It has been reported that approximately two-thirds of companies in the U.S. are affected by fraud, losing an estimated 1.2% of revenue each year to such activity.  Indirect costs associated with fraud, such as reputational damage and costs associated with investigation and remediation of the fraudulent acts, may also be substantial. When and where implemented, an internal whistleblower hotline is a critical component of a company’s anti-fraud program, as tips are consistently the most common method of detecting fraud.  Consequently, it is essential that companies consider implementing, if they have not already done so, effective whistleblower hotlines.  To the extent hotlines are currently in place, companies need to evaluate them to ensure that the hotlines are operating as intended and are effective in preventing and identifying unethical or potentially unlawful activity, including corporate fraud, securities violations and employment discrimination or harassment. This evaluation should be a key element of every company’s assessment of its compliance and ethics program.
Weekend reading for Wall Street: Leo Strine, chief justice of the Delaware Supreme Court, has some advice on how M&A bankers can keep their clients – and themselves – out of legal trouble.
In a speech Friday to a group of Delaware corporate lawyers, Mr. Strine outlined ways to “reduce the target zone for plaintiffs’ lawyers,” who today sue over nearly every corporate transaction and have increasingly put financial advisers in their crosshairs.
Mr. Strine stressed that bankers should be held accountable for their advice. Directors are typically M&A newbies and lean on unbiased advisers to vet bidders, set pricing expectations and eventually agree to a deal.
“When a board hires a financial advisor, they are hiring just that: a financial advisor. They are not hiring someone to deliver a caveat-laden, liability-disclaiming two-page fairness opinion,” he wrote.
Still, even well-run sales processes can needlessly give fodder to plaintiffs’ lawyers to sue, he said.
For example, bankers often tweak financial metrics over the course of a months-long sales process. But “sanitized” boardroom minutes often fail to document these changes, Mr. Strine said, leaving directors and advisers at a loss when later asked by a plaintiffs’ lawyer.
Mr. Strine’s solution? Redline board documents to show any revisions and explain why they were made.
Similarly, undisclosed conflicts of interest can imply that bankers’ advice was tainted. Conflicts don’t bar banks from working on a deal, but should be made clear to the boards that hire them, Mr. Strine said.
His comments come as bankers are increasingly coming under scrutiny for their M&A advice. Earlier this month, another Delaware judge ordered RBC Capital Markets LLC to pay $76 million to shareholders of a company it advised in a 2011 buyout. The judge ruled that RBC’s desire for fees on both sides of the transaction – advising the company and lending to the winning bidder – colored its advice and ultimately shortchanged investors.
RBC has maintained it acted properly.
Mr. Strine didn’t skimp on his trademark oratorical flair. Beyonce and Jay-Z make an appearance, as did HBO’s hit series “Game of Thrones” and a pair of NBA players. (Stressing the need for boards to retain top-tier advisers, he said: “You don’t guard Dwight Howard with Nate Robinson,” referring to the 6-foot-11 center for the NBA’s Houston Rockets and the 5-foot-9 Denver Nuggets guard.)
Elsewhere, he notes the tendency of M&A deals to resemble “stylized interactive theatre” – and not even good theatre, but rather “the opaque, high-falutin style of a jejune drama student in a Master of Fine Arts program.” (He seems to prefer “the blunt, earthy style of an Arthur Miller.”)
Good weekend reading, indeed.
Talk about a snapback rally.
In this week’s installment of MoneyBeat Week, our Friday podcast, the crew takes a look at this week’s big rebound and what it means for markets in the weeks ahead.
After a sharp selloff earlier this month, the major indexes stormed back with vengeance. The S&P 500 rose 4.1% this week, its biggest gain since January 2013. The Nasdaq Composite added 5.3%, its best weekly performance since December 2011.
In addition, Reebok received an offer from a surprise bidder. We give the latest on that situation and what it means for parent company Adidas and the rest of the retail landscape.
For all that and more, grab a set of headphones and take a listen to MoneyBeat Week. Or catch us on iTunes along with other Journal podcasts in the WSJ What’s News section.
Shire PLC, the Dublin-based pharmaceutical company whose $54 billion merger with AbbVie Inc. got called off earlier this month, says it’s looking at potential acquisitions of all sizes–particularly after it receives a “welcome addition to the bank account” via a $1.6 billion breakup fee from AbbVie on Monday.
On a conference call with analysts Friday, Shire Chief Executive Flemming Ornskov said the company had continued to track potential large targets after the AbbVie deal was announced–even though it would have been difficult to actually pursue them–and thus ”did not miss a beat.”
Even without the breakup fee, Mr. Ornskov pointed out that Shire completed a $4.5 billion acquisition in January of ViroPharma Inc. The deal, he said, speaks to the company’s ability to integrate and fund large deals.
Analysts at Citigroup Inc. estimate that Shire could finance deals worth up to $13 billion.
For now, executives said that Shire is actively looking at acquisition targets that complement with the company’s existing product portfolio of rare-disease drugs or would lead them into areas adjacent to their portfolio. Mr. Ornskov said Shire would be judicious about where it spends its money.
Analysts say Shire still remains an attractive takeover target. The company’s business of selling drugs to treat rare diseases could make the company attractive to a number of large drug makers, they say.
In an interview with CNBC Friday afternoon, Mr. Ornskov said that right now Shire is “focused on being someone on the acquiring track.”
Shire’s Nasdaq-listed shares rose more than 5% on the back of better-than-expected earnings and guidance Friday. They’re still up roughly 38% in 2014, despite falling more than 30% when AbbVie’s board recommended against the deal.
– Hester Plumridge contributed to this post.
KLA-Tencor dramatically ramped up its cash return to shareholders – and may have upped the ante against rivals in the process.
The maker of semiconductor manufacturing tools announced a “leveraged recapitalization” plan late Thursday that includes a special $16.50 per share dividend and an additional $250 million on its existing buyback. Part of this will be financed with about $2.5 billion in debt. The company explained the move as a vote of confidence in its business prospects, though some are worried by its growing debt load. Fitch downgraded its credit rating to BBB-, even as the stock jumped.
This may pressure others in the sector to dip into their wallets. Credit Suisse named “cash rich” companies Teradyne and Lam Research as candidates that could return more of their bounty, as the industry becomes less cyclical. KLA’s move also suggests less potential for big M&A activity in the group. Applied Materials is still working to finish its merger with Tokyo Electron , and Lam already picked up rival Novellus back in 2012.
For its part, KLA-Tencor seems to have decided to bet big on itself.
Welcome to BitBeat, your daily dose of crypto-current events, written by Paul Vigna and Michael J. Casey.
Bitcoin Latest Price: $356.67/ down 0.23% (via CoinDesk)Crossing Our Desk:
–At the heart of Overstock CEO Patrick Byrne’s plan for a decentralized cryptocurrency-based stock exchange is the promise of doing away with a centralized system for settlement and clearing that he has campaigned against for a decade.
For now, though, U.S. securities regulations will force Overstock’s so-named Medici exchange to adopt key aspects of that centralized system — most importantly, a clearing house.
Still, the team from cryptocurrency startup Counterparty that’s been tasked with building the exchange, in which trades of “cryptosecurities” will be embedded into bitcoin’s universal “blockchain” ledger, say it will nonetheless produce a far more transparent system than that of traditional stock exchanges. Speaking in a conference call with BitBeat, they also claimed that Medici would prevent “naked short-selling,” a commonly used strategy for betting against shares that was the target of a long-running, quixotic and at times wacky campaign by Mr. Byrne.
For now, the exchange will fall short of what Counterparty cofounder Evan Wagner described as the “Holy Grail” of direct peer-to-peer share exchanges. Still, he said, the project offers a unique opportunity to demonstrate the blockchain’s capacity to make individual trades fully traceable, which he said could make pricing fairer and prevent fraud. Ultimately, their goal is to show regulators that it offers a path toward a fully decentralized system for stock transfers.
“There are big things we can do from day one with regards to transparency,” said Robby Dermody, another of Counterparty’s cofounders.
In the long run, Mr. Demody said, peer-to-peer share trading over Medici would incur just 20% of the costs carried by the current, centralized system run by the Depository Trust & Clearing Corporation, the entity owned by Wall Street banks and brokerages that manages clearing for most securities in U.S. capital markets.
Overstock.com communications director Judd Bagley, who also participated in the interview, contrasted the traceable transactions that Medici will employ at the outset to that of the DTCC, which at the end of each day nets out multiple individual payments and security transfers to and from each brokerage into single end-of-day settlements. Without that netting, Mr. Bagley argued, investors can’t engage in naked short-selling because each sale or short sale will correspond with the actual delivery of a security. Mr. Bagley has had a central role in coordinating Mr Byrne’s anti-naked short-selling campaign over the years.
Whereas in traditional short-selling investors first borrow or at least arrange to borrow shares before selling them, all with the goal of buying them back at a profit after they’ve fallen in price, a naked short sale occurs without the investor making those arrangements in advance. In both cases, the investor posts the proceeds of the sale as collateral with their broker until the securities are delivered to the buyer at the time of settlement. Naked short-selling is legal so long as the investor fully intends to seek out and borrow the shares after selling them.
Mr. Byrne and others contend that the occurrence of failed settlements in naked short-sale transactions – cases where borrowed shares aren’t delivered – makes the DTCC complicit in a conspiracy among hedge funds to unfairly drive down the stock of certain companies and obtain outsized profits. The Overstock CEO laid out his argument in a 2008 Forbes Op-ed in 2008. Critics of Mr. Byrne say nearly all such failures are the result of technical difficulties and the DTCC is usually able to resolve them shortly after the settlement period.
His controversial claims, in which he has at times cited particular journalists and an unnamed “Sith Lord” hedge-fund manager as parties to the alleged conspiracy, seems to be a key motivator of Mr. Byrne’s bid to build the cryptosecurity exchange. The DTCC declined to comment for this article.Contacts: firstname.lastname@example.org, @paulvigna / email@example.com, @mikejcasey
Trading houses Trafigura AG and Noble Americas Corp. have reached a settlement for an undisclosed sum to resolve a legal dispute over a gasoline trade gone wrong.
Trafigura sued Noble in New York federal court in July, claiming it breached a contract to accept a delivery of 25,000 barrels of gasoline last October. Trafigura said it was forced to sell the gas to a third party at a loss, and that it suffered additional losses on gasoline hedge positions related to the trade. Trafigura says it lost over $500,000 in total from the trade.
Under the terms of the deal, Trafigura was sending Noble six batches of gasoline totaling 150,000 barrels up the Colonial Pipeline that runs from Houston to New Jersey. But Noble refused one of the shipments amid a grade designation change by the pipeline company.
The case offers a rare glimpse at the operations of commodity trading houses, which are normally highly secretive.
Noble, whose main U.S. office is in Stamford, Conn., negotiated the trade with Trafigura’s Houston office. But after the delivery dispute, Noble called Trafigura’s office in Montevideo, Uruguay, and said the firm needed to sell it a futures position to make good on old deal. The Uruguay office, unaware of the background, sold the futures contract to Noble, on which Trafigura then sustained even more losses.
For its part, Noble denied the allegations.
Both companies declined to comment.
After seven years of M&A famine, Wall Street firms that make their business advising companies on deals are enjoying the feast.
Global deal volume reached $2.8 trillion in the first nine months of the year, a 34% year-on-year rise and the highest level since 2007, when volume in the first nine months totaled $3.6 trillion. This surge in deal making has helped boost the third-quarter earnings of independent advisory firms across Wall Street.
Greenhill & Co. reported third quarter revenue more than doubled Thursday to $92 million from $44.6 million during the same period a year earlier. The firm’s chief executive, Scott Bok, said he expects revenues to grow further as more announced deals cross the finish line. Advisory fees at Greenhill represent the vast majority of firm’s total revenue.
Lazard Ltd. yesterday morning reported record third quarter revenues of $583 million, helped by a 37% year-on-year rise in M&A and other advisory revenues to $241.2 million. Its asset management business also posted record revenues.
Chief Executive Ken Jacobs highlighted a U.S.-led global economic recovery and an uptick in cross-border activity as factors that contributed to the firm’s third quarter performance.
Susquehanna analysts wrote that Lazard “is setting up for a fantastic overall year with strength in both segments.”
Evercore Partners Inc., meanwhile, reported the best third quarter in its history earlier this week, helped by a strong increase in investment banking revenues to $198.5 million, up from $161.3 million in the third quarter of last year.
Few expected the good times to end quickly.
Greenhill’s Mr. Bok said on a call with analysts Thursday that despite the firm’s strong earnings, the volume of completed M&A deals globally had not yet picked up meaningfully from pre-crisis levels. But the outlook for announced deals looks strong and that bodes well for Greenhill’s future revenue outlook, he said.
Mr. Bok highlighted the consumer retail, health-care and industrials as sectors where M&A activity has been strong, adding that strategic deals are also “firmly back on the agenda”.
As for the recent spate of volatility that has afflicted the market, the CEOs of these firms aren’t worried yet.
“I certainly don’t think one week or 10 days of volatility is changing the way any company is looking at a deal,” Greenhill’s Mr. Bok said.
Private equity is getting its own fight club. Well sort of. Unlike in the film, you will be able to talk about the existence of the club and there won’t actually be any bare knuckle boxing competitions.
A new group, who are tentatively calling themselves the Private Equity Combat Sports group, or ‘PECS’, is launching next month in London, with the aim of teaching buyout execs a kick-ass form of self-defense developed by the Israeli special forces.
(This item also appears in Private Equity News, a U.K.-based trade publication owned by Dow Jones & Co.)
If you haven’t come across Krav Maga take a look at this wince-inducing video. It’s a fast paced and slightly extreme type of hand-to-hand combat.
“It’s about the learning and the fitness rather than beating other people up!” says Duncan Easterbrook, a finance director at new buyout firm GHO Capital Partners who is behind the new venture.
He says the 90-minute class will happen weekly at a gym he co-owns in Vauxhall from early November and is aimed at private equity executives as well as industry lawyers, accountants and placement agents.
Easterbrook says he hopes it will be a useful way for those in the industry to network as well as get fit.
“The two things just came together and I thought a good thing would be to bring people from the industry together to train and learn. Personally I can’t explain how great it’s been from a learning and a fitness perspective,” he says.
Mr. Nader, the five-time presidential candidate who earlier this year opened a new front in his corporate-reform crusade, sent a letter to Apple Inc. CEO Tim Cook on Thursday, imploring the iPhone maker to reduce its spending on corporate buybacks and spend some of that money on improving wages.
“Tolerating poverty wages is not the price we pay for affordable phones,” Mr. Nader wrote in the letter. “Rather, poverty wages and harmful conditions are a consequence of tolerating outrageous stock buybacks. You had a choice for the $130 billion: living wages for workers or stock buybacks for millionaires? You chose buybacks. Here’s a challenge for the present and future use of surplus profits: why not let the customers decide?”
Mr. Nader’s letter stands in direct opposition to a position staked out by billionaire investor Carl Icahn, who earlier this month said the market was undervaluing Apple and that the company should extract more value for shareholders by buying back more stock.
Mr. Nader said there are “many alternate ways” Apple could spend its profits, including spending that money on “dignified working conditions and living wages, instead of unproductively using their surplus to buy stocks back from the wealthy.”
Earlier this year, WSJ reported that Mr. Nader, the longtime consumer advocate, was putting together a shareholder-activism group. As part of that effort, the 80-year-old planned to pledge 1% of his financial net worth, or roughly $50,000, in each of the next three years if a group of 15 to 20 others will join him to raise a total of about $10 million.
An Apple spokesman didn’t immediately respond to a request for comment.
For more than a decade, Wall Street gave Amazon.com Inc.'s spending spree a pass. The company regularly reported quarterly loss after quarterly loss, yet strong revenue growth gave investors confidence the online retail giant was on the right path.
It doesn’t seem to be getting a pass any more.
Amazon late Thursday reported its largest quarterly loss in 14 years amid a surge in spending on new-product development, music and video licensing, and more. Even amid a 20% jump in revenue, Amazon reported a $437 million third-quarter loss, its biggest loss in 14 years.
Shares sank more than 7% on Friday and recently traded around $290, its lowest level of the year. The stock, which is down more than 25% this year, has now suffered sizable drops after each of its past four quarterly reports.
Analysts say investors are growing impatient and want to see the payoff from all the spending.
“We believe Amazon is shifting to the status of a ‘show me’ story as each time a margin inflection point seems to be in reach, it disappears,” B Riley analyst Scott Tilghman wrote on Friday.
“It is unclear how long the current investment cycle is going to continue, and the company has not shown any interest in driving even the tiniest amount of leverage off its sizable revenue base,” Colin Gillis, technology analyst at BGC Partners, wrote to clients on Friday.
Part of the quarterly loss was driven by a $170 million charge the company took on its Amazon Fire smartphone, which analysts say is selling poorly.
And the online retailer unveiled a cautious outlook for the current quarter, arguably its most important due to the holiday season.
Mr. Gillis has a hold rating and a 12-month price target of $340 on Amazon. “While there are certainly risks to Amazon’s forward success, and the company has not shown an ability to be meaningfully profitable, Amazon has shown an ability to robustly attract consumers into its ecosystem,” he said.
Other analysts aren’t so optimistic about the stock’s next move.
“While recent announcements have given us increased visibility into Amazon’s revenue growth, we are not convinced that the company will share sufficient details about future spending to allow us to accurately model profit growth, and it may take time before [earnings per share] grows sufficiently to justify its share price,” Michael Pachter, an analyst st Wedbush Securities, wrote to clients.More In Amazon
Benchmark Research said momentum is “likely to remain against the stock in the short-term,” although the firm maintains a $350 price target as it sees Amazon’s investment spending continuing at a more moderate pace in 2015.
For its part, Amazon acknowledges it needs to change. On a conference call with reporters, Amazon CFO Tom Szutak struck a more cautious tone with reporters than he has in the past.
“We do have a lot of opportunities in front of us,” he said. “We ertainly have been in several years now of what I will call an investment mode, but we know that we have to be very selective about which opportunities we pursue.”
–Greg Bensinger contributed to this report.
Another inversion deal is off the table.
Cutrale-Safra succeeded Friday in its effort to convince Chiquita Brands International Inc.’s shareholders to reject the company’s acquisition of Fyffes PLC. The Brazilian firm returned Thursday with an 11th hour takeover bid for Chiquita that — at $14.50 per share — was slightly higher than its previous bid and enough to sway Chiquita’s shareholders.
Chiquita shareholders voted Friday morning on the Fyffes transaction, and Chiquita cited the vote as a reason to call off the deal without disclosing the results.
That makes the Chiquita-Fyffes deal the latest tax inversion to fall apart in the weeks since the U.S. Treasury proposed revisions to their rules on inversions. Chiquita repeatedly said that the Fyffes deal was not struck with taxes in mind, but it had planned to take Fyffes’ Irish headquarters.
While inversions were seen as a key driver of M&A activity this year, Dealogic data shows only nine inversion deals valued at roughly $140 billion had been announced in 2014, and several of those have been called off in the past several weeks.
AbbVie Inc. and Shire PLC cited the Treasury’s new rules when they called off their $54 billion merger earlier this month. So did Salix Pharmaceuticals Ltd., which ended plans for a $2.7 billion merger with the Italian parent company of drug maker Cosmo Technologies Ltd. Auxilium also shelved its inversion deal with QLT Inc. and instead agreed to be bought by Endo International PLC.
Chiquita said it’s entering into discussions with Cutrale-Safra and would update the market if the deal is agreed upon.
If Cutrale-Safra ultimately succeeds in purchasing Chiquita, the U.S. could still lose a bulk of the company’s tax revenues. The bidders’ firms are both located in Brazil, and while the company has not commented on whether it would move Chiquita’s headquarters post-deal, it’s possible that it could relocate to Brazil.
Critics of the U.S. tax system have said that without broader changes to the U.S. tax code, a crackdown on tax inversions would lead instead to U.S. companies becoming targets of non-U.S. companies.
Shares of Chiquita are up 3% Friday, after rising roughly 8% Thursday when Cutrale-Sufra submitted its higher bid.
“While we are convinced [Fyffes] would have been a strong merger partner, we will now go forward as competitors.,” said Chiquita Chief Executive and President Edward Lonergan.
Meanwhile, if Chiquita enters into a deal with Cutrale-Safra or another partner in the next nine months, Fyffes will have the right to a termination fee worth 3.5% of the value of Chiquita’s shares the day before the agreement.
–Dana Mttiolo and Razak Musah Baba contributed to this article.
Although fundamental trends at U.S. banks seem “almost petrified,” an analyst at Oppenheimer saw at least one bright spot in the third quarter: a pickup in banks’ revenue from lending and investing.
So-called “net interest income” climbed 3.2% in the third quarter from a year ago–even though loan growth was up just 0.3% at the banks covered by Oppenheimer.
The results aren’t all equal however. While net interest income and loan growth at the big banks seem to be moving in the same direction, at regionals they are moving in opposite directions, Oppenheimer analyst Chris Kotowski said.
Big banks in the third quarter logged net interest income growth of 2.4% and loan growth of 1.7%. Regionals, by contrast, reported a net interest income decline of 2.9% despite much higher loan growth of 4.9%.
“Something is clearly amiss with the regionals,” said Mr. Kotowksi in an interview.
Part of the discrepancy could be explained by higher revenue at the big banks from fixed income, currencies and commodities trading. Big banks across the board reported higher revenue in the third quarter than a year earlier. Regional banks don’t have big trading arms.
“Regionals are simpler, but it is not necessarily the better business model,” says Mr. Kotowski.
He notes that while regional banks’ bread and butter lending products like auto loans, home mortgages and home equity have to compete heavily on pricing. By contrast, big banks dominate the credit card business, where there is more customer loyalty and better pricing.