March 23, 2023

DealBook: U.S. Markets Closed on Tuesday

The New York Stock Exchange, which did not open Monday.Richard Drew/Associated PressThe New York Stock Exchange, which did not open Monday.

7:32 p.m. | Updated

Even in an era of widespread electronic trading, markets and those who tend to them are still proving vulnerable to the fury of a major hurricane.

Stock markets in the United States will be closed again on Tuesday for a second day without trading as Hurricane Sandy’s approach intensified the wind and rain in the New York area.

The New York Stock Exchange, the Nasdaq stock market and BATS Global Markets said in separate statements that they had agreed to close, after consulting with other exchanges and clients. The N.Y.S.E. added that it planned to operate on Wednesday, pending developments in weather conditions.

The stoppage is the first time the markets have been closed for consecutive days because of weather since a blizzard forced the N.Y.S.E. to close for two days in 1888. And it remained the first unscheduled market closure since the Sept. 11 terrorist attacks.

Markets in Europe and Asia were roughly flat on Monday. The FTSE 100 index closed down 0.2 percent, at 5,795, while the Hang Seng was down 0.2 percent at 21,511.05.

Hurricane Sandy Multimedia

Over all, a second day of closed markets could have a relatively limited effect on trading when business resumes, according to Larry Tabb, the founder and chief executive of the Tabb Group, a financial research firm.

An extended halt in trading could create some pent-up demand among traders that might lead to some higher volatility, he said. That could mean stocks of companies like insurers could see swings in their prices. But he predicted a short-lived effect on the markets.

In a research note published on Monday, Sam Stovall, the chief equity strategist for Standard Poor’s Capital IQ, said Hurricane Sandy would most likely not have a lasting effect on market performance. He noted that the S. P. 500-stock index rose 4 percent in the three months after Katrina, the costliest hurricane in American history.

“History says that hurricanes typically don’t trigger market declines,” Mr. Stovall wrote. “Equities are more likely driven by wider-reaching global events than localized natural disasters.”

The decision to keep the American exchanges closed came as little surprise, with market operators having already hinted that they would stay closed as the storm’s impact intensified. And the Securities Industry and Financial Markets Association, or Sifma, recommended that United States bond markets stayed closed on Tuesday as well.

The exchange closings have also meant that companies seeking to go public may need to delay their initial public offerings. That group includes Restoration Hardware, which had been hoping to raise as much as $124.8 million in its market debut.

And while 234 million shares of Facebook became eligible for trading on Monday, employees who held the stock were unable to sell. The company had moved up the expiration of a so-called lockup on the shares to help bolster staff morale.

The CME Group said that it would open its United States index futures and options markets for overnight trading, closing them at 9:15 a.m. Eastern time on Tuesday. It would also keep closed the physical trading floor of the Nymex commodities exchange, which was in a mandatory evacuation area in Lower Manhattan, but electronic trading of energy and metals would continue. On Monday, crude oil prices fell 74 cents, or 1.3 percent, to finish at $85.54 a barrel in Nymex trading.

Representatives for the exchanges emphasized that the safety of their employees was paramount, relying on skeleton crews to run critical operations. The companies have been consulting with regulators like the Securities and Exchange Commission and the Federal Reserve Bank of New York, as well as clients and Sifma.

While the N.Y.S.E. initially prepared to open for electronic trading on Monday, the exchange got some resistance from brokerages wary of using the emergency plan, which was last tested in March, according to people briefed on the matter. Market operators, trading firms and regulators ultimately decided to err on the side of caution.

A continued stoppage in trading is expected to have some costs for exchanges like the N.Y.S.E. and the Nasdaq. Richard Repetto, an analyst at Sandler O’Neill Partners, estimated in a research note that stock and option exchanges would lose about $1 million in transaction fees for every day that they are closed.

That loss of revenue will probably not hurt those companies’ earnings, Mr. Repetto said, though he added that he did not factor in lost revenue from exchanges’ other businesses.

Other Wall Street firms made contingency plans as well.

Goldman Sachs advised employees in an internal memorandum to stay home on Tuesday, and said that its offices at 200 West Street and 30 Hudson Street would be closed.

Citigroup said that its offices in evacuated parts of Lower Manhattan would remain closed.

Most of JPMorgan Chase’s offices will remain open, with smaller staffing. But the bank said it would close all of its retail branches in New York, New Jersey and Connecticut on Tuesday.

A version of this article appeared in print on 10/30/2012, on page B5 of the NewYork edition with the headline: Storm Forces Markets to Remain Closed.

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DealBook: For Wall Street Watchdog, All Grunt Work, Little Glory

ROCKVILLE, Md. — Last week, when a former Boston Red Sox infielder faced accusations of insider trading, the Securities and Exchange Commission got credit for levying a $100,000 fine. The Department of Justice in May heralded a guilty plea from a one-time senior executive at the Nasdaq Stock Market who traded on secret information. And earlier this year, after a lawyer was accused of stealing insider tidbits, federal prosecutors in New Jersey boasted of the arrest.

But in each case, the federal government was not the first to detect the potential fraud. Rather, the initial alarm bells were sounded by an obscure group of private-sector analysts stationed here in suburban Maryland.

In an office park 20 miles outside Washington, the Financial Industry Regulatory Authority, Wall Street’s nonprofit self-regulator, has quietly built a small army of market police. Since Wall Street’s financial crisis in 2008, this fledgling fraud task force has entered the front lines of fighting insider trading, even if the group rarely earns the credit.

Finra’s fraud group is akin to being the sous chef to the S.E.C. and other government regulators: the team prepares evidence against America’s most-wanted traders, but receives little of the glory when the cases are served.

“We identify the dots so other people can connect them,” said Cameron Funkhouser, an executive vice president at Finra and the head of the insider trading group, known in regulatory speak as the Office of Fraud Detection and Market Intelligence. “We’re a clearinghouse of regulatory intelligence.”

The group has no shortage of cases to pursue. The federal government’s renewed crackdown on insider trading is playing out on multiple fronts, prompting a roughly 50 percent rise in S.E.C. enforcement actions over the last two years and 52 criminal convictions in New York.

And now, as the government’s purse strings tighten, more and more cases are coming from Finra, a nonprofit watchdog whose coffers are relatively plush. The fraud detection group’s roster has ballooned to more than 130 people, a roughly 20 percent jump since late 2009, when the group opened its doors.

Cameron Funkhouser, the head of fraud detection at the Financial Industry Regulatory Authority.Mac William Bishop/The New York TimesCameron Funkhouser, the head of fraud detection at the Financial Industry Regulatory Authority.

“We don’t have the bureaucratic baggage of the S.E.C.,” Mr. Funkhouser said. “People used to say, ‘We don’t really regulate that, it’s not in our jurisdiction.’ We don’t care.”

The role of aggressive regulator is an unlikely twist on Finra’s reputation. It has no subpoena power and, at best, has a spotty track record for detecting fraud.

Born out of the 2007 merger between the National Association of Securities Dealers and the New York Stock Exchange’s regulatory arm, Finra has traditionally stuck to monitoring 600,000-plus stockbrokers. It failed, critics say, to detect fraud and wrongdoing in the lead-up to the financial crisis. In 2008, the peak of the crisis, Finra filed 1,073 disciplinary actions, down from 1,204 two years earlier.

After the crisis, Finra’s board in October 2009 issued a report rebuking the organization for missing R. Allen Stanford’s investment scheme, among other problems. That same day, Finra announced the birth of the fraud detection group.

Finra already had a new whistle-blower unit, but Stephen Luparello, Finra’s vice chairman, decided to centralize the efforts into a larger group, paying particular attention to Ponzi schemes and insider trading.

Industry lawyers say the group’s expansion has sharpened Finra’s regulatory teeth. Last year, the group referred more than 500 potential fraudsters to the S.E.C. or other federal law enforcement agencies. Public Enemy No. 1 — suspected insider traders — made up 244 of the referrals, a record for Finra.

“Cam’s widely recognized as having a nose for fraud,” said Barry R. Goldsmith, a partner at the law firm Gibson Dunn, who was the senior enforcement official at the National Association of Securities Dealers. Mr. Funkhouser, a tenacious lawyer whose Finra career has spanned nearly three decades, “is an ‘I smell a rat’ kind of guy,” he said.

The group’s bread-and-butter inquiries aim at suspicious trading, usually by hedge funds and retail investors, ahead of mergers or startling earnings announcements. Finra opens an investigation after more than 90 percent of mergers.

The sleuthing often begins with a scan of the group’s specialized computer software, the Securities Observation News Analysis and Regulation, or Sonar as it’s known by the team. The program allows Finra to pinpoint mergers or other news, and then connect the events to an unusual price and volume movement in a stock.

The group then examines who worked on the merger, aiming to trace whether lawyers and bankers carry even minor connections to the traders. To help connect the dots, Finra analysts do what any dogged investigator would do: seek guidance from Facebook and Twitter. Once, Finra caught a former Lehman Brothers trader leaking inside information that he gleaned from his wife, a public relations executive.

The fraud group’s office here is replete with a “war room” — a basic conference room where six Finra managers gather every Wednesday to discuss the most promising insider trading cases. Occasionally, Mr. Funkhouser will even answer the group’s whistle-blower phone line, a task typically done by junior staff, or give tipsters his personal cellphone number.

While Mr. Funkhouser is the face of the crew, he has a deep, if eclectic, bench.

The head of the whistle-blower unit, Joe Ozag, was a terrorism detective for the United States Capitol Police and a former broker at Morgan Stanley. Anthony Cavallaro and Paul Lane once prosecuted homicides and robberies at the Manhattan district attorney’s office. The head of the insider trading group, Sam Draddy, was a high-ranking S.E.C. official in Washington.

The group’s sole high-ranking female member, Laura Gansler, wrote the book that formed the basis for the movie “North Country,” starring Charlize Theron. Mr. Funkhouser calls Ms. Gansler “the brain” of the group.

The group has become a source of pride for Finra, especially after the bruising days of 2008. Richard G. Ketchum, Finra’s chief executive, often dispatches e-mails to Mr. Funkhouser’s team after the S.E.C. files a case that originated at Finra. “Great win,” his notes say.

“It’s critical,” Mr. Ketchum said in an interview, “for investor protection and it’s critical for our reputation.”

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China to Wall Street: The Side-Door Shuffle

IT was the hot new thing on Wall Street — one of those exotic investments that seem to promise untold riches for the lucky few.

And, like so many hot new things, it went cold fast.

Such was the fabulous stock-market flameout of a company called Rino International, an untested enterprise that, until recently, would have raised nary an eyebrow in the United States.

But over the last few years, Rino International and scores of other young Chinese companies slipped into the United States stock market through the back door. Rino’s American stockholders later lost hundreds of millions of dollars when accusations surfaced that the company had fudged its books. All told, investors’ losses on these Chinese ventures have stretched into the billions.

How companies like Rino wormed their way into the temples of American capitalism is a story for these financial times. Even amid the wreckage of the 2007-8 financial collapse, an ecosystem of Wall Street enablers — bankers, lawyers, entrepreneurs, auditors — spirited Chinese companies to the United States. With some deft financial maneuvers, these businesses essentially went public while sidestepping the usual rules. Before long, many were trading on the Nasdaq stock market, alongside the likes of Google.

It was all perfectly legal. With bankers’ help, the Chinese companies executed what are known as reverse mergers. They bought American companies that were merely shells and assumed those companies’ stock tickers — sort of the Wall Street equivalent of “Invasion of the Body Snatchers.” The strategy let them avoid reviews with state and federal regulators that are normally required for initial public stock offerings.

At issue now is who should bear responsibility for the bursting of yet another Wall Street bubble. Should it be the Chinese executives and their bankers, who engineered the deals and celebrated these companies? Or should it be the investors, who bought these stocks when, in hindsight, the risks seemed clear enough? The lawsuits are flying.

Next to Bernard L. Madoff and the sins of the subprime era, the supposed shenanigans of a few Chinese companies might seem like small beer. But the developments underscore fundamental questions that came to the fore in the financial crisis: What do the people who create and sell investments owe to those who buy the investments? And where, if anywhere, are the regulators?

Dozens of Chinese companies that, like Rino, entered the United States market via reverse mergers have since been accused of fraud or shoddy accounting. The shares of at least 19 of them have been suspended or delisted by Nasdaq, wiping out billions of dollars in stock market value. Shares of Rino, which were flying high at $35 in 2009, have been removed from the exchange.

Laurence M. Rosen, whose law firm has filed a class-action suit against Rino International, says Rino’s bankers failed investors. Wall Street didn’t do its homework, he says.

“This is egregious,” Mr. Rosen says. “They said they did due diligence but were fooled — but they weren’t doing any solid due diligence.”

Rino has been accused of creating phony business contracts and wildly inflating its sales, among other things. Executives at Rino International, which is based here in Dalian and makes industrial pollution control systems, declined to comment, beyond saying that it is conducting business as usual.

THERE is not much to see outside the headquarters of Rino International here. The company resides in a bland corporate park that is home to a number of other Chinese businesses. A guard stands watch at the gated entrance. Inside, workers load steel beams onto trucks. The bang and hum of factory work rises from workshops.

Dalian, a seaport city in northeastern China with a population of about six million, in recent years has developed into a fast-growing hub of machine manufacturing, petrochemicals, oil refining and electronics. Driving this growth have been companies like Rino, whose name means “green promise” in Chinese.

David Barboza reported from Dalian, China, and Azam Ahmed from New York. Xu Yan contributed research in Shanghai.

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DealBook: Former Nasdaq Executive Pleads Guilty to Insider Trading

Shannon Stapleton/Reuters

Donald L. Johnson had a privileged role at the Nasdaq Stock Market.

When companies that trade on Nasdaq wanted to understand how impending news would affect their share prices, they would consult with Mr. Johnson, who was a senior executive on the exchange’s so-called market intelligence desk.

Over a three-year period, Mr. Johnson took that secret corporate information and, directly from his work computer, traded in an online brokerage account in his wife’s name, reaping illegal profits of about $750,000.

On Thursday, Mr. Johnson pleaded guilty to the brazen insider-trading scheme in Federal District Court in Alexandria, Va. He was also sued by the Securities and Exchange Commission. The 56-year-old Mr. Johnson, who lives in Ashburn, Va., faces up to 20 years in prison.

“He was a gatekeeper,“ Lanny A. Breuer, assistant attorney general of the Justice Department’s criminal division, said at a news conference. “This was a particularly shocking abuse of trust.“

Nasdaq’s failure to protect its corporate clients’ secret information is an embarrassment for the exchange, which competes fiercely with the New York Stock Exchange and foreign exchanges for public company listings.

“We’re cooperating with authorities,“ said a Nasdaq spokesman, who declined to comment further on the case.

The Nasdaq has an insider trading policy that prohibits employees from trading on confidential information about its listed companies, and requires that they disclose all brokerage accounts and holdings that they control. The government says that Mr. Johnson did not disclose his wife’s brokerage account to Nasdaq.

Jonathan Simms, a lawyer for Mr. Johnson, did not immediately return a phone call seeking comment.

Mr. Johnson’s case is the latest in the government’s far-reaching investigation into insider trading, which has not only rattled Wall Street but reached beyond its canyons to ensnare doctors, management consultants and railroad workers. Last month, the Justice Department brought criminal charges against a longtime Food and Drug Administration chemist and his son for using sensitive information about drug approvals to earn millions of dollars in profits. Another case was brought against a corporate lawyer, who was accused of feeding confidential data about merger deals to traders over a 17-year period.

Earlier this month, the United States attorney in Manhattan won the highest-level conviction to date in their recent efforts when a jury found Raj Rajaratnam, a billionaire hedge fund manager, guilty of earning more than $50 million in illegal trading profits.

“The Department of Justice is watching you and we will find you and prosecute you to the fullest extent of the law,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia.

Such tough talk from federal prosecutors has been backed up with aggressive tactics being used to prosecute white-collar crime, including wiretapping traders’ phones.

Here, federal prosecutors worked with the S.E.C. and the Financial Industry Regulatory Authority, Wall Street’s own regulatory authority, to catch Mr. Johnson. The agencies pursued the case after observing suspicious trading activity in Mr. Johnson’s wife’s account surrounding market-moving news about several publicly traded companies.

Mr. Johnson traded on confidential information in nine separate cases from 2006 to 2009, according to the S.E.C.

In one instance, on Oct. 30, 2007, Mr. Johnson had a phone conversation with the chief financial officer and general counsel of United Therapeutics about the successful completion of a drug trial. The next day, Mr. Johnson bought 10,000 shares of United Therapeutics stock in his wife’s brokerage account. After the company issued a statement on Nov. 1 announcing the news, Mr. Johnson began selling the stock from his office computer, booking $175,000 in profits.

In another example, Mr. Johnson met with a senior executive at Digene, who told him about the pending resignation of the company’s president and the senior executive’s promotion to chief financial officer. Suspecting that the news would hurt the company’s stock price, Mr. Johnson sold short about 10,000 shares of Digene stock in his wife’s account, meaning that he bet the price of the stock would drop. After the public announcement, which drove down Digene’s shares, Mr. Johnson covered his short position and booked a $34,000 gain.

The government says that other companies Mr. Johnson illegally traded include the Central Garden and the Pet Company and Idexx Laboratories.

Federal authorities said that Mr. Johnson made the illegal trades only episodically over the three-year period in the hopes that authorities would not detect a questionable pattern of trading in his wife’s account. The S.E.C. named his wife, Dalila Lopez, a “relief defendant,“ meaning that the agency has not sued her, but will seek to recover the illicit profits in her possession.

Mr. Breuer, the assistant attorney general, and Robert Khuzami, director of the S.E.C.’s enforcement division, used identical metaphors in their statements to describe Mr. Johnson’s activity.

“This case is the insider-trading version of the fox guarding the henhouse,“ Mr. Khuzami said.

U.S. v. Donald Johnson

S.E.C. v. Donald L. Johnson

“Mr. Johnson was a fox in a henhouse,“ Mr. Breuer said.

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DealBook: Yandex Is Set for $1.3 Billion Stock Offering

The Moscow headquarters of Yandex, which is set to go public on Tuesday.Sergei Karpukhin/ReutersThe Moscow headquarters of Yandex, which is set to go public.

Less than one week after LinkedIn’s blockbuster debut, Wall Street is gearing up for the initial public offering of yet another multibillion-dollar Internet start-up.

Yandex, one of Russia’s largest Web companies, will price its offering at $25 a share, well above expectations, according to a person briefed on the deal who was not permitted to discuss the offering. The Moscow-based company, which is set to go public on Tuesday morning, will sell 52.2 million shares in its initial public offering and raise $1.3 billion. Its group of underwriters, led by Morgan Stanley, Goldman Sachs and Deutsche Bank Securities, also has the option to sell an additional 5.2 million shares to cover over-allotments.

At $25 a share, the company is being valued at $8 billion.

Enthusiasm has been building for Yandex, the most popular search engine in Russia. Two weeks ago, Yandex forecast a more modest price range of $20 to $22 a share.

For investors, Yandex represents a bet on Russia’s burgeoning technology market. Last year, it generated about 64 percent of all search traffic in the country, trumping the Internet giant Google in the region. And unlike some of its peers, the business is churning out consistent profits, according to its recent regulatory filings. Last year, it recorded revenue of $439.7 million and net income of $134.3 million.

“Yandex should generate investor interest as the only U.S.-traded company with pure exposure to Russia’s large and underpenetrated online advertising market, which is expected to grow from $840 million in 2010 to $2.3 billion by 2013,” Stephanie Chang, an analyst with I.P.O. advisory firm, Renaissance Capital, wrote in a research note on Monday.

The company, which will trade on the Nasdaq Stock Market under the ticker symbol “YNDX,” is also expected to ride a rising wave of investor enthusiasm for popular technology start-ups. In the last few weeks, a string of Internet I.P.O.s have roared out of the gates, amid surging demand for Internet companies. Last Wednesday, for instance, LinkedIn, a social network for professionals defied expectations, more than doubling on its first day of trading. Earlier this month, Renren, one of China’s leading social networks, rose 29 percent on its debut and raised $743 million in its offering. Both stocks have since pulled back — LinkedIn and Renren fell about 5 percent on Monday — but LinkedIn remains 96 percent above its offering price.

“There will be huge demand for Yandex; there has been since day one,” said Scott Sweet, a senior managing partner of I.P.O. Boutique.

He added, “Yandex didn’t need the help, but they should send LinkedIn a ‘thank you’ card.”

Yandex is another important test for the market.

By the sheer size of its initial public offering, it is the largest Internet issue to hit the American stock market since Google’s $1.7 billion offering in 2004. Still, it is not the only major technology I.P.O on deck this week. On Thursday, Freescale Semiconductor, is expected to go public with an offering that could raise about $1 billion.

For Yandex, it has been a long road to the public markets. The company originally filed to go public in 2008, but the company postponed it plans amid turmoil in the financial markets. Yandex’s largest shareholders include the hedge fund Tiger Global Management, Baring Vostok Private Equity Funds and the company’s chief executive, Arkady Volozh, all of which are selling some shares in the offering.

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