marry his golf skills with the big rolodex of corporate executives he struck up friendships with during his time at Donaldson Lufkin Jenrette and more recently Deutsche Bank. A member of more than a half dozen prestigious East Coast golf clubs, Evans has played with an elite group over the years, including former President Bill Clinton. Now there is nothing unusual about brokers, traders and business executives spending a lot of their free time teeing off on the links. Many a corporate merger has been agreed to in principle on the back nine. And Wall Street investment firms are famous for sponsoring charity golf outings that are widely attended by hedge fund traders, mutual fund managers and corporate executives. Investment firms and mutual funds often arrange similar “corporate access” events — typically conferences and dinners — where money managers and analysts are invited to meet and schmooze with business leaders. Yet, the ability of a big hedge fund to get several hours alone with a corporate executive on a golf course reveals the great information disparity that exists between ordinary investors and the savviest of traders. “To some extent, the notion of a level playing field and a truly public market is a myth,” said Donald Langevoort, a Georgetown University Law Center professor. SOMEBODY’S GOT TO DO IT What’s clear is that there aren’t many on Wall Street, much less at a hedge fund, like Evans, who gets paid to play golf three or four times a week with corporate executives and other rich people at historic courses like Merion Golf Club in suburban Philadelphia or Shinnecock Hills Golf Club on Long Island. In fact, one person who knows Evans and has golfed with him calls him something of a “pioneer” in the $1.7 trillion hedge fund industry. Others, upon learning of Evans and his unusual post, expressed a sentiment similar to the one stated by the manager of another hedge fund: “How do I get a job like that?” Evans, a 1987 Harvard Business School graduate who was named one of Wall Street’s top institutional equity salesmen in a Reuters survey in 2000, declined to comment through an SAC Capital spokesman. Like his boss, Cohen, he appears to guard his privacy vigorously — a fairly intensive Internet search for a picture of him on the links came up empty. Jonathan Gasthalter, SAC’s spokesman, also declined to discuss Cohen’s decision to hire Evans and his unusual corporate role. To some degree, Evans may owe his job to the new reality hedge fund managers find themselves in following the worst financial crisis in decades. Today, even the industry’s most successful managers must work harder than ever to woo new investors and keep current ones from bolting. But beyond the need to raise capital, Evans’ time spent on the greens also sheds a light on the many often subtle ways that hedge funds use to get access to corporate executives and a potential edge over their competitors. “While this job sounds unique, it is my understanding there are a lot of people with jobs at hedge funds who are there to help facilitate information flow,” said Jill Fisch, a University of Pennsylvania Law School professor, who specializes in corporate governance issues. “The whole goal at a hedge fund is to have an information edge.” PAR FOR THE COURSE Securities experts said there’s nothing inherently wrong with a hedge fund organizing small golf outings for its traders and analysts to meet with corporate executives in order to get to know a company or an industry better. That is the kind of fundamental research and basic information gathering that often separates one hedge fund from the other. But securities lawyers said there is always a concern that in a casual setting like playing three hours of golf, a company executive may blurt out some confidential corporate information and the hedge fund later trades on it. “The potential issues are fairly obvious because these are events where there is unlikely to be strong compliance control,” said Langevoort, the Georgetown professor. “Everybody knows in their head what the rules are. But when you go out in one of these settings it is easy to slip.” A securities lawyer in New York, who did not want to be identified because he and his law firm do a lot of regulatory defense work for Wall Street investment firms, said concern about the leaking of confidential information is always greatest when traders and executives gather in more intimate settings as opposed to some well-attended public event like a football or baseball game. In the wake of the October 16 2009 arrest of Galleon Group co-founder Raj Rajaratnam and nearly two-dozen others on insider trading charges, federal authorities have said stamping out the misuse of secret corporate information by hedge funds is a major priority. Authorities are particularly focused on the ways hedge funds gather information to get a so-called trading edge. The Galleon investigation also has caused headaches for Cohen because several people charged in the case had once worked at SAC Capital. But so far no one has been charged with wrongful trading while working at Cohen’s fund. CHIP SHOTS To be sure, there’s no indication that the golf excursions arranged by Evans have raised any concerns with regulators or federal authorities. People familiar with them said Evans’ main task is to set up golf dates with corporate executives to help cement better relationships, not unearth confidential corporate information. In fact, SAC Capital takes steps to make sure that even if some executive let his lips flap a bit too much while waiting to hit a putt, the fund doesn’t trade on anything that is said. A former SAC Capital employee familiar with the golf outings said shares of companies whose executives attend a golf outing that Evans has either arranged or co-sponsored are put on a “restricted list” — meaning the stock can’t be traded for a set period of time. In September, for instance, SAC Capital put shares of chemical company DuPont on the restricted list, after Evans and another SAC employee attended a small golf outing with Deutsche chemical analyst David Begleiter and Dupont Chief Financial Officer Nicholas Fanandakis. The outing, which also included a few mutual fund managers, was officially organized by Begleiter. The small outing was held at Merion Golf Club, often rated as one of the top private courses in the United States, because Evans is a member of the 114-year-old club. He and Begleiter became friendly during the nine years Evans worked for Deutsche. Officials with Deutsche and DuPont declined to comment. Chandler Withington, Merion’s assistant golf professional, said in an email that the club does not disclose “information on any of our members without their consent.” In a regulatory filing, SAC Capital reported owning 65,000 shares of DuPont, a rather meager position for a large hedge fund. Evans, a former college swimmer and baseball player at American University, did not take up golf until graduate school. Standing approximately 6’4″ inches tall, he is said to be ambidextrous, able to throw and write with both hands. People who know him say Evans has worked hard to hone his golfing skills, even overcoming a case of Guillain-Barre syndrome in 1994 — an ailment that can cause temporary muscle paralysis. Several of his friends, who did not want to be identified, said Evans values the relationships he made with wealthy individuals and corporate executives while working on Wall Street. They added that he would not do anything to jeopardize the friendships he has made or his reputation. Jack Thompson, an avid golfer who is in the business of raising capital for a number of investment funds, said he sees nothing unusual about using golf as a way to get to know a person or a company. “This is no different than the CEO of some company golfing with customers,” said Thompson. “They are networking and sharing information. It doesn’t mean they are doing anything wrong.” Some on Wall Street said getting face time with a corporate executive on a golf course is akin to a hedge fund throwing a splashy party at a nightclub or renting a cruise boat to entertain guests — something many funds are known to do from time to time. Others point out that many hedge funds work with doctors to get insight on medical industry trends and some even hire private investigators to gather dirt on chief executive officers. For instance, in 2007, William Ackman, the manager of Pershing Square Capital Management, employed an outside consultant to track the corporate plane travel of Ceridian Corp.’s then chairman L. White Matthews. Ackman, in mounting a campaign to push for changes at Ceridian, had charged the company let Matthews misuse the corporate jet by flying seven times in 63 days to his vacation home in Jackson Hole, Wyoming. SHUSH Still, there is something about golf, with its leisurely pace and the tendency of players to turn off their phones and Blackberrys for a while, that can encourage normally tight-lipped people to let their hair down. Over the years, it’s something securities regulators have noticed as well. In 2001, for instance, the Securities and Exchange Commission and federal prosecutors charged a San Diego man with making $137,485 in illegal profits from a confidential tip he got while golfing with the director of a company that was on the verge of being acquired. Federal authorities charged Douglas Gloff with trading on the inside information after the director of Acuson said the company was “going to go away.” Authorities didn’t charge the unnamed director with any wrongdoing after concluding he made a mistake and tried to prevent Gloff from trading on the confidential buyout information. Regulators said the director called Gloff and told him not to buy any Acuson shares “unless you want to go to jail.” Gloff subsequently pleaded guilty to insider trading, forfeited his illicit trading profits and paid a $137,485 fine to the federal government. Still, securities experts say a savvy trader can glean a lot from a long golf game with a company executive even if the talk on the greens has nothing to do with business. They point out that an astute trader can learn a lot from a person’s body language and demeanor. “Sometimes you can watch a person for four hours and get an idea of how things are going at a company,” said Georgetown’s Langevoort. “You can learn a lot from what he doesn’t want to talk about.” Cohen just might be onto something here with the hiring of Evans. As one of the hedge fund industry’s most successful managers for more than two decades, he’s had a reputation for making some groundbreaking hires. SAC Capital was one of the first hedge funds to hire an in-house psychiatrist, Ari Kiev, to talk to stressed traders and analysts. Kiev died last November. Several years ago, Cohen aggressively started adding compliance people to the payroll to make sure traders at the fund do not cross the line. Other big funds have since followed suit. So, who knows? Maybe instead of “2 and 20″ — a typical hedge fund’s management and performance fees — “fore!” will become the industry’s new mantra. (Reported by Matthew Goldstein; Editing by Jim Impoco and Claudia Parsons) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Video: Fertik Calls Web Privacy Tools `Antivirus for Your Life’

November 16, 2010

Nov. 16 (Bloomberg) — Michael Fertik, chief executive officer of Reputation Defender, talks about his company’s business strategy and the market for Internet privacy products. Fertik speaks with Margaret Brennan on Bloomberg Television’s “InBusiness.” (Source: Bloomberg)

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Peggy McColl: Are You Marketing From a Place of Integrity?

October 27, 2010

Let me set the scene for you. It’s the beginning of spring and you have decided it’s time to seek out the support of a professional to help you with your weight loss goals and get ready for shorts season. You go to the gym for your first appointment with your personal trainer and there he is. One hundred pounds overweight and laboring for breath as he reaches the top of the stairs to greet you. Your heart sinks. You were putting your faith in someone to show you the way and it looks like he has not been able to find it on his own. Sounds a little far-fetched? Perhaps in person it is, but this type of disconnect happens behind the safe curtain of the internet all of the time. I have had a few of these experiences myself over the years and you probably have also. I have known authors to write books about how to get rich, yet they had no money. They planned to get rich by teaching others how to do it. Odd, isn’t it? There are also a lot of social media “experts” teaching people how to use social media for profits, but where are their actual profits, how are they making money from it, besides teaching it to others? Hmm? Ever meet someone who appeared completely disorganized, always full of drama and living in reactive mode? Were you ever shocked to find out he/she was a life coach? Then there are the folks who write about how to have a happy marriage and they have been divorced several times. In this case maybe they are telling you what not to do? Perhaps they should put it into practice before they deem themselves the teacher. I even had a client who signed up for one of my wealth programs and agreed to pay the investment over three payments. After being reminded that her second and third payments were overdue she came up with a proposition for me. If I helped to promote her own product about getting rich, the money I made by being her affiliate would pay me for my services. Did I lose you there for a minute? I am not surprised. I was confused and shocked when she suggested it to me. Now I am not suggesting that everyone online is a phony. What I am strongly recommending is that if you are going to offer anything, and I mean anything online, you need to do so from a place of total integrity . Your brand, your reputation, and your success depend upon being authentic. That is the only way to create raving fans. You don’t want clients that are happy you want clients that are raving about you. By being authentic it causes other people to talk about you. They are so impressed that they can’t wait to tell their friends and colleagues about you or your business. When your curtain is pulled back, what will your clients see? If you are not being authentic you are not building a business on a solid foundation. People will find out about you, one way or another. The online you should be a mirror image of the real you . Have you found that success follows authenticity? Do you have a raving fan story? Please share them in the comments section below.

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Jonathan Bernstein: Product Recalls — Tips for Businesses, Media and Consumers

October 27, 2010

Cribs. Strollers. Tylenol (again). Riding Mowers. Aromatherapy Kits. These are just a few of the recent recalls tracked at the consumer website Recalls.org . Through my work in support of product recalls, both food and consumer products, I have identified trends in both well-done and poorly done recalls that prompted me to offer these ten tips to businesses that may have to go through this process — and it’s also a 10-point system by which consumers and the media can evaluate a business’ performance during a recall. Remember That Rapid Response To A Known Product Problem Minimizes Damage, so the time to examine the systems you have in place for recall is NOW, not when you already have a product needing recall. Have A Product Recall Plan Ready To Use Anytime, one that covers the operational, legal and public relations (internal and external) components of making a recall. Hint: “We’ll wing it when it happens” is not a product recall plan. Have The Core Members Of A Product Recall Team Identified And Trained In Advance. It may be necessary to have one team at a corporate level to direct recall activities overall, and individual teams more focused on the operational aspects of product recall at the sales/marketing and/or manufacturing levels. And you’d be amazed at how some people you think will be cool in a crisis actually aren’t, and vice versa – behavior that often is identified through training that includes simulating a recall. Have Back-ups For Critical People And Recall Systems. Assume that some recall-related lead personnel will not be available when you need them. Assume that the computer system where you maintain your stakeholder contact lists has crashed. Assume other similar worst-case scenarios and make your back-up plans accordingly. Have Contact Lists For All Stakeholders Set Up On Automated notification Systems. This is particularly important for end-users and distributors of your products. You can’t rely on the media alone to reach them. Consider The Use Of Virtual Incident Management. There are a number of Internet-centered systems that allow recall team members to exchange real-time information, access current communications documents, and keep team leaders updated even if the team is geographically scattered. Make Recall-related Decisions That Are Based On Protecting Your Brand/reputation And Not Just On Your Legal Risks. The infamous Bridgestone-Firestone recall started far too late because the company’s leadership was considering risks other than the most important one — the risk of aggravating the court of public opinion. Communicate Internally And Externally. Remember that every employee and, often, dedicated contractors are public relations representatives and crisis managers for your organization, whether you want them to be or not. You must empower them with reassuring messages about the recall suitable for use at their respective levels of the company, and you don’t want them to learn of the recall from external sources before they hear about it from you. Don’t Wait For The CPSC, FDA, Or Other Regulatory Agencies To Protect Your Reputation. While each regulatory agency that can get involved in product recalls has its own process to follow, that process can often delay how much time passes before product consumers and distributors are notified — a delay which, in worst-case scenarios, can cause injuries or deaths. In that event, the court of public opinion may react very negatively to both your organization and the regulator — but you’re the one whose revenue and reputation will be most impacted. Focus Special Communications On Highly Disgruntled Customers And Distributors. In this Age of the Internet, and in a litigious society, a few angry people can make waves completely disproportionate to their numbers or even to the injury suffered (if any). The recall process should include an “Escalated Cases” team to focus on such complaints when they’re received. Businesses: in many industries, recalls are inevitable. But if you don’t want your crisis to become a disaster, learn from the mistakes of others. Reporters: don’t let organizations get away with mediocre recall communications. Consumers: have you been told what you need to know about a recall? If the list above says “no,” then complain, loudly! That’s the only way organizations will start to do it right.

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Jeff Bennett: With Recession Comes a Return to Sharing

September 28, 2010

We live in a new era molded by constant change and transitions. Gone are the days of easy credit, a relatively full employment roster and endless budget surpluses. The financial collapse of 2008 had a profound impact on Wall Street, but the weight was heaviest on Main Street and along the citizen byways across the globe. Businesses, governments and consumers are coping by reining in discretionary spending across all categories and those same groups are looking at age old ways to make the most of what they have without buying new, or even buying at all. Thus, the notion of collaborative consumption resurfaced and is fast making its way to households and businesses across America. Arianna Huffington’s recent piece about the ” purpose in times of transition ” offered an interesting perspective on how we, as citizens and owners of our own space, view our daily options. This “transition phase” has allowed us to take a deeper look into what motivates us and drives us as consumers, and make conscience decisions that reflect our morals, and not our bank accounts. In her piece, Huffington writes: Millions of Americans are being forced to go outside the range of their experience by the staggering decline of the middle class. And discussions of what it means to have a good life, of what’s really valuable in life, are no longer confined to the classroom. I couldn’t agree more, and that’s also why I’ve become so invested in the collaborative consumption movement by bringing back the basic lessons of our childhood: share, and share well. The age old functions of swapping and sharing are vogue again. This idea of swapping and sharing is gaining in momentum and creating a new model of consumption where collaboration reigns supreme. Yes, the declining economy is enabling these new consumption models but there is more to the story. The Internet has been transformed from a network of links to a network of people. The web is a social space and offers a valuable platform to already formed offline social networks consisting of family, friends, schools, co-workers and more. In any community, the reputation of a citizen is paramount and this is becoming truer for online social networks, as well. However, while online commerce services wide markets, it has not fully replaced offline commerce. So, how do consumers make viable decisions in times of transitions with so many influencers? Enter: the online-to-offline commerce (o2o) — where consumers demand is aggregated online and then fulfilled offline. To quote Ms. Huffington, again: No matter what stage of transition we are at — and even if change has been painfully foisted on us — it’s important to see ourselves as more than a bundle of needs. We can all have a voice in redefining what the “good life” will mean going forward — and a hand in creating it. But how do you define the good life? How do we come together to create it? Rachel Botsman recently published a new book on this topic called, What’s Mine is Yours . In this manifesto about collaborative consumption, Botsman alludes to the power of the crowds in redefining consumption patterns across the globe. Botsman offers examples of many companies that have been formed to serve this evolving opportunity, ranging from the enormous powerhouses like eBay and Craigslist, to the emerging peer-to-peer networks at Swap.com, RelayRides, RentCycle, Zopa and car sharing from ZipCar. I’ve grown as an executive alongside the Internet. I had a front row seat to the establishment of the Search category during my time with Lycos. Now, I’m positioned as a change agent with the establishment of the Swap category as the CEO of Swap.com. I can say, definitively and without hesitation, that there is massive demand in the market to seek alternative consumption. A key element is for a consumer to establish their reputation in these emerging communities to help maximize their opportunity. We have amassed nearly 1 million members on Swap.com who help facilitate the swapping of books, music, movies and games. There is significant demand for us to expand our presence in these categories and into new categories — this demand inside our community will not only help members swap and save money, but also define their “good life” as it pertains to a healthier way of spending. Healthy spending equals happy consumers, and happy consumers are, after all, what makes the market go ’round…

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Richard Barrington: Fool’s Gold? Four Reasons Gold May Be Overhyped

September 1, 2010

The price of gold reached new highs in spring 2010, spending most of May around the $1,200-an-ounce mark. Clearly, gold is big. Why all the hoopla? Gold is a security blanket people turn to in troubled times, when a chunk of metal seems refreshingly straightforward in a financial world of asset-backed securities and exotic derivatives. Moreover, gold is popular as a hedge against inflation–the idea being that gold has an intrinsic store of “real” value that keeps up with the value of goods and services even if the price of those goods and services rises. This is in contrast to money deposited in bank accounts, which lose purchasing power if low savings account rates, money market rates , and CD rates are overwhelmed by inflation. Gold’s recent popularity–reflected in its sky-high prices–reflects the uncertainty that many investors have about the economy. Is this reputation justified? A look at the facts suggests that gold may be overhyped as an inflation hedge or safety investment. Four Reasons Gold May Be Overhyped Before you jump into buying gold on the premise that it will act as a hedge against inflation, consider these four reasons for thinking twice: Gold has a volatile price history. The Consumer Price Index (CPI), the most common basis in the US for measuring inflation, has risen in 39 of the past 40 years. If something is to be a reliable hedge against inflation, it would have to show similarly regular increases in price. Gold, however, is nowhere near that consistent. The price of gold has risen in 25 out of the last 40 years–not bad overall, but by no means steadily keeping pace with inflation. Even in high-inflation years, gold’s track record is less than ideal. The CPI has risen by 5% or more in 11 of the past 40 years, and gold actually declined in price in 4 of those years. In fairness, gold has had some spectacular gains at times, but it depends on what time period you look at. The bottom line is, gold has not been the consistently reliable hedge against inflation it’s been made out to be. Emotional expectations about inflation may already be built into the price of gold. One thing you should examine when buying any asset is what expectations are already reflected in the price. Gold has had a spectacular run, rising by more than 300% in the past decade. That suggests some pretty optimistic sentiment about gold is already built into the price. If you buy gold when the price is this high, are you buying an inflation hedge or an inflated asset? The financial markets have seen a series of boom-and-bust bubbles in recent years, from dot-coms to real estate to oil. At around $1,200 an ounce, is gold nearing the peak of one of those cycles? Gold does not produce income or earnings. The focus on price is essential with gold, because all you have going for you is the hope that someone will pay more for it in the future than you paid for it. If gold fails to rise in price–and it went about 25 years, from 1980 until 2005, with no net increase in price–there are no earnings, dividends, or interest payments generated in the meantime. It is just dead money under those circumstances and may even cost you something to store and protect it. Gold is not diversified. Stocking up on gold can mean putting too many eggs in one basket. As an alternative, if you are concerned about commodity inflation, consider buying a broad mix of commodities, covering areas such as food, building materials, and energy. Gold can have a place in a mixed investment portfolio. But as with any investment, you need to consider the price you pay and keep the size of your position in proportion with your other investments. It’s OK to buy gold, as long as you’re sure you aren’t buying hype. The original article can be found at MoneyRates.com: Fool’s Gold? Four Reasons Gold May Be Overhyped

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David Isenberg: Are IPOA, BAPSC and PSCAI Complicit or Just Irrelevant?

August 26, 2010

Today we consider the work of Surabhi Ranganathan. She is a PhD Candidate, Cambridge University, a graduate of the New York University Law School and a consultant to the law school’s Institute for International Law and Justice . Earlier this year she published a paper in the Georgetown Journal of International Law title ” Between Complicity and Irrelevance? Industry Associations and the Challenge of Regulating Private Security Contractors .” Unlike numerous other law journal articles this is not another rehash of national or international laws . As she writes in her summary, “In this paper, I examine the reasons for and against giving serious consideration to the regulatory function of industry associations and engage in a critical evaluation of their claims to legitimacy, accountability and effectiveness as regulatory bodies.” It is important to note that she is not against private military and security contracting trade associations. Indeed, she thanks “Doug Brooks [founder of IPOA] for responding to many queries about industry associations.” In fact, she thinks they do have a useful role to play. In her introduction she writes: In discussing regulation of the private military and security industry, scholars and policy advocates do not ignore the role of industry associations, but they do sideline them. The focus is on regulation by states, or by an international office created by treaty, or a combination of the two. Such “formal” regulation is undeniably important. However, a preference for it is not irrational only insofar as it can be assumed that states and international offices are willing and able to effectively regulate PMSCs. This is often not the case. On several occasions states have shown themselves unwilling or unable (or both) to regulate PMSCs. An international office that can do so is far from being realized. On the other hand, several industry associations have come into being in the last few years, each with at least a partial mandate for regulation of PMSCs. It is surprising then that their regulatory potential has received little serious consideration. To date there does not exist a single analytical account of their activities. Little effort has been made to grapple with issues relating to the legitimacy of their regulatory claims, and the effectiveness and accountability of their regulatory activities. This paper aims to fill that gap. … To clarify, I do not argue that industry associations should replace formal regulation. Recognizing the importance of national and international regulation, and of plural regulatory initiatives, my paper supports three conclusions. First, industry associations are important contributors to better regulation of PMSCs. Second, even so, their claims to legitimacy, accountability and effectiveness are mixed, and differ for each association. Third, some weaknesses in such claims have to do with external factors, such as lack of state backing and negative public perception. However, there are other factors that associations themselves should address to bolster their regulatory claims. Now, some people are, to say the least, dubious about trade associations; suspicious of their advocacy of allowing greater industry self-regulation or avoiding further government regulation. I have been so myself, on various occasions, when their rhetoric does not match their actions. Given how well that has worked in other industry sectors (BP and the Minerals Management Service in the Gulf of Mexico anyone?) such suspicions are understandable. On the other hand the trade association, notably the International Peace Operations Association (IPOA), since renamed the Association of the Stability Operations Industry; the British Association of Private Security Companies (BAPSC); and even the Private Security Company Association of Iraq (PSCAI) have done some useful things, such as informing legislators what actually goes on in the PMSC world so useful policy can be made. And to their credit no trade association has ever said that they should replace national laws or regulations Still, there is good reason why state regulation of PSC should always come first. Ranganathan writes: In general, academic scholars and policy advocates prefer formal regulation of PMSCs for two reasons: PMSCs offer essential services that are traditionally expected of a state, and, often, their operations bring them into close proximity with vulnerable populations. This is especially true of conflict and post-conflict situations — the focus of this paper — where PMSCs are contracted to perform a range of functions, including guarding persons and property, providing logistical and operational support to the military, catering to requirements for food and living quarters during operations and post-conflict reconstruction; advising and training the military, and developing strategies for military operations, interrogation, and administration of prisons. Certainly, fears of human rights violations are well founded, as are concerns relating to compromises between state interests, military welfare and international stability, as a consequence of outsourcing to PMSCs. She then notes biases that may influence people’s preference for formal regulation such as a preference for “status quo,” “seriously flawed memories” “susceptibility to “informational cascades,” “availability heuristic.” and “extremeness aversion.” But she goes on to say the preference for formal regulation is not solely a product of our biases. There are two good reasons that support such preference. First, in theory, states (and international bodies) do have greater capacity to regulate PMSCs. Industry associations cannot impose criminal law sanctions upon wrongdoers. Their most stringent penalty is expulsion of a company from membership. In most cases, a state possesses greater power to investigate complaints relating to actions of PMSCs in the field. Moreover, a state is able to ban as well as otherwise regulate a PMSC in all cases where there is a territorial nexus or affiliation of nationality (of the company, or its employees), or where the state has concluded a contract with that PMSC. The jurisdiction of an international office may not even be limited by affiliations of territory or nationality. In contrast, companies may put themselves out of the reach of an industry association by simply withdrawing from membership. Second, there are valid grounds for skepticism relating to the legitimacy of the regulatory role that industry associations play. Not only are industry associations often private bodies; they are also in essence trade groups with close affinities to their member companies and dependence upon member companies for funds and for manning various administrative committees. These are reasonable bases for doubt about the depth of the regulatory commitment of industry associations and their independence from the particular interests of their member companies. Industry associations are rarely afforded express recognition or backing by states, and this undermines their efficacy. It is, undeniably, a challenge for industry associations to construct a plausible account of the legitimacy of their regulatory commitment. Ranganathan, however, does not dismiss the regulatory contribution of industry associations as unimportant. She considers them among the few extant regulatory agents and takes seriously their claims of being more plausible and effective regulators for the industry. After detailing their various contributions she finds “industry associations do seek to promote high standards of conduct among PMSCs through cooperation with formal regulatory initiatives. However, like coercive mechanisms, cooperative mechanisms also lack full implementation.” Perhaps that is because such associations have conflicting goals, which are essentially to be both advocate for and regulator of their memberships. She writes: The three industry associations are not just private bodies, they are also trade-associations with close links to their members and indeed are dependent upon members for the performance of their regulatory functions. Moreover, along with better standards of service, they aim to enhance contract opportunities for their members. These factors provide grounds for several concerns, among them: the possibility of spurious creation, or “capture,” of an association by the specific interests of some of its members; the difficulty of ensuring continued adherence of PMSCs to industry associations; and the lack of accountability to third parties affected by the activities of the industry associations. … The creation of an industry association could be an exercise on the part of its members to provide only the facade of regulatory constraints. A driving force for this exercise could be the members’ quest to differentiate themselves from business rivals. This is a pertinent concern given that two of the associations (BAPSC and PSCAI) were founded by their members. Another concern, however legitimate the creation of an association, is its potential for capture by the specific interests of one or few of its members at the cost of other members, non-member companies, or relevant third parties, such as populations in their areas of operation. In the case of the three industry associations, capture is made possible by the active participation of members in regulatory functions. For instance, Professor Michael Waller claims that the complaint against Blackwater was made to IPOA by competitors of the company, possibly to discredit it in a bid to seize its Iraq contract. Its competitors could also have participated in review of its conduct in what would clearly have been an abuse of regulatory process. Both the above situations are pernicious, for they indicate improper functioning of the concerned industry-association, even as the observers are lulled into false confidence about the regulated nature of the industry. In such cases we can hardly accept as legitimate any claim of the regulatory commitment of such an association. We thus need to examine what assurance we have that an industry association will act to accomplish the (regulatory) goals it prates. Ranganathan notes that, “Good faith consent by PMSCs to the regulatory authority of an association does not guarantee that the association can bind members effectively if provisions allow members to opt out without any prejudice to their interests, if penalties for violation are insufficient, or if the enforcement process is too weak to make a material impact. Like bona fide consent, effectiveness speaks to legitimacy of the association as well as to the popular support it is likely to enjoy.” She also examines the associations’ claims to legitimacy, accountability, and effectiveness. Although since PSCAI provides very little information she ends up primarily comparing IPOA and BAPSC. She finds that “IPOA clearly makes the strongest claim to order-based legitimacy” but that doesn’t mean there isn’t room for a lot of improvement. The following is specific to IPOA. I include it not to pick on it but since Ranganathan finds it has the strongest claims it is worth noting what she sees as its weaknesses. The contrasting structures of BAPSC and IPOA should not demand the conclusion that the latter performs its regulatory role better than the former. However, to the extent that both associations claim to regulate PMSCs, it may be said that IPOA displays greater structural commitment to do so. Even so, certain structural elements of IPOA do give rise to concern. These include the fact that a large chunk of IPOA’s budget comes from the dues paid by its member companies and that seats on several of the task-specific committees, including the membership and standards committees, may be had on a volunteer basis. The first fact could imply the need for greater scrutiny of structural and procedural safeguards that insulate IPOA from the interests of particular members, but it is the second which is really structurally flawed in the sense that it creates greater potential for “capture” of institutional processes by particular members. Determining committee positions by soliciting volunteers not only allows members to sit in judgment over other members, but to do so solely on the basis of their will instead of a more neutral process like rotation or random selection. Moreover, there are no institutional checks to prevent a member from volunteering for seats on several committees and for years in succession. Thus, EOD Technology, Inc. (“EODT”) has had representatives sitting concurrently on the Executive Committee, the Standards Committee and the Membership and Finance Committee in 2007 and 2008. In contrast, the membership criteria released by BAPSC indicate that at least the membership committee is elected by the BAPSC General Assembly. IPOA also espouses “transparency” as vital to its legitimacy. However, its own procedures are only transparent to a limited extent. On the one hand, its website, journal, annual reports, and papers by its staff provide a vast amount of information about organs, personnel, and member companies, and also the mechanisms employed to promote quality of service among member companies. Some commentators also note with approval that the IPOA takes on interns as evidence of the openness of its operations. On the other hand, this information changes rapidly — previously available documents become unavailable quickly. In addition, there are aspects of the association’s work that are not transparent. For instance, the association does not explain its membership decisions. It does not even provide a public record of the companies that had applied for membership and were refused. Possibly, this is motivated by prudential considerations, such as not deterring potential members from applying or current applicants from reapplying. The revelation that a company was refused membership could ironically also impair the image of the rest of the industry, because normally a refusal of membership would suggest that the applicant company was unwilling or unable to provide assurance of its compliance with the IPOA Code of Conduct. For an already prejudiced and non-discerning audience, this fact could smirch their perception of all PMSCs as unlikely to conform to the standards prescribed. It is understandable that IPOA is reluctant to contribute towards this adverse view of the industry. Even so, the lack of a public record raises doubts about the veracity of IPOA’s procedures. Given IPOA’s financial dependence on annual contributions from existing members, and its policy of allowing members to volunteer for a position on the membership committee, it is a matter of real concern that members may be able to hijack the selection process for new members. A membership decision in favor of an applicant may be influenced by an existing member’s interest in, or potential partnerships with, the applicant. Since the review process is not stringent in practice, a decision for refusal of membership may have been induced by members competing for business with the applicant. A controversial example is the repeated denial of membership to Aegis, information of which has leaked on to the Internet. Aegis is a founding member of BAPSC and PSCAI, though admittedly its reputation is far from spotless. Trophy videos of its personnel shooting at civilians are freely available on the Internet. Its chief executive is Tim Spicer, former manager of the notorious Sandline, Inc., which was involved in the “Arms to Africa” affair. However, it is not known whether either factor was relevant to IPOA’s decision. Aegis’s claims that it was “invited” to apply for membership each time it was refused have further obscured the facts. Similar criticisms can be made with respect to IPOA’s Enforcement Mechanism. At present, IPOA does not provide any information about complaints made to it. This is so despite the provision in the IPOA Code that in ordinary circumstances, submissions by complainants shall be deemed public. The IPOA also does not provide any public explanation for decisions of the Standards Committee or of the ad-hoc task forces. Indeed, the only occasion upon which the public may even [*362] be aware that a decision has been made is when a company has been expelled from membership, but there is no instance of this at present. Again, IPOA’s policies may be guided by the same concerns, mentioned earlier, that confidentiality is important to encourage PMSC participation in IPOA, and that making complaints against particular companies will harm the public image of the whole industry. News sources suggest that Blackwater withdrew from IPOA membership because it was afraid of damaging information leaks during the IPOA review of its conduct. However, for stakeholders affected by the actions of a PMSC, or for a state, or even for other member companies, the secrecy surrounding IPOA proceedings may detract from its espousal of due process. IPOA’s aim for its membership to be taken as certification of a PMSC’s high standards of service and belief that repudiation of membership will be a “commercial kiss of death” for the company is incongruous with the lack of transparency in its procedures, especially as there are no avenues for external review. Moreover, this aim is at odds with concerns that publicizing the action taken against one company will affect the reputation of all. While IPOA cannot on its own overcome audience prejudices, it can do more to assure the audience of the reliability of its decisions. Perhaps as a starting point, to compensate for lack of complete transparency, IPOA should introduce neutral oversight of its decision-making processes. Ranganathan believes that despite their flaws, the trade associations have an important role to play. She concludes: An exploration of the regulatory claims of the principal industry associations in the PMSC industry reveals a fairly sincere effort on the part of at least two of the associations to construct credible accounts of their legitimacy and accountability. Of course, there remain concerns about their structures and processes, responsiveness to third parties and their relationship (and fragmentation of authority) with each other. Critical questions also arise as to their actual capacity to regulate PMSCs. Although it is inaccurate to suggest that industry associations are irrelevant for this purpose, it is true that the absence of state backing limits the role that associations can play. Even so, their (actual and potential) role is both significant and distinct from the role played by states. Apart from prescribing codes of conduct, industry associations actually educate member companies about the standard of conduct expected from them, and, through a variety of mechanisms, persuade them to strive towards better performance standards. Moreover, they engage with individual companies at a micro level to identify and resolve problematic issues and assist governments at a broader level to understand PMSC operations and formulate policy. Their ability to “bind” members would improve tremendously if states were to view membership to these associations as a precondition for hiring PMSCs, or for permitting other consumers to hire PMSCs.

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David Isenberg: Are IPOA, BAPSC and PSCAI Complicit or Just Irrelevant?

August 26, 2010

Today we consider the work of Surabhi Ranganathan. She is a PhD Candidate, Cambridge University, a graduate of the New York University Law School and a consultant to the law school’s Institute for International Law and Justice . Earlier this year she published a paper in the Georgetown Journal of International Law title ” Between Complicity and Irrelevance? Industry Associations and the Challenge of Regulating Private Security Contractors .” Unlike numerous other law journal articles this is not another rehash of national or international laws . As she writes in her summary, “In this paper, I examine the reasons for and against giving serious consideration to the regulatory function of industry associations and engage in a critical evaluation of their claims to legitimacy, accountability and effectiveness as regulatory bodies.” It is important to note that she is not against private military and security contracting trade associations. Indeed, she thanks “Doug Brooks [founder of IPOA] for responding to many queries about industry associations.” In fact, she thinks they do have a useful role to play. In her introduction she writes: In discussing regulation of the private military and security industry, scholars and policy advocates do not ignore the role of industry associations, but they do sideline them. The focus is on regulation by states, or by an international office created by treaty, or a combination of the two. Such “formal” regulation is undeniably important. However, a preference for it is not irrational only insofar as it can be assumed that states and international offices are willing and able to effectively regulate PMSCs. This is often not the case. On several occasions states have shown themselves unwilling or unable (or both) to regulate PMSCs. An international office that can do so is far from being realized. On the other hand, several industry associations have come into being in the last few years, each with at least a partial mandate for regulation of PMSCs. It is surprising then that their regulatory potential has received little serious consideration. To date there does not exist a single analytical account of their activities. Little effort has been made to grapple with issues relating to the legitimacy of their regulatory claims, and the effectiveness and accountability of their regulatory activities. This paper aims to fill that gap. … To clarify, I do not argue that industry associations should replace formal regulation. Recognizing the importance of national and international regulation, and of plural regulatory initiatives, my paper supports three conclusions. First, industry associations are important contributors to better regulation of PMSCs. Second, even so, their claims to legitimacy, accountability and effectiveness are mixed, and differ for each association. Third, some weaknesses in such claims have to do with external factors, such as lack of state backing and negative public perception. However, there are other factors that associations themselves should address to bolster their regulatory claims. Now, some people are, to say the least, dubious about trade associations; suspicious of their advocacy of allowing greater industry self-regulation or avoiding further government regulation. I have been so myself, on various occasions, when their rhetoric does not match their actions. Given how well that has worked in other industry sectors (BP and the Minerals Management Service in the Gulf of Mexico anyone?) such suspicions are understandable. On the other hand the trade association, notably the International Peace Operations Association (IPOA), since renamed the Association of the Stability Operations Industry; the British Association of Private Security Companies (BAPSC); and even the Private Security Company Association of Iraq (PSCAI) have done some useful things, such as informing legislators what actually goes on in the PMSC world so useful policy can be made. And to their credit no trade association has ever said that they should replace national laws or regulations Still, there is good reason why state regulation of PSC should always come first. Ranganathan writes: In general, academic scholars and policy advocates prefer formal regulation of PMSCs for two reasons: PMSCs offer essential services that are traditionally expected of a state, and, often, their operations bring them into close proximity with vulnerable populations. This is especially true of conflict and post-conflict situations — the focus of this paper — where PMSCs are contracted to perform a range of functions, including guarding persons and property, providing logistical and operational support to the military, catering to requirements for food and living quarters during operations and post-conflict reconstruction; advising and training the military, and developing strategies for military operations, interrogation, and administration of prisons. Certainly, fears of human rights violations are well founded, as are concerns relating to compromises between state interests, military welfare and international stability, as a consequence of outsourcing to PMSCs. She then notes biases that may influence people’s preference for formal regulation such as a preference for “status quo,” “seriously flawed memories” “susceptibility to “informational cascades,” “availability heuristic.” and “extremeness aversion.” But she goes on to say the preference for formal regulation is not solely a product of our biases. There are two good reasons that support such preference. First, in theory, states (and international bodies) do have greater capacity to regulate PMSCs. Industry associations cannot impose criminal law sanctions upon wrongdoers. Their most stringent penalty is expulsion of a company from membership. In most cases, a state possesses greater power to investigate complaints relating to actions of PMSCs in the field. Moreover, a state is able to ban as well as otherwise regulate a PMSC in all cases where there is a territorial nexus or affiliation of nationality (of the company, or its employees), or where the state has concluded a contract with that PMSC. The jurisdiction of an international office may not even be limited by affiliations of territory or nationality. In contrast, companies may put themselves out of the reach of an industry association by simply withdrawing from membership. Second, there are valid grounds for skepticism relating to the legitimacy of the regulatory role that industry associations play. Not only are industry associations often private bodies; they are also in essence trade groups with close affinities to their member companies and dependence upon member companies for funds and for manning various administrative committees. These are reasonable bases for doubt about the depth of the regulatory commitment of industry associations and their independence from the particular interests of their member companies. Industry associations are rarely afforded express recognition or backing by states, and this undermines their efficacy. It is, undeniably, a challenge for industry associations to construct a plausible account of the legitimacy of their regulatory commitment. Ranganathan, however, does not dismiss the regulatory contribution of industry associations as unimportant. She considers them among the few extant regulatory agents and takes seriously their claims of being more plausible and effective regulators for the industry. After detailing their various contributions she finds “industry associations do seek to promote high standards of conduct among PMSCs through cooperation with formal regulatory initiatives. However, like coercive mechanisms, cooperative mechanisms also lack full implementation.” Perhaps that is because such associations have conflicting goals, which are essentially to be both advocate for and regulator of their memberships. She writes: The three industry associations are not just private bodies, they are also trade-associations with close links to their members and indeed are dependent upon members for the performance of their regulatory functions. Moreover, along with better standards of service, they aim to enhance contract opportunities for their members. These factors provide grounds for several concerns, among them: the possibility of spurious creation, or “capture,” of an association by the specific interests of some of its members; the difficulty of ensuring continued adherence of PMSCs to industry associations; and the lack of accountability to third parties affected by the activities of the industry associations. … The creation of an industry association could be an exercise on the part of its members to provide only the facade of regulatory constraints. A driving force for this exercise could be the members’ quest to differentiate themselves from business rivals. This is a pertinent concern given that two of the associations (BAPSC and PSCAI) were founded by their members. Another concern, however legitimate the creation of an association, is its potential for capture by the specific interests of one or few of its members at the cost of other members, non-member companies, or relevant third parties, such as populations in their areas of operation. In the case of the three industry associations, capture is made possible by the active participation of members in regulatory functions. For instance, Professor Michael Waller claims that the complaint against Blackwater was made to IPOA by competitors of the company, possibly to discredit it in a bid to seize its Iraq contract. Its competitors could also have participated in review of its conduct in what would clearly have been an abuse of regulatory process. Both the above situations are pernicious, for they indicate improper functioning of the concerned industry-association, even as the observers are lulled into false confidence about the regulated nature of the industry. In such cases we can hardly accept as legitimate any claim of the regulatory commitment of such an association. We thus need to examine what assurance we have that an industry association will act to accomplish the (regulatory) goals it prates. Ranganathan notes that, “Good faith consent by PMSCs to the regulatory authority of an association does not guarantee that the association can bind members effectively if provisions allow members to opt out without any prejudice to their interests, if penalties for violation are insufficient, or if the enforcement process is too weak to make a material impact. Like bona fide consent, effectiveness speaks to legitimacy of the association as well as to the popular support it is likely to enjoy.” She also examines the associations’ claims to legitimacy, accountability, and effectiveness. Although since PSCAI provides very little information she ends up primarily comparing IPOA and BAPSC. She finds that “IPOA clearly makes the strongest claim to order-based legitimacy” but that doesn’t mean there isn’t room for a lot of improvement. The following is specific to IPOA. I include it not to pick on it but since Ranganathan finds it has the strongest claims it is worth noting what she sees as its weaknesses. The contrasting structures of BAPSC and IPOA should not demand the conclusion that the latter performs its regulatory role better than the former. However, to the extent that both associations claim to regulate PMSCs, it may be said that IPOA displays greater structural commitment to do so. Even so, certain structural elements of IPOA do give rise to concern. These include the fact that a large chunk of IPOA’s budget comes from the dues paid by its member companies and that seats on several of the task-specific committees, including the membership and standards committees, may be had on a volunteer basis. The first fact could imply the need for greater scrutiny of structural and procedural safeguards that insulate IPOA from the interests of particular members, but it is the second which is really structurally flawed in the sense that it creates greater potential for “capture” of institutional processes by particular members. Determining committee positions by soliciting volunteers not only allows members to sit in judgment over other members, but to do so solely on the basis of their will instead of a more neutral process like rotation or random selection. Moreover, there are no institutional checks to prevent a member from volunteering for seats on several committees and for years in succession. Thus, EOD Technology, Inc. (“EODT”) has had representatives sitting concurrently on the Executive Committee, the Standards Committee and the Membership and Finance Committee in 2007 and 2008. In contrast, the membership criteria released by BAPSC indicate that at least the membership committee is elected by the BAPSC General Assembly. IPOA also espouses “transparency” as vital to its legitimacy. However, its own procedures are only transparent to a limited extent. On the one hand, its website, journal, annual reports, and papers by its staff provide a vast amount of information about organs, personnel, and member companies, and also the mechanisms employed to promote quality of service among member companies. Some commentators also note with approval that the IPOA takes on interns as evidence of the openness of its operations. On the other hand, this information changes rapidly — previously available documents become unavailable quickly. In addition, there are aspects of the association’s work that are not transparent. For instance, the association does not explain its membership decisions. It does not even provide a public record of the companies that had applied for membership and were refused. Possibly, this is motivated by prudential considerations, such as not deterring potential members from applying or current applicants from reapplying. The revelation that a company was refused membership could ironically also impair the image of the rest of the industry, because normally a refusal of membership would suggest that the applicant company was unwilling or unable to provide assurance of its compliance with the IPOA Code of Conduct. For an already prejudiced and non-discerning audience, this fact could smirch their perception of all PMSCs as unlikely to conform to the standards prescribed. It is understandable that IPOA is reluctant to contribute towards this adverse view of the industry. Even so, the lack of a public record raises doubts about the veracity of IPOA’s procedures. Given IPOA’s financial dependence on annual contributions from existing members, and its policy of allowing members to volunteer for a position on the membership committee, it is a matter of real concern that members may be able to hijack the selection process for new members. A membership decision in favor of an applicant may be influenced by an existing member’s interest in, or potential partnerships with, the applicant. Since the review process is not stringent in practice, a decision for refusal of membership may have been induced by members competing for business with the applicant. A controversial example is the repeated denial of membership to Aegis, information of which has leaked on to the Internet. Aegis is a founding member of BAPSC and PSCAI, though admittedly its reputation is far from spotless. Trophy videos of its personnel shooting at civilians are freely available on the Internet. Its chief executive is Tim Spicer, former manager of the notorious Sandline, Inc., which was involved in the “Arms to Africa” affair. However, it is not known whether either factor was relevant to IPOA’s decision. Aegis’s claims that it was “invited” to apply for membership each time it was refused have further obscured the facts. Similar criticisms can be made with respect to IPOA’s Enforcement Mechanism. At present, IPOA does not provide any information about complaints made to it. This is so despite the provision in the IPOA Code that in ordinary circumstances, submissions by complainants shall be deemed public. The IPOA also does not provide any public explanation for decisions of the Standards Committee or of the ad-hoc task forces. Indeed, the only occasion upon which the public may even [*362] be aware that a decision has been made is when a company has been expelled from membership, but there is no instance of this at present. Again, IPOA’s policies may be guided by the same concerns, mentioned earlier, that confidentiality is important to encourage PMSC participation in IPOA, and that making complaints against particular companies will harm the public image of the whole industry. News sources suggest that Blackwater withdrew from IPOA membership because it was afraid of damaging information leaks during the IPOA review of its conduct. However, for stakeholders affected by the actions of a PMSC, or for a state, or even for other member companies, the secrecy surrounding IPOA proceedings may detract from its espousal of due process. IPOA’s aim for its membership to be taken as certification of a PMSC’s high standards of service and belief that repudiation of membership will be a “commercial kiss of death” for the company is incongruous with the lack of transparency in its procedures, especially as there are no avenues for external review. Moreover, this aim is at odds with concerns that publicizing the action taken against one company will affect the reputation of all. While IPOA cannot on its own overcome audience prejudices, it can do more to assure the audience of the reliability of its decisions. Perhaps as a starting point, to compensate for lack of complete transparency, IPOA should introduce neutral oversight of its decision-making processes. Ranganathan believes that despite their flaws, the trade associations have an important role to play. She concludes: An exploration of the regulatory claims of the principal industry associations in the PMSC industry reveals a fairly sincere effort on the part of at least two of the associations to construct credible accounts of their legitimacy and accountability. Of course, there remain concerns about their structures and processes, responsiveness to third parties and their relationship (and fragmentation of authority) with each other. Critical questions also arise as to their actual capacity to regulate PMSCs. Although it is inaccurate to suggest that industry associations are irrelevant for this purpose, it is true that the absence of state backing limits the role that associations can play. Even so, their (actual and potential) role is both significant and distinct from the role played by states. Apart from prescribing codes of conduct, industry associations actually educate member companies about the standard of conduct expected from them, and, through a variety of mechanisms, persuade them to strive towards better performance standards. Moreover, they engage with individual companies at a micro level to identify and resolve problematic issues and assist governments at a broader level to understand PMSC operations and formulate policy. Their ability to “bind” members would improve tremendously if states were to view membership to these associations as a precondition for hiring PMSCs, or for permitting other consumers to hire PMSCs.

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Jonathan Bernstein: Egg Recall — Don’t Roll That Way

August 20, 2010

This week’s recall of at least 380 million eggs potentially contaminated by salmonella makes it clear that too many CEO’s play ostrich about the possibility of a recall. They wait until the recall is required and then try to figure out what to do, resulting in additional risk for consumers and the company’s reputation. If you manufacture and/or sell any product that could be subject to recall: Remember that rapid response to a known product problem minimizes damage. The time to examine the systems you have in place for recall is now, not when you already have a product needing recall. Have a product recall plan ready to use anytime, one that covers the operational, legal and public relations (internal and external) components of making a recall. Hint: “We’ll wing it” is not a product recall plan. Have the core members of a product recall team identified and trained in advance. It may be necessary to have one team at a corporate level to direct recall activities overall, and individual teams more focused on the operational aspects of product recall at the sales/marketing and/or manufacturing levels. And you’d be amazed at how some people you think will be cool in a crisis actually aren’t, and vice versa – behavior that often is identified through training that includes simulating a recall. Have back-ups for critical people and recall systems. Assume that some recall-related lead personnel will not be available when you need them. Assume that the computer system where you maintain your stakeholder contact lists has crashed. Assume other similar worst-case scenarios and make your back-up plans accordingly. Have contact lists for all stakeholders set up on automated notification systems. This is particularly important for end-users and distributors of your products. You can’t rely on the media alone to reach them. Consider the use of virtual incident management. There are a number of Internet-centered systems that allow recall team members to exchange real-time information, access current communications documents, and keep team leaders updated even if the team is geographically scattered. Make recall-related decisions that are based on protecting your brand/reputation and not just on your legal risks. The infamous Bridgestone-Firestone recall started far too late because the company’s leadership was considering risks other than the most important one — the risk of aggravating the court of public opinion. Communicate internally and externally. Remember that every employee and, often, dedicated contractors are public relations representatives and crisis managers for your organization, whether you want them to be or not. You must empower them with reassuring messages about the recall suitable for use at their respective levels of the company, and you don’t want them to learn of the recall from external sources before they hear about it from you. Don’t wait for the CPSC, FDA, USDA or other regulatory agencies to protect your reputation. While each regulatory agency that can get involved in product recalls has its own process to follow, that process can often delay how much time passes before product consumers and distributors are notified — a delay which, in worst-case scenarios, can cause injuries or deaths. In that event, the court of public opinion may react very negatively to both your organization and the regulator — but you’re the one whose revenue and reputation will be most impacted. Focus special communications on highly disgruntled customers and distributors. In this Age of the Internet, and in a litigious society, a few angry people can make waves completely disproportionate to their numbers or even to the injury suffered (if any). The recall process should include an “Escalated Cases” team to focus on such complaints when they’re received. CEOs need to remember that the public expects them to do what’s right, not just what’s required.

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Tom Doctoroff: Tang Jun’s Drama: A Chinese Business Tragedy

August 13, 2010

After his academic credentials were exposed as fraudulent, Tang Jun, heretofore one of China’s most esteemed business executive and role models, has emerged as the star in a quintessentially Chinese dramatic tragedy. His reputation endured further pummeling when, two weeks after the news of his doctored California Institute of Technology PhD emerged, another scandal broke regarding misallocation of $30 million related to a Jiangsu real estate deal. In response to the hubbub, Tang Jun, without a shred of remorse, exclaimed, “Losers cheat some people and get caught. Winners cheat the whole world all the time.” Is Tang Jun China’s Bernie Madoff? Did he betray the good will of the Chinese people? Most admired his transformation from small potato to master and commander, a rare bi-cultural breed who leveraged stints at Microsoft and Shanda, China’s largest on-line gaming company, to represent the face of modern Chinese business. In the process, he became the nation’s highest paid executive, earning a billion renmenbi per year at New Huadu group, the conglomerate owned by Fujian native Chen Fashu, the “Warren Buffet of China.” Is Tang Jun without moral scruples? To westerners, the answer is, of course, yes. He built his reputation on, at best, half truths and, at worse, outright deceit. Further, former colleagues at Microsoft and Shanda describe Mr. Tang as a pseudo-leader, perpetually detached, more interested in managing his image amongst foreign bosses and investors than generating lasting shareholder value. Interestingly, however, the post-scandal reaction of many ordinary Chinese was far more ambiguous, sometimes sympathetic. Although this case unleashed a tidal wave of schadenfreude , the masses were more titillated than up in arms. According to one 35-year-old professional, “He was only doing what anyone in his position would do.” And another: “Tang Jun got caught. He pushed it too far. But, today, it’s so competitive. We have no choice but to play the damn game. Face is everything.” In China, an ambitious, anti-individualistic and morally relativistic society, integrity is often perceived as a luxury. Despite the brutality of the Great Leap Forward, Cultural Revolution and Tiananmen Square, Mao is still considered a great leader because he unified – i.e., stabilized — the nation. Even Mencius, who regarded benevolence as innate, focused his philosophical energies on harnessing the power of goodness to reinforce a well-ordered social structure. Such moral utilitarianism is felt everywhere in the Middle Kingdom. From tolerance of corruption to wide availability of commercialized sex, Chinese are no-nonsense pragmatists. (Am I saying people are “immoral”? No. But, in the PRC, a non-monotheistic culture sans God or Heaven, ends justify means. Corruption lubricates business relationships. Prostitutes are less threatening to family cohesion than mistresses. ) In this respect, can-do “winners” – people who start, forge and build things — are infinitely more respected than guai guai “good guys.” “Face,” something Tang Jun was desperate to acquire, plays an important role in amassing the interpersonal “capital” to get things done. Face, public endorsement “reinvested” for future gain, is social currency. On the dog-eat-dog business battlefield, face is blood. It lubricates all interactions, personal and financial, and requires constant replenishment. When it dries up, a man not only moves backwards, he disappears into a sea of anonymity. Tang Jun, 46, had a master plan. By writing books such as “My Success Can be Replicated,” he wanted to become an icon. By appearing on television shows and glossy magazine covers, he hoped to achieve guru status, a weapon he could wield on his trek to the top of Mount Glory. However, even in a status-obsessed country such as China, substance counts. The practical Chinese revere results. They worship engineers, technocratic leaders with a master plan. They love concrete things, “infrastructure” that lifts all boats. Throughout his career, Tang Jun ignored this truth. He cultivated his image but, in the end, no one knew the man, his beliefs or his vision. I have interacted with Tang Jun in different circumstances, in both jazz bars and conference rooms. He is an almost preternatural shape shifter, projecting radically differ persona depending on his audience. Deferential to Chinese bosses and foreign boards, he is a shark with subordinates. Rarely have I met an individual capable of unleashing both yin and yang with equal vigor and, yes, aplomb. Sadly, Tang Jun’s fabrications and moral ambiguity came to light before he could demonstrate tangibly irrefutable value as a business leader. Substantial accomplishments were not self-evident. Had he not billed himself as the incarnation of Chinese capitalism or publicized his outrageous salary, his transgressions would certainly have been forgiven and probably ignored. But this son of China flew too close to the sun. His crash to Earth was ordained. With his image shattered, possibly for good, what will become of Tang Jun? He is currently in the United States, far from Shanghai’s wagging tongues and barking bloggers. He may simply fade away. Hopefully, however, he will do some soul searching and realize external validation never trumps genuine self-possession. In hyperkinetic, brashly materialistic boom times, the Middle Kingdom needs a real role model who extols– and perhaps even profits from — this timeless truth.

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BP Name Change: Amoco Possible Rebranding Option For Stations

July 30, 2010

NEW ORLEANS — BP gas station owners across the country are divided over whether the oil giant stained by its handling of the Gulf spill should rebrand U.S. outlets as Amoco or another name as part of its effort to repair the company’s badly damaged reputation. Some who have seen their sales plunge because of protests say BP has already sought a fresh start by naming an American to replace its gaffe-prone British CEO, so why not change the name on gas stations marquees as a further symbol of that culture shift. Others worry that a name change is a big deal that is risky given all the marketing dollars already spent building up the BP brand. They also believe a successful turnaround with the existing brand will have a bigger payoff. In the aftermath of the oil spill, some BP-branded gas stations reported sales declines of 10 percent to 40 percent from Florida to Illinois. BP later responded by offering distributors of BP gasoline cash in their pockets, reductions in credit card fees and help with more national advertising. The BP name and green-and-yellow sunflower logo took over after BP merged with Amoco in the late 1990s, replacing the Amoco name and its blue-and-red torch inside an oval logo. There is precedent for such a drastic move to return to the Amoco name or to go with a new name. Think AirTran after the ValuJet crash and Xe Services after the killing of civilians by Blackwater Worldwide guards in Iraq. John Kleine, who heads a trade group that represents distributors of BP gasoline in the U.S., told The Associated Press that interest in changing names has not reached a fever pitch by any means, but it has supporters and is percolating among station owners ahead of their annual convention with BP executives in October. “Is it on the minds of people? Sure,” Kleine said. “It would not be a topic of conversation if not for the oil spill.” Kleine noted that many distributors would still like BP to try to rebuild its existing brand, and if that cannot be done, then to consider alternatives. Distributors in many cases also own and operate stations. Two BP officials said in e-mails that the company is not considering rebranding U.S. gas stations. BP owns just a fraction of the more than 11,000 stations across the U.S. that sell its fuel mostly under the BP banner. ARCO, a BP affiliate, is predominant in the West. Kleine said the Amoco name is no longer supposed to be used, but acknowledged in rare cases it may still exist in a few locations. Most BP-branded stations are owned by local people whose primary connection to the oil company is the logo and a contract to buy gasoline. Bob Juckniess, who owns 10 BP-branded stations in the Chicago area, is in the camp that wants BP to consider rebranding to Amoco at U.S. outlets. “The BP brand is very tarnished right now, not just the brand but the reputation as a company is tarnished,” said Juckniess. He added, “Amoco was very well known and had a great reputation as a name and a brand.” Juckniess said he feels so strongly about the issue that he would “urge BP to look at the ramifications of such a change.” It is noteworthy that Bob Dudley, the American who will replace Tony Hayward as CEO on Oct. 1, worked for 20 years at Amoco Corp. On the other side of the debate is Jeff Miller, whose company owns, operates and supplies roughly 56 BP-branded stations primarily in southeastern Virginia. He said that if BP does the job right and invests back in its brand and customer base, it stands to gain more by not changing the name at U.S. stations. “When you look at all the case histories of all that have done it well, whether it is Toyota, Tylenol or Exxon, they have all reinvested in their brand and done a better job,” Miller said. “If you just change the name and don’t change the behavior, have you really gained anything?” Miller said he has heard from a number of station owners who have suggested BP rebrand U.S. stations as Amoco, but he describes that as a “knee-jerk reaction.” “I think you get a better return by working on repairing your reputation than starting fresh,” he said. Jim Donnini, whose company owns, operates and supplies roughly 75 gas stations in Florida that fly under brands including Chevron, Exxon, Shell, Sunoco and Valero, said Amoco was a very strong brand in Florida. “Everybody thought they missed their opportunity to keep it that way,” Donnini said of BP, referring to the aftermath of the Amoco merger. Donnini, who doesn’t own any BP stations, said he has heard from owners of BP-branded stations in Florida who would like BP to consider a name change at U.S. stations. “It’s really a shame the independent businessmen that fly that BP flag are being victimized,” Donnini said.

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Tom Emmer, Anti-Gay Pol, Gets Donations From Target, Stirring Up Controversy

July 28, 2010

Over at The Awl, Abe Sauer has been documenting the rise to prominence of Tom Emmer , a Republican member of Minnesota’s State House of Representatives who is running to replace Tim Pawlenty as Minnesota’s governor. Most of you non-Minnesotans probably know Emmer as the guy who wanted to cut the minimum wage for service-sector workers who earn income based on tips . Another thing you might want to know is that he’s hostile to the rights of the LGBT community. Per Sauer : Emmer says marriage “is the union between one man and one woman” and he supports the constitutional marriage amendment defining marriage as such. As a point of his “values” position, Emmer has been married to just one (presumably biological) woman since 1985. Meanwhile, claiming that it infringes on individual rights, he opposed the state’s indoor smoking ban. Displaying a complete lack of self-awareness, Emmer called one of these two issues “social engineering.” Can you guess which one? Enter national mega-retailer Target, whose corporate headquarters is in Minneapolis. As Sauer reported last week, Target donated “$100,000 cash and another $50,000 of in-kind goods and services” to a political action committee named MN Forward. In turn, MN Forward has used those donations to run ads in favor of Emmer’s candidacy. Sauer called Target’s donations “surprising,” and it’s not hard to see why : Progressive compared to its peers, Target extends domestic-partner benefits to gay and lesbian employees. It has also openly sponsored Twin Cities Pride and other gay and lesbian events in the state. Target puts its name on Minnesota AIDS Walk, a move that many corporations, worried about religious consumer terrorism, are far too cowardly to even consider. Target’s been deservedly rewarded, receiving a top rating of 100 percent on the 2009 and 2010 Human Rights Campaign Corporate Equality Index and Best Places to Work for LGBT Equality, the 2009 Rainbow Families Award and the 2009 Lavender Pride Award–and a reputation amongst the LGBT community as a “good” big box retailer. In subsequent follow-ups, Sauer has documented that Target’s response to inquiries on this matter is based on two points . First: that its donations are based “strictly on issues that affect our retail and business interests.” Second: It continually insists that its “rating of 100% on the 2009 and 2010 Human Rights Campaign Corporate Equality Index further demonstrates the reputation our company has earned.” The Huffington Post reached out to the Human Rights Campaign today, to inquire about whether Target’s political donations in this instance would affect that pristine 100 percent rating on its Corporate Equality Index. The short answer: No, because political donations aren’t part of that index’s calculations. From HRC spokesman Michael Cole: Since news of Target’s contribution to MN Forward, an independent expenditure committee, became public last week, people have asked HRC if political contributions by companies are factored into a company’s score on the Corporate Equality Index (CEI). Unless the contribution is to a ballot initiative that is anti-LGBT (such as California’s Prop. 8 in 2008), political contributions are not factored into a company’s score for a number of good reasons. It’s important to understand that the CEI is a measure of the workplace practices of a company toward its own LGBT employees. We don’t believe that rating companies based upon their political contributions is an accurate reflection of their commitment to LGBT equality in the workplace. In fact, corporate America is leading the way on issues of equality: over 85% of Fortune 500 companies prohibit discrimination on the basis of sexual orientation and 40% include gender identity in their nondiscrimination policies; and 57% provide domestic partnership health insurance benefits. Companies most often contribute for reasons associated with their particular business. With respect to the CEI and political contributions, it would be difficult to develop criteria by which to judge companies. Virtually every company in the Fortune 1000 today has contributed to candidates (of both political parties) that have voted against issues important to the LGBT community. There are Democrats and Republicans alike, for instance, that voted against the repeal of DADT in the U.S. House of Representatives. Should a company that contributed to these incumbents get points deducted from their CEI score? As a rule, we don’t believe that political contributions to candidates make companies any less committed to a diverse and inclusive workforce. HRC does pledge to keep an eye on this issue, however: The advent of unlimited corporate political contributions as a result of a recent U.S. Supreme Court ruling is a subject of great concern to all progressive movements, ours included. We will continue to monitor its impact on issues of equality and will revisit the issue of whether and how to factor in the political contributions made by corporate America as new information becomes known to us. Over at the Village Voice , Jen Doll speaks to Target spokesperson Jessica Carlson, and gets a little bit further with Target’s side of this debate: So, why donate to someone who’s anti gay marriage if you call yourself a supporter of the gay comunity? Carlson : At this point what we’re sharing is what was in Gregg’s email. To be clear, we donated to a political action committee, the MN Forward, which is a bi-partisan group, and not directly to Emmer’s campaign. Carlson goes on to say that she “can’t speculate on the nature of where our donations will go” in the wake of this story. RELATED: Real America: Why Target Supports Tom Emmer [The Awl] Real America: Target CEO Chooses “Business” over Gay Rights [The Awl] Target Says “We Do Not Have a Political Agenda” [Runnin' Scared @ The Village Voice] [Would you like to follow me on Twitter ? Because why not? Also, please send tips to tv@huffingtonpost.com -- learn more about our media monitoring project here .]

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Matt Wilson: Ten Rules Every Entrepreneur Should Live By

July 27, 2010

Entrepreneurs come in all shapes and sizes, from all different backgrounds and are involved in all different business models. There are however many lessons that every entrepreneur needs to know. Characteristics like determination, creativity and poise will outlast flashy get rich quick schemes time and time again. Take a look at these ten rules every entrepreneur should live by, courtesy of Under30CEO the resource for young entrepreneurs … America has always been a beacon of entrepreneurialism because it is so deeply rooted in our history. Our country was founded and then settled by innovators willing to sacrifice old certainties for new opportunities. The people who came to America a few hundred years ago looking for a better life were risk takers in every sense. Do not mistake being a risk taker with being reckless. Risk takers must also become risk analyzers — evaluating the pros and cons, then trusting their instincts and recognizing and seizing an opportunity to create their own businesses. We, as a nation, must regain our appetite for risk in order to embolden the hearts of our entrepreneurs. You may have recognized common traits that bind these entrepreneurs. We don’t believe these shared traits are merely a coincidence; we think they are the keys to their success. We hope you’ll apply these traits to your own strategy for success for your future or existing business. We’ve highlighted them in every chapter throughout the book and now present them together, along with examples of their application by our entrepreneurs. 1. Trust Your Gut Successful, independent-minded entrepreneurs know when to trust their gut. An expanding body of research from a number of fields — including economics, neurology, and cognitive psychology — confirms that intuition is a real form of knowledge. It’s a skill you can develop and strengthen — one that’s particularly valuable in the most chaotic, fluid business environments, when you must make critical, high-pressure decisions at a moment’s notice. At such times, intuition usually beats rational analysis. Trusting your instincts also emboldens you to carry out new, untested ideas and ventures, even when nobody else believes in them. It’s about seeing the need for a product or new service and just knowing you can make it happen. You may not have the cash on hand to commission a market study or conduct a focus group, but you’re still willing to stake your reputation and money on that idea. Why? Because that’s what your gut tells you to do. 2. Buck the Conventional Wisdom Ignore those who say, “It won’t work” or “It’s never been done that way.” Our profiled entrepreneurs succeeded in large part because they veered away from established formulas and ways of thinking. Don’t just blindly accept the so-called best practices of your industry. Look at them with a hypercritical eye. Dissect them, slice and dice them, contemplate different what-if scenarios. Challenging convention can open the door to competitive advantage. 3. Never Let Adversity or Failure Defeat You Don’t accept the limits that others or circumstances place upon you. The ranks of successful entrepreneurs are filled with men and women who refused to stop believing in themselves, despite the derision of others or heartbreaking failures in their past. As an entrepreneur you’ll undoubtedly experience stressful moments that will test your faith, especially in the beginning when you’re still trying to establish your brand and separate from the pack. Just remember, the antidotes are persistence and resiliency. 4. Go on a Treasure Hunt and Find an Undeserved Niche In the business world, there’s nothing more exciting than finding an underserved niche representing a lucrative market that everyone else has failed to spot and target. That’s like finding gold bullion at a crowded beach — it was there for everyone else to see, but you were the one who took notice of the golden glint in the sand. Even a huge multi-billion-dollar company can’t offer something for everyone. Look for ways to fill a niche — a road even small start-ups can take. Many niches are too small for giant corporations to consider. 5. Spot a New Trend and Pounce Often, a shift in cultural or economic trends will create new entrepreneurial opportunities. Sometimes that shift arises from advances in technology. Many of our profiled entrepreneurs recognized emerging consumer needs and desires that signaled new market opportunities. 6. Hit ‘Em Where They Ain’t Casey Stengel, legendary manager of the New York Yankees, loved to tell the story of baseball great “Wee Willie” Keeler, who stood at just 5′ 4”, weighed 140 pounds, and began a streak of eight seasons with two hundred or more hits. The Hall of Famer’s bat was only thirty inches. Once a sports reporter asked him how such a small guy could get so many big hits. Willie replied, “Keep your eye clear, and hit ‘em where they ain’t — that’s all.” The same holds true in the business world. Whenever possible, set your sights on areas that your competitors have neglected or ignored. 7. Just Start If you have an idea for a business, truly believe it will succeed, and are willing to push yourself harder than you ever have before, then take the risk and just get started. If your gut is telling you this business idea is a winner, take action now. The “perfect” time for a business launch will never present itself. More often than not, waiting just gives would-be competitors the opportunity to beat you to the punch. None of the entrepreneurs we interviewed waited for a sign from heaven or until a long-forgotten aunt died and left them $300,000 in seed money. Many faced tremendous financial hurdles. Nonetheless, they saw a market opportunity and grabbed it. 8. Save Your Bucks and Get Noticed Without Expensive Advertising If your start-up business is on a tight budget, there are plenty of ways to get customers’ attention without spending money on advertising. Get your creative juices percolating and try something different. And when an opportunity arises to expose your brand to the masses, don’t think twice — jump right in. Use your own creativity to make your company stand out in a crowd. 9. Exploit Your Competitor’s Weakness and Make It Your Strength The sharpest entrepreneurs have a knack for viewing the world from the perspective of their customers. That quality can help identify your competitors’ vulnerabilities and shortcomings. If your number one competitor has a reputation for slow deliveries, for example, make certain your deliveries arrive in less time. Engage and listen to customers to identify such weaknesses. 10. Never Stop Reinventing Your Company You know the old adage “If it ain’t broke, don’t fix it”? The problem with that piece of advice is that it invites complacency — and complacency in business is like a slow leak in a tire. You may not notice the damage it’s causing until the thing is completely flat and you can’t move forward. Top-performing entrepreneurs aren’t afraid to take chances and keep expanding their product line. They’re not afraid to give their business a major overhaul now and then to keep pace with changes in the marketplace. And sometimes a complete face-lift is in order. Believe that growth and opportunity for this nation’s economy are inevitable. Look at the world through the eyes of an entrepreneur. Use your imagination to identify market opportunities that others have overlooked. Believe in the power of your ideas and just start the pursuit of your own entrepreneurial dream. It’s up to you to reclaim the American Dream. This post originally appeared at Under30CEO.com written by Don Martin and Renee Martin authors of The Risk Takers .

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Owen Thomas: Tesla Motors CEO Can’t Handle the Truth

July 9, 2010

Elon Musk, the CEO of electric-car startup Tesla Motors and rocket-launcher SpaceX, should be applauded for the mighty challenges he’s taken on and the powers of persuasion he has deployed to build his companies. But along the way, he discovered that he could stretch the truth, casually and frequently, as a shortcut to getting things done. Clad in a sheen of bubbly optimism, his mendacity nonetheless has consequences. Through Tesla’s IPO, he has now taken hundreds of millions of dollars from taxpayers and public investors who expect not just a return but square dealing from the man who is managing their company for them. So where has Musk spun the facts? Critical reporting Well, let’s go with the most recent one: He’s lied about me, and VentureBeat, apparently in retaliation for our aggressive and accurate reporting. In an article published by the Huffington Post , he calls me “Silicon Valley’s Jayson Blair .” He accused me of making errors, but never once specified them. Here’s the truth: I cited Musk’s own words from court filings, which we had paid a freelance reporter to find and copy, legally, from a courthouse in Van Nuys, Calif. I also interviewed a host of other sources. I emailed Musk questions and called his lawyer repeatedly before publishing. We went to extra lengths to nail down the facts: Before publishing, VentureBeat editor-in-chief Matt Marshall called Musk and had interviews with at least three Tesla board members. We make no apologies for seeking the truth about Tesla Motors and Elon Musk, a vital company and an iconic entrepreneur of Silicon Valley. Our reporting (here’s one example of our series) helped investors get a more truthful picture of a company that was going public and the man behind it. Musk also accused me of “collaborating” with the lawyer representing Justine Musk, his ex-wife, in their divorce case. Also false: I picked up the phone and called her lawyer, and he had the courtesy to answer my questions. Now, we should all be used to Musk insulting journalists who don’t report what they’re told to. But calling someone a “Jayson Blair” is a troubling assertion to anyone who prefers his insults to have a factual basis. When I ran fact-checking at Business 2.0 magazine, here’s what I would have asked the writer to prove before I’d let him get away with that kind of factual assertion: So, you want to compare this Owen Thomas person to one of journalism’s most infamous miscreants . Is Owen Thomas a drug addict? Is Owen Thomas mentally unstable? Has Owen Thomas plagiarized or invented facts? The answer to all of those, in case you were curious, is no. And so out comes the chief of reporters’ red pen. The one specific claim Musk made about my reputation was that I had written that he was broke. Not true. If you review the story I reported on his personal finances and their impact on Tesla , you’ll see I merely quoted Musk’s own words from his divorce filing, in which he said that he “ran out of cash.” When VentureBeat first started raising questions about Musk’s personal finances, his expensive divorce case, and the impact they might have on Tesla’s IPO, a Tesla spokesman initially said that the company had no plans to update its IPO prospectus to reflect our reporting. However, in the end, Tesla updated its SEC filings to acknowledge substantially all of the concerns we raised as potential risk factors investors should consider. That is the ultimate correction of the record, and it stands today. Musk’s personal spending There are other whoppers in Musk’s piece, such as the suggestion that of the $200,000 per month he’s spending, a mere $30,000 a month is going to his own personal household expenses, with the rest going to legal fees in his divorce case. Actually, the figure he told a court is $98,023 a month, according to filings in that case , including $50,000 a month in rent. The founding of Tesla Motors An aside to Musk: Making false statements is something the law frowns on. Oh, but wait, Musk should already know that. He and I met in San Francisco in 2008 for drinks , and over the course of the evening, he made several disparaging remarks about Tesla Motors cofounder Martin Eberhard’s management of the company before Musk had ousted him as CEO — specifically, Musk alleged, for misrepresenting the cost of making the Tesla Roadster. In 2009, Eberhard sued Musk for defamation , citing the comments Musk had made to me, among others. Musk filed a scathing response to the lawsuit, repeating many of his negative claims about Eberhard. Then it headed to mediation, and the case was settled. Eberhard’s lawyer declared himself “very pleased” with the result , and Tesla issued a press release in which Musk said that Eberhard had been “indispensable” to the company in its early days. The safety of customers’ deposits When Tesla’s finances were at their most perilous, in the winter of 2008 and spring of 2009, the company was dependent on advance reservation payments from customers for cash flow. The company’s cash balance had run down to $9 million, and the company was struggling to raise $40 million in convertible debt. (He announced that that round had closed in November 2008, while in fact, according to Tesla’s SEC filings, it did not close until March 2009.) To raise funds in the meantime, Tesla began taking deposits on the Model S sedan, even though that car was far from production, and continued taking deposits on Roadsters. Musk first told customers that he would personally guarantee the deposits they were placing, “even in the worst case of an Armageddon scenario.” Then he said that their deposits were completely at risk and they could lose all their money. One of those statements had to be false. Musk’s history as an entrepreneur In persuading other investors to back Tesla Motors, Musk has frequently traded on his past success as an entrepreneur at companies like Zip2 and PayPal. But Zip2 was so troubled that one of its venture capitalists, Derek Proudian, had to step in as acting CEO , a move rarely seen at venture-backed companies. And Musk was ousted as CEO of PayPal by his own management team. To this day, Musk tells a version of PayPal’s history that few who were there at the time agree with. Tesla’s investors Most dangerously, Musk has repeatedly made misrepresentations about Tesla’s finances. In February 2009, he sent a letter to customers saying that Tesla would start getting funds from a Department of Energy loan in four to five months. In fact, it had not received the loan at that point and there was no certainty it would get it, a point a Tesla spokeswoman had to clarify. (Tricky, that, saying your CEO had misrepresented the facts without calling him a liar .) He also said Tesla would turn profitable in 2009. Of course, it didn’t, as the company’s published financials later revealed. (Musk later claimed, using questionable accounting whose details have never been revealed, that the company had been profitable for one month of the year .) In an interview for the May 2009 issue of Car and Driver, he told that magazine’s readers that General Electric had become an investor . It hadn’t, and it never did, according to Andy Katell, a GE spokesman who spoke with me at the time. The Toyota deal After unveiling an agreement to buy the NUMMI plant in Fremont, Calif., from the Toyota-backed joint venture which owned it, Musk claimed that Tesla and Toyota planned to jointly develop several models of cars and build them at NUMMI . It’s true that he got Toyota CEO Akio Toyoda to stand next to him and make grand promises. But in fact, as the company later revealed in its SEC filings, Tesla and Toyota had no agreement to develop any cars, and there was no guarantee that they ever would. The pity of it all is this: I don’t believe Musk twists the truth out of malice. Rather, at this point, it may well be out of habit. He’s so used to getting his way that future possibilities just seem like present realities to him. And pragmatically, it’s worked. Whenever Tesla has been in a bind, Musk has spun his way out of trouble. It’s a character trait of which elements are found among many successful entrepreneurs: the compelling presentation of an alternate reality in the hopes that so many people will sign on to the vision that it comes true. Apple CEO Steve Jobs, for example, is so masterful at this that people speak of his reality distortion field. But Musk may have taken distortion to extremes. The question now is whether Musk’s past habits will serve him well as the CEO of a publicly traded company. Already, it seems the investors who have entrusted Musk with hundreds of millions of dollars are having doubts. With shares of Tesla having already fallen by nearly half since their post-IPO pop, perhaps Musk’s bubble is finally deflating. But those who are still sticking with the company should ask themselves this: Has Tesla adequately disclosed to investors the risk of its CEO’s curious relationship with the truth? Originally posted at VentureBeat .

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Tears Of A Bull: Wall Street Complains Over Mistreatment

July 9, 2010

Despite this year’s large spike in corporate profits and strong stock market performance, major political donors on Wall Street are abandoning the Democratic Party in large numbers in reaction to a perceived anti-business bias from Congress and the White House. This “revolt among big donors on Wall Street is hurting fundraising for the Democrats’ two congressional campaign committees, with contributions from the world’s financial capital down 65 percent from two years ago,” the Washington Post reported . This fundraising free fall from the New York area has left Democrats with diminished resources to defend their House and Senate majorities in November’s midterm elections. Although the Democratic Senatorial Campaign Committee and the Democratic Congressional Campaign Committee have seen just a 16 percent drop in overall donations compared with this stage of the 2008 campaign, party leaders are concerned about the loss of big-dollar donors. Obama administration officials have responded by arguing emphatically that they’re not out to get big business — indeed, they say, Wall Street has much to be thankful for . In a Thursday interview, White House chief of staff Rahm Emanuel argued that rather than recoiling against Obama, business leaders should be grateful for his support on at least a half-dozen counts: his advocacy of greater international trade and education reform open markets despite union skepticism; his rejection of calls from some quarters to nationalize banks during the financial meltdown; the rescue of the automobile industry; the fact that the overhaul of health care preserved the private delivery system; the fact that billions in the stimulus package benefited business with lucrative new contracts, and that financial regulation reform will take away the uncertainty that existed with a broken, pre-crash regulatory apparatus. Treasury Secretary Tim Geithner took a similar line, telling CNBC this week , “We have a pro-growth agenda. Part of the agenda is growing exports. They’re central to our future. … [W]e’re going to be committed to making sure we’re that we’re expanding opportunities for American business everywhere. Now, this president understands deeply that governments don’t create jobs, businesses create jobs. And our job as government is try to make sure we’re creating the conditions that allow businesses to prosper so they can hire people back, get this economy going again.” Writing in Friday’s New York Times, Nobel Prize-winning economist Paul Krugman argues that the cries of woe aren’t coming from businesses but rather from business lobbyists : “peddling scare stories about what Democrats are up to is a large part of what organizations like the [Chamber of Commerce, the major business lobby] do for a living.” So why are we hearing so much about the alleged harm being inflicted by an antibusiness climate? For the most part it’s the same old, same old: lobbyists trying to bully Washington into cutting taxes and dismantling regulations, while extracting bigger fees from their clients along the way. Beyond that, business leaders are, as I said, feeling unloved: the financial crisis, health insurance scandals, and the catastrophe in the Gulf of Mexico have taken a toll on their reputation. Somehow, however, rather than blaming their peers for bad behavior, C.E.O.’s blame Mr. Obama for “demonizing” business — by which they apparently mean speaking frankly about the culpability of the guilty parties. Well, C.E.O.’s are people, too — but soothing their hurt feelings isn’t a priority right now, and it has nothing at all to do with promoting economic recovery.

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Don McNay: Lay the Favorite and Wall Street Ethics

July 3, 2010

Easy Come, Easy Go -Bobby Sherman Lay The Favorite is Beth Raymer’s debut book that revolves around her life as an assistant to a professional gambler in Las Vegas. Raymer parlayed that initial job into a series of positions in the gambling industry in the United States, the Caribbean and Costa Rica. It’s a fascinating tale by a first time writer. I think more about Raymer as a writer than I do as a human being. She stole from her customers, and did a lot of unseemly things. As I note in my book, Son of a Son of a Gambler , my father was a professional gambler in the glory days of Newport and Northern Kentucky. Dad seemed a lot like the character “Dink” in Raymer’s book. Dad and the bookmakers he associated with operated with a unique moral code. They violated the law by being gamblers and bribed politicians to keep from being shut down but they never stole from each other or their customers. The son of a famous gambler and I discussed our father’s worlds. We noted that gamblers operated on a high ethical code more than many business people. Certainly they operated on higher ground than Wall Street. As dad often noted, all he had was his reputation and the word of his clients. He expected them to honorably pay their debts and most of them did. Dad didn’t have the ability to sue for damages. He didn’t have fancy lobbyists and didn’t get a government bailout if things went wrong. Unlike the movies, dad didn’t have leg breakers. Gary Mayer said in the Bookie , my favorite and most accurate book about bookmaking, “bookies don’t carry guns, they don’t even carry sharp pencils.” I’ve always preferred gambling ethics to Wall Street ethics. At least I did until I read Raymer’s book. Most of the people in her book were stealing from someone. Stealing from the boss, stealing from clients, stealing from each other. Everything had an angle and the goal was to put one over on one another. The ethics of my father’s era had been replaced by the ethics of Goldman Sachs. I had a hard time deciding whether I liked Lay The Favorite . For the first 100 pages, I absolutely loved it. Ramer’s writing style is riveting and her insights into her world are dead on. She weaves her personal story into an overall narrative about a sub culture few people know much about. I wanted to like her book but it is hard to like a book that ends by the author ripping off a client and taking pride in “getting one over on him.” There are very good books on similar topics. The Smart Money by Michael Konik is a fascinating look at big time sports betting, at a level far beyond what Raymer glimpsed. Martha Frankel’s Hats and Eyeglasses is a literary masterpiece with a gambling theme. As I previously mentioned, my favorite is The Bookie , a hard to find 1974 classic by Gary Mayer. Not only is it a realistic glimpse into the life of a bookmaker, it is one of the funniest books I’ve ever read. If you can find it, I highly recommend reading it. All in all, I recommend reading Lay The Favorite . I hope the author can someday get past her lack of ethics and conscience. If not, she has a big career waiting for her on Wall Street. —- Don McNay, CLU, ChFC, MSFS, CSSC is an award-winning financial columnist and Huffington Post Contributor. You can read more about Don at www.donmcnay.com McNay founded McNay Settlement Group, a structured settlement and financial consulting firm, in 1983, and Kentucky Guardianship Administrators LLC in 2000. You can read more about both at www.mcnay.com McNay has Master’s Degrees from Vanderbilt and the American College and is in the Hall of Distinguished Alumni of Eastern Kentucky University. McNay has written two books. Most recent is Son of a Son of a Gambler: Winners, Losers and What to Do When You Win The Lottery McNay is a lifetime member of the Million Dollar Round Table and has four professional designations in the financial services field.

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Marshall Goldsmith: Does What They Think About You Hold You Back?

May 15, 2010

How do you define who you are? If you think about the various components of how you define yourself, where did they originate? If you’re like most people, your identity is formed to a large extent by what you remember from your past and by what other people think about you and tell you about yourself. Where the past and other people’s opinions meet what I call your “reflected” identity. Other people remember events in your past and may remind of you of them, sometimes too often. It’s one thing for the executive above to admit to poor follow up. But if his boss or wife or customers tell him the same thing, it reinforces the picture he already has of himself. You might know this as feedback. Feedback from others is how we shape our reflected identity. As a professional who relies on feedback as a tool for helping people change for the better, I would never disparage the value of it; however, I feel obligated to note that not all feedback is offered in good faith or in the most forgiving spirit! For example, perhaps your spouse constantly reminds you of your one or two failures as a mate. Or perhaps it’s a colleague who never misses an opportunity to remind you of one of your more serious workplace mishaps. It could be the boss whose only impression of you is some less-than-brilliant statement you made in a meeting, which he repeats to anyone who will listen whenever your name comes up. (Year ago, I gave feedback to one manager who repeatedly derided one of his top lieutenant’s work habits, all because the subordinate refused to schedule an early morning phone call with the boss over a holiday weekend. I regarded this as an admirable display of work-life balance, but the manager saw it as evidence of the man’s 9-to-5 mentality and, therefore, a lack of commitment.) The fact is that while some feedback is quite fair, some of it is part of the ribbing and back-slapping that is supposed to be taken as part of a lively corporate environment where quick speech, one-liners, and “humor” are meant to be fun. Sometimes these little jokes and stabs at one another are not fun and in an environment where we tend to become what other people say we are, the wrong kind of feedback can be self-limiting and destructive. People who keep reflecting your worst moments back to you–with the implication that these moments are the real you–are no different than the friend who sees that you’re on a diet trying to lose weight and yet insists, “C’mon, you can loosen up for one day. Have a second helping of this cake.” They’re trying to suck you back to a past self, someone you used to be, not who you are or want to become. It’s likely that we’ve all found some value in paying attention to our reflected identity, but it’s important to keep a healthy skepticism about as well. At its worst, your reflected identity can be based on little more than hearsay and gossip and may tarnish your reputation. At its best it may enhance your reputation–and help you succeed. But either way, it’s not necessarily a true reflection of who you are. So, even if your reflected identity is accurate, remember it doesn’t have to be predictive. We can all change!

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Alan Fein: Goldman: Not So Smart, But Well-Connected

May 7, 2010

The firestorm coming down on Goldman Sachs is puzzling. The firm is getting what it deserves, but for the wrong reasons. Goldman Sachs is being vilified for being smarter than everyone else. In fact, they deserve what they are getting, not because they were so smart, but because they were not so smart. But unlike most everyone else, Goldman was rescued by the government for their profound miscalculations, and that is the scandal that should upset people. Let me explain. The SEC’s case against Goldman and last week’s Senate beat-down are based on the charges that Goldman failed to disclose to its clients that the derivatives their clients were buying were designed to fail. More broadly, it is alleged that Goldman had essentially concluded that the mortgage derivative market was crashing and kept that knowledge to itself. The SEC and a parade of bloviating Senators rightly pilloried Goldman for ignoring its duties to its clients. Wall Street’s general defense of Goldman has been that Goldman was selling these garbage derivatives to other big boys – really big boys – who should have known better, but weren’t as smart as Goldman. Goldman, the theory goes, shouldn’t be punished for being smart. Along these lines, Warren Buffett, who I usually agree with, has come to Goldman’s defense. “It’s very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded,” Buffett said last week. Andrew Ross Sorkin, who I usually agree with, opined that plain-spoken Warren might be right: “it does seem odd that the government, and the public, has chosen to vilify one of only a couple of firms that made fewer mistakes than the rest.” What seems to be missing here is that when you play it out, Goldman made at least one mistake that was a doozy. Goldman was using its superior intellect not only against its clients, but against those who agreed to insure the other side of Goldman’s own bets against the mortgage industry, most notably AIG. The sharpies at Goldman convinced the insurers at AIG that the garbage AIG agreed to insure would never go belly up, and that AIG could take in a couple points of “premiums” and never have to worry about paying off. AIG believed the instruments were good as gold. After all, the same sharpies had already convinced the dolts at the ratings agencies to rate the garbage AAA. So what was Goldman’s doozy of a mistake? They failed to underwrite their own underwriters at AIG. It now appears that by 2007, the really smart guys in the room had already concluded that the mortgage derivative market would end badly. Yet Goldman kept creating more derivative instruments that required a counterparty to bet in favor of the market. In the past they actually bought a lot of the instruments on their own account, but by 2007 – knowing what they knew – they were buying insurance from AIG as a “hedge” against the inevitable downside. They were dumb, I would argue, because they knew or should have known that AIG had issued billions and billions of dollars of coverage on the bonds, and if (when) the market burst, AIG would never be able to satisfy its obligations. What happens if you or I fail to underwrite our underwriters? What if we buy flood insurance from a company that’s overcommitted when the flood comes? Too bad for us. Not so bad for Goldman. It appears that in the months leading up to AIG’s collapse, Goldman saw where this was heading and fought daily with AIG to protect its positions. During this period, Goldman certainly wasn’t telling its stockholders, or the SEC, or anyone else, that it faced a catastrophic loss if AIG was unable to meet its insurance obligations. But in September, 2008, when AIG failed, Goldman convinced its alum, Treasury Secretary Paulson, that the United States Government should honor AIG’s commitment to Goldman Sachs! Not part of AIG’s commitment, but all of it. One hundred cents on the dollar – a total of $16 billion. So Goldman, the group of geniuses who failed to underwrite their underwriter, was fully protected from its profound risk and folly. It appears that Goldman successfully convinced Secretary Paulson that they were in extremis, and that Goldman’s failure could bring down the entire economy. Once Goldman was saved, however, the bounce was immediately back in their step, and hubris returned. Goldman’s leaders blew off a meeting at the White House. They reveled in their reputation as the smartest guys on the Street. They announced that they were never in trouble, and didn’t want or need any loans from the government. Of course, Goldman didn’t offer to pay back the billions we taxpayers paid them to cover all of AIG’s debt. Instead, Goldman waited a few months, and then deemed themselves worthy of nearly all that money in bonuses, the lion’s share going to the Goldman principals who oversaw the failure to underwrite their underwriters. And that is the scandal no one is really talking about.

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Video: Roger Lowenstein Says Goldman Needs to Settle With SEC: Video

May 7, 2010

May 7 (Bloomberg) — Roger Lowenstein, a Bloomberg columnist and author of “The End of Wall Street”, talks with Bloomberg’s Margaret Brennan about the reputation of Goldman Sachs Group Inc. and the Securities and Exchange Commission’s lawsuit against the firm. Lowenstein says Goldman needs to settle with the SEC. (Source: Bloomberg)

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Goldman Says It Didn’t Mislead Investors

April 20, 2010

By Christine Harper April 20 (Bloomberg) — Goldman Sachs Group Inc. , facing a fraud lawsuit from U.S. regulators, reported net income almost doubled in the first quarter and said it didn’t mislead investors. “This all seems to be at root about whether someone intentionally misled someone, and that’s not something we would approve of or sanction,” Goldman Sachs Co-General Counsel Greg Palm told analysts on a conference call today. He spoke after the firm said earnings jumped 91 percent to $3.46 billion, or $5.59 a share, surpassing analysts’ estimates . Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein , finds itself fending off regulatory claims while and cementing its position as the most profitable investment bank in Wall Street history. The Securities and Exchange Commission accused the firm of failing to tell investors in a 2007 collateralized debt obligation that hedge fund Paulson & Co., which planned to bet against the CDO, helped select the underlying assets. Goldman Sachs had “no incentive” for the deal to fail, and lost more than $100 million on the transaction, Palm said. The firm was “somewhat surprised” when the SEC filed its suit on April 16, as “no one had told us in advance,” he said. Fallout Eyed Blankfein, 55, didn’t refer specifically to the suit today, saying in a statement, “In light of recent events involving the firm, we appreciate the support of our clients and shareholders, and the dedication and commitment of our people.” Shareholders said concern about potential fallout from the accusations would supersede the earnings report. The stock, which fell 13 percent on April 16 after the SEC filed its case, fell $1.17 to $162.15 at 9:38 a.m. in New York Stock Exchange composite trading. Ralph Cole , a senior vice president in research at Ferguson Wellman Inc., is among investors who said they are concerned the case could hurt Goldman Sachs’s reputation and cause clients to switch their business to other firms. Another worry is that the case could lead to additional lawsuits against the bank and add impetus to financial-reform efforts that would erode Goldman Sachs’s earnings potential. Reputational Risk “I don’t think the cost of this one suit’s the big deal, not certainly compared to what they make,” said Cole, whose firm manages $2.6 billion including Goldman Sachs stock. “It’s what does this do to their reputation and what does this do to the industry because of the current legislation going through?” In the U.K., meantime, Britain’s financial regulator said Goldman Sachs’s London units will be formally investigated for fraud. “The Financial Services Authority has decided to commence a formal enforcement investigation into Goldman Sachs International in relation to recent SEC allegations,” the FSA said in an e-mailed statement. Goldman Sachs said revenue from fixed-income, currencies and commodities trading, which contributed more than half of revenue last year, rose 13 percent in the first quarter to an all-time high of $7.39 billion from $6.56 billion. That beat estimates for $5.95 billion from Howard Chen at Credit Suisse Group AG and $6.09 billion from Roger Freeman at Barclays Capital. Bank of America Corp. and JPMorgan Chase & Co. , the two biggest U.S. banks by assets, both reported record fixed-income revenue last week of $5.52 billion and $5.46 billion respectively. Investment-Banking Revenue “We’re looking at a great year for capital markets firms,” Thomas Brown , CEO of Second Curve Capital LLC and founder of bankstocks.com, said yesterday. Equities-trading revenue rose 18 percent to $2.35 billion from $2 billion a year earlier, Goldman Sachs said. Gains from principal investments, which includes the company’s stakes in Industrial & Commercial Bank of China Ltd. as well as real estate and other companies, were $510 million compared with a net loss of $1.41 billion in the first quarter of 2009. Investment-banking revenue climbed 44 percent to $1.18 billion from $823 million last year. Within that, fees from financial advice fell 12 percent to $464 million from $527 million and equity-underwriting revenue surged to $371 million from $48 million. Debt underwriting generated $349 million compared with $248 million a year earlier. Compensation and benefits, the firm’s biggest expense, increased 17 percent to $5.49 billion in the quarter, or 43 percent of the firm’s overall revenue. The cost compared with $4.71 billion in the first quarter of 2009, when the firm set aside 50 percent of revenue. The bank said the percentage of quarterly revenue put aside for compensation expense was the lowest for any first quarter. To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

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Blankfein Proving Inferior to Dimon in Swaps: Credit Markets

April 20, 2010

By Shannon D. Harrington, Kate Haywood and John Detrixhe April 20 (Bloomberg) — The cost to protect Goldman Sachs Group Inc. bonds from losses rose to the highest level in two months compared with JPMorgan Chase & Co. after regulators accused Wall Street’s most profitable firm of fraud. Credit-default swaps on Goldman Sachs jumped the most in more than a year in the past two trading sessions, rising 39.4 basis points since April 15 to 130.5 basis points, according to CMA DataVision. Goldman Sachs swaps are now 57.9 basis points higher than JPMorgan’s, up from 34.7 basis points on April 15, the day before the lawsuit was made public, and the most since Feb. 15. The wider gap shows debt investors are increasingly skittish that a U.S. Securities and Exchange Commission lawsuit will curb Goldman Sachs’s revenue, and pushed the cost of its derivatives above Bank of America Corp.’s. Goldman Sachs default swaps had been moving closer to JPMorgan’s before the SEC’s allegations signaled the more aggressive regulatory stance. “Goldman Sachs is the one that potentially has more to lose on the side of regulatory reform,” said Jon Duensing , a senior portfolio manager at Smith Breeden Associates in Boulder, Colorado, which has more than $22 billion of assets under management. “It has more of the businesses that are going to be caught in the crosshairs of financial reforms.” Hedge Against Losses Goldman Sachs credit swaps, used to speculate on creditworthiness or to hedge against losses, are now trading 7.3 basis points wider than those from Charlotte, North Carolina- based Bank of America. Goldman Sachs is set to report first- quarter earnings today. Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt was unchanged yesterday at 143 basis points, or 1.43 percentage point, the lowest since November 2007 and down from a record 511 basis points in March 2009, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 3.914 percent. Ford Motor Co., the only major U.S. automaker to avoid a government-assisted bankruptcy last year, plans to sell $1.09 billion of bonds backed by payments on consumer auto loans, according to a person familiar with the offering. JPMorgan, Morgan Stanley and Royal Bank of Scotland Plc are managing the sale, said the person, who declined to be identified because terms aren’t public. Ford, based in Dearborn, Michigan, is among companies selling bonds backed by consumer and business loans after the Federal Reserve’s Term Asset Backed Securities Loan Facility ended last month, a sign that demand for the debt has returned. Daimler AG, Bayerische Motoren Werke AG and Deere & Co. all had sales last week, according to data compiled by Bloomberg. Unsecured Bonds Banks in Europe are increasing the use of unsecured bonds as collateral for loans after policy makers tightened the criteria on pledging asset-backed securities, according to the European Central Bank. Financial firms in Europe put up about 570 billion euros ($768 billion) of banks’ unsecured debt to get central bank funding last year, overtaking notes backed by mortgages and consumer debt as the biggest collateral pool, the ECB said in its annual report. Sankaty Advisors LLC, Bain Capital LLC’s debt-investment affiliate, has raised about $900 million to lend to medium-sized companies. The Sankaty Middle Market Opportunities Fund LP has investors including Pennsylvania’s Public School Employees Retirement System, according to people familiar with the matter, who declined to be identified because the information is private. Sankaty spokeswoman Charlyn Lusk declined to comment. Asia Bond Risk The cost of protecting Asia-Pacific corporate and sovereign bonds from default declined, after Citigroup Inc. said profit more than doubled as the global economic rebound trimmed costs for bad loans and the value of subprime mortgage bonds rose. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 3 basis points to 94 basis points, while the Markit iTraxx Australia index retreated by 3 basis points to 81.5, Deutsche Bank AG prices show. In emerging markets, the extra yield investors demand to own bonds instead of Treasuries fell 0.02 percentage point to 2.37 percentage points, according to the JPMorgan Emerging Market Bond Index. The gap this year had widened to as much as 3.23 percentage points on Feb. 8. Brazilian local-currency government bonds will outperform stocks in 2010 after trailing equities for four of the past five years as interest rates jump and shares get more expensive, according to the country’s fourth-largest pension fund. Banco Panamericano SA sold $500 million of 10-year bonds. Brazil’s Bonds “There is more upside in fixed income,” said Jorge Simino , who oversees 16.5 billion reais ($9.3 billion) in assets as investment director at Fundacao Cesp, the retirement fund for employees of utility Cia Energetica de Sao Paulo . “There is some exaggeration in stock prices.” Brazil’s real-denominated bonds returned 2.4 percent in local currency terms this year, beating the average return of 1 percent for emerging markets, according to JPMorgan’s ELMI+ indexes. The benchmark Bovespa stock index is up 0.74 percent this year. Brazilian bonds gained 11 percent last year, while the Bovespa stock index soared 83 percent. The SEC said April 16 that Goldman Sachs sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle. “You live or die on your reputation, and if that’s in doubt, you’ve got some problems,” said Brian Yelvington , the head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. Goldman Sachs said in a statement that the allegations are “completely unfounded.” CDOs pool bonds, loans and other fixed-income assets into securities of varying risk and return. ‘Game Changer’ The suit could be a “game changer” because it shows the SEC is seeking to redeem itself after regulatory failures and may foreshadow other litigation, said David Kotok , chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. “When you have the 500-pound gorilla known as the Securities and Exchange Commission attacking, investigating and alleging fraud, it is highly unlikely that it is a single, one- off event,” Kotok said. “This is a big action that took a lot of development.” U.K. Prime Minister Gordon Brown on April 18 called for the Financial Services Authority to follow the SEC and start a probe, and German Chancellor Angela Merkel said her nation’s financial regulator asked the commission for details on its Goldman Sachs suit. Hold Accountable Lawmakers who want to hold Wall Street firms accountable for the financial crisis that sparked the worst recession since the Great Depression may be emboldened, said John Anderson , head of credit at Gartmore Investment Management in London. Bank of America and Merrill Lynch & Co. led Credit Suisse AG’s “CDO litigation risk” list after offering $16.85 billion of collateralized debt obligations similar to the one that prompted a fraud suit against Goldman Sachs . The tally of lead underwriters of CDOs with “salient characteristics” of the disputed deal between 2005 and 2008 may help investors gauge the risk that lawsuits will spread to other firms, Credit Suisse said in a report yesterday. Bank of America, the largest U.S. bank, acquired New York-based Merrill Lynch in January 2009. Widening Spreads      Goldman Sachs’s 5.375 percent bonds due in 2020 were the most-traded U.S. corporate notes yesterday, falling 1.21 cents on the dollar to 98.38 cents to yield 1.79 percentage points more than similar-maturity Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Spreads for the firm, with Chief Executive Officer Lloyd Blankfein at the helm, compare with 1.91 percentage points for all financial corporate credit, according to Bank of America Merrill Lynch’s U.S. Financial Corporate Index. The index widened 0.03 percentage point on April 16, after five straight days of tightening. Credit swaps protecting Goldman Sachs debt for five years jumped 5.1 basis points yesterday after 34.3 on April 16, according to CMA prices. Michael DuVally , a Goldman Sachs spokesman, declined to comment. JPMorgan spokesman Brian Marchiony couldn’t immediately be reached for comment. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Contracts on JPMorgan, run by CEO Jamie Dimon , rose 5 basis points to 72.6 basis points, CMA prices show. Swaps on Citigroup rose 8.5 basis points to 145.6, Morgan Stanley climbed 6.6 to 145.1 and Bank of America rose 7.7 to 123.2, CMA prices show. To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; Kate Haywood in London at khaywood@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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`Adversarial Shot’ at Goldman Sachs Raises Stakes for SEC Enforcement Unit

April 19, 2010

By David Scheer, Joshua Gallu and Jesse Westbrook April 20 (Bloomberg) — Robert Khuzami , shortly after becoming the Securities and Exchange Commission’s enforcement chief last year, told Congress the agency must be willing to fight big cases to show it poses a “credible threat.” Targeting Goldman Sachs Group Inc., the most profitable company in Wall Street history, in the SEC’s first contested lawsuit against a major investment bank in more than a decade reflects the enforcement unit’s new combative approach. The stakes for the SEC are high. While winning high-profile cases may help the agency restore its image after being battered by the financial crisis and its failure to detect frauds including Bernard Madoff ’s Ponzi scheme, losing may tarnish the SEC’s reputation. Goldman Sachs said it will “vigorously” fight the case, which hinges on whether information withheld by the firm should’ve been disclosed to investors. The lawsuit says: “We’re willing to file big cases, we’re willing to file against the biggest firms, and we’re willing to file about the most complicated stuff,” said Mark Radke , a former SEC official now at Dewey & LeBoeuf LLP in Washington. “With this adversarial shot across Goldman’s bow, other banks will feel immense pressure to avoid being cast in a similar light,” said Charles Clark , a former SEC enforcement lawyer who works at Kirkland & Ellis LLP in Washington. Firms “may go to extraordinary lengths to avoid a similar fate.” Sophisticated Investors SEC Chairman Mary Schapiro , 54, is expanding protection of so-called sophisticated investors such as pension funds, insurance companies and banks after financial companies worldwide lost more than $1.78 trillion since the start of 2007 in the worst economic crisis since World War II. “The days of ‘buyer beware’ may be changing,” said Todd Henderson , a law professor at the University of Chicago. “In light of the financial crisis and the fact that sophisticated investors aren’t just losing their own money but taxpayers’ money, the interest of regulators is higher.” The SEC on April 16 accused Goldman Sachs of creating and selling collateralized debt obligations in 2007 tied to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities. Goldman Sachs also didn’t disclose to investors that Paulson was betting against the securities, the SEC said. The SEC’s Republican commissioners, Kathleen Casey and Troy Paredes, opposed the lawsuit against Goldman Sachs, which was approved in a 3-2 vote, two people with knowledge of the matter said yesterday. The allegations are “completely unfounded in law and fact,” Goldman Sachs said in a statement after the suit was announced. The company said it will fight the claims and “defend the firm and its reputation.” After Madoff Khuzami, 53, took the enforcement unit’s helm in March 2009 as lawmakers questioned the agency’s vigilance and debated its future after Madoff’s fraud and the collapses of Lehman Brothers Holdings Inc. and Bear Stearns Cos. In May, he told the Senate Banking Committee the agency needed to beef up its trial unit to maintain its courtroom clout and credibility. “We must convey to all defendants in SEC actions that not only do we assemble winning cases against them, but also we are prepared to go to trial and we will win,” he said. For decades, the SEC brought almost all claims against Wall Street’s biggest investment banks as settled cases. The arrangements let firms avoid legal battles that could damage their businesses. The last time the SEC “went to war” against a major investment bank was against Drexel Burnham Lambert, though there may have been smaller cases in the decade that followed, said Dewey & LeBoeuf’s Radke. Drexel initially fought the SEC’s 1988 lawsuit, which stemmed from an insider-trading probe, by meeting the agency’s lawyers at the courthouse to voice objections. The firm settled the following year. Grassley The Goldman Sachs case may show lawmakers that the SEC is willing to be more confrontational after U.S. Senator Charles Grassley , an Iowa Republican, said the agency showed too much deference to Wall Street, said Peter Henning , a former SEC attorney who teaches at Wayne State University Law School in Detroit. Grassley faulted the SEC after an agency official discussed potential enforcement cases against Bear Stearns with JPMorgan Chase & Co. in March 2008 as the government pushed JPMorgan to buy the failing investment bank. The senator also criticized SEC officials for discussing an investigation into Morgan Stanley Chairman John Mack with the firm’s lawyer in 2005 when the company was considering naming him chief executive officer. Mack, who stepped down as CEO in January, wasn’t accused of wrongdoing by the SEC. No Warning     Although the agency warned Goldman Sachs last year that it was investigating and might eventually file a complaint over its dealings in collateralized debt obligations, the SEC didn’t alert the firm before it filed the suit on April 16, according to a person close to the company. People within Goldman Sachs interpreted the absence of a warning as a sign that the SEC has become more confrontational, the person said. “The SEC picked a fight with the biggest kid on the block,” said Henning. “That may be part of the message the commission wanted to send. It may help re-establish their reputation.” An effort to demonstrate the SEC’s renewed vigor backfired in September when a federal judge rejected a $33 million proposed settlement with Bank of America Corp. The agency later broadened its claims, forced the bank to overhaul its corporate governance and pay a $150 million fine. That stumble and the agency’s failures in the Lehman, Bear Stearns and Madoff cases may have emboldened firms, making them more likely to challenge findings by agency investigators, said Jacob Frenkel , a former SEC lawyer now in private practice at Shulman Rogers Gandal Pordy & Ecker in Potomac, Maryland. “The level of deference the agency has received historically to its cases is a deference it has lost,” Frenkel said. “It can only be reestablished through a chain of more successful enforcement cases.” To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net ; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net ; Joshua Gallu in Washington at jgallu@bloomberg.net .

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Bill Moyers: Dr. King’s Economic Dream Deferred

April 2, 2010

Forty-two years ago, on April 4, 1968, Dr. Martin Luther King, Jr., was assassinated, gunned down in Memphis, Tennessee. To those of us who were alive then, the images are etched in painful memory: One day, Dr. King is standing with colleagues, including Ralph Abernathy and Jesse Jackson, on the balcony of the Lorraine Motel; the next, he’s lying there mortally wounded, his aides pointing in the direction of the rifle shot. Then we remember the crowds of mourners slowly moving through the streets of Atlanta on a hot sunny day, surrounding King’s casket as it was carried on a mule-drawn farm wagon; and the riots that burned across the nation in the wake of his death, a stinging, misbegotten rebuke to his gospel of non-violence. We sanctify his memory now, name streets and schools after him, made his birthday a national holiday. But in April 1968, as Dr. King walked out on that motel balcony, his reputation was under assault. The glory days of the Montgomery, Alabama, bus boycott and the 1963 March on Washington were behind him, his Nobel Peace Prize already in the past. A year before, at Riverside Church in New York, he had spoken out — eloquently — against the war in Vietnam. King said, “A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death,” a position that angered President Lyndon Johnson, many of King’s fellow civil rights leaders and influential newspapers. The Washington Post charged that King had, “diminished his usefulness to his cause, to his country, and to his people.” With his popularity in decline, an exhausted, stressed and depressed Martin Luther King, Jr., turned his attention to economic injustice. He reminded the country that his March on Washington five years earlier had not been for civil rights alone but “a campaign for jobs and income, because we felt that the economic question was the most crucial that black people and poor people, generally, were confronting.” Now, King was building what he called the Poor People’s Campaign to confront nationwide inequalities in jobs, pay and housing. But he had to prove that he could still be an effective leader, and so he came to Memphis, in support of a strike by that city’s African-American garbage men. Eleven hundred sanitation workers had walked off the job after two had died in a tragic accident, crushed by a garbage truck’s compactor. The garbage men were fed up — treated with contempt as they performed a filthy and unrewarding job, paid so badly that forty percent of them were on welfare, called “boy” by white supervisors. Their picket signs were simple and eloquent: “I AM A MAN.” A few weeks into their strike, which had been met with opposition and violence, Dr. King arrived for meetings and addressed a rally. Ten days later, he returned to lead a march through the streets of Memphis that ended in smashed windows, gunshots and tear gas. Upset by the violence, he came back to the city one more time to try to put things right. The night before his death, King made his famous “Mountaintop” speech, prophetically telling an audience, “Longevity has its place. But I’m not concerned about that now. I just want to do God’s will. And He’s allowed me to go up to the mountain. And I’ve looked over. And I’ve seen the Promised Land. I may not get there with you. But I want you to know tonight, that we, as a people, will get to the Promised Land!” The next night he was dead. Twelve days later, the strike was settled, the garbage men’s union was recognized and the city of Memphis begrudgingly agreed to increase their pay, at first by a dime an hour, and later, an extra nickel. That paltry sum would also be prophetic. All these decades later, little has changed when it comes to economic equality. If anything, the recent economic meltdown and recession have made the injustice of poverty even more profound, especially in a society where the top percentile enjoys undreamed of prosperity. Unemployment among African-Americans is nearly double that of whites, according to the National Urban League’s latest “State of Black America” report. Black men and women in this country make 62 cents on the dollar earned by whites. Less than half of black and Hispanic families own homes and they are three times more likely to live below the poverty line. The non-partisan group United for a Fair Economy has issued a report that features Martin Luther King, Jr., on the cover with the title, “State of the Dream 2010: Drained.” Dr. King’s dream is in jeopardy, the report’s authors write, “The Great Recession has pulled the plug on communities of color, draining jobs and homes at alarming rates while exacerbating persistent inequalities of wealth and income.” Nor will a recovery ameliorate the crisis. “A rising tide does not lift all boats,” United for a Fair Economy’s report goes on to say, “because the public policies, economic structures, and unwritten rules of racism form mountains and ridgelines, and hills and valleys that shape our economic landscape. As a result, a rising economic tide fills the rivers and reservoirs of some, while leaving others dry and parched.” This is a perilous moment. The individualist, greed-driven free-market ideology that both our major parties have pursued is at odds with what most Americans really care about. Popular support for either party has struck bottom, as more and more agree that growing inequality is bad for the country, that corporations have too much power, that money in politics has corrupted out system, and that working families and poor communities need and deserve help because the free market has failed to generate shared prosperity — its famous unseen hand has become a closed fist. It is hard to overstate the consequences of choosing more of the same — the very policies that have sundered our social contract. But hear the judgment of Nobel Laureate Kenneth Arrow, echoing Martin Luther King, Jr.’s life and martyrdom. “The vast inequalities of income weaken a society’s sense of mutual concern,” Arrow said. “…The sense that we are all members of the social order is vital to the meaning of civilization.” Bill Moyers is managing editor and Michael Winship is senior writer of the weekly public affairs program Bill Moyers Journal , which airs Friday night on PBS. Check local airtimes or comment at The Moyers Blog at www.pbs.org/moyers .

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AT&T May Find IPad Downloads Exert Bigger-Than-Anticipated Network Strain

April 1, 2010

By Olga Kharif and Amy Thomson April 1 (Bloomberg) — AT&T Inc. , facing criticism for jams in its network in cities like New York, may find the Apple Inc. iPad adds more strain than officials anticipated. The biggest U.S. phone carrier has played down the expected impact of Apple’s iPad tablet computer, which goes on sale this weekend in the U.S., saying many consumers will choose to run it on Wi-Fi hot spots rather than on AT&T’s wireless network. That logic may be setting up customers for disappointment, Bloomberg’s BusinessWeek.com reported, citing analysts and data based on capacity strains caused by handsets like the iPhone. “AT&T seems to be convinced that most of the time users will be connected to Wi-Fi,” said Craig Moffett , a Sanford C. Bernstein & Co. analyst who rates the shares “market perform.” “That’s a pretty big stretch, given it’s a new device nobody’s used before.” An iPad on AT&T’s third-generation network will consume about two-thirds as much network capacity as an iPhone, according to independent wireless industry analyst Chetan Sharma. That could be the equivalent of 1.7 million additional iPhones hitting AT&T’s network this year, assuming Apple sells the 2.7 million of the devices that Piper Jaffray & Co.’s Chris Larsen forecasts. The iPad “certainly could put a strain” on the network if consumers use its Internet capabilities extensively and sales meet expectations, Larsen said. “If they were to get into a situation where they again got behind the capacity, it would damage their reputation.” Commuter Tasks The analysts are basing their assumptions on people like Peter Costanzo. The 45-year-old online marketing director for Perseus Books Publishing in New York has ordered a 3G-capable version of the iPad. He plans to use it during his 75-minute commute from Long Island to read the paper, buy digital books, make notes and retrieve e-mail. “As publishers, it’s really important to see how the device performs,” he said. The more consumers learn of the iPad’s potential, the more likely they are to stretch network capacity. The iPad “is extremely bandwidth-intensive,” Moffett said. “It could set users up for disappointment.” To be sure, the iPad isn’t likely to bring a large telecom network to its knees. And until consumers start snapping them up — analysts expect Apple to sell 2 million to 6 million iPads in 2010 — the industry won’t know how extensively iPad owners will stream video and perform bandwidth-intensive tasks. Six Versions Three initial versions of the iPad will communicate using Wi-Fi wireless Internet technology. Three additional models due later in April will communicate over 3G. Many users may opt for less expensive, Wi-Fi-only versions and use them in hot-spot-laden areas such as their homes, airports and coffee shops. AT&T Chief Executive Officer Randall Stephenson said at a March 2 investor conference in San Francisco that he expects the iPad to be mainly “a Wi-Fi-driven product.” Even the 3G iPad will have the ability to switch over to Wi-Fi when it comes in contact with a hot spot, helping ease network strain, Glenn Lurie , AT&T’s head of emerging devices, said in an interview. “We’re giving you the ability to have a very nice experience,” he said. Buyers of 3G-enabled iPads will be able to use AT&T’s cellular network for $15 or $30 per month depending on how much data they plan to consume. Those plans will also include access to AT&T’s more than 20,000 Wi-Fi hot spots in the U.S. “We feel very good about where our network is,” AT&T spokesman Mark Siegel said. ‘Landmark Deal’ Apple spokeswoman Natalie Kerris said users aren’t apt to experience network congestion. “AT&T is a great partner and they are offering a landmark deal for iPad customers with no-contract data plans at great prices,” she said. AT&T’s ability to stand up to iPad demands will hinge partly on how much it’s used to watch video. A two-hour movie would probably send three to five times more data to the iPad than watching a similar video file on an iPhone or iPod, according to James Brehm, a senior consultant at Frost & Sullivan. The files would be much larger than those containing electronic books, which have been the predominant use of tablet- style devices like Amazon.com’s Kindle. “Longer term, you could see it causing network congestion,” said Jonathan Schildkraut , an analyst with Jefferies & Co. who has a “hold” rating on AT&T. To contact the reporter on this story: Olga Kharif in Portland, Oregon, at okharif@bloomberg.net ; Amy Thomson in New York at athomson6@bloomberg.net .

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Toyota Asks ABC News to Retract `Irresponsible’ Sudden-Acceleration Report

March 18, 2010

By Alan Ohnsman and Jeff Plungis March 19 (Bloomberg) — Toyota Motor Corp. asked U.S. broadcaster ABC News to retract and apologize for an “irresponsible” report it aired last month suggesting electronics as the cause of sudden acceleration in its cars. The world’s largest automaker is working to repair its reputation after recalling 8 million vehicles worldwide to fix defects linked to bursts of speed. The National Highway Traffic Safety Administration said yesterday that evidence from a Toyota Prius involved in a Harrison, New York, crash tied to unintended acceleration found no sign the car’s brakes had been applied. Toyota has said accelerators that stick or snag on floor mats are at fault in sudden acceleration, with no evidence of failures in the electronic-control systems of its cars and trucks. An ABC News report on Feb. 22 challenged that assumption, and the network in a response to Toyota defended its right to air the report. The network owned by Walt Disney Co. “relentlessly promoted” a view that electronics in Toyota and Lexus models were a cause of sudden-acceleration complaints, without providing “credible scientific evidence,” Christopher Reynolds , Toyota’s U.S. general counsel, said in a March 11 letter to ABC News President David Westin . “Toyota deserves a public retraction and formal apology from ABC News for your irresponsible broadcast,” Reynolds said in the four-page letter, reported yesterday by the Web site gawker.com. ‘Legitimate, Newsworthy’ ABC News’s report on the design of Toyota electronic throttle controls was “legitimate and newsworthy,” John Zucker , ABC Inc. senior vice president of law & regulation, said yesterday in a three-page letter to Reynolds. Toyota was contacted on Feb. 22, before the broadcast for a response to be included in the report, and didn’t respond, Zucker said. ABC News had included a fabricated video image of a car tachometer in the broadcast “to create the false and misleading impression with viewers of a dangerous and uncontrolled acceleration,” Reynolds wrote. The original video image was deemed difficult for viewers to observe because of the car’s motion, Zucker responded. Using a different shot was an “editorial error,” and a re-edited video has been posted to the abcnews.com Web site, he said. “The larger point, however, is that the use of the video shot was not intended to, and did not, materially mislead the public,” Zucker said. “ABC News intends to continue to cover the issues surrounding reports of unintended acceleration by Toyota vehicles.” Harrison Accident Toyota City, Japan-based Toyota faces more than 100 class- action and individual lawsuits from customers related to vehicle defects. Toyota’s American depositary receipts, each equal to two ordinary shares, fell 49 cents to $78.81 yesterday in New York Stock Exchange composite trading. The shares have lost $25.2 billion in market value since Toyota announced a recall on Jan. 21. In the suburban New York crash on March 9, a 2005 Prius sped out of control before hitting a stone wall. The Prius’s diagnostic recorder indicated the car’s accelerator was engaged, NHTSA said in the e-mailed statement. “Information retrieved from the vehicle’s onboard computer systems indicated there was no application of the brakes and the throttle was fully open,” the Washington-based auto safety agency said in the statement. “Any release of information regarding an investigation that’s not complete or without consulting local investigating authorities is irresponsible,” said Captain Anthony Marraccini, head of the Harrison police department. Gilbert’s Test The information mentioned by NHTSA is “just one snapshot,” Marraccini said. Harrison police are still meeting with Toyota to analyze the data and is using the Rockville, Maryland, office of RTI International, a forensic engineering company, to help assess the crash, he said. Toyota told reporters March 8 that Southern Illinois University professor David Gilbert ’s test, featured in the ABC broadcast, altered a circuit in a way that couldn’t occur in everyday driving, so it couldn’t be used as evidence of sudden acceleration. Toyota Motor Sales vice president of corporate communications, Mike Michels , said at the time that the company wasn’t planning legal action against ABC. Reynolds couldn’t be immediately reached for comment yesterday. The automaker “reserves the right to take any and every appropriate step to protect and defend the reputation of our company and its products from irresponsible and inaccurate claims,” Reynolds wrote in the letter, which was copied to Disney Chief Executive Officer Robert Iger . Gilbert testified before a U.S. House of Representatives hearing on Feb. 23 that he had isolated weaknesses in Toyota’s electronic throttle system not found in units from other automakers. Toyota engineers and those from the firm it hired to assess its electronics, Exponent Inc., used Gilbert’s technique to induce engine-revving in vehicles from General Motors Co., Daimler AG and Chrysler Group LLC at the March 8 demonstration. To contact the reporters on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net ; Jeff Plungis in Washington at jplungis@bloomberg.net

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Steve Parker: Did W’s NHTSA ignore Toyota problems? On-air this weekend!

March 12, 2010

Saturday March 13 LIVE at 11am Pacific / 2pm Eastern www.TalkRadioOne.com Steve Parker’s The Car Nut Show Not only has Toyota become the butt of millions of jokes while buyers avoid their sales lots, but local news seems obsessed with reporting on any Toyota involved in any accident. Is this fair? The Orange County (CA) District Attorney has filed suit against Toyota for knowingly endangering the public with defective products. Where will it all end? Does Toyota stand a chance of ever recovering their market share and, most especially, their reputation? And Congress is taking a hard luck at the Bush Administration’s version of NHTSA … like Wall Street and the SEC, did W’s NHTSA look the other way as evidence against Toyota mounted? This plus the latest on Hummer, Saab, Ford and all the rest, plus your calls at 213-291-9410. Join in the conversation! Sunday March 14 LIVE at 5pm Pacific / 8pm Eastern www.TalkRadioOne.com Steve Parker’s World Racing Roundup NASCAR has been underway for what seems like months now, but this is a truly big racing weekend … IndyCar and Formula 1 both launch their 2010 seasons, F1 in Bahrain and the US open-wheelers on a new street course in Sao Paulo, Brazil. F1 still rakes in billions, while IndyCar continues their losing association with Versus cable, a 10-year deal which guarantees continued low viewership for the series (four races, including the Indy 500, will be on ABC-TV this year). Plenty to talk about so you join in, too! 213-291-9410.

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Toyota Executives in U.S. Lobbied Headquarters in Japan for Safety Changes

March 2, 2010

By Angela Greiling Keane, Jeff Plungis and Jeff Green March 3 (Bloomberg) — Toyota Motor Corp. ’s top U.S. executive warned his bosses in Japan in 2006 that the quality of the company’s vehicles was slipping and that regulators were stepping up scrutiny. A slide presentation by Jim Press , then Toyota North America’s president, urged changes that would have given the Americans more information to deal directly with safety complaints, according to copies posted yesterday as part of a Senate hearing on sudden acceleration in Toyota vehicles. The disclosure that Press was asking for better communication on safety issues from Toyota headquarters as early as 2006 bolstered the Senate panel’s complaints that the company’s response to complaints was insufficient. Chris Tinto , a vice president in Toyota’s Washington office, made a similar request less than two years after Press. “It doesn’t seem like this message was heard in Japan,” said Senator Jay Rockefeller , a West Virginia Democrat and chairman of the Commerce, Science and Transportation Committee. “A year and a half later, Chris Tinto, Toyota’s top safety official in Washington, tried to warn his superiors in Japan that quality problems were growing and, in his words, ‘we have a less defensible product.’” The Senate commerce committee was the third congressional panel to review the handling by Toyota and the U.S. National Highway Traffic Safety Administration of the recalls, involving about 8 million vehicles worldwide. “There is a new dynamic in the U.S.,” Tinto wrote in the note for the 2008 presentation. “As you face NHTSA, we ask TMC to trust our judgment when we need your urgent help in getting issues resolved. We need faster information flow and more technical support when hot issues arise.” LaHood’s Testimony “Public safety took a back seat” to Toyota profits, Rockefeller said. U.S. regulators may urge automakers to install brake- override systems on new vehicles, Transportation Secretary Ray LaHood said during the hearing. NHTSA is “looking at the possibility of recommending the brake override system in all manufactured automobiles,” LaHood told the Senate panel. The software can slow vehicles in the event of unintended acceleration. Toyota has said it will put advanced brake-override systems in all new vehicles starting in 2011. The company will also retrofit seven current models with a software fix that slows a vehicle if it receives signals both to accelerate and brake, Jim Lentz , the company’s U.S. sales chief, told a House committee last week. Legislation Planned “I firmly believe this is going to require strong legislative action,” Rockefeller told the Toyota executives at the hearing’s close. “We must seriously consider a rulemaking requiring brake override.” Complaints of defects aren’t limited to Toyota vehicles, and the entire U.S. auto industry should be examined, Senator Daniel Inouye , a Hawaii Democrat, said at the hearing. “It is not a Toyota problem,” Inouye said. “It is an industry problem. If it is an industry problem, we should hear from the industry, not just Toyota.” Other lawmakers urged investigations into both Toyota and NHTSA, which regulates auto safety. “Clearly the recent recalls have not been handled well either by the government regulators or the Toyota Motor company,” Senator John Thune , a South Dakota Republican, said. Death Toll NHTSA has received complaints of 43 fatal crashes involving unintended acceleration in Toyota vehicles from 2000 through last month, up from 26 reported through mid-February. “Toyota became the number one car company in the world because of its relentless marketed reputation for safety,” said Senator Frank Lautenberg , a New Jersey Democrat. “I’m deeply concerned that this reputation was built on a house of cards.” LaHood told the Senate panel he’d support a ban for NHTSA employees hired by automakers from interacting with the agency for a certain period of time, a ban already in place for political appointees at the agency and Congress members. NHTSA Administrator David Strickland , in his first testimony before Congress on the recalls, said his “responsibility as an administrator is to run a department with the highest ethics possible.” NHTSA Funding Two Republican members of the House Appropriations Committee asked for a hearing into NHTSA’s funding yesterday. Congress hasn’t had a session on the agency’s budget in three years, Republican Representatives Jerry Lewis of California and Tom Latham of Iowa said in a letter to House Appropriations Committee Chairman David Obey , a Wisconsin Democrat. Toyota appointed former U.S. Transportation Secretary Rodney Slater to help lead a committee on global quality formed by the company to reduce the likelihood of future vehicle recalls. Slater, a partner at the Washington law firm Patton Boggs LLP, will serve on the panel being set up by Toyota after the recalls. The Japanese carmaker announced the appointment in testimony prepared for yesterday’s hearing. “We are making fundamental changes in the way our company operates in order to ensure that Toyota sets an even higher standard for vehicle safety and reliability, responsiveness to customers and transparency with regulators,” Yoshimi Inaba , Toyota’s North American president, told the Senate panel. NHTSA has received four reports from drivers saying their Toyota vehicles experienced sudden unintended acceleration after they were in the shop for repairs under the automaker’s recalls. The reports were posted on the regulator’s Web site. A Transportation Department spokeswoman, Olivia Alair , said the agency is looking into the complaints and hasn’t confirmed their validity. “We will continue to thoroughly investigate any complaints involving unintended acceleration,” Brian Lyons , a Toyota spokesman, said yesterday. To contact the reporters on this story: Angela Greiling Keane in Washington at agreilingkea@bloomberg.net ; Jeff Plungis in Washington at jplungis@bloomberg.net ; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net

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SAC’s Cohen Trades Secrecy for Golf With Investors Enticed by 30% Returns

February 26, 2010

By Katherine Burton and Anthony Effinger Feb. 26 (Bloomberg) — In late January, billionaire Steven A. Cohen hosted a golf outing for two dozen people at the Bear Lakes Country Club in West Palm Beach, Florida. Most of his guests were investors in his hedge fund firm, SAC Capital Advisors LP, plus a few prospects. The party played the Lakes Course — so named because 12 holes out of 18 have a water hazard — as 30-mile-per-hour gusts blew off the Atlantic Ocean, says Jeffrey Vale , director of research at Infinity Capital Partners LLC, who was one of Cohen’s guests. Cohen, who’s proud of his 10-stroke handicap, hit shot after shot straight down the fairways, Vale says. The outing was unusual for Cohen, Bloomberg Markets reports in its April issue. Cohen, 53, spends most days trading stocks on his 180-person trading floor in Stamford, Connecticut. He and 100 portfolio managers buy and sell 100 million shares a day, about 1 percent of all shares traded on U.S. exchanges. Two years ago, Cohen didn’t need to take his investors golfing. He let his record — a 30 percent average annual return for 18 years — speak for itself. “There was a perception that Steve was the wizard behind the curtain,” says Vale, an SAC client since 2001. “Performance was so good, most investors probably didn’t care.” Cohen has become more sociable because he sees an opportunity to grow as the hedge fund industry shrinks, investors say. SAC, an acronym of its founder’s name, now manages $12 billion, down from $16 billion at its mid-2008 peak. First Loss Ever The firm’s flagship SAC Capital International Ltd. fund suffered a 19 percent loss in 2008 — its first ever — amid a stampede out of hedge funds by panicked investors. The financial crisis and subsequent recession killed off 2,300 funds in 2008 and 2009, according to Chicago-based Hedge Fund Research Inc. Cohen, one of the survivors, is raising money so he can hire and mentor new investment professionals to keep the firm going after he retires. The new openness may put current investors at ease. Two former employees of SAC have been linked to the Galleon Group LLC scandal, the largest insider-trading probe ever to shake the $1.6 trillion hedge fund industry. Neither is accused of engaging in insider trading while working for SAC. Cohen is lifting the veil because he must, says Peter Rup , chief investment officer at Artemis Wealth Advisors LLC, a New York-based company that manages $352 million for wealthy families. He says investors stopped tolerating SAC-type secrecy after New York investment manager Bernard Madoff was exposed as a fraud. More Investor-Friendly “After Bernie Madoff , nobody will invest in an operation that is very clandestine,” Rup says. “Even the most crass and abrasive managers are more investor-friendly now.” Rup considered investing in SAC in 2005, he says, then balked when neither Cohen nor any of his analysts would meet with him. Cohen, who lives on a 14-acre (6-hectare) estate in Greenwich, Connecticut, which he bought for $14.8 million in 1998, allowed a reporter to visit his offices in Stamford. He declined to comment for this article. Though Cohen attends more golf and other outings than he once did, most days the balding, blue-eyed, stocky investment manager does what he knows best: He trades. He has a perch in the middle of the Stamford floor, and his bets account for about 10 percent of profits — down from more than 50 percent 10 years ago. He doesn’t like noise, so the phones on the floor don’t ring; they light up. He prefers jeans and sweaters to suits and looks more like a tax accountant on casual Friday than a trading titan running a $12 billion hedge fund firm. Picasso to Warhol Near the trading floor hang pieces from Cohen’s extensive art collection, which includes works by Vincent Van Gogh , Pablo Picasso and Andy Warhol . Cohen maintains the temperature on the trading floor at 69 degrees Fahrenheit (21 degrees Celsius) to make sure no one dozes. If a portfolio manager or analyst can’t answer a question about a stock, Cohen is likely to lash out. “Do you even know how to do this f—ing job?” is a standard barb, current and former employees say. Portfolio managers make money, or they’re fired. They usually last about four years. Cohen snapped back from his 2008 loss in 2009. The $6 billion SAC Capital International fund, open to investors outside the U.S. and to tax-exempt institutions within the country, was up 29 percent, after fees, according to investors. The gain was about the same at Cohen’s main onshore fund, the $3 billion SAC Capital Management LP. Bad Credit Bets It was a return to form after the 2008 loss, which was mostly due to credit investments that went bad. While a 19 percent downturn was about average for hedge funds, according to HFR, Cohen has since turned his focus back to what he has done for most of his career: buying stocks and selling them short. Cohen doesn’t so much own stocks as rent them: He typically holds positions for 2 to 30 days, although some might remain on the books for six months or more, according to a document sent to potential investors in early 2009. The 2008 loss could have been much worse. Months before Lehman Brothers Holdings Inc. went bankrupt in September 2008, Cohen saw trouble coming in the credit markets and sold off as much as $7.5 billion of bonds, primarily debt issued by banks and finance companies, along with related securities, according to four people familiar with the situation. Amid the wreckage of the market crash, SAC and other survivors are trying to vacuum up money from pension funds and other institutions that must chase higher returns to meet obligations. Many of those investors are choosing big hedge funds with long track records such as SAC. Pitching Goldman Clients During his January visit to Florida, Cohen pitched prospective investors at Morgan Stanley’s annual conference on hedge funds, people who attended say. He spoke at a similar conference in May that Goldman Sachs Group Inc. organized for its clients, and recently made a marketing trip to Europe, according to people familiar with his fundraising efforts. The campaign has worked. During the last six months of 2009, investors poured $1.3 billion into SAC, about 10 percent of the $15 billion raised by all hedge funds during the period. Investors are handing Cohen their money even though he collects some of the highest fees in the industry — a 3 percent management fee and as much as 50 percent of profits. Most managers charge 2 percent and 20 percent. Links to Galleon The new investments are flooding in despite the fact that SAC’s name cropped up in the Galleon probe. That investigation goes back to at least 2007, when the Justice Department used wiretaps in an insider-trading case for the first time and recorded phone conversations that led in October to the arrest of Galleon founder Raj Rajaratnam and five others. Another 15 people have been charged since, and nine have pleaded guilty. Rajaratnam managed $7 billion at Galleon’s peak. Two people linked to the Galleon case have ties to SAC. Richard C.B. Lee pleaded guilty on Oct. 13 to charges that he traded on insider information at Spherix Capital LLC, a San Jose, California-based firm he co-founded in 2008. Lee worked at SAC from 1999 to 2004. He’s cooperating with authorities. No one has alleged that Lee engaged in insider trading while at SAC. Portfolio manager Richard Grodin left SAC to start New York-based Stratix Asset Management LLC in 2004, taking Lee with him. Last year, his new firm, New York-based Quadrum Capital Management LLC, received a subpoena regarding its trading, according to a person familiar with the investigation. He hasn’t been charged. Grodin didn’t return calls seeking comment. Tapping ‘Tippee 1’ A third former employee, analyst Jonathan Hollander , was allegedly involved in another insider-trading ring while he was employed by Cohen at SAC, according to two people familiar with the matter. In January 2009, the SEC filed a civil complaint against Ramesh Chakrapani , then a Blackstone Group LP managing director. The SEC alleged that in January 2006 Chakrapani told a person identified as “Tippee 1” that supermarket chain Albertsons was about to be purchased. About a week later, a consortium that included the private-equity firm Cerberus Capital Management LP announced the buyout. Tippee 1 used the information to reap $18,000 in a personal account and to generate $3.5 million for his employer, who wasn’t identified. Hollander is Tippee 1, the two people say. Neither Hollander, who left SAC in late 2008, nor SAC is accused of wrongdoing in the Chakrapani suit. SEC Probes After the suit was filed, SAC examined Hollander’s trades, SAC spokesman Jonathan Gasthalter says, and the firm continues to cooperate with the U.S. inquiry. Hollander didn’t return a call seeking comment. His lawyer, Aitan Goelman , also declined to comment. The Securities and Exchange Commission and the Justice Department are looking into the trading patterns of even larger players than Rajaratnam, according to a person familiar with the case. The SEC and the Justice Department declined to comment. At least one agent at the Federal Bureau of Investigation, B.J. Kang, has been inquiring about SAC’s trading for several years, according to a person who’s been interviewed by him. Kang was the lead agent in the Galleon investigation and is pictured in photos taking Rajaratnam into custody on Oct. 16. No one at SAC has been accused of wrongdoing, and the firm has received no subpoenas. Kang didn’t return a call seeking comment. FBI spokesman James Margolin declined to comment. Hedge Home Runs People who have worked for Cohen say they never saw any evidence of insider trading. Cohen doesn’t need pilfered information to succeed, says a person who worked at SAC. Another former portfolio manager for SAC says working there is like working for the New York Yankees — a team that always wins and that everyone who’s not a fan hates. Other hedge fund managers say that one reason federal investigators might be asking questions about SAC is that, like Galleon, Cohen’s firm made its name with rapid trades in and out of stocks. Cohen has also made a practice of investing in the funds of some of his former employees, including Grodin’s Stratix, according to investors. Cohen told clients at the beginning of the year that he will no longer make such investments because of the risk to his reputation if something goes wrong. SAC takes strong measures to prevent traders from dealing in insider information, investors say. Cohen’s staff of 800 includes 20 legal and compliance workers who, among other things, monitor instant messages and e-mails, including those sent and received by Cohen. Harvey Pitt , former chairman of the SEC, and Stephen Cutler , former head of the regulator’s enforcement unit, have held workshops with SAC employees about complying with SEC rules. Divorce Battle Cohen’s most aggressive accuser may be his former wife, Patricia. She sued him in U.S. District Court in New York in December, alleging that Cohen lied about his net worth during their divorce, thereby reducing payments to her. They were married for a decade and had two children before separating in 1988. Patricia alleged in court papers that in 1986 Cohen, then a trader at investment firm Gruntal & Co., told her that he had received inside information about the soon-to-be-announced takeover of RCA Corp. by General Electric Co. Patricia says she asked her husband if trading on such information was legal, and he answered that the source was a former classmate of his and that the information had come via a “mutual friend,” not directly from the source, so it didn’t count as insider trading. Taking the Fifth Patricia’s lawsuit says that Cohen was questioned by the SEC and that at times he invoked his Fifth Amendment right against self-incrimination. No charges were brought. “These are ludicrous allegations made by a former spouse that are entirely without merit,” Gasthalter said in a statement e-mailed to Bloomberg News on Dec. 16. In mid-January, Patricia dropped her suit, switched attorneys and said she planned to file a new complaint. She had not done so as of Feb. 25. A week after his ex-wife’s court action last year, Cohen was featured in the tabloid New York Post, which put up a video on its Web site showing Cohen and his second wife, Alexandra, then newlyweds, appearing on a talk show in 1992 devoted to men who can’t separate from their ex-wives even after starting new relationships. Cohen, looking trim with a full head of dark hair and orb- like horn-rimmed glasses, spars with a man in a muscle shirt in the audience after admitting he slept with his ex-wife while courting Alexandra. Television Appearance “I don’t think it’s unusual when you’re separated that you go back a few times to just find out that it doesn’t work,” Cohen says on the show. “It clarified things.” Cohen is a rich target for an angry former wife. About half of the $12 billion managed by SAC belongs to Cohen or his employees, according to a document provided to investors in 2009. His mansion in the woods north of downtown Greenwich has a basketball court, an ice skating rink and a two-hole golf course. Inside hangs his eclectic art collection, which includes works by Marc Quinn , who casts sculptures of his head in his own frozen blood. In April 2009, Cohen exhibited some of his collection at Sotheby’s in New York, including paintings by Paul Cezanne , Lucian Freud and Edvard Munch . All 20 images were of women. Art dealers estimated that the works on display, just a small part of Cohen’s collection, were worth $450 million. Cohen gives tens of millions to charity. Alex, as his second wife is known, is president of the Steven A. and Alexandra M. Cohen Foundation. Robin Hood Contributor Among its biggest beneficiaries is the Robin Hood Foundation , started by hedge fund billionaire Paul Tudor Jones in 1987 to fight poverty in New York. Cohen sits on the board. In 2008, the Cohens gave $8.6 million to Robin Hood, according to their charity’s most recent public filing with the Internal Revenue Service. The same year, the Cohens gave $50 million for emergency pediatric care at Morgan Stanley Children’s Hospital at New York-Presbyterian hospital in Washington Heights, the northern Manhattan neighborhood where Alex, who is of Puerto Rican heritage, grew up. In 2009, the foundation gave $30 million to Brown University for undergraduate financial aid. Cohen’s son Robert graduated from there in 2008. Cohen has been interested in the stock market since he was 13 years old. He started following stocks listed in the New York Post that his father, a dress manufacturer, brought home to suburban Great Neck, New York, each night. Wharton Grad Cohen left Long Island for the Wharton School of the University of Pennsylvania, where he would often skip class to watch stocks at a local brokerage. He taught himself to be a master “tape reader,” according to people who know him, able to predict the direction of a stock by watching each tick of the price and the volume of shares traded. After graduating in 1977 with a degree in economics, Cohen joined Gruntal, a New York brokerage firm. Cohen came on board as a proprietary trader, buying and selling stocks with Gruntal’s money. He thrived and in 1985 became the firm’s head proprietary trader, a job he held until 1992, when he quit to start SAC. In 1991, a transaction at Gruntal became the sole black mark on his record. He bought 100 shares of a very thinly traded stock at the end of the month, enough to drive the share price up sharply, increasing the value of the firm’s holdings by more than $100,000. In January 1995, a New York Stock Exchange panel sanctioned Cohen, saying he “engaged in conduct inconsistent with just and equitable principles of trade.” NYSE Sanction The NYSE barred him for four weeks from working for a company that was a member of the exchange. By that time, Cohen, who neither admitted nor denied wrongdoing, had left the broker- dealer to found SAC. At Gruntal, glass walls separated Cohen’s team from the retail brokers, says Dan Cherniack, who was a clerk on the retail options desk. “He was a pretty good yeller and screamer back in the day,” says Cherniack, who admired Cohen’s trading prowess. One day, Cherniack and Cohen struck up a conversation in the elevator. Cohen said his trading clerk had just left and asked whether Cherniack wanted the job. Cherniack took it on the spot. The move made his career. He was one of nine people who started the firm that became SAC. Everyone stumped up cash. They took some from investors, too, and raised a total of $25 million. About half came from Cohen, Cherniack says. Money at Risk They rented an office at 14 Wall Street, across from the NYSE. Everyone sat at one long desk shaped like a capital I, with Cohen in the middle. The new company traded mostly large-capitalization stocks such as 3M Co., Merck & Co. and GE, as Cohen had done at Gruntal, Cherniack says. The difference was that the money they were risking was theirs, and that made the group overly cautious, he says. Cohen became impatient. “He ripped into everybody,” Cherniack says. “He said, ‘What, are you scared because it’s your own money now?’” The group got the message. In August 1992, its first month, SAC returned 3.41 percent, according to SAC marketing documents. For the year, it earned 17.5 percent, after fees. As a sign of things to come, the group made money every month that year and for all of 1993, when SAC returned 51 percent. The firm didn’t have a losing month until December 1994, when it dropped 0.02 percent, according to SAC documents. ‘A Brotherhood’ “It was a brotherhood,” Cherniack says. Cohen married Alexandra Garcia the same year he started SAC. She worked as an administrative assistant at brokerage Hoare Govett Ltd. before marrying Cohen. Cohen’s best years were yet to come. In 1999, at the height of the Internet bubble, the firm’s biggest fund returned 69.7 percent, after fees, betting that technology shares would soar. Then SAC turned around and bet that the Internet and tech bubble would pop, which it did. The fund earned 71.8 percent in 2000. Cohen’s natural ability as a tape reader has been a big part of his success, former employees say. In addition to trading his own stocks and overseeing 300 managers, analysts and traders globally, Cohen buys and sells “minis,” says one former employee. “Mini” is short for a security called the S&P 500 E-mini future, an electronically traded derivative that rises and falls with the Standard & Poor’s 500 Index and is sold in smaller units than other index futures. ‘Mini’ Trading “He does that all day, every day, completely intuitively,” the former employee says. Unlike many hedge funds, which tend to have a handful of executives making investment decisions, SAC runs what amounts to 100 small funds. SAC borrows as much as $4 for every $1 of its own from prime brokers, including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co., then distributes the hoard to various teams. Managers’ contracts have “down-and-out” clauses: lose 5 percent from your peak assets, and SAC can take away half of what remains. Suffer a 10 percent loss, and you could be out. In 2008, 12 portfolio managers and their teams were fired or resigned, according to a person familiar with the matter. Each team manages from $300 million to $500 million, on average, according to an SAC marketing document. The teams are paid based on their own performance, and SAC’s higher-than- normal fees ensure that each portfolio manager’s take is almost as high as if he or she were running an independent shop. Long Vetting Process After an interview process that can take 14 months, including multiple rounds with executives, including Cohen, and a background check that employees joke will turn up the name of a candidate’s second-grade teacher, a manager will sign a two- or three-year contract, which will be renewed if he meets his return targets. There can be heated competition among portfolio managers, who are often vying with colleagues covering the same industries. SAC has 13 teams trading health-care stocks, for example, and 11 doing technology, according to an October 2009 marketing document. In his own trading, Cohen solicits ideas from everyone at the firm, people familiar with the arrangement say. Send “Stevie” an idea that makes money and you get paid something extra, they say. When pitching a contrarian bet on a stock to Cohen, his minions must explain what other big investors think of it, and why that’s not correct. Stock Catalyst Whether the stock is cheap or expensive is irrelevant. There must be a catalyst that will make it move, a former employee says. The boss has a sense of humor that’s dry, along the lines of Jerry Seinfeld , former employees say. In September 2008, before Lehman’s bankruptcy, Cohen sent a companywide e-mail: “It’s all up to the government now. I have no idea what will happen. Good luck to you all. This is a recording.” Working at SAC is tough, even as hedge funds go. One of the worst aspects, at least for people who like weekends, is Sunday “homework.” Every week from 5 p.m. to 9 p.m., Cohen has his portfolio managers and analysts call in to tell him what’s coming up that week for the companies they follow. One former analyst says she worked every weekend one summer before, fed up, she quit. Borrowing $7 Billion Cohen succeeds because he cuts his losses quickly when things go south, former employees say. A case in point was his move out of corporate bonds. In 2006 and 2007, a team of traders at SAC’s New York-based subsidiary, Sigma Capital Management LLC, spent $400 million of the firm’s cash, plus as much as $7 billion in borrowed money, on the debt, according to people familiar with the transactions. In the fourth quarter of 2007, Cohen and one of his senior bond managers, Peter Abramenko , concluded that with subprime mortgages starting to tumble, banks were about to lose billions of dollars on home loans made during years of easy credit and rising prices. They decided to sell everything and, by mid-2008, had gotten out of most of their positions. Abramenko declined to comment. That June, SAC closed down the bond arm of Sigma. Three months later, Lehman failed, and the debt of financial institutions fell in price by more than 40 percent during the next six months. Had SAC held on, it would have faced punishing margin calls and might have had some of its assets stuck at Lehman, one of its prime brokers, after it declared bankruptcy. On Oct. 8, 2008, after the S&P 500 had fallen for six consecutive days, Cohen told most of the SAC managers trading stocks to liquidate. Going to Cash By the end of the year, SAC held $7.9 billion in cash, according to a document sent to potential investors in early 2009. Even so, his biggest fund had dropped by almost a fifth, mostly from losses in its holdings in convertible bonds and other securities tied to the credit markets. Cohen is a restless manager of both stocks and his company. In 2005, he branched out from stocks into bonds, currencies and private equity. By the end of 2008, he had fired almost everyone who didn’t trade stocks, saying the lesson of the market crash was that he couldn’t trade every asset class successfully. Investors don’t mind if Cohen is fickle, so long as he continues to bring in 30 percent annual returns. “It’s Cohen’s ability to adapt to a changing environment that’s his biggest strength,” Infinity Capital’s Vale says. “My biggest fear is that he retires.” To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net ; Anthony Effinger in Portland, Oregon, at aeffinger@bloomberg.net .

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Yanukovych’s Inauguration Sets Stage for Parliamentary Battle With Premier

February 25, 2010

By Daryna Krasnolutska and Kateryna Choursina Feb. 25 (Bloomberg) — Viktor Yanukovych today will be sworn in as Ukraine’s fourth president since the collapse of the Soviet Union two decades ago, eradicating the memory of his first bid for the post in 2004 that triggered the Orange Revolution. Yanukovych, 59, will receive a blessing at the Kyiv Pechersk Lavra monastery and will be inaugurated in the parliament at about 10 a.m. He’ll later meet foreign guests including U.S. National Security Adviser James L. Jones and European Union foreign policy chief Catherine Ashton . Russia will be represented by parliamentary speaker Boris Gryzlov and President Dmitry Medvedev ’s chief of staff Sergei Naryshkin . The new president beat Prime Minister Yulia Tymoshenko in the Feb. 7 runoff election and, unlike five years ago, survived a court challenge against the result. He now must piece together a majority to remove his rival from the premiership. As president, he can replace the foreign and defense ministers and with the backing of 300 deputies would also be able to oust the central bank governor. Tymoshenko yesterday reiterated her refusal to form a coalition with lawmakers loyal to Yanukovych. “Tymoshenko is now doing her best to hamper Yanukovych’s attempts to set up a new majority,” said Anastasia Golovach , an analyst at Renaissance Capital in Kiev. “It is difficult to predict when Yanukovych will be able to set up a new coalition. I think it will be next week. If by the end of next week he has reached a dead end, he will try to push early parliamentary elections.” The prime minister has refused to concede she was beaten by her rival in the Feb. 7 presidential election and claims the results were falsified. The premier retracted an appeal to the Higher Administrative Court after a one-day hearing, accusing it of being biased. New Majority Yanukovych said on Feb. 21 he hopes a new majority will be created this week. The current coalition of 244 seats includes Tymoshenko’s bloc, outgoing President Viktor Yushchenko ’s bloc and parliamentary speaker Volodymyr Lytvyn ’s party. Yanukovych, with 171 seats, will need to secure 27 seats from the communist party, 20 seats from Lytvyn’s party and at least 8 lawmakers from Tymoshenko or Yushchenko’s blocs for a majority. The parliamentary tussle is a far cry from the demonstrations that characterized the Orange Revolution. Yanukovych was initially declared winner in the 2004 election, provoking millions to take to the streets in protest at what they considered falsified results . The Supreme Court canceled the outcome and called a third round, which brought Viktor Yushchenko into office with Tymoshenko as his partner and first prime minister. Yanukovych has campaigned to erase his reputation as favoring Russia over the West and stressed that he is as enthusiastic about integration into the European Union as Tymoshenko. He also pledged to set up a stable government. Ukraine’s economy needs political stability to combat an economic recession, which is the deepest since 1994, and restore investor confidence. The hryvnia lost 42 percent against the dollar since September 2008 and was the world’s second worst performer after the Venezuelan Bolivar. The yield on Ukraine’s 2016 Eurobond fell 18 basis points to 10.07 percent at 8:33 a.m. in Kiev. The credit default swap spread on the country’s five-year debt narrowed to 936 basis points yesterday from 944 the previous day, according to Bloomberg data. A narrower CDS spread signals improved investor perceptions of credit risk. Ukraine’s benchmark index of stocks is up 23 percent this year, and soared 90 percent in 2009. To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net ; Kateryna Choursina in Kiev at kchoursina@bloomberg.net

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Frank Quattrone’s First IPO Since Comeback Leaves Investors With Losses

February 17, 2010

By Michael Tsang Feb. 17 (Bloomberg) — Frank Quattrone’s return to the initial public offering market is leaving investors with losses. QuinStreet Inc., Silicon Valley’s first IPO this year, has yet to close above its $15 offering price since it began trading on Feb. 11, dropping 2.5 percent even as the Nasdaq Composite Index climbed 3.1 percent. Quattrone’s Qatalyst Partners was paid $2.1 million to help QuinStreet choose underwriters for its $150 million offering and negotiate terms of the deal, according to filings with the Securities and Exchange Commission. The initial sale marked Quattrone’s first involvement with an IPO after winning a legal battle stemming from allegations in 2003 that he gave out shares to favored executives. QuinStreet’s performance contrasts with the technology companies that Quattrone took public in the 1990s, when offerings from Cisco Systems Inc. and Amazon.com Inc. helped make him one of the highest-paid bankers during the Internet boom. “Quattrone does what any good advisor does, he basically tries to estimate what the market will be like and he was a little bit too optimistic,” said Raphael Amit , a management professor who studies venture-capital financing at the University of Pennsylvania’s Wharton School in Philadelphia. “We are in a different world. The bar for an IPO is much higher now” than in the 1990s, he said. Quattrone declined to comment through his spokesman Robert Chlopak . Telephone calls to Douglas Valenti , chief executive officer at QuinStreet, and Kenneth Hahn , the company’s chief financial officer, weren’t returned. Nasdaq, S&P 500 QuinStreet’s shares have underperformed the broader market even after the Foster City, California-based company cut the price of its IPO by as much as 21 percent. Shares of the online advertiser increased 0.6 percent to $14.63 yesterday on the Nasdaq Stock Market, while the Nasdaq Composite advanced 1.4 percent and the Standard & Poor’s 500 Index climbed 1.8 percent. On its first day of trading, QuinStreet rose as much as 3.7 percent before closing unchanged at $15. The Internet marketer’s initial sale came as a slump in IPOs deepened. At least six U.S. offerings have been postponed or delayed this year, while the 10 companies that completed IPOs have cut the size of their deals by 30 percent on average, data compiled by Bloomberg showed. Half have declined since listing their shares. QuinStreet’s drop is “more about the fact that capital markets are not where we’d like them to be,” Amit said. Cisco, Amazon.com The first-day gains of IPOs that Quattrone arranged burnished his reputation in the 1990s. San Jose, California- based Cisco jumped 24 percent after its sale in February 1990, while Amazon.com of Seattle climbed 31 percent in May 1997. The former head of technology banking at Credit Suisse First Boston made more than $200 million in compensation from 1998 to 2001. Quattrone was forced out of the financial industry after the NASD in 2003 accused him of giving out IPO shares to executives to win investment banking business and federal prosecutors charged him with obstructing justice. NASD dropped its case in 2006 and a U.S. judge formally approved dismissal of charges against Quattrone in August 2007. He started Qatalyst Partners, a San Francisco-based advisory firm focused on technology companies, in March 2008. With Qatalyst as its financial adviser, QuinStreet picked Credit Suisse Group AG of Zurich, Charlotte, North Carolina- based Bank of America Corp. and JPMorgan Chase & Co. in New York to lead its initial sale. Duncan King , a spokesman at Credit Suisse, declined to comment, as did Bank of America’s John Yiannacopoulos and Brian Marchiony of JPMorgan. Relative Value The IPO priced 10 million QuinStreet shares at $15 each after the company and its underwriters set a range of $17 to $19. A midpoint IPO price of $18 a share would have given a market capitalization of $808 million to QuinStreet, which runs marketing Web sites for clients such as for-profit education companies and gets paid when visitors click for more information and become customers. That valued the advertiser at 39.4 times its net income of $20.54 million last year, almost double the median 19.8 times earnings for 27 online marketing and information companies globally, according to data compiled by Bloomberg. At $15 a share, QuinStreet is 66 percent more expensive. Rusal, Energizer QuinStreet isn’t alone in hiring a financial adviser for its share sale. N M Rothschild & Sons Ltd. served as United Co. Rusal’s financial adviser for its HK$17.4 billion ($2.2 billion) sale in January. Moscow-based Rusal, the world’s largest aluminum producer, declined 22 percent since its Hong Kong listing through last week. Rothschild provided “corporate finance advice” related to the IPO, according to the prospectus. Energizer Holdings Inc., the St. Louis-based battery-maker known for its indefatigable bunny, paid former UBS AG investment banker Kenneth Moelis’s advisory firm, Moelis & Co., $1.75 million for its $465.5 million share sale in May. To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net .

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Tony Greenberg: Why Good Service Is About Trust

February 16, 2010

I’m a tough customer. I admit it. Takes one to know one. I’m a loud shocking dose of reality for companies that sell me something. I expect too much from them. I’ve given them my money for, and put my trust in; their products or services, and I expect them to value that accordingly. I can be a firm’s greatest ally or its worst nightmare. So when something goes wrong, I want the company to fix it. Now! When it takes too long, I let them know it. When service representatives can’t solve the problem, I want to talk to their bosses, their bosses’ bosses, all the way up to their CEOs. And when a service rep tells me, “My supervisor will just tell you the same thing,” well, there’s nothing I want to hear less. Why am I such a pain in the, excuse me, why am I such an exacting customer? Because I’ve been on the other side of the fence, working in the customer-service business, for my entire career. I answer my own phone. When my customers have a problem, I have a problem. And it’s my job to fix it. My customers aren’t small companies, either. They include some of the world’s biggest movie studios, software makers, and game companies, among others. But if I want them coming back, I have to fix their problems, and fast. So I know what it takes. Just because I’m an extreme case, doesn’t mean I’m alone (extreme, maybe slightly irrational, and definitely passionate, but not strange). I know customers deserve better than most companies give them. Michael Treacy was never more right. Why do firms think they can excel in more than one of these three disciplines: Operational excellence, Product leadership or Customer intimacy. Pick any successful firm and see they are great at one , not all. After all, what’s your time worth? For a business, what’s your customer worth? What happens when a company doesn’t value the time of its customers? As a customer, do you include the cost of bad customer service when you decide to buy from one company over another? Shouldn’t our service providers pay us our hourly rate when they put us on hold? Ahh, that would make them think thrice. And if you don’t value your time in dealing with a company that doesn’t, you should. “We don’t want to push our ideas on to customers; we simply want to give them what they want.” – Laura Ashley Companies spend hundreds, even thousands of dollars to acquire a single steady customer, on the expectation that they will be able to milk that customer for far more money in coming years (figure out your company’s cost of customer acquisitions and their lifetime value here ): The math is pretty straightforward. Yet everywhere we look, there are companies that can’t seem to count. It seems they are quite clear about where their heads are at: * I called T-Mobile on a separate issue and it took 13 minutes to get someone on the line. After multiple ID authentications, the service rep told me he couldn’t help with a problem with that phone line when I called on that phone line. “It’s Our Policy,” they said. I had to call back from a different phone line to get help. You and your policy will send your customers running. My policy is to give my money to someone else. Please don’t ever tell me your policy. Just make me happy. * Credit card companies, especially supervisors, don’t even answer your call. (See Jackie Ramos , the bank employee fired after complaining about exorbitant client charges) Instead, you have to leave a number so someone can call back later, even days later, if you’re around and able to take the call. And rather than putting your photo on your credit card to reduce fraud, they just charge usurious interest rates to “make up for their losses.” Don’t the banks understand that we don’t even know who owns which bank now? In the jumble of bank consolidations post-meltdown, I was sorting out which credit cards were mine and which were my various companies. Certain cards had different names than the actual bank name. My auto-pay and my firms were fully confused. This of course led to overpays, underpays, extortion and usurious charges, credit limit cuts, etc. Thank goodness Bank of America had one rock star, Janet Sassano, whom I found after being up hung up on, hours wasted and insulted by other customer “service” specialists. Sassano, by contrast, was the proverbial princess in shining armor. She took each of my 12 issues and resolved them to my absolute satisfaction. She took great pride in helping me sort out these issues and was pleasant, trusting, and reliable in calling me and my accounting team back and even checked up on us as the months went on. * Toyota has a full-fledged disaster on its hands, one that could scar the company for years, because it didn’t deal quickly with issues tied to its brake and accelerator systems. (The New York Times took a long look at Toyota’s ongoing pattern of slow responses to safety/quality issues, available here .) * I had to go all the way up the Southern California Edison ranks to its CEO to resolve what should have been a simple matter of fixing an online payment snafu. To their credit, that did solve the problem. I addressed them in a 15-point, 22-page document requesting policy, and governance and process-management changes. Also to their credit, they articulately responded in writing about how they would address each of those issues. But why oh why was it necessary to go to the top for something that should have been relatively easy to fix? Then there’s MacMall, a Torrance, CA. based distributor of Apple computers and related gear. It the same firm as PC Mall. If you’re on any technology mailing list, you’ve probably gotten at least 70 of their catalogs, or seen their multi-page magazine ads. I guess poor customer service is a core MacMall positioning element that I could have known about ahead of time. Note their low consumer rating on ResellerRatings.com. If you were ever to consider returning or replacing a product, it would be one of the worst places you could choose. Out of thousands of online resellers, to me it seems like it’s just one step above a phishing site. MacMall execs, I suggest you look at the Apple stores, busting at the seams, and chase the premium services market not the sleazy discount / no service no frills game. I take a lesson and story from my friend Billy Ladin – founder ComputerCraft, one of the first Apple retailers from the 80′s. He was taught lessons from partners Steve Jobs and his former employee, who told him discounts were the only way to survive. Yup, that employee was Michael Dell. I guess in the long run Steve Jobs got it right. It seems he had a tough time finding retailers so he did it for himself. Look at him now. One time I met Jobs, skiing with him on Aspen mountain. We were having lunch, and I was curious as to why he bought 2 apple strudels and no meal. He said, ‘Why should I eat that boring food when I can have this,” as he crunched into his meal. Classic. I wonder if it was the Apples or if the same would be true for chocolate. Everything he makes is exciting. A few months ago, I bought a computer from MacMall for the first time (granted, I have been a customer for years). I should have realized then that trouble was coming when the company wouldn’t let me buy a computer online, have it configured and installed with my software choices, and pick it up at the store two miles from my place. I had to wait four days for the computer to be shipped those two miles to my office and pay for postage. Guess what they said: “It’s Our Policy.” How lovely. They explained that it was a security risk. I asked them how they thought a known customer who puts in a known credit card and will pick up the equipment with his personal ID is a risk compared to international fraud rings that steal products, services, PayPal accounts and more by using a credit card online? Riddle me that, Batman. “Everything starts with the customer.” –Louis Gerstner, IBM Four months later, the computer’s hard drive failed. I went to the Apple Store and had a great experience. But when I went to swap the hard drive for solid-state storage so I wouldn’t be vulnerable to another hardware failure, they told me I couldn’t, because I hadn’t bought the machine directly from Apple. I had to go back to MacMall for that. That led to a long and unsatisfying dance with MacMall, going all the way up to and through its president, who promised in an email to call me. But then he chose instead to tell his store to blow me off. The bottom line: I wanted the hard drive replaced, but needed the bad drive back so I could recover my important data. MacMall wouldn’t let me, and in fact, after a lengthy delay, ultimately refused to do anything to fix the problem because I had complained too much. One MacMall technician was an angel, and I’d like to use that trouper’s name, but I’m afraid it’ll just get him in trouble. Apple’s process wasn’t perfect (some of their policies, later waived, seemed nonsensical). But had I bought Apple’s computer from Apple, my problem would have been fixed, and quickly. Apple gives its managers the flexibility and discretion to solve a customer’s unique problem. They understand that they’re building a relationship of trust with a customer, not just cashing in on a quick purchase. “Above all, we wish to avoid having a dissatisfied customer. We consider our customers a part of our organization, and we want them to feel free to make any criticism they see fit in regard to our merchandise or service. Sell practical, tested merchandise at reasonable profit, treat your customers like human beings — and they will always come back.” – L.L. Bean So who needs MacMall ? They survive on a threadbare margin of just 1.8 percent. They must depend on volume (and those endless ads and catalogs) to generate enough new customers to make ends meet. Margins that thin make it almost impossible for any company to finance a proper customer-service operation, and the evidence suggests that’s not where they spend their money. They spend it on making policies to not serve customer needs. Apple, by contrast, has a secret weapon in its stores: the Genius Bar. If you need help, they answer questions, diagnose issues and solve problems. Even my initial phone call was promptly answered, and the online personnel set up a high-priority appointment at the Genius Bar to analyze the problem in person. A company like Compact Appliance also understands the trust equation. I bought an air conditioner, but it was too loud to use. I had to return it, and called the CEO, who was apologetic, and fixed the problem immediately, even helping me pick out a replacement. Trust me; I’ll use them again and again and again. “There are only two industries that refer to their customers as users.” – Edward Tufte So, saving $50 on a $1,200 computer is nice, but what’s your time worth? There’s probably a reason why a company like MacMall has dozens of negative Facebook posts about it. Too many of us do a terrible job understanding a product’s true cost. It’s not just the purchase price. It’s what it costs to live with that product, and its maker, for years to come, especially if something goes wrong. Companies that skimp on customer service and cut corners on parts are secretly charging you more than you know. So what keeps a customer coming back? Trust. Trust that they’re buying good products. Trust that they’ll get a fair price. And trust that they will be dealt with fairly if a problem arises. And how do they build that trust? It seems the more suck-cessful a firm becomes the worse they usually become… You already know my answer: Only Time Buys Trust . And if a company doesn’t take the time to build and continue to earn customer trust, it deserves to be in trouble. I know every time my company, RampRate Sourcing Advisors, works with a client, it’s another chance to build trust. It’s also another chance to blow it. I can’t let that happen. We don’t let it happen ever. Even if we lose money, it’s our reputation. We need to be better consumers if we expect to get better products. That means holding companies accountable when they shortcut on service, and give us short shrift on quality products. Your time matters at least as much as that little discount you may get. Remember that next time you decide whether you want to buy that computer from MacMall or Apple. So tell me, have you had a bad experience with a company that led you to stop buying its products? Did you shout it out to your comrades and associates? Did you tip your competitor to buy from them…grin? Did you tell others? Did you talk about your problem on Yelp, Twitter, Facebook, or other sites? Did you report them to the authorities? Do Something! Do you include the company’s reputation for reliability and service in the cost of its products? I urge you to tell your stories here by posting to this service manifesto. Pass the link. Shout it out. Lets all try to make our lives easier. “There are only two ways to get a new customer: 1. Solicit a new customer any way you can. 2. Take good care of your present customers, so they don’t become someone else’s new customer.” -Ed Zeitz

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Michael O’Donovan: Ex-Dunkin’ Donuts Exec Sues Company For Spreading Rumors Of His ‘Excessive Drinking’

February 10, 2010

A former top executive at Dunkin’ Brands who helped assemble the chain’s culinary dream team has filed a $5 million lawsuit that accuses the company of violating a separation agreement by providing negative references, ruining his reputation with defamatory statements, and causing the loss of multiple job opportunities.

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Bob Dowling: Rethinking Toyota

February 9, 2010

Toyota’s pummeling is long overdue. With some 8 million cars on recall, repair costs exceeding $2 billion and the Prius suffering brake problems, the easy days for its legendary arrogant American dealers are at least temporarily over. How arrogant? “Do you wish to order one” was the response I got when I asked to test a Prius at the Westport Ct. dealer in 2007. “I’d like to drive one first.” “That would be a month from now at 9.30 am. If you’re late you’ll miss the opportunity.” I bought a Subaru. This December. I went to Gettel Toyota in Sarasota, Fl about buying a Prius. Chris Crews, the young salesman got out a model after a 80 minute wait, then was sharply elbowed aside by his boss Sean as soon as I asked about an on the road price. “I’m going to put you in a Prius today,” said Sean. “You won’t be able to say no.” To get a price, you have to agree to buy. I walked out. Two sales managers followed me to my car. “Ninety percent of customers don’t return,” said Tom. “We have to pressure you.” Or thought they did. On Thursday I drove a Prius I bought privately to the John Pierson Toyota dealership in Stuart, Fl the day after the Prius brake problem was announced. The place was jammed with seniors eating free Subway sandwiches and wondering about their Priuses, Corollas and Camrys. The south lot was jammed with new Toyota’s waiting for the accelerator repair part to arrive. With little to sell, salesmen had hours to banter. Then suddenly out of the blue came a fresh idea. Remember the customer! “I’d like to see the company take a big chunk of the marketing, budget and give the money to our loyal customers,” said Kevin Peterson, a service manager. “Offer them say 10% of the value of their car. That would probably cover any resale loss and be offset by millions of dollars in goodwill and free PR. We don’t have to be at the Superbowl to sell cars. We have a massive marketing budget. This is time to show our customers we’re on their side.” According to valuations announced today Feb 8 by Edmonds.com a number of Toyota models have in fact lost 10% of their value since the recall. Ideas like this seldom make it up the ranks in larger corporations but the simplicity of the thing makes it revolutionary. How many businesses want to really take care of loyal customers? You can count them on one hand — Apple, Best Buy, Mercedes, BMW, Lexus, Honda, people who chose to or need to run the business on reputation and service. Most of the rest of sales is aimed at transaction marketing pioneered by Wall Street banks in the 1970s. Hook ‘em in — cram the teaser deposit rate, the cheap car, the iffy cable service, the unreliable flat screen or the hidden fee mutual fund down their throat. Then screw ‘em when they complain. And make sure they can’t complain to you. If you’ve wound up in a call center in India or the Philippines where the robotic help, through no fault of their own, has no way to make a decision, you know the drill. Bad offshore service was a key reason for the downfall of Dell, Circuit City and dozens of other companies who blew off once loyal customers. Toyota floated above the pack because the reputation of its vehicles for value and reliability and — with the Prius — hybrid innovation made buyers put up with its arrogant American dealers. Now that those days are over, Toyota needs a big rethink. Its Japanese dealers could never bash customers like they do in America because Toyota Japan lives off repeat buyers, same as the every 2 year trade in U.S car makers enjoyed in the 1950s? That kind of loyalty won’t come back and doesn’t need to for any carmaker, Detroit or foreign. But for Toyota, the choice it’s facing is to come up rebuilding plan that sticks or slide into the pack with everyone else. In the Stuart dealer’s showroom hangs a huge red banner that says 80% of Toyotas that are 20 years old are still on the road. Maybe those owners are a good place to start…

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Toyota Plunges as Expanded 5.3 Million Recall of Vehicles Tarnishes Image

January 27, 2010

By Alan Ohnsman and Mike Ramsey Jan. 28 (Bloomberg) — Toyota Motor Corp. , the world’s largest carmaker, fell in Tokyo for a fifth straight day as it expanded recalls by more than 1 million vehicles, adding to concerns its reputation for quality may be permanently tarnished. The shares dropped as much as 4.7 percent to 3,530 yen and traded at 3,620 yen as of 10:21 a.m. local time, bringing their decline to 14 percent since Jan. 21, when Toyota announced a recall of 2.3 million vehicles after finding a pedal flaw linked to unintended acceleration. Toyota’s “reputation for long-term quality is finished,” Maryann Keller , senior adviser at Casesa Shapiro Group LLC in New York, said yesterday in an interview. “People aren’t going to buy Toyotas, period. It doesn’t matter which model. What’s happened is sufficient to keep people out of the stores.” The carmaker said late yesterday it’s expanding a record 4.3 million-vehicle recall announced in November to include 1.09 million additional U.S. vehicles, to fix accelerator pedals at risk of being trapped by floor mats. Losing its reputation for quality would undercut Toyota’s decades-long campaign to promote reliability and safety that helped it become No. 2 in U.S. sales. Models Added The company said Jan. 26 it would suspend the U.S. sale and production of eight models involved in the Jan. 21 recall. Those models account for more than half its deliveries in the country, including its top-selling Camry and Corolla cars. “We don’t know how long the sales halt will last, which makes the stock unattractive,” said Hiroichi Nishi , an equities manager at Nikko Cordial Securities Inc. in Tokyo. Models that were added yesterday to the November recall are 2008-2010 Highlander sport-utility vehicles; 2009-2010 Corolla compact cars; 2009-2010 Venza wagons; and the 2009-2010 Toyota Matrix hatchback. General Motors Co.’s 2009-2010 Pontiac Vibe, a version of the Matrix, is also to be recalled, said Martha Voss , a Toyota spokeswoman. Toyota’s American depositary receipts fell the most in more than a year yesterday, and GM added incentives to woo owners of the U.S. autos being recalled to fix the pedal flaw. “This is going to have severe ramifications for Toyota,” said John Wolkonowicz , an analyst at IHS Global Insight in Lexington, Massachusetts. “The Teflon seems to have evaporated.” Quality Concerns Two Toyota recalls in three months compounded concern that quality may have slipped after a decade of North American expansion. The company’s 1,460 U.S. Toyota and Lexus dealers and hundreds of North American suppliers are awaiting word that engineers have found a solution for the pedal defect. While Toyota City, Japan-based Toyota is aware that its reputation for quality may be endangered, “this is a customer safety issue,” said Irv Miller , U.S. group vice president for corporate communications. Miller said he wasn’t aware whether the decision to halt production was made by President Akio Toyoda . “He is certainly aware of the issue,” Miller said. Along with Camry and Corolla, Toyota’s recall covers the Avalon sedan and Matrix hatchback; RAV4, Highlander and Sequoia SUVs; and Tundra pickups. Also included is the Pontiac Vibe, a version of the Matrix built at a joint Toyota-GM plant until last year. Weekly Fallout Global Insight estimated that Toyota would lose 20,000 vehicle sales a week as long as it ceases selling and producing the eight models. U.S. sales of the affected Toyota vehicles totaled 998,744 in 2009, according to researcher Autodata Corp. of Woodcliff Lake, New Jersey. Wolkonowicz said the models accounted for 70 percent of Toyota brand sales and about 56 percent of overall U.S. sales when Lexus is included. Stopping sales of some models will cut Toyota’s offerings as U.S. consumers begin returning to dealer lots after last year’s slump. Toyota posted a 32 percent gain in December U.S. deliveries, topping the industry’s 15 percent increase, and will report January totals on Feb. 2. On Feb. 4, Toyota will release earnings for its fiscal third quarter ended Dec. 31. Wolkonowicz, the Global Insight analyst, said the fallout for Toyota may not end soon. The U.S. was Toyota’s largest market through 2007, contributing half or more of global operating income. Toyota trails only GM in U.S. sales and surpassed the Detroit-based automaker’s global total in 2008. ‘Biggest Crisis’ “This is the biggest crisis in the auto industry since the bankruptcies of GM and Chrysler,” he said. “Toyota is not going to be able to contain this problem in a short period of time. It’s going to drag on and linger, unlike the bankruptcies of GM and Chrysler last summer.” The automaker retained the top spot in June in J.D. Power & Associates’ survey of initial quality and topped Consumer Reports magazine’s annual survey of automotive brand perceptions this month. Still, Toyoda already was under pressure to improve quality since he took the helm in June, and the latest setbacks probably will add to the strain as competitors including South Korea’s Hyundai Motor Co. narrow Toyota’s lead. Toyota continues to investigate the pedal-related flaw reported last week and doesn’t yet have figures on any related accidents, injuries or fatalities, said Brian Lyons , a spokesman. The company is aware of at least five deaths related to the floor mat-related recall from November, he said. Pedal Fixes Last week’s recall involved a potential flaw in pedal parts made by CTS Corp. that could, “in rare instances, mechanically stick in a depressed position or return slowly to the idle position,” according to Toyota. Toyota said in a statement late yesterday that pedals using a revised design “are now in full production at CTS to support Toyota’s needs.” The company is also working with CTS to test modifications to existing pedals that will be available “as quickly as possible.” Toyota accounts for about 3 percent of annual sales at Elkhart, Indiana-based CTS, according to the company. Vehicles with pedal parts from Toyota-affiliated Denso Corp. weren’t included in last week’s recall. “This is a very rare occurrence, incidents of sudden acceleration, but because Toyota’s had made multiple actions related to it, the perceived image is they don’t have a handle on it,” said Jake Fisher , senior auto engineer for Consumer Reports. “They’ve been trying to be proactive, but that’s probably not what consumers will draw from this.” Consumer Response Bill Visnic, senior editor at consumer researcher Edmunds.com, said shoppers may not differentiate between the Toyota autos on the recall list with those still available on showroom floors. “It’s definitely going to put a damper on the entire atmosphere around a dealership,” he said. “This is a real test of the strength of the brand.” At Santa Monica Toyota in suburban Los Angeles, General Manager Billy Rinker said he received about 15 customer calls early yesterday about the recall. “I don’t think they lost” the reputation for quality, Rinker said of Toyota. “Toyota wants to be as perfect as possible, so they are fixing it.” News of the recalls was “scary,” said Prius owner Caroline Schkolnick, 51, of Beverly Hills, California, who was having her car serviced in Santa Monica. She reported no problems with her hybrid, which was covered by the November floor-mat recall, and said she isn’t worried about the pedals. “There were mistakes and I respect them for fixing them,” Schkolnick said. Toyota may be “overreacting” in suspending sales and production, said Mickey Anderson, president of Performance Auto Group in Omaha, Nebraska, which owns three Toyota stores and two Lexus outlets. “Probably, that’s the right thing to do,” Anderson said. “While this will be a burden for Toyota and the dealers, it is absolutely the most proactive way to take care of the customers.” To contact the reporters on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net ; Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net

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Toyota Falls as Quality Image May Be `Finished’ on Halt of Sales, Output

January 27, 2010

By Alan Ohnsman and Mike Ramsey Jan. 28 (Bloomberg) — Toyota Motor Corp. fell in Tokyo trading, headed for a fifth day of declines amid concerns that a widening vehicle recall and a U.S. sales halt for its top- selling models may have permanently tarnished its reputation. The shares dropped as much as 4.7 percent to 3,530 yen and traded at 3,555 yen as of 9:19 a.m. local time, bringing their decline to 15 percent since Jan. 21, when Toyota announced a recall of 2.3 million vehicles after finding a pedal flaw linked to unintended acceleration. Toyota’s “reputation for long-term quality is finished,” Maryann Keller , senior adviser at Casesa Shapiro Group LLC in New York, said yesterday in an interview. “People aren’t going to buy Toyotas, period. It doesn’t matter which model. What’s happened is sufficient to keep people out of the stores.” The company said yesterday it would expand a U.S. vehicle recall to Europe, a day after announcing it would suspend the sale and production of models that account for more than half its U.S. deliveries, including Camry and Corolla cars. Losing its reputation for quality would undercut a decades-long campaign to promote reliability and safety that helped Toyota become the world’s largest carmaker and No. 2 in U.S. sales. “We don’t know how long the sales halt will last, which makes the stock unattractive,” said Hiroichi Nishi , an equities manager at Nikko Cordial Securities Inc. in Tokyo. Toyota’s American depositary receipts fell the most in more than a year yesterday, and General Motors Co. added incentives to woo owners of the U.S. autos being recalled to fix the pedal flaw. ‘Severe Ramifications’ U.S. sales of eight models are being suspended after last week’s recall, and five North American plants are being idled, Toyota said Jan. 26. That followed a 4.3 million-unit recall in 2009 for a related problem tied to floor mats. “This is going to have severe ramifications for Toyota,” said John Wolkonowicz , an analyst at IHS Global Insight in Lexington, Massachusetts. “The Teflon seems to have evaporated.” Two Toyota recalls in three months compounded concern that quality may have slipped after a decade of North American expansion. The company’s 1,460 U.S. Toyota and Lexus dealers and hundreds of North American suppliers are awaiting word that engineers have found a solution for the pedal defect. While Toyota City, Japan-based Toyota is aware that its reputation for quality may be endangered, “this is a customer safety issue,” said Irv Miller , U.S. group vice president for corporate communications. Weekly Fallout Miller said he wasn’t aware whether the decision to halt production was made by President Akio Toyoda . “He is certainly aware of the issue,” Miller said. Along with Camry and Corolla, Toyota’s recall covers the Avalon sedan and Matrix hatchback; RAV4, Highlander and Sequoia SUVs; and Tundra pickups. Also included is the Pontiac Vibe, a version of the Matrix built at a joint Toyota-GM plant until last year. Global Insight estimated that Toyota would lose 20,000 vehicle sales a week as long as it ceases selling and producing the eight models. U.S. sales of the affected Toyota vehicles totaled 998,744 in 2009, according to researcher Autodata Corp. of Woodcliff Lake, New Jersey. Wolkonowicz said the models accounted for 70 percent of Toyota brand sales and about 56 percent of overall U.S. sales when Lexus is included. ‘Short-Term’ Sales Stopping sales of some models will cut Toyota’s offerings as U.S. consumers begin returning to dealer lots after last year’s slump. Toyota posted a 32 percent gain in December U.S. deliveries, topping the industry’s 15 percent increase, and will report January totals on Feb. 2. On Feb. 4, Toyota will release earnings for its fiscal third quarter ended Dec. 31. Wolkonowicz, the Global Insight analyst, said the fallout for Toyota may not end soon. The U.S. was Toyota’s largest market through 2007, contributing half or more of global operating income. Toyota trails only GM in U.S. sales and surpassed the Detroit-based automaker’s global total in 2008. “This is the biggest crisis in the auto industry since the bankruptcies of GM and Chrysler,” he said. “Toyota is not going to be able to contain this problem in a short period of time. It’s going to drag on and linger, unlike the bankruptcies of GM and Chrysler last summer.” Toyota Probe The automaker retained the top spot in June in J.D. Power & Associates’ survey of initial quality and topped Consumer Reports magazine’s annual survey of automotive brand perceptions this month. Still, Toyoda already was under pressure to improve quality since he took the helm in June, and the latest setbacks probably will add to the strain as competitors including South Korea’s Hyundai Motor Co. narrow Toyota’s lead. Toyota continues to investigate the pedal-related flaw reported last week and doesn’t yet have figures on any related accidents, injuries or fatalities, said Brian Lyons , a spokesman. The company is aware of at least five deaths related to the floor mat-related recall from November, he said. Last week’s recall involved a potential flaw in pedal parts made by CTS Corp. that could, “in rare instances, mechanically stick in a depressed position or return slowly to the idle position,” according to Toyota. Toyota said in a statement late yesterday that pedals using a revised design “are now in full production at CTS to support Toyota’s needs.” The company is also working with CTS to test modifications to existing pedals that will be available “as quickly as possible.” Consumer Response Toyota accounts for about 3 percent of annual sales at Elkhart, Indiana-based CTS, according to the company. Vehicles with pedal parts from Toyota-affiliated Denso Corp. weren’t included in last week’s recall. “This is a very rare occurrence, incidents of sudden acceleration, but because Toyota’s had made multiple actions related to it, the perceived image is they don’t have a handle on it,” said Jake Fisher , senior auto engineer for Consumer Reports. “They’ve been trying to be proactive, but that’s probably not what consumers will draw from this.” Bill Visnic, senior editor at consumer researcher Edmunds.com, said shoppers may not differentiate between the Toyota autos on the recall list with those still available on showroom floors. “It’s definitely going to put a damper on the entire atmosphere around a dealership,” he said. “This is a real test of the strength of the brand.” ‘Perfect as Possible’ At Santa Monica Toyota in suburban Los Angeles, General Manager Billy Rinker said he received about 15 customer calls early yesterday about the recall. “I don’t think they lost” the reputation for quality, Rinker said of Toyota. “Toyota wants to be as perfect as possible, so they are fixing it.” News of the recalls was “scary,” said Prius owner Caroline Schkolnick, 51, of Beverly Hills, California, who was having her car serviced in Santa Monica. She reported no problems with her hybrid, which was covered by the November floor-mat recall, and said she isn’t worried about the pedals. “There were mistakes and I respect them for fixing them,” Schkolnick said. Toyota may be “overreacting” in suspending sales and production, said Mickey Anderson, president of Performance Auto Group in Omaha, Nebraska, which owns three Toyota stores and two Lexus outlets. “Probably, that’s the right thing to do,” Anderson said. “While this will be a burden for Toyota and the dealers, it is absolutely the most proactive way to take care of the customers.” To contact the reporters on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net ; Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net

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Matt Spangler: Lessons From Late Night

January 13, 2010

I’v gotta admit its been fun to watch the huge cluster f&*k that is the new NBC “Late Night” wars. At the minimum its given some great fodder for each host to joke on each other. The video of Jimmy Kimmel doing Leno last night is an instant classic. I don’t know much about the situation beyond what I’ve read but I don’t think anyone would argue that its not exactly going how NBC hoped it would. It’s tough to make judgments without all the facts, but based on Conan’s statement and now Leno’s rumored response , at the end of the day, the “NBC Executives” making the decisions will bear most of the burden for the destruction of The Tonight Show brand and the costly repercussions. From a broader management perspective I think there are a few valuable lessons for employees and executives of any kind of organization … both what to do, and what not to do. 1. Trust in your hires and give them time to be successful. Creating a following and an incredible show takes time (certainly longer then the 8 months Conan and his team were given). It’s true for any position. In order for people to be effective in their jobs they need the time to learn about the new environment, new customers and the job itself. This often means time and the opportunity to grow and succeed. This sometimes means weathering some bad times before getting to the good. Sure, you mentor new hires, provide constructive feedback and help along the way, but if you are diligent in your process of finding the right people, they need to be given the time and space to do their job well before you pull the rug out from under them. 2. If you’re going to empower people, give them the tools to succeed. When Conan took over The Tonight Show, people who owned the affiliate networks and leadership on Conan’s team clamored that they needed a good lead into the local news that would then build a strong audience leading into their new Tonight Show. NBC didn’t listen and instead chose to put the former host on his own show before Conan as a 5-day a week low cost alternative. Leno’s last minute deal showed a lack of confidence in Conan carrying The Tonight Show, and did not provide a good lead in for the new host. If you are not really ready to make a move in your business, then go back to the table and make sure its the right decision. Give people that have committed to your company the respect they deserve by having open conversations about what it will take for them to be successful and then do your best to support those needs. 3. Don’t air your dirty laundry in public. When Jeff Gaspin went to the press and stated that the plan was to move the shows he acted as if this was gonna be no big deal while he made unfinished negotiations behind the scene public. He played his cards too soon in some sort of foolish attempt to force the hands of his employees. The plan for what was to be done should have never been aired to the public until they figured out the plan and got agreement from the various parties. Its tough to keep secrets these days, especially in television, and that’s why early, open and honest discussion with your people in private is always the best way to move forward. Once you’ve arrived at a joint decision you can announce what is happening to the world. By airing their disputes and concerns in the press, NBC gave their hosts no choice but to issue their own statements in opposition to this strategy that made the NBC executives look disconnected from two of their biggest talents and opened the door for public opinion to effect the negotiations. 4. Keep your head high, stay true to who you are and be humble under pressure. In his press statement Conan honored the legacy of the show and the hard work of his staff while taking into consideration the effect the move would have the on the shows around his time slot. He spoke honestly, passionately and plainly while keeping the door open for reconciliation and dialogue. His poise and class in this situation will be remembered by the public and in the end his reputation, audience and overall brand will continue to be strong no matter what his next steps may be.

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ReputationDefender Secures $8.65 Million in Series B Funding Led by Bessemer Venture Partners and Kleiner Perkins Caufield & Byers

January 12, 2010

World’s First Online Reputation and Privacy Management Company Plans to Accelerate Product Development and Engineering Operations; Appoints Former Comcast VP as Chief Marketing Officer

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Martin Luz: China’s Newest Export: Better PR for China

January 6, 2010

Lest you think that PR is just for tarnished sports heroes, bankrupt corporations and divorcing GOP hypocrites heavyweights , last month China launched a PR campaign aimed at improving the image of “Made In China.” Indeed, they could use some PR help. On the “quality” front, China’s reputation is a total disaster , with high profile contaminations of everything from drywall , to milk , toys , toothpaste , tires , pet food , seafood (for humans), and pharmaceuticals … and who knows what else that hasn’t been caught. That’s not even mentioning the dust clouds blowing from China that circle the Earth. Or the tons of mercury settling on the U.S. from China’s coal-fired power plants. But as necessary as the campaign may be, it highlights some key things about PR that people outside the profession need to know. And some in the profession still need to learn. Here is the first … (the second will come later) … Whether you’re a person, company or country … you can’t change your image if your behavior undermines your message at every turn. Undermining Your Own Message The China campaign tries to lip-lock the rest of the world with the idea that we are all the greatest of partners.

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Tokyo Stock Exchange Cuts Execution Times in Effort to Draw More Trading

January 3, 2010

By Theresa Barraclough Jan. 4 (Bloomberg) — The Tokyo Stock Exchange debuts an upgraded trading system today, four years after a series of computer woes dented investor confidence in the world’s second-largest equities market. Arrowhead, the new trading system, slashes to five milliseconds the time needed to process orders, from two to three seconds previously, while enabling the exchange to adapt quickly to smaller order volumes or sudden increases in the number of transactions, the bourse said on its Web site . The upgrade may help restore the reputation of an exchange last month ordered to pay 10.7 billion yen ($115 million) in damages to Mizuho Securities Co. over its failure in December 2005 to cancel a faulty sell order. Six weeks earlier, system problems had shut down trading for more than four hours, while further glitches emerged during the following half year. Processing time will fall to the level of the larger New York Stock Exchange, still behind the London Stock Exchange’s three milliseconds. London plans an upgrade next year to shorten its processing time to less than one millisecond. New listings on the Tokyo exchange may rise to as many as 100 this year as Japan’s economy recovers and more technology companies seek capital, Atsushi Saito , president of the bourse, said in an interview with Bloomberg TV on Dec. 28. Economy Recovers After shrinking for four consecutive quarters, Japan’s economy emerged from recession in the three-month period ended June 30, overcoming the financial crisis earlier than the U.S. and Europe. “We can expect between 50 and 100” new listings, Saito said. “We will see more emerging new companies with very unique technology, so they will naturally look for capital.” There were 10 initial public offerings on the Tokyo Stock Exchange in 2009, according to data from T&C Financial Research Inc., while 19 companies listed on exchanges across Japan during the year. Japan’s Topix, the index that tracks shares traded on the TSE’s first section, ended a two-year plunge in 2009 with a 5.6 percent gain to 907.59. The benchmark Nikkei 225 Stock Average rose 19 percent for the year to 10,546.44 To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net .

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Tokyo Exchange Upgrades Trading System 4 Years After Serial Computer Woes

January 3, 2010

By Theresa Barraclough Jan. 3 (Bloomberg) — The Tokyo Stock Exchange debuts an upgraded trading system tomorrow, four years after a series of computer woes dented investor confidence in the world’s second-largest equities market. Arrowhead, the new trading system, slashes to five milliseconds the time needed to process orders, from two to three seconds previously, while enabling the exchange to adapt quickly to smaller order volumes or sudden increases in the number of transactions, the bourse said on its Web site . The upgrade may help restore the reputation of an exchange last month ordered to pay 10.7 billion yen ($115 million) in damages to Mizuho Securities Co. over its failure in December 2005 to cancel a faulty sell order. Six weeks earlier, system problems had shut down trading for more than four hours, while further glitches emerged during the following half year. Processing time will fall to the level of the larger New York Stock Exchange, still behind the London Stock Exchange’s three milliseconds. London plans an upgrade next year to shorten its processing time to less than one millisecond. New listings on the Tokyo exchange may rise to as many as 100 this year as Japan’s economy recovers and more technology companies seek capital, Atsushi Saito , president of the bourse, said in an interview with Bloomberg TV on Dec. 28. Economy Recovers After shrinking for four consecutive quarters, Japan’s economy emerged from recession in the three-month period ended June 30, overcoming the financial crisis earlier than the U.S. and Europe. “We can expect between 50 and 100” new listings, Saito said. “We will see more emerging new companies with very unique technology, so they will naturally look for capital.” There were 10 initial public offerings on the Tokyo Stock Exchange in 2009, according to data from T&C Financial Research Inc., while 19 companies listed on exchanges across Japan during the year. Japan’s Topix, the index that tracks shares traded on the TSE’s first section, ended a two-year plunge in 2009 with a 5.6 percent gain to 907.59. The benchmark Nikkei 225 Stock Average rose 19 percent for the year to 10,546.44 To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net .

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National Express Sought U.K. Compromise on Rail Line That Was Nationalized

December 24, 2009

By Jonathan Browning and Howard Mustoe Dec. 24 (Bloomberg) — National Express Group Plc offered to pay the U.K. government 100 million pounds ($160 million) in return for a staged withdrawal from the unprofitable East Coast railroad franchise, according to official documents obtained by Bloomberg News. The plan was rejected and the line nationalized. National Express sought a management contract as an alternative to defaulting on the franchise as it ran out of cash to fund the route between London and Scotland, minutes of meetings requested by Bloomberg News under the Freedom of Information Act show. After Transport Minister Andrew Adonis turned down the proposal, National Express said July 1 it would hand back the franchise before the end of the year. The statement sent the company’s stock down 13 percent in four days and prompted a series of takeover bids that the London-based rail and bus operator fended off before raising cash in a rights offer. “It was a game of poker and I think Adonis played a reasonable hand,” said Christian Wolmar , author of “Broken Rails,” a history of Britain’s railways. “Default was extremely damaging for National Express because it sent their share price plummeting and made them vulnerable to takeover, so to them it would have been worth offering money to avoid that.” A National Express spokeswoman, who declined to be identified, said last night that the company had no comment beyond remarks from executives to Adonis recorded in the government minutes. National Express was trading little changed as of 9:03 a.m. in London today after earlier slipping 1 percent. The stock has declined 26 percent this year, giving the company a market value of 970 million pounds. No Commitment Department for Transport spokesman Simon Horsborough said that at no time in the talks with National Express had the government given a commitment to a management contract, an arrangement under which the East Coast route would still have been run by the company, but with the state bearing the costs. “We have been consistent in saying that we will not renegotiate franchise agreements,” the spokesman said in an e- mailed statement yesterday. “These documents make that quite clear. We have a duty to explore all options to protect passengers and taxpayers and the option of a management contract was only discussed on that basis.” The opposition Conservative party said the documents cast doubt on Adonis’s actions in the months leading up to the nationalization of the East Coast line and that the government had passed up on millions of pounds being offered by an operator wishing to exit a franchise on good terms. ‘Extreme Outcome’ “Adonis needs to explain exactly why he sought the most extreme outcome and the upheaval of a default on one of the country’s most important rail lines,” Theresa Villiers , who speaks on transport matters for the party, said in an e-mail. Richard Bowker , chief executive officer at National Express at the time of the discussions, told Adonis that the company “had no viable alternative but to withdraw from the franchise from 1 July and that the best way to proceed was for East Coast to continue on a management contract until the franchise was re- tendered,” the minutes reveal. Bowker, who left National Express on Aug. 31 to run a train company in the United Arab Emirates, told Adonis that the U.K. rail industry was “fundamentally broke,” according to the minutes. The East Coast service was taken into public ownership on Nov. 13 and no other companies have defaulted. Public Interest The transport minister argued that the proposal from National Express, which also runs two other rail companies and local and long-distance buses, wasn’t in the public interest because it might have encouraged rival operators to follow a similar course, according to the documents. The U.K. government held almost six months of discussions with National Express about the matter before Adonis informed Chairman John Devaney of his decision at a meeting on June 26, the papers show. Adonis said in talks with Devaney that a default would “dent the reputation of the business,” while arguing that a compromise would prompt other operators to seek similar terms. Stagecoach Group Plc , operator of Britain’s biggest rail franchise, and buyout firm CVC Capital Partners Ltd. submitted bids for National Express in the months following its default on the East Coast line. The company, which also runs school buses in North America, rejected the approaches before raising 360 million pounds in a share sale on Dec. 15, allowing it to cut debt and avoid pushing up interest payments by breaching loan terms. To contact the reporters on this story: Jonathan Browning in London jbrowning9@bloomberg.net . Howard Mustoe in London at hmustoe@bloomberg.net

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Tishman Group’s $5 Billion Property Boomerang Costly Lesson for Rob Speyer

December 21, 2009

By Oshrat Carmiel and David M. Levitt Dec. 21 (Bloomberg) — Rob Speyer showed little interest in his family’s real estate business until his father began talking about buying Manhattan’s Rockefeller Center. It was 1995. Speyer, then 26, was a reporter for the New York Daily News, covering fires and events like the Puerto Rican Day Parade. His dad’s plans to purchase the art-deco complex for $1.2 billion changed everything. “I caught the bug,” Speyer said of joining Tishman Speyer Properties LP, the firm co-founded in 1978 by his father, Jerry, and Robert Tishman . “Until that moment, I had other ideas and ambitions and it was really hearing about that transaction that flipped the switch in my head and made me say: ‘I want to learn this business.’” Speyer, now co-chief executive officer of Tishman Speyer, is getting another lesson, one on enduring the global commercial property rout. Tishman Speyer and BlackRock Realty LP’s $5.4 billion purchase of New York’s Stuyvesant Town and Peter Cooper Village apartments is unraveling, testing the young Speyer and his father, a 30-year real estate veteran. “A default is expected” on the complex, according to Fitch Ratings, which has estimated the property’s value at $1.8 billion. The transaction is among at least four — including the $13.6 billion purchase of Archstone-Smith Trust with Lehman Brothers Holdings Inc. in October 2007 — that the company made as values rose and Jerry Speyer was giving his son increasing responsibility for running the company. Prices fall Tishman Speyer is in talks to overhaul debt on five downtown Chicago office buildings. Partnerships including the company have been sued for foreclosure on a 56-acre California office park purchased with another parcel for $200 million. And on Dec. 18, Standard & Poor’s withdrew its credit rating on a group of Washington-area properties with debt payments that Tishman and its partners have been trying to restructure. The Speyers are being hurt in part by U.S. commercial real estate prices that have fallen 43 percent since late 2007. The fallout represents the biggest challenge for Rob Speyer since he became co-CEO with his father in June 2008, said Lawrence Longua , director of the REIT Center at New York University’s Schack Institute of Real Estate. “It’s going to be a long time before he can overcome this,” Longua said. “This has really been quite damaging.” Big Buyers Since 2001, Tishman Speyer has been the biggest U.S. commercial real estate buyer after Blackstone Group LP, according to the New York research firm Real Capital Analytics . Rob Speyer is part of a multi-generational group of New Yorkers whose families made fortunes in real estate, including the Milsteins, Zeckendorfs and LeFraks. Jerry Speyer was named the world’s No. 1 developer in a 1998 New York Times article that referred to him as the anti-Donald Trump. A 1992 graduate of Columbia College, Rob Speyer runs a company that has managed, owned or developed more than $54 billion in assets on four continents, including 116 million square feet of space and 92,000 residential units, according to its Web site. Its current portfolio is worth $33.5 billion, including distressed assets written down to zero, company spokesman Steven Rubenstein said in an e-mail. Holdings include the MetLife Building in New York, the Civic Opera Building in Chicago, the Paris Bourse in France and properties in Germany. ‘Low Man’ Speyer’s first job in the business was in management and leasing at Tishman Speyer. He worked on revamping Rockefeller Center, the 6.2 million-square-foot complex built by John D. Rockefeller Jr. in the 1930s as a show of faith in America during the Great Depression. Rob Speyer described himself as “the low man on the totem pole” when he first joined the New York-based firm. His first lease brought the luxury Reebok Sports Club to the center, replacing a U.S. passport office. “That was a very exciting negotiation,” Speyer said. “The passport office created these lines that literally created a circumference around the building and it was not great for the repositioning of the center.” Sandy Lindenbaum , a lawyer with Kramer Levin Naftalis & Frankel LLP, said Rob Speyer attended city planning and landmark hearings while the company was revitalizing Rockefeller Center. “I would tell him: ‘There’s a meeting downtown, you don’t have to come,’” Lindenbaum said. “He said: ‘No, no, no. I want to learn, I want to be there.’ He would insist.” Chicago Talks In 1998, Rob Speyer joined the company’s redevelopment unit and modernized 300 Park Ave., the Colgate-Palmolive Co . headquarters Tishman Speyer bought for $180 million, Jerry Speyer said. An appraisal last month valued the property at $650 million, Jerry Speyer said. Things have turned out differently elsewhere. In Chicago, the company is trying to restructure debt on office properties it bought in 2007 for $1.72 billion. The Federal Reserve Bank of New York oversees $1.4 billion of loans made by Bear Stearns Cos. In Los Angeles, KeyBank National Association sued to foreclose on the Playa Vista industrial, office and film production property Tishman Speyer and Walton Street Capital LLC bought in 2007. The owners failed to repay $154 million of debt on the complex due in July, KeyBank said in a complaint filed on Oct. 20. Broker CB Richard Ellis Group Inc. was hired to sell the property, according to manager Trigild Corp. A foreclosure won’t affect any of Tishman Speyer’s other properties, spokesman Rick Matthews said in October. Facing Default In New York, the company is facing default on Stuyvesant Town and Peter Cooper Village, Manhattan’s biggest apartment complex. The property is a World War II-era, 80-acre development housing about 25,000 people. The $3 billion in debt used to buy it was bundled with other commercial mortgages and sold as bonds. Tishman Speyer is trying to win a forbearance agreement, according to a person familiar with the financing who declined to be identified because the talks are private. Such an accord would halt default proceedings and allow negotiations on a restructuring. When Tishman Speyer and BlackRock Realty bought the 11,200- unit property in 2006, they planned to raise rents, evict illegal occupants and upgrade the complex with amenities including a gym, concierge service and new gardens. Tenants’ Lawsuit Those plans were challenged by a recession, slackening demand for rentals and a legal victory for tenants who claimed some rent increases were illegal. Average rents for a two- bedroom Manhattan apartment fell 16 percent after peaking in May 2007 at $3,907, according to Gary Malin , president of property broker Citi-Habitats Inc. “Rob is a first-class smart guy, but the overriding thing in real estate is timing,” said Peter Hauspurg , president of Eastern Consolidated Properties Inc., an investment sales brokerage that handles apartment deals. “No matter how strong your skill sets are, if you buy at the wrong time, there’s no way you can make it work out.” Tishman Speyer has ceased signing new leases at the complex, Bud Perrone , a company spokesman, said. It reached a temporary agreement with tenants this month that will reduce some rents starting in January. Investors including the Florida State Board of Administration, the California Public Employees’ Retirement System and the Church of England put money into the Stuyvesant Town deal. U.S. government-owned mortgage finance companies Fannie Mae and Freddie Mac own the biggest portion of the debt. Florida and BlackRock have written down their stakes to zero, according to Dennis MacKee , a spokesman for the Florida State Board , and Brian Beades , a BlackRock spokesman. Pension Investments Doug Bennett, the senior investment officer for real estate at the Florida State Board, the fourth largest U.S. pension fund, recommended the organization invest $250 million, according to a March 2007 memo released by the agency. Bennett made that call based on a 17-page analysis which detailed Tishman Speyer and BlackRock’s “aggressive” plans to reduce the number of rent-stabilized apartments in the complex, according to the memo. Florida anticipated a return of almost 14 percent on its investment, according to the memo. Calpers, the California state pension fund, projected a 13.5 percent rate of return on its $500 million investment, according to a document provided by agency spokesman Clark McKinley . Stuyvesant Town may hurt Tishman Speyer’s efforts to raise money in the future, said Longua , of New York University. “They’re going to have a lot of ‘I’m sorrys’ to deal with,” he said. Evictions In the year after the purchase, Tishman Speyer filed “hundreds” of non-renewal notices against rent-stabilized tenants, accusing them of having a residence elsewhere, according to Jack Lester, the attorney representing the Stuyvesant Town-Peter Cooper Tenants Association in a class- action lawsuit. “They were engaged to evict as many tenants as they could,” Lester said. New York City rent stabilization protects tenants of about 1 million apartments from sharp rent increases, according to the New York City Rent Guidelines Board. A unit remains stabilized as long as the rent is less than $2,000 a month or the tenant’s income is less than $175,000 for two consecutive years, according to the board’s Web site . Since acquiring the property, Tishman Speyer served 1,062 non-renewal notices to Stuyvesant Town-Peter Cooper residents who own or reside in a second home, the company said. Those notices were backed by evidence that the home was their primary residence. The company has had a total of 10,595 expiring leases in that period. Tenants gave up their apartments in 45 percent of cases resolved to date, the company said. Since March, 72 non-renewal notices have been served for the same issues. ‘Tough Deal’ Tishman Speyer’s losses will be limited to the $112 million equity investment the firm made in the complex, a person familiar with the structure of the deal said. The company has about $2 billion in cash on its balance sheet, said the person. That doesn’t mean the company isn’t looking back, Rob Speyer said. “It’s clearly been a tough deal,” he said of Stuyvesant Town. “We’re not in a great position.” Both Speyers said they don’t think the purchase will hinder their standing or ability to buy and sell buildings. “It’s just unfortunate that we hit this boomerang on this deal,” co-CEO Jerry Speyer said in the interview. “But is this deal going to change the reputation of Tishman Speyer, or what people think of either Rob or myself? I don’t think so, honestly. I certainly would hope not.” Sitting side-by-side in a conference room at Bloomberg LP’s headquarters in Midtown Manhattan , Rob Speyer takes the lead in discussing Stuyvesant Town and his father sits silently for almost an hour. Rob’s Deals It’s only when the subject of the firm’s reputation is raised that Jerry Speyer speaks. “Even in this really dreadful period that we’ve been through, we sold this incredible amount of real estate thanks to Rob’s foresight,” he said. “I jotted down some specifics if you’re curious,” the elder Speyer said, removing a folded paper from his suit pocket. It contained a handwritten list of well-timed property sales his son arranged. They include the sale of the New York Times Building in 2007 to Africa Israel Investments Ltd. for $525 million. Tishman Speyer bought it three years earlier for $175 million. The company also sold 666 Fifth Ave. to Kushner Cos. for $1.8 billion in 2007. It was the highest price ever paid for a single U.S. building at the time. Demand Changed Rob Speyer said he made these sales after noticing a “dramatic pick-up” in demand in 2004. Jonathan Mechanic , chairman of the real estate practice at Fried Frank Harris Shriver & Jacobson LLP, said Rob Speyer shouldn’t be blamed for deals that have lost value. “The world turned upside down,” said Mechanic, who has represented Tishman Speyer. “If I told you Lehman wouldn’t exist or Bear Stearns wouldn’t exist, you would have asked me if I was out of my mind,” he said. “Tishman Speyer and Rob were part of that world, and they’re one of many that suffered.” “When you go back to the history of the deals he’s done and the profits he’s made for investors, you had years of tremendous returns,” Mechanic said. No matter how the Stuyvesant Town transaction is judged, Rob Speyer will one day take over the company, Jerry Speyer said. For now, they work together from seventh-floor offices linked by a conference room at 45 Rockefeller Plaza. Only One Rule Jerry Speyer said the father-son partnership is free of conflict. There’s only one rule: If either opposes a transaction, the company passes on it. “I don’t think there can be any greater pleasure for a father than to see his son go way past him. And I have every confidence that Rob is going to be a hell of a lot more successful than I ever was,” Jerry Speyer said. “He’s got more curiosity, more intellect, and more drive.” “Rob came, he learned, he executed and developed a following in the company that was absolutely unique.” The Speyers said they are proud of their work revitalizing Stuyvesant Town and Peter Cooper Village. Tishman Speyer has spruced up the grounds, adding bushes and flowers, new intercoms, a fitness center and a movie screening room . The tenants of the development are now waiting to see how their landlord resolves the debt restructuring. Both Speyers said it was too early to comment. Whatever the outcome, the tenants group that bid against Tishman Speyer to buy the complexes in 2006 also learned a lesson about real estate. “I’m glad we didn’t win,” said life-long tenant Jim Roth. “We probably would have overpaid.” To contact the reporters on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net ; David M. Levitt in New York at dlevitt@bloomberg.net .

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Bank of America Said More Likely to Tap Insider for CEO as Kelly Drops Out

December 15, 2009

By David Mildenberg and Sree Vidya Bhaktavatsalam Dec. 15 (Bloomberg) — Bank of America Corp. is more likely to promote someone from its own ranks to be chief executive officer after the leading outside candidate withdrew, according to a person familiar with the matter. No other outsider is actively engaged in talks with the company now that Bank of New York Mellon Corp. CEO Robert Kelly has dropped out, said the person, who declined to be identified because the search is confidential. Bank of America’s board hasn’t made a decision about the next CEO, the person said. The six-person committee leading the search to replace Kenneth D. Lewis may now turn to Chief Risk Officer Gregory Curl , 61, or Brian Moynihan , 50, who heads consumer banking. Lewis plans to leave at the end of the year. “There is a strong sentiment on Wall Street that any internal candidate isn’t going to be the person to take the rust off the reputation of Bank of America,” David Dietze , president and chief investment strategist at Point View Financial Services in Summit, New Jersey, said in an interview. His company owns an undisclosed number of the bank’s shares. Kelly told his employees yesterday for a second time he won’t leave his job, according to a memo obtained by Bloomberg. Kelly was in talks last week with Bank of America’s board after the largest U.S. lender repaid a $45 billion taxpayer bailout, people familiar with the matter said. Kelly, 55, had told the operating committee of BNY Mellon last month that he was “not interested” in the Bank of America position. Kelly had sought $20 million in pay and the title of chairman as well as CEO, the Wall Street Journal reported today, citing people familiar with the matter. Bank of America investors voted to split the duties of chairman and CEO in April. A call to Scott Silvestri , a spokesman at Charlotte, North Carolina-based Bank of America, wasn’t returned. ‘My Place Is Here’ “After talking with them, I firmly concluded that my place is here,” Kelly, who is chairman and CEO of BNY Mellon, wrote to his employees. Since the board started the CEO search in October at least four people have rebuffed approaches, including Citigroup Inc. director Michael O’Neill ; former JPMorgan Chase & Co. investment-banking co-head William Winters ; U.S. Bancorp CEO Richard Davis ; and Eugene McQuade , a former Freddie Mac president who now oversees Citigroup’s largest banking subsidiary, according to people familiar with the matter. Compensation was the main issue separating Bank of America’s board and Kelly, the person said. “Mr. Kelly was very flexible on compensation — in fact it was at the bottom of his list — but the more important drivers of his decision were the strategic opportunities for growth at BNY Mellon,” spokesman Kevin Heine said in an e-mail. Kelly declined to discuss his interest in Bank of America during an interview yesterday with Bloomberg TV after meeting with President Barack Obama over bank lending. Lewis, 62, also attended the meeting at the White House. Lewis said in September he would step down at the end of this year. To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net ; David Mildenberg in Charlotte at dmildenberg@bloomberg.net .

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Larry Flynt Wins Partial Victory Against Nephews In Court Battle Over New Porn Company

December 11, 2009

LOS ANGELES — The porn family feud that played out in federal court this week ended in a draw Friday when a jury ruled that Larry Flynt’s estranged nephews infringed on their famous uncle’s trademark when they launched their own smut business, but did not invade his privacy and were not liable for the substantial attorney fees both sides rang up. The jury of four men and four women rendered its verdict after a four-day trial, during which they sat next to a big-screen TV that was used to repeatedly display blown-up photos of porn DVD boxes featuring naked women on the front and people engaged in all sorts of contortions on the back. They listened as Flynt, who was paralyzed when he was shot by a white-supremacist sniper in 1978, sat in his gold-plated, velvet-lined wheelchair on Tuesday and Wednesday and testified that in the porn business his name stands for quality. His nephews, he said, were besmirching it by putting that name on “trashy” adult movies. “The junk they publish hurts my reputation, which in turn hurts my revenue,” the gruff, gravelly voiced porn king testified. As both sides debated what constitutes an elegant sex film as opposed to a trashy one, jurors sat stone-faced, observing posters for films with titles like “Hot Showers” and “Sex at Your Service.” After about three hours of deliberations Friday, they concluded that Flynt’s nephews, Jimmy Flynt Jr. and his brother, Dustin Flynt, did indeed infringe on their uncle’s trademark when they produced films with just the word “FLYNT” in large capital letters above the titles. At the same time, the jury rejected Flynt’s contention that his nephews invaded his privacy, a ruling their attorney, Dan DeCarlo, said holds Flynt responsible for all attorney fees. Overall, both sides claimed victory. Flynt’s attorney, Mark Hoffman, said all his client wanted was to maintain his good name in the porn community, adding that he never asked the jury for monetary damages. “This has been very hard on Mr. Flynt,” he said. “He never wanted to go this far. All he wanted to do was the right thing.” Meanwhile, Jimmy Flynt Jr. said he has already launched a new Web site that he believes meets the requirements of the jury’s ruling. Called flyntnation.com, it contains both his and his brother’s first names, as well as the disclaimer, “Larry Flynt is not affiliated with and does not endorse this.” “No one wins in this thing,” said Jimmy Jr., who bears a striking resemblance to his square-jawed uncle. “It’s sad that the family is in this dispute, but we felt strongly that we should be allowed to use our name in our business.” The nephews launched their own company after their uncle fired them from executive positions at Larry Flynt Publications in November 2007. Jimmy Jr., 37, had worked there for 17 years, starting in the mailroom. His 34-year-old brother had been there 10 years. “I felt they were doing a horrible job,” their 67-year-old uncle testified. Larry Flynt, who started in the porn business more than 40 years ago, owns Hustler magazine and other publications, operates Internet sites and retail stores, produces films, owns pricey real estate and even markets a line of clothing. Although his privately held company is said to be worth tens of millions of dollars, he fired his nephews’ father, Jimmy Flynt Sr., last year, saying he needed to save money to sue Jimmy Sr.’s sons. “I told him that this lawsuit was going to be expensive to finance it, and the only way I could was to not have him working for the company,” Flynt testified during the trial.

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Ireland Cuts Pay for Nurses, Police as Government Struggles to Lower Debt

December 10, 2009

By Colm Heatley and Ian Guider Dec. 10 (Bloomberg) — Ireland faces “more pain” after the government pledged to continue cuts to help calm investor concern that the country will struggle to pay its bills. Finance Minister Brian Lenihan , who announced pay cuts for teachers, nurses and police in his 2010 budget late yesterday, will reduce current spending by a combined 6 billion euros ($8.8 billion) over the next two years. He’s aiming to narrow the deficit to 2.9 percent of gross domestic product by 2014 from 11.7 percent this year. “The budget distributes an awful lot of pain,” said Simon Barry , an economist at Ulster Bank Ltd. in Dublin, a unit of Royal Bank of Scotland Group Plc. “But the reality is there is more to come.” Ireland is suffering from the worst recession in its modern history as it grapples with the fallout of a property- market crash and the near collapse of its banking system. The budget came amid continued concerns about debt-laden nations after Fitch Ratings cut its rating on Greece’s debt by one step to the third-lowest investment grade and Standard & Poor’s revised Spain’s outlook to negative. “By taking the difficult but necessary measures now, we will rebuild our nation’s self confidence here at home and our reputation abroad,” Lenihan said. “The worst is over.” Spreads Fitch’s decision on Dec. 8 to cut Greece’s rating, combined with the Dubai debt crisis, which pushed up the risk premiums of countries such as Ireland, increased pressure on Lenihan to deliver on his budget savings. The difference in yield , or spread, between 10-year Irish bonds and equivalent German bunds widened 2 basis points to 192 basis points. It’s widened almost 40 basis points in the last two weeks, while the gap between Greece and Germany jumped 68 basis points in that period to the widest since April 3. “2011 is an important year,” Colm McCarthy , an economics at University College Dublin, who headed the government’s spending group, said in an interview with state broadcaster RTE today. “If the government can stick to its plans, by the middle of the year people ought to have at least begun to see the winning post.” Pay Cuts Lenihan’s 2014 deficit target would bring the country into line with European Union rules, which set a shortfall limit of 3 percent of GDP. Ireland will still have a debt-to-GDP ratio of about 80 percent, almost double the level at the end of 2008. About 1 billion euros will be cut from the public services bill, Lenihan said in his budget speech. Prime Minister Brian Cowen will take a 20 percent pay cut and other ministers will have their salaries reduced by 15 percent, so “those at the top lead by example,” he said. Ireland will cut public workers’ pay by as much as 10 percent. It will also reduce welfare payments for some unemployed and cut child benefit by 16 euros a month, leading to a reduction of 760 million euros in the welfare bill next year. Lenihan, who indicated some taxes could rise in 2011, may face a period of industrial unrest. About 250,000 government workers went on strike last month in anticipation of pay cuts, and labor unions yesterday threatened further action. “This is only the beginning,” said Eoin Fahy , an economist at KBC Asset Management in Dublin, which manages the equivalent of 8.3 billion euros. “We are faced with the prospect of another four or more budgets as tough as this one before we get even close to budgetary balance.” To contact the reporter on this story: Colm Heatley in Belfast at cheatley@bloomberg.net ; Ian Guider in Dublin at iguider@bloomberg.net

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Jeffrey Picower, Madoff Associate, Leaves Fortune To Charity

November 10, 2009

NEW YORK — A man who made billions of dollars off Bernard Madoff’s Ponzi scheme signed a will leaving the bulk of his fortune to charity, but the gift’s ultimate size may depend on legal wrangling over how much of the money rightfully belongs to cheated victims. Jeffry Picower, 67, a prominent philanthropist, drowned after suffering a heart attack in the swimming pool of his Palm Beach, Fla., mansion on Oct. 25. Unlike some other Madoff investors, he died a rich man. The trustee unraveling Madoff’s financial web said Picower withdrew some $7 billion from his Madoff accounts over the decades – well more than he invested. That money is now known to have been stolen from other people, and Picower’s widow said in a statement this week that the family wished to return some of it through “a fair and generous settlement” that might help overcome some of the “devastation” wrought on Madoff’s victims. The exact amount of that settlement is still unknown. Madoff trustee Irving Picard has sued claiming victims are entitled to get back all $7 billion. The family has argued that under New York law, it should only have to return bogus profits they earned in the past six years, or around $2.4 billion. On Tuesday, the family’s lawyer, William D. Zabel, said the Picowers might be open to paying “more than the law would require them to, in order to help the victims of scheme.” Yet the family also made clear that it is trying to protect its own charitable projects. In a will signed on Oct. 15, Picower said he wished to donate most his multibillion-dollar estate to a new philanthropic foundation, minus $200 million for his widow, Barbara, $25 million for his daughter, Gabrielle, and additional millions for grandchildren and other friends and relatives. The foundation, the will said, would be “for broad charitable purposes,” although Picower suggested it spend half its money on medical research. He also gave $25 million to the Picower Institute of Learning and Memory at the Massachusetts Institute of Technology, $1 million each to the New York Public Library, the Harlem Children’s Zone and the Nurse-Family Partnership in Denver, Colo. and $4 million to a group of Parkinson’s disease research scientists. Picower had Parkinson’s disease. Lawyers for Picard have argued in court papers that Picower must have realized that the “implausibly high” returns he was getting from Madoff’s operation were the result of fraud. Barbara Picower said in her statement that it was “a great tragedy that my husband Jeffry’s sudden and untimely death prevented him from seeing the full restoration of his reputation for honesty, integrity and professional achievement.” Zabel said he couldn’t discuss how much the family might ultimately be willing to pay in a settlement because the two sides have been in negotiations. Zabel added that the Madoff case has been “an albatross” for the family, and weighed on Picower personally before his death.

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