Business News: Electric Cars Are Charged for Battle

Business News: Electric Cars Are Charged for Battle

Electric Cars Are Charged for Battle

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Three Ways to Drive Electric

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Rethinking the iPhone Threat to AT&T

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Blame High Gas Prices on Laziness and Greed

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Pricey Champagne Revives in Discount Market

Posted: 31 Dec 2010 04:42 AM PST

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By Clementine Fletcher

Dec. 31 (Bloomberg) -- As New Year’s revelers ring in 2011 with a bottle of bubbly, the makers of the most expensive champagnes are celebrating a return to favor after two years of decline while cheaper brands continue to battle on price.

“The market is polarizing,” said Andrew Hawes, managing director of Mentzendorff, the U.K. distributor of Bollinger, and chairman of the U.K. Champagne Agents’ Association. After discounting across the board in 2009, “we’re seeing this year that certain brands aren’t involved in it. We’re seeing a parting of the ways, and that trend is going to continue.”

Sales of the most expensive wines including those made by LVMH Moet Hennessy Louis Vuitton SA are bucking the industry trend as the wealthiest drinkers shell out more than 100 euros ($133) a pop for a bottle of champagne again amid a revival in luxury spending after the credit crunch. Sales dropped in 2008 and 2009, when conspicuous consumption was “seen as virtually socially unacceptable,” Hawes said.

Champagne sales as a whole are set to post a decline of 0.9 percent by value this year, the third straight drop, according to Euromonitor research. Volume of the highest-priced champagne segment will continue to grow at a compound annual growth rate of 1.8 percent from 2009 to 2015, according to a report by market researcher International Wine and Spirit Record.

The fall in sales “can pretty much be traced back to Lehman,” Hawes said, referring to the collapse of Lehman Brothers Holding Inc. “At the back end of 2008, if you were going to be drinking a premium brand of champagne you’d better have been doing it on your own in the garden shed.”

Louis XIV

Champagne is produced from grapes grown only in the Champagne region of northeast France. The drink is made from three primary grapes: Pinot Noir, Chardonnay and Pinot Meunier, and gained favor with French kings including Louis XIV, according to Laurent-Perrier’s website, giving it the cachet of being an exclusive, luxury drink.

Paris-based LVMH, the world’s biggest maker of champagne, reported a 22 percent increase in sales in the first nine months of 2010 at its spirits and wine unit and said there was a “good return” of consumer demand for the drink in the third quarter.

The company generates about half of revenue at the unit from sales of champagne brands including bottles of Moet & Chandon and Veuve Clicquot, the bestselling champagnes in the world, according to Euromonitor. The drinks range from about $46 for a bottle of Moet & Chandon’s Brut Imperial non-vintage to $346 for Veuve Clicquot’s 1998 vintage rose “La Grande Dame,” according to thedrinkshop.com.

‘Brand Builders’

Pernod Ricard SA’s champagne unit expected to have a “pretty good Christmas” season after a revival in demand in the third quarter, said Lionel Breton, chief executive officer of the Paris-based maker’s Martell Mumm Perrier-Jouet division. Sales of Perrier-Jouet, which retails for about 32.90 euros in a Paris store, soared 36 percent in the three months to Sept. 30.

“We took a decision not to discount during the crisis,” Breton said in an interview. “We consider ourselves as brand builders and not volume pushers.”

Lanson-BCC, the maker of the Boizel and Lanson brands, reported an 8.5 percent increase in sales excluding a brokerage unit in the first half of 2010, outpacing a 6.7 percent increase in volume. The company, which says it’s the second-biggest champagne producer globally, reported “superior vintages such as champagne Lanson” and export sales had performed better than its secondary brands.

Premium Labels

Laurent-Perrier is selling more premium champagnes, increasing the ratio of those wines sold to 35.1 percent in the first half of its fiscal year from 33.8 percent a year before, it said Dec. 7. Vranken-Pommery Monopole said that the phenomenon of trading down during the recession had faded in the first half of the year, and that the company was seeing a return to big-name brands and prestige cuvees.

That’s in contrast to the lower end of the market, where consumers can find 10-pound ($15) bottles of Charles de Villers at the U.K.’s William Morrison Supermarkets Plc stores and half- priced bottles of Louis Chaurey for 17 pounds at Marks & Spencer Plc.

“It hasn’t really been the Veuve Clicquots, the Laurent- Perriers and the Perrier-Jouets” which have been discounted this year, said Simon Hales, an analyst covering the drinks industry at Evolution Securities in London. “It’s those brands where consumers don’t take any notice of the name on the bottle, and just say ‘buy that because it’s cheap.’”

Firmer Prices

Some champagne producers are still struggling. Remy Cointreau SA, the maker of Piper-Heidsieck champagne that retails for about $30 on wine.com, said Nov. 15 it hired bankers to sell the unit, which is unprofitable even after a 12 percent increase in first-half sales.

Producers are hoping for strong volume sales over the holiday season to give them greater leverage to increase prices in 2011, according to Trevor Stirling, an analyst at Sanford C. Bernstein in London. Champagne may show “more firmness in pricing” if volume improves.

The full effect of the rebound remains to be seen and may not be sustainable, said Spiros Malandrakis, an analyst at Euromonitor. “I don’t think the bounceback is either so solid or has massive potential for growth moving forward,” he said. Discounts on champagne in years past may also have damaged the champagne brand, which may lead consumers to trade down to sparkling wines like cava or prosecco, he said.

That said, “I don’t think it’s necessarily going to cannibalize champagne,” said Evolution’s Hales. Champagne’s “mystique is not going to go away.”

“There’s a kind of magic in champagne,” Breton at Pernod said. “It’s not just sparkling wine; it’s champagne.”

--With reporting by Andrew Roberts in Paris. Editors: Celeste Perri, Sara Marley

To contact the reporter on this story: Clementine Fletcher in London cfletcher5@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

Hungary Takes EU Helm as Orban Asserts Power Over Courts, Media

Posted: 31 Dec 2010 05:13 AM PST

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By Zoltan Simon

Dec. 31 (Bloomberg) -- The European Union’s charter calls for respect for the rule of law, human rights, economic progress and media freedom. Some in Brussels are wondering whether Hungarian Prime Minister Viktor Orban, whose country takes over the rotating EU presidency on Jan. 1, has read it.

In the seven months since Orban came to power with a two- thirds parliamentary majority, he has implemented retroactive taxes in violation of the constitution, curbed the Constitutional Court’s power, effectively nationalized private pension funds and put ruling-party allies in charge of at least four independent institutions, including the audit office.

The measures have been criticized by the Brussels-based European Commission, the EU’s executive body, as has a media law approved this month empowering a new council -- appointed by the ruling party -- to fine or shut down media outlets. The government’s moves to cut the salary of Magyar Nemzeti Bank President Andras Simor and prohibit him from naming outside members to the Monetary Council “raise concerns” about central bank independence, the European Central Bank said Dec. 13.

“The government needs to act now to correct the blot on the country’s international reputation,” Tamas Vahl, president of the German Chamber of Commerce in Budapest, which groups such large investors in Hungary as Audi AG and Robert Bosch GmbH, said in a telephone interview. “Any news that makes investors question their faith in the rule of law in Hungary is dangerous.”

‘Unstable Conditions’

More than a dozen companies wrote to the EU commission expressing concern about “unstable conditions” for foreign investment in Hungary after the cabinet imposed retroactive taxes on the energy, financial, retail and telecommunication industries, Annett Urbaczka, a spokeswoman for German utility company RWE AG, a signatory, said in a Dec. 27 phone interview from RWE headquarters in Essen.

Magyar Telekom Nyrt., controlled by Deutsche Telekom AG, another signatory, will cut dividends because of the taxes, Chief Executive Officer Christopher Mattheisen told a conference in Budapest on Dec. 7. “Uncertainty” about the duration of the so-called crisis tax poses challenges to longer-term investment decisions by management, he said.

The government says the tax is needed to meet budget deficit targets, with the aim of reducing the shortfall to less than 3 percent of gross domestic product next year from a targeted 3.8 percent this year.

Ratings Downgrade

Revenue from pension-fund and industry taxes will provide only a one-time boost, Fitch Ratings said on Dec. 23 as it joined Moody’s Investors Service in downgrading Hungary’s credit to its lowest investment rank. Fitch, Moody’s and Standard & Poor’s all have negative outlooks on Hungary, meaning they are more likely to cut the rating to “junk” than keep it stable.

Since Orban, 47, took office on May 28, Hungary’s credit- default swaps, the price investors demand to insure government debt against default, have risen more than in any other country except Spain and Portugal.

Lajos Kosa, deputy chairman of Orban’s Fidesz party, threw markets in turmoil on June 3 by saying the Hungarian economy had a “slim chance” of avoiding a Greece-like economic crisis. A day later, Orban’s spokesman, Peter Szijjarto, said Hungary was in a “grave situation.”

The comments, less than a month after officials in Brussels had assembled an EU-led rescue package for Greece worth about $927 billion, fed concern that Europe’s debt crisis was spreading and caused the forint to drop to a four-year low against the euro.

Further Enlargement?

Hungary plans to use the six-month rotating presidency to emphasize further EU enlargement and to focus on the issue of the Roma, an impoverished minority group that faces discrimination in Europe. In addition, Orban wants to strengthen the bloc’s ability to respond to the economic malaise, according to the country’s EU presidency website.

The presidency, though, also puts Orban in an international spotlight. The media law could have a “chilling, self-censoring effect on free expression,” according to a Dec. 16 report by the Vienna-based Organization for Security and Cooperation in Europe. Germany called on Orban to “accommodate criticism” from the OSCE, government spokesman Christoph Steegmans said on Dec. 22.

“This could ruin Hungary’s PR during its presidency,” Piotr Maciej Kaczynski, an analyst at the Centre for European Policy Studies in Brussels, said in a phone interview. “It can always turn nasty, but there is no reason for it to turn nasty because there are legal mechanisms to ensure Hungary complies with European norms.”

Voting Rights

Such mechanisms may include taking an issue to the European Court of Justice or suspending a country’s voting rights. The commission probe into whether the media law is in line with European norms is a first step, Kaczynski said.

“You can’t in the role of the EU presidency shake someone’s hand and turn around and tweak some of the most fundamental rights,” Luxembourg Foreign Minister Jean Asselborn said in a Dec. 27 phone interview. “This is about the essence of EU values, the freedom of opinion and expression.”

Hungarian Nepszava news daily and weeklies Elet es Irodalom and Magyar Narancs ran blank cover pages to protest the new Media Council. Its five appointees, all picked by the ruling party, Fidesz, have the power to regulate all media, including newspapers and Internet.

“These decisions, which violate the spirit of democracy, risk making Hungary the black sheep of the union,” Laszlo Kovacs, a former European Commissioner and member of the opposition Socialist Party, told reporters in Budapest yesterday.

No Power Abuse

The Media Council won’t abuse its powers and its fines will be “proportional,” Laszlo L. Simon, a Fidesz lawmaker and head of Parliament’s Culture and Press Committee, told MTI news service on Dec. 28.

Orban says he won’t compromise, echoing his defiance in July of International Monetary Fund recommendations to cut spending and his days as a student leader in 1989, when he called for the exit of Soviet troops from Hungary.

“We are not even considering” changing the media law, Orban told HirTV in a Dec. 23 interview. “I’m not willing to respond to parliamentary debates or Western opinion with shaky legs.”

Orban says his policies will boost the economy, allowing Hungary to “outgrow” its debt burden, the highest at 79 percent of GDP among the 10 central and eastern European countries that have joined the bloc since 2004. And they will help raise Hungary’s employment rate, the second-lowest after Malta at 55 percent.

Constitutional Court

The policies include the curbing of the Constitutional Court’s powers to prevent justices from striking down industry taxes. The court posed a “dramatic risk” to the country’s goal of reducing the budget deficit, Economy Minister Gyorgy Matolcsy said on Nov. 5.

An ultimatum the cabinet gave to 3.3 million people with private pension funds to move their accounts to the state budget by the end of next month or lose their government pensions also serves to cut the debt and the deficit, the government says.

The overhaul is denting Orban’s popularity, though his party retains three times the backers of the biggest opposition party. Fidesz had 33 percent of support among eligible voters in December, down from 37 percent in November, according to a Szonda Ipsos poll taken from Dec. 8-15. The Socialists had 11 percent. Results have a 2.5 percent margin of error.

“Success is the ultimate arbiter,” Orban told reporters in Bratislava on Dec. 14. “If the country achieves its goals, than the decisions that led to that were good ones.”

That doesn’t convince Peter Pataky, leader of the National Association of Hungarian Labor Unions, who says Orban is “sweeping away” independent institutions.

“The problem is not that they have so much power,” Pataky said. “It’s that they’re abusing their power. This is what’s making people afraid.”

--With assistance from Stephanie Bodoni in Luxembourg, Nicholas Comfort in Frankfurt and James Neuger in Brussels. Editors: Anne Swardson, Willy Morris

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

Euro Imbalances Mean 80% Risk Bloc Will See Overhaul, CEBR Says

Posted: 31 Dec 2010 05:13 AM PST

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By Scott Hamilton

Dec. 31 (Bloomberg) -- The likelihood the euro area will exist in its current structure in a decade is 20 percent as governments fail to take sufficient measures to tackle economic imbalances, the Centre for Economics and Business Research said.

The euro region will have another debt crisis by this spring, when Spain and Italy have to refinance more than 400 billion euros ($532 billion) of bonds, CEBR Chief Executive Officer Douglas McWilliams said in an e-mailed note released in London today.

“The euro might break up at this point, though European politicians are normally able to respond to a crisis,” he said. “If the euro doesn’t break up, this could be the year when it weakens substantially toward parity with the dollar.”

The European Union and the International Monetary Fund approved rescue packages for Ireland and Greece this year after concerns about the sustainability of government finances pushed up bond yields. German government bonds advanced yesterday after Italy’s borrowing costs rose at a government debt sale.

“I suspect that what will break up the euro will be the failure of most of the countries to take the tough medicine necessary to make their economies competitive over the longer term,” McWilliams said. “We give it only a 1-in-5 chance of surviving in its present form for 10 years.”

The CEBR’s comments come as part of the group’s “top 10 predictions” for 2011, which include an economic crisis in Japan and no changes in interest rates in the U.S., the euro area and the U.K.

The British housing market will also be “weak” and “prices could even edge down” in the first half, before greater competition among banks to lend pushes down the cost of borrowing, boosting the market, McWilliams said. This will result in values being “much the same at the end of the year as at the beginning,” he said.

--Editors: Jennifer M. Freedman, Eddie Buckle

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

Three Hedge Funds Got Data From Consultant, U.S. Says

Posted: 31 Dec 2010 05:12 AM PST

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By Bob Van Voris, Pamela MacLean and David Voreacos

(Updates with bail hearing in fifth paragraph.)

Dec. 30 (Bloomberg) -- A former Primary Global Research LLC expert-networking consultant was charged by U.S. prosecutors in Manhattan with selling inside information to portfolio managers at three unidentified hedge funds.

Winifred Jiau, arrested in Fremont, California, as part of a national probe of insider trading, was accused of selling data on Nvidia Corp. and Marvell Technology Group Ltd., makers of computer components, through Primary Global, according to a filing yesterday in Manhattan federal court. The hedge funds paid her $200,000 through the firm, prosecutors said.

Jiau, 43, is the seventh person connected to Primary Global to be charged in a U.S. insider trading investigation that has ensnared company employees and consultants.

The Jiau complaint shows prosecutors are gathering evidence of alleged insider trading against hedge fund employees. The probe became public last year with the arrest of Galleon Group LLC hedge fund co-founder Raj Rajaratnam. The FBI recorded thousands of conversations during their investigation of the firm, lawyers said at an October hearing. Rajaratnam, who denies the charges, is scheduled to go on trial in Manhattan next year.

Jiau is charged with one count each of conspiracy to commit securities fraud and securities fraud. She appeared yesterday in San Francisco federal court and was ordered held in custody by U.S. Magistrate Judge Nandor Vadas, who set a hearing for Jan. 12 on whether to transfer her to New York. She is scheduled to appear today to seek release on bail.

‘Strong’ Evidence

The evidence against Jiau is “strong,” Assistant U.S. Attorney Wilson Leung told the judge, adding that there is a “cooperating witness and audio recordings.” When asked by Vadas if she understood the charges, Jiau said “I not have a chance to know until now.” Barry Portman, her assigned public defender, said the complaint is a “lengthy document.” The first count carries a maximum sentence of 20 years in prison.

Prosecutors claim Jiau began getting paid for insider information in September 2006.

In May 2008, Jiau separately gave two hedge fund portfolio managers, one of whom worked for two hedge funds, “on point and accurate” data about the quarterly financial results at Marvell before it was released to the public, prosecutors said. One of the funds netted more than $820,000 in profits based on that inside information, the FBI said.

Jiau also gave quarterly financial data in August 2008 about Marvell to the same two managers, referred to as CC-1 and CC-2 in the complaint.

Inside Data

CC-1 founded a New York entity referred to as Hedge Fund A and CC-2 worked at two separate hedge funds, according to the complaint. A cooperating witness who pleaded guilty, CW-1, began working as a research analyst at Hedge Fund A in March 2008, the FBI said in court papers.

CC-1 told the cooperating witness to get inside data from various co-conspirators, including Jiau, the FBI said. She gave inside information to CC-1 and CC-2, and the cooperating witness listened to their conversations about Marvell, the FBI said.

CC-1 also recorded conversations with Jiau, and the complaint quoted Jiau in conversations about Marvel’s second- quarter earnings that the company announced on Aug. 28, 2008.

When CC-2 asked if she had data yet on the next quarter, she said: “As soon as I get it, I give you guys a buzz,” according to court papers.

CW-1 “understood that Jiau obtained the information about Marvell and Nvidia from a source who was not authorized to disseminate” it, according to the complaint.

‘Expert Consultant’

Marilyn Gerber, a spokeswoman for Primary Global, said in an e-mailed statement that Jiau served as an “expert consultant” with the company from September 2006 to December 2008, declining further comment.

Jiau was the fifth Primary Global consultant arrested in an insider-trading crackdown that also has led to criminal charges against two other employees of the company. One of the consultants, former Dell Inc. supply chain manager Daniel DeVore, pleaded guilty Dec. 10.

On Dec. 16, Federal Bureau of Investigation agents arrested three technology company workers who allegedly sold secrets about Apple Inc., Dell and Advanced Micro Devices Inc. The men, who worked at AMD, Flextronics International Ltd. and Taiwan Semiconductor Manufacturing Co., were arrested on securities fraud and conspiracy charges for a scheme that Manhattan U.S. Attorney Preet Bharara said operated from 2008 to early 2010.

James Fleishman, a sales manager at Primary Global, also was arrested the same day as the three men. If convicted, all four face as long as 20 years in prison.

Leaked Information

DeVore pleaded guilty to conspiracy to commit securities fraud and wire fraud. He said he worked as a paid consultant for Primary Global and, through the firm, accepted money from hedge funds for inside information. At his plea hearing, he said he leaked inside information to clients of Primary Global and New York-based consulting firm Guidepoint Global LLC, according to a transcript.

James Fingeroth, a spokesman for Guidepoint Global in New York, declined to comment yesterday.

The expert-network arm of the Galleon probe was revealed last month with the execution of search warrants at hedge funds on Nov. 22, and the Nov. 24 arrest of Don Ching Trang Chu, another Primary Global employee.

FBI Agents

FBI agents from New York and Boston executed warrants at the offices of Level Global Investors LP and Diamondback Capital Management LLC, hedge funds founded by alumni of SAC Capital Advisors. Agents that day also executed a search warrant at the offices of Loch Capital Management. None of the firms or their employees has been accused of any wrongdoing.

Expert-networking companies such as Mountain View, California-based Primary Global match investors with specialists who provide insight into specific markets. Prosecutors in the case have described in criminal complaints the links among Primary Global, the technology experts it employed and unidentified hedge funds willing to pay for inside information.

Santa Clara, California-based Marvell, which makes chips for the BlackBerry phone, declined to comment on Jiau’s arrest. Bob Sherbin, a spokesman for Nvidia, also based in Santa Clara, said Jiau was a contractor who left the company a year ago, declining further comment.

Lawsuit

A Winifred Jiau filed a sexual-harassment lawsuit against her former employer, San Francisco-based Adteractive Inc., in 2007. The complaint said she has an undergraduate degree from National Taiwan University and a Master’s degree in statistics from Stanford University. The plaintiff in the lawsuit matches the age and northern California residence of the Winifred Jiau charged by prosecutors.

Jiau founded a company that got funding from Intel Corp., according to the lawsuit. In the suit, filed in California Superior Court in San Francisco, the plaintiff claimed she worked as a senior statistician for Adteractive from April to July of 2006, when she was fired after refusing the alleged sexual advances of a supervisor.

According to the civil suit, the plaintiff had “over ten years of work experience building financial and economic models” and she “started her own company that was funded by Intel.”

The case was dismissed on Dec. 29, 2008, after the filing of a notice of a confidential settlement, according to court records. An Adteractive attorney, Aryn Pedowitz, declined to immediately comment on the case.

Theo Emison III, a lawyer who filed the civil suit, said he was unable to say whether his former client is the woman charged yesterday.

Wiretap Recordings

Recorded and wiretapped conversations have been at the center of the Galleon probe and its various arms. Investigators made consensual and wiretap recordings of an unidentified expert-networking firm’s phones, the land lines of an unidentified hedge fund and the mobile phones of two of the men arrested Dec. 16 -- Mark Anthony Longoria, who worked at chipmaker AMD, and Walter Shimoon, formerly of Flextronics, a Singapore-based maker of electronic components -- the U.S. said.

At least two hedge funds are described in the complaint against the men. Neither is identified by name.

The U.S. also made consensual recordings using five cooperating witnesses, had a tap on mobile phones used by Shimoon and Longoria, and recorded conversations at Primary Global in November 2009, a month after Rajaratnam’s arrest, according to court papers.

One Witness

Court papers indicate at least five people have been working with the government in the insider-trading probe. Only one witness was identified by name: Richard Choo-Beng Lee, a former partner at San Jose, California-based hedge fund Spherix Capital LLC. He began cooperating with the U.S. in April 2009, according to court records, providing information to Bharara’s office in the government’s case against Galleon. He pleaded guilty in November 2009.

His partner at Spherix, Ali Far, who also worked as an analyst and portfolio manager at Galleon, pleaded guilty and is aiding the U.S. in the Galleon probe.

The U.S. said Chu established a relationship with Lee and that Spherix paid Chu’s firm, Primary Global, for tips concerning Atheros Communications Inc., Broadcom Corp. and Sierra Wireless Inc., according to the government’s complaint.

At yesterday’s court hearing in San Francisco, Portman told the judge that Jiau is a U.S. citizen and has known about the insider-trading investigation since mid-December. She didn’t attempt to flee when FBI agents arrived at her home, the lawyer said in his argument that she be released.

Leung countered that Jiau is a “flight risk,” and that when agents went to her house, they heard her car running in an attempt to drive off. Leung said the agents found packed luggage inside her house.

Leung said that Jiau claimed she had just returned from a trip to Asia. The prosecutor said her Asia trip took place in October, and that she had traveled to Beijing and returned through Taiwan.

The case is U.S. v. Jiau, 10-Mag.-2900, U.S. District Court for the Southern District of New York (Manhattan).

--With reporting by Lisa Wolfson in San Francisco. Editors: Mary Romano, Michael Hytha.

To contact the reporters on this story: Bob Van Voris in U.S. District Court, Southern District of New York in Manhattan at rvanvoris@bloomberg.net; Pamela MacLean in U.S. District Court, Northern District of California in San Francisco; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

Transocean Challenges Agency Authority to Probe Blast

Posted: 31 Dec 2010 05:12 AM PST

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By Joe Carroll

(Updates with board’s comment in seventh paragraph.)

Dec. 31 (Bloomberg) -- A federal panel that investigated the fatal 2005 Texas refinery blast that resulted in a $50 million fine for BP Plc hasn’t got the authority to probe the company’s April deep-water drilling disaster, according to rig owner Transocean Ltd.

Under federal law, floating rigs are exempt from oversight by the U.S. Chemical Safety and Hazard Investigation Board, Rachel G. Clingman, an attorney for Transocean, said in a letter to the agency obtained by Bloomberg. Transocean owned the Deepwater Horizon that burned and sank after BP’s Macondo well erupted April 20, triggering the worst U.S. offshore oil spill.

The chemical board’s power to investigate accidents aboard permanently moored offshore installations such as oil-production platforms doesn’t extend to rigs, which move from site to site, Clingman, from Sutherland Asbill & Brennan LLP in Houston, said in the letter. While Transocean plans to continue answering questions and providing documents to the chemical board on a voluntary basis, the company won’t respond to subpoenas from the agency, she said.

“Transocean always has sought cooperation over confrontation in responding to reasonable government inquiries,” Clingman wrote to Donald Holmstrom, a chemical board investigator, in the letter dated yesterday. “Please also advise if CSB would like to accept Transocean’s many offers to meet and confer.”

Blowout Preventer

The chemical board is one of several federal agencies and Congressional panels looking into what went wrong when a plume of gas and crude from BP’s well off the Louisiana coast engulfed Transocean’s rig, killing 11 workers, injuring 17 and bringing offshore energy exploration in U.S. waters to a standstill.

In the letter, Vernier, Switzerland-based Transocean also asked the chemical panel to turn over correspondence with U.S. Representatives Henry Waxman and Bart Stupak regarding the rig catastrophe, along with internal board procedures for conducting investigations and interviews. Waxman and Stupak, Democrats from California and Michigan, respectively, helped lead Congressional probes of the disaster.

Daniel Horowitz, a spokesman for the Washington-based chemical board, said the agency has jurisdiction to investigate the incident.

“The source of the flammable gas was the fixed well installation on the seabed, and the Deepwater Horizon itself was also functioning as a fixed facility during the drilling operation,” he said in e-mailed comments.

‘Disappointed’ at Transocean

The board also has broad authority to conduct studies of actual or potential safety issues under its statute. Most companies are cooperating with the board in its investigation, which is non regulatory and is aimed at preventing future accidents, he said.

“We are therefore disappointed with Transocean’s statements and have asked the Justice Department to enforce the CSB’s subpoenas so the investigation can move forward without interference,” Horowitz said.

Last week, the chemical panel criticized a joint U.S. Coast Guard-Interior Department board for allowing employees of Transocean and Cameron International Corp., maker of the blowout preventer installed on the well, to participate in inspections of the device. The preventer, a 50-foot (15-meter) stack of valves, failed to halt the surge of gas and oil when workers attempted to activate it from the bridge of the burning rig.

Public Trust

The chemical board said the involvement of Transocean and Cameron employees created a conflict of interest that “diminishes the credibility of the entire process and jeopardizes the public’s trust in the examination results,” Rafael Moure-Eraso, chairman of the Chemical Safety Board, said in a Dec. 23 letter to Michael Bromwich, who oversees the Interior Department’s Bureau of Ocean Energy Management, Regulation and Enforcement.

In 2005, an explosion occurred at BP’s Texas City, Texas, refinery when an octane-boosting unit overflowed as it was being restarted. The blast killed 15, injured thousands and was powerful enough to shatter windows five miles away. The Chemical Safety Board found numerous safety lapses that created “a catastrophe waiting to happen,” according to John Bresland, the board’s chairman.

--Editors: John Viljoen, Clyde Russell.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net.

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

New York Prepares for First New Year’s Eve Since Bomb Attempt

Posted: 31 Dec 2010 05:06 AM PST

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By Chris Dolmetsch and Peter S. Green

Dec. 31 (Bloomberg) -- New York City is deploying thousands of police officers to Times Square for the first New Year’s Eve since an attempted terrorist bombing in May.

Hundreds of thousands of revelers descend on Broadway and Seventh Avenue to celebrate the year’s end and watch a lighted ball drop from a flagpole atop One Times Square. The tradition began in 1904 and attracts as many as 1 million people, according to the Times Square Alliance, a business-residents group.

The police department will deploy a “counterterrorism overlay” in Times Square, including thousands of uniformed and undercover officers, hand-held and vehicle-mounted radiation detectors, helicopters and elevated observation towers, Police Commissioner Raymond W. Kelly said.

“We always do things a little bit differently,” Kelly said yesterday at a press conference. “We don’t want to get stuck in a rut, so some of our deployments will change.”

There are no specific threats against the city, Kelly said. “I think it will be a safe and happy event,” he said.

The celebration will be the first since Pakistani immigrant Faisal Shahzad attempted to detonate a car bomb in Times Square on the evening of May 1. Shahzad pleaded guilty to the bombing attempt in June and was sentenced to life in prison.

Backpacks, large bags and alcohol will be prohibited in Times Square, and pocketbooks will be inspected as revelers enter fenced-in viewing zones, the Police Department said in a statement.

About 1,200 police recruits who graduated last week will be deployed in the area.

43rd to 59th

As more people arrive, new zones will be opened from 43rd Street as far north as 59th. Those who leave their areas before midnight won’t be allowed back, the police said.

“I, for one, am going to be there,” New York Mayor Michael R. Bloomberg said yesterday. “At least one of my children is going to be there. And I expect to have a great time.” The mayor is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

There is no parking on east-west streets from 33rd to 59th streets and from Sixth to Ninth avenues until 1 a.m. tomorrow. Parking on most north-south avenues in the area will be restricted, the police said.

Times Square will be closed to vehicles starting at 3 p.m., and people are being encouraged to take public transportation to the area. Some subway entrances near Times Square will be closed starting at about 7 p.m.

Subway Service

Southbound and northbound N, R and W trains will skip the 49th Street station from 7 p.m. until tomorrow at 12:15 a.m., and the No. 1 train will skip the 50th Street station in the same period.

The police department will monitor other events tonight as well, such as fireworks displays at the Statue of Liberty and Prospect Park in Brooklyn, a four-mile (6.4-kilometer) run in Central Park and almost three dozen dinner cruises on city waterways, Kelly said.

Milder weather may bring more visitors, said Tim Tompkins, president of the Times Square Alliance. Most of the 20 inches of snow that fell on New York last weekend has been removed from the area, he said.

Today is forecast to be mostly sunny, with a high temperature near 43 degrees Fahrenheit (6 degrees Celsius) followed by a mostly clear night with a low of about 32, according to the National Weather Service.

“Generally the biggest indicator of how many people show up and also how early they show up is whether it’s bone-chilling cold or a little bit warmer,” Tompkins said. “It does look like relative to the season it’s going to be warmer. Usually that means the crowds fill up a little quicker and a little earlier.”

The fears of a terrorist attack are “no greater or less than in previous years,” he said.

“NYPD is the best law enforcement agency anywhere for dealing with huge events in a high-profile place,” he said.

Most of the 20 inches of snow that fell on New York last weekend has been removed from Times Square, he said.

--Editors: Charles Carter, Patrick Oster

To contact the reporters on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net; Peter S. Green in New York at psgreen@bloomberg.net.

To contact the editors responsible for this story: David E. Rovella at drovella@bloomberg.net; Mark Tannenbaum at mtannen@bloomberg.net.

Most Asian Stocks Rise as U.S. Jobless Claims Fall; BHP Slips

Posted: 31 Dec 2010 05:05 AM PST

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By Anna Kitanaka and Shani Raja

Dec. 31 (Bloomberg) -- Most Asian stocks rose, with the MSCI Asia Pacific excluding Japan Index on course for the seventh annual increase in eight years, after improved U.S. data boosted confidence in the global economic recovery.

MediaTek Inc., Taiwan’s largest chip designer, gained 2.5 percent in Taipei as jobless claims fell and business grew in the U.S. Chunghwa Picture Tubes Ltd., which makes television parts, jumped 6.9 percent after announcing an investment plan in China. BHP Billiton Ltd., the world’s biggest mining company, lost 1.3 percent in Sydney after the price of crude oil fell the most in a month.

“Investor confidence has swung back to a view that the global recovery is on track,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Ltd., which manages about $90 billion. “Despite lingering concerns, it should continue with some solid earnings gains. Global liquidity is plentiful, while companies are cashed up, boosting the prospects for mergers and acquisitions, dividend increases and buybacks.”

The MSCI Asia Pacific excluding Japan Index climbed 0.3 percent to 478.83 as of 8:09 p.m. in Hong Kong, with about eight stocks advancing for every seven that fell. The gauge is on course for a 6.7 percent gain this month and has climbed 15 percent this year on speculation that growth in corporate profits will weather Europe’s debt crisis, Chinese steps to curb inflation and concern about the pace of the U.S. economic rebound.

Regional Benchmarks

Australia’s S&P/ASX 200 Index fell 0.9 percent while New Zealand’s NZX 50 Index declined 0.8 percent. Taiwan’s Taiex index gained 0.8 percent, while Singapore’s Straits Times Index fell 0.7 percent. Hong Kong’s Hang Seng index advanced 0.2 percent, and China’s Shanghai Composite index rose 1.4 percent.

The Shanghai gauge’s advance for a third day narrowed its decline for the year to 15 percent, the worst performer among the 14 largest world benchmark indexes, according to data compiled by Bloomberg.

Markets in Japan, South Korea, Indonesia, the Philippines, Malaysia and Thailand are closed today for the New Year holidays. Markets closed early in Hong Kong, Australia, New Zealand and Singapore today.

Futures on the U.S. Standard & Poor’s 500 Index fell 0.1 percent today. The gauge lost 0.1 percent yesterday after its highest valuation since June overshadowed reports showing a drop in jobless claims, the fastest business expansion in two decades and a gain in pending home sales.

Taiwan Tech Companies

Taiwanese information technology companies were amongst the biggest supporting stocks on the MSCI Asia Ex-Japan index.

MediaTek gained 2.5 percent to NT$417.5 in Taipei. Advanced Semiconductor Engineering Inc., the world’s No. 1 chip packaging and testing company, rose 4.5 percent to NT$33.75. Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker which receives 58 percent of its revenue from America, climbed 0.6 percent to NT$71.

In the U.S., first-time filings for unemployment insurance decreased by 34,000 to 388,000 in the week ended Dec. 25, compared with the median forecast of 415,000 in a Bloomberg News survey, Labor Department figures showed. A separate report showed businesses in the U.S. grew 68.6 in December at a faster pace than forecast, a sign the world’s largest economy was accelerating heading into 2011.

‘External Problems’

All 10 industry groups in the MSCI Asia Ex-Japan index have risen this year, led by consumer discretionary, industrial and healthcare companies.

“This year we’ve done OK as our picks in the consumer sector have performed well,” said Pauline Dan, Hong Kong-based chief investment officer at Samsung Asset Management, which oversees about $72.1 billion in assets. For 2011, “external markets still face problems that haven’t been resolved. Even economic recovery doesn’t mean everything is rosy and positive.”

Chunghwa Picture Tubes jumped 6.9 percent to NT$4.66, the third-biggest increase on the MSCI Asia Ex-Japan index. The company said it will set up a touch-panel manufacturing base in Fuzhou, China with full production to commence by May.

Raw material producers fell the second-most among the 10 industry groups on the MSCI Asia Ex-Japan index today.

BHP led declines by Australian mining companies, falling 1.3 percent to A$45.25. BHP was the biggest support for both the MSCI Asia Ex-Japan gauge, and the MSCI Asia Pacific Index this year. Rio Tinto Group, the world’s third-biggest miner, lost 0.3 percent to A$85.47. Energy World Corp., a producer of oil, natural gas and power, slid 3.4 percent to 57 Australian cents.

Crude oil for February delivery declined as much as 0.4 percent to $89.48 a barrel on the New York Mercantile Exchange. Prices, which have increased 13 percent since Dec. 31, 2009, are poised to end the year at the highest level since 2007.

PT Charoen Pokphand Indonesia, Indonesia’s biggest producer of chicken feed, posted the biggest gain on the MSCI Asia Ex- Japan index this year, surging 309 percent to 1,840 rupiah on Dec. 30, the final day of trade for the year in Jakarta. The company said in October that nine-month net income jumped 50 percent to 1.6 trillion rupiah.

--With assistance from Hanny Wan in Hong Kong. Editor: Nick Gentle.

To contact the reporters on this story: Anna Kitanaka in Tokyo at akitanaka@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

GDF Said to Study IPO for Oil, Gas Production Unit

Posted: 31 Dec 2010 05:04 AM PST

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By Nicholas Comfort, Brett Foley and Tara Patel

(Adds share price in fifth paragraph.)

Dec. 31 (Bloomberg) -- GDF Suez SA, operator of Europe’s largest natural-gas network, is studying a plan to sell shares or a minority stake in its oil and gas production business, according to three people with knowledge of the matter.

GDF Suez may soon hire an investment bank to manage an initial public offering or help find a buyer for the stake, said one of the people, who declined to be identified because the plans are private. The shares may be sold in London or Paris, one of the people said.

Armelle Dillar, a spokeswoman for Paris-based GDF Suez, declined to comment.

The former French gas monopoly led by Gerard Mestrallet plans to sell between 4 billion euros ($5.3 billion) and 5 billion euros of assets over two years following this year’s deal to take control of International Power Plc. The combination will create the world’s second-biggest power producer and follows the 2008 merger between Gaz de France SA and Suez SA.

GDF Suez pared losses and was trading down 19 cents at 27.05 euros at 12:35 p.m. Paris time. The shares have dropped 11 percent this year, giving the utility a market capitalization of about 61 billion euros.

GDF Suez has said it is seeking to raise crude oil and gas reserves to 1.5 billion barrels of oil equivalent, mainly through external growth. The stake sale could be a way to raise cash to reduce debt and for investment in exploration and production projects, one of the people said.

GDF Suez is operator of the North Sea Gjoea field, estimated to hold 82 million barrels of oil and condensate and 40 billion cubic meters of gas. GDF holds a 30 percent stake, Statoil ASA 20 percent, Petoro AS 30 percent, Royal Dutch Shell Plc 12 percent and RWE AG 8 percent.

Greenland Exploration

The French utility is in a consortium with Shell and Statoil for gas and oil exploration licenses in Greenland waters as well as having projects in Australia, Algeria, Qatar and a shale gas exploration permit in southern France. GDF Suez wants to develop technical expertise in so-called unconventional and tight gas in Europe, including Germany and eastern Europe, vice- chairman Jean-Francois Cirelli said in May.

The French utility said in November exploration and production sales were “practically stable” with a drop in total hydrocarbon production to 24.6 million barrels of oil equivalent at the end of September compared with 26.1 million barrels of oil equivalent the previous year.

Mestrallet earlier this year cut his forecast for 2011 earnings growth because demand for natural gas may not recover as quickly as expected following the economic slump and a “historic” drop in demand.

In August, GDF Suez agreed to join its units outside Europe and assets in the U.K. and Turkey with those of U.K.-based International Power, creating a London-listed electricity producer that’s majority owned by GDF Suez.

GDF Suez’s net debt was 31.8 billion euros at the end of September, down by 1.7 billion euros from three months earlier, the company said last month.

--Editors: Will Kennedy, Jeff St.Onge.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net; Tara Patel in Paris at tpatel2@bloomberg.net.

To contact the editors responsible for this story: Jeff St.Onge at jstonge@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net

Clearwire Chair Craig McCaw to Quit Today

Posted: 30 Dec 2010 09:07 PM PST

Canadians Spend Like Crazy Americans

Posted: 29 Dec 2010 02:00 PM PST

Business News: The Health-Care Act on Trial

Business News: The Health-Care Act on Trial

The Health-Care Act on Trial

Posted: 29 Dec 2010 02:00 PM PST

Doctors Getting Rich with Fusion Surgery Debunked by Studies

Posted: 30 Dec 2010 04:46 AM PST

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By Peter Waldman and David Armstrong

Dec. 30 (Bloomberg) -- Suffering from an aching back, truck driver Mikel Hehn went to see surgeon Jeffrey Gerdes in 2008. The St. Cloud, Minnesota, doctor diagnosed spinal disc degeneration, commonly treated with physical therapy, and said surgery wasn’t called for.

Unhappy with the answer, Hehn turned to Ensor Transfeldt, a surgeon at Twin Cities Spine Center in Minneapolis. Transfeldt performed fusion surgery on Hehn, screwing together three vertebrae in his lower spine.

Fusion aims to limit painful spine movements. This one didn’t work out. Two years later, the pain in Hehn’s neck, lower back, buttocks and thighs is so bad that he can’t hold a job and seldom leaves home, he said in an interview.

“There’s days when I just can’t take it and the tears run,” said Hehn, 52, who lives in Sartell, Minnesota. He said he takes oxycodone for pain, Soma to sleep, Lexapro for depression and Imitrex for headaches.

Hehn’s surgery generated a $135,786 bill from Abbott Northwestern Hospital in Minneapolis, feeding a national boom in costly fusion surgeries. It also illustrates how spine surgeons have prospered from performing fusions, which studies have found to be no better for common back pain than physical therapy is -- and a lot more dangerous.

The number of fusions at U.S. hospitals doubled to 413,000 between 2002 and 2008, generating $34 billion in bills, data from the federal Healthcare Cost and Utilization Project show. The number of the surgeries will rise to 453,300 this year, according to Millennium Research Group of Toronto.

Unnecessary Surgeries

The possibility that many of these and other surgeries are needless has gotten little attention in the debate over U.S. health care costs, which rose 6 percent last year to $2.47 trillion. Unnecessary surgeries cost at least $150 billion a year, according to John Birkmeyer, director of the Center for Healthcare Outcomes & Policy at the University of Michigan.

“It’s amazing how much evidence there is that fusions don’t work, yet surgeons do them anyway,” said Sohail Mirza, a spine surgeon who chairs the Department of Orthopaedics at Dartmouth Medical School in Hanover, New Hampshire. “The only one who isn’t benefitting from the equation is the patient.”

The Twin Cities Spine bill for Hehn’s surgery was $19,292, his medical records show. The firm received $8,978 after an insurance discount, $7,742 of it for Transfeldt’s services. Hehn’s insurer paid after his bid for workers’ compensation coverage was denied on grounds he wasn’t injured on the job.

Royalties, Consulting Fees

Another beneficiary was Medtronic Inc., which makes products for spinal surgery, including Infuse, a bone-growing material widely used in fusions. Infuse accounted for $17,575 of Abbott Northwestern’s charges, Hehn’s medical bills and insurance records show.

Infuse, approved by the U.S. Food and Drug Administration in 2002, had sales of $840 million last year.

Medtronic paid six of the 10 Twin Cities Spine surgeons -- including Transfeldt -- $1.75 million in royalties and consulting fees in the first nine months of this year. It also makes other financial contributions to the firm.

“Product usage is not a part of any development or consulting relationship” between Medtronic and doctors, said Brian Henry, a company spokesman.

Eleven Twin Cities Spine fusion patients, most of whom tried to get or hold onto coverage benefits through the Minnesota Workers’ Compensation Court of Appeals, said in interviews that the surgery did nothing to relieve their back pain, and in several cases left them worse off than before.

Hooked on Morphine

The patients illustrate the costs and risks of fusion surgery. They are not a scientifically representative sample of Twin Cities Spine patients, the majority of whom the firm says are happy with the treatment they receive.

One of the 11 died of a methadone overdose when his pain worsened after surgery and he couldn’t afford prescription painkillers, his mother said. Another patient said he is hooked on morphine to ease the burning sensation in his back where screws and rods were implanted in an operation that cost his insurer $60,000.

Twin Cities Spine performs fusions on patients with conditions the surgery doesn’t treat effectively, said Brian Nelson, an orthopedic surgeon and medical director of a Minneapolis clinic that stresses exercise for back pain. Nelson said he used to perform fusions and has been in the operating room with at least three of the 10 Twin Cities Spine surgeons.

“I have a lot of respect” for the practice and its surgical skills, Nelson said. “But we have a fundamental disagreement. I think there are too many people being fused.”

Risk Warnings

Payments by medical-device makers pose an “irresistible” temptation to tailor treatment to more-lucrative procedures, said Eugene Carragee, chief of spine surgery at Stanford University in Palo Alto, California. “There is precious little in human nature to suggest this proposition is unlikely.”

Twin Cities Spine believes in a “conservative course of treatment in the vast majority of cases,” according to an e- mailed statement from Lisa Arrington, the practice’s marketing director. There are some people for whom surgery is appropriate, she wrote, and numerous patients “have experienced successful outcomes from spinal fusion procedures,” regaining functionality. The operations “reduced pain and improved their quality of life,” she said.

The firm declined to comment on individual patients, and did not make the doctors who treated them available for comment. Twin Cities Spine surgeons routinely warn of potential surgical risks, including nerve damage, blood clots and the need for more surgery, according to letters provided by several patients.

Degenerative Disc Disease

Financial relationships with medical companies are disclosed to patients and do not influence whether surgery is performed, according to the statement from Arrington. Royalties are not received by Twin Cities Spine doctors on devices they use in surgery, the e-mail said.

Fusion has helped spine surgeons become the best paid doctors in the U.S. Their average annual salary is $806,000, more than three times the earnings of a pediatrician, according to the American Medical Group Association, a trade organization for doctor practices.

One of the most common causes of back pain is degenerative disc disease, or the breakdown in the soft, puck-shaped cushions between the vertebrae. Pain also comes from a condition called stenosis, or the narrowing of the spinal canal, which can be caused by bulging discs or arthritis.

Narcotics For Pain

British and Norwegian researchers found fusion no better than physical therapy for disc-related pain in three studies, totaling 473 patients, published in the journals Spine, Pain and the British Medical Journal between 2003 and 2006. A 2001 Swedish study of 294 patients in Spine found fusion better than physical therapy that was less structured than the kinds used in the other studies.

Rates of complications from surgery in three of the European studies -- including bleeding, blood clots, and infections -- were as high as 18 percent. None reported complications from physical therapy. The four studies are cited in journals as the only head-to-head, randomized comparisons between the two treatments.

In a U.S. study in Spine in 2007, surgeons reported fusion was successful in only 41 percent of 75 patients suffering from lower-back disc degeneration. Success measures included pain reduction. Two years earlier in the same journal, surgeons found a 47 percent success rate among 99 patients, 80 percent of which were taking narcotics for pain two years later. Both studies compared fusion to artificial disc replacement in trials submitted to the FDA.

Evidence ‘Lacking’

Evidence that fusion is better than a simpler procedure called decompression for stenosis is “lacking,” a study in the Journal of the American Medical Association found earlier this year. The study also found that fast-growing complex fusions -- those joining more than three vertebrae -- carried a 5.6 percent risk of life threatening complications, more than double the 2.3 percent rate for decompression, which usually involves cutting away damaged discs or bone pressing on spinal nerves.

Twin Cities Spine performs 3,000 spine surgeries a year, 1,300 of them fusions, and accounts for 75 percent of the spine operations at Abbott Northwestern, according to Daryll Dykes, a surgeon in the practice. More than 4,000 spine procedures a year are performed at Abbott Northwestern, the most of any U.S. hospital, according to its website.

The practice generates big bills. Medica Health Plans, one of Minnesota’s largest insurers, says it pays a median of $26,021 for back surgeries performed by Twin Cities Spine, including hospital and doctor fees. The medians range between $12,814 and $23,546 for all other spine and orthopedic practices in the area, Medica says.

Porsches, Ferrari, Mercedes

One Twin Cities Spine surgeon, Manuel Pinto, 56, earned $1.85 million from the practice in 2007, according to filings in his divorce proceedings that year. He told state superior court in Minneapolis that he and his wife’s assets included two Porsches; a Ferrari 430 coupe; a Mercedes Benz; two other cars; three boats and proceeds from the $1 million sale of a farm where the Pintos bred Lusitano horses.

Pinto’s 7,185-square-foot house presides over a wooded promontory on Lake Minnetonka. Valued at $4 million in 2007, the house has a swimming pool and 50 yards of beach.

In addition to Transfeldt, Pinto is one of the six surgeons who receive payments from Medtronic. The others are Francis Denis, Timothy Garvey, Joseph Perra and James Schwender.

Schwender, 44, earned $1.2 million from the practice and $440,000 from royalties and consulting in 2008, divorce filings show. Schwender bought his lakefront home outside Minneapolis for $2.6 million in 2005, according to real estate records.

‘90 Percent Success’

Twin Cities Spine performed 1,100 lumbar, or lower-back, fusion surgeries in 2009, Dykes said. Of those, he added, 380 patients had degenerative disc disease and another problem such as stenosis, and 282 had degenerative disc disease alone.

Twin Cities Spine doesn’t have any scientifically validated studies on the success of fusion for those in the latter group, Dykes said. He called them “the controversial patients.”

Spinal fusion on back-pain patients is performed as a last resort after less invasive treatments fail, he said. Measuring outcomes has been difficult because researchers, doctors and payers can’t agree on criteria for success, he said.

“Living Well With Back Pain,” a 2006 consumer guide produced by Twin Cities Spine and published by HarperCollins, states that, “With proper patient selection and optimal surgical techniques, the success rate for spinal fusion surgery for back pain is now about 90 percent.”

Two-Level Surgery

A letter from Pinto to patient Robin Washburn in 2005 said surgery offered “a very good chance” of success, adding that a “good to excellent outcome” would mean at least a 70 percent reduction in pain.

Two spinal fusion surgeries later, her back is worse than ever, said Washburn, who is 40 and a 911 dispatcher in Grand Rapids, Minnesota. Washburn’s insurer, Blue Cross Blue Shield of Minnesota, paid $80,000 for the two procedures.

“Before it was annoying. Now, it’s pain every day, all day, worse when it’s cold,” she said in an interview.

Ninety-eight percent of Twin Cities Spine’s post-operative patients who responded to a 2009 survey would choose or recommend the group for surgical care, according to Arrington’s e-mailed statement. She said about a third of patients responded to the survey.

Patients that the practice recommended to Bloomberg News for interviews reported being happy with their surgeries. One of them, Jody Rasmusson, 48, of Minneapolis, underwent her second spinal surgery in three years by Dykes in October 2009. One year after the two-level fusion and decompression, the shooting pain in her back and legs was gone, said Rasmusson, a bank customer- service agent. A level is the space between two vertebrae; a two-level surgery means three vertebrae were fused.

Playing Football

Before Robert Gumatz, 60, had a five-level spinal fusion by Dykes in November 2009, the grain-company manager had so much back and hip pain he was losing the use of his legs, he said. He had stopped playing soccer with his kids and taking nightly walks with his wife. A year later, “I can play tackle football if I want to,” said Gumatz, of Oakdale, Minnesota. “I know I’m an exception. I have no pain.”

For 50 years, surgery was a calling at Twin Cities Spine. Led by surgeon John H. Moe, a pioneer in correcting scoliosis, or abnormally curved spines, the group’s doctors rebuilt the twisted backs of children with polio and other malformations -- vertebra by vertebra.

They traveled at least 90 days a year, often paying their own way, to show doctors around the world how to mend childhood spinal deformities, said David Bradford, who spent 20 years at the practice before becoming chair of orthopedics at the University of California at San Francisco in 1991.

Adapting Fusion

At home, Bradford said surgeons operated weekly at Gillette Children’s Hospital in St. Paul, Minnesota, usually for free. “‘It was just what you did; that’s why we became doctors,” said Bradford, now a professor and chair emeritus at UCSF’s spine center. “We weren’t in medicine to make gazillions.”

While senior surgeons continue to research and treat crippling disease, Pinto and other protégés have also adapted the fusion techniques Moe pioneered to surgery for common back pain, said Robert Winter, the firm’s research director.

Twin Cities Spine surgeons published articles on fusion techniques for back pain and presented results at professional meetings. Its financial relationship with Medtronic, the largest maker of spinal implants in the U.S., began as early as 2002, when, according to a deposition by Pinto, he began receiving money from the company, which is based in Fridley, Minnesota.

Medtronic Money

In addition to the $1.75 million it paid the six Twin Cities Spine surgeons this year, Medtronic and three other device companies give the practice a total of $100,000 to $500,000 for a fellowship program, Arrington said. Twin Cities Spine calls it the largest such program in the country and says it has trained 140 spine surgeons.

Medtronic also has disclosed contributing $150,000 in 2008 to a non-profit that Schwender heads to spread the use of minimally invasive surgical devices. The contribution represented 95 percent of the non-profit’s expenses that year, according to the organization’s latest-available tax filings.

In 2004, Pinto was seeing Jean Kingsley, 57, a patient who had had two previous fusion surgeries and was still suffering back pain. Pinto told her, according to a hospital report he wrote, that more “surgical treatment could provide her with some relief of her pain” if her symptoms “were extremely severe, unrelenting” and had “failed extensive conservative care,” which “appeared to be the case.”

Not Negligent

Her third operation, a daylong procedure by Pinto in September of that year, fused 13 vertebrae along her entire spine and was a disaster. Kingsley, of Milaca, Minnesota, returned home paralyzed from the waist down, according to hospital records in a lawsuit she brought against Pinto. A jury in Minnesota state court found earlier this year that Pinto was not negligent in the case.

The judge awarded $46,616 in attorney’s fees to Pinto, which Kingsley said she can’t pay. She has appealed the decision. Her case is a “unique set of events for which even in retrospect there is no obvious explanation that one can prove,” Pinto said in his 2008 deposition, in which he estimated he performed 400 to 500 back surgeries a year.

Abbott and Twin Cities Spine billed a combined $239,000 for the surgery, Kingsley’s records show. Insurer Medica says it paid about a third of that amount after a discount.

Kingsley arrived home in a wheelchair, wore a diaper for two and a half years and had a home health aide visiting to bathe her in bed, she said in a deposition in the case. As her condition improved, she said she was able to move short distances with the aid of leg braces and a walker.

‘I’m Paralyzed’

Today, Kingsley lives alone after the 2008 death of her husband. She said she takes medication for depression and doesn’t do “much of anything,” usually watching television and reading, and lives off Social Security benefits from her husband’s death. “Now I don’t feel any pain,” Kingsley said in an interview. “I’m paralyzed.”

Pinto co-authored a study in Spine in 2009 on 125 of his patients who had, like Kingsley, undergone fusions of four or more vertebrae. The study, which a Twin Cities Spine fellow presented at six surgical conferences around the globe, concluded that patients with extensive degenerative pain “can be successfully treated with surgical intervention.”

The Pinto study showed why back-pain patients should avoid spinal fusions, said Stanford University’s Carragee. The paper tracked progress in only 80 of the 125 surgical patients; “what happened to the other 45 patients?” Carragee asked.

Lifting a Keg

Twenty-seven of the 80 patients needed a second surgery, while about 40 percent of the patients had complications, including 5 percent of the men who suffered permanently diminished sexual function, Carragee said.

“This should make you pretty cautious about doing this kind of stuff,” he said.

Twin Cities Spine, in its statement, said Pinto’s study was the first to report on such extensive fusion surgery for degenerative back pain, an operation it said “is in no way comparable” to less complicated procedures.

Schwender first performed fusion surgery on Catherine Engels in May 2001, after finding she had a herniated disc. She came to see him again on June 4, 2003, complaining of sharp back pain, her medical records show.

Engels, now 50, received Schwender’s support for a workers’ compensation claim, in which she said she injured her back lifting a keg at a liquor store where she worked in July 2000. Schwender said in a deposition that the incident was “a significant contributing factor” to Engels’s back problems.

‘Constant, Sharp Pain’

The workers’ compensation judge rejected her claim, finding “multiple significant inconsistencies” between her and Schwender’s testimony, on one side, and the medical records submitted by six doctors Engels saw before Schwender, on the other. Two of those doctors said Engels hadn’t attributed her back pain to any specific injury, and others said Engels attributed the pain to lifting patio brick, the judge found.

Schwender operated a second time on Engels in January 2004, removing the screws and rods he’d put in her spine and decompressing the spinal canal. It didn’t help. By then, Schwender told Engels, the rods and screws had shifted and caused permanent nerve damage, she said in an interview. Now she has “constant, sharp pain” down her left leg, treated with drugs and a neurostimulator in her back designed to send out current that interferes with pain signals.

“I went through with fusion thinking it would be the cure- all,” Engels said. “It wasn’t.”

OxyContin, Hydrocodone, Elavil

Dan Bebault was suffering from lower back and leg pain when he visited Twin Cities Spine’s Garvey in May 2006. Garvey discussed surgery with him and told him he’d “likely” be able to return to light work three to six months afterwards, according to Bebault and notes Garvey made on the case. “He pretty much talked me into it,” Bebault said.

The fusion took place in August that year. When Bebault returned to see Garvey five months later, he said, his life was falling apart. The pain had spread to his neck and arms, and OxyContin, hydrocodone and Elavil weren’t helping much. Bebault’s wife had left him after the surgery; he hadn’t worked in four years.

Garvey wasn’t sympathetic, said Bebault, a 53-year-old former machinist who lives in Brooklyn Park, Minnesota. “He said my life was like an old country-western song and he didn’t want to hear about it,” Bebault said in an interview at his home. “He said come back if I want more surgery.”

Methadone Overdose

Additional fusion surgery for Bebault’s neck “would be an option,” Garvey’s chart notes from this time say. Bebault, now reunited with his wife and on Social Security disability, decided against more surgery and quells the pain in his back and neck with 120 milligrams a day of morphine, plus occasional vicodin, valium and amitriptyline, an anti-depressant.

He said he feels “withdrawals” when his morphine wears off, shaking and sweating. His surgery cost his former employer’s workers’ compensation insurer $48,633; Garvey’s fee was $5,870.

“The patient is like a piece of meat; everybody’s making money off the guy,” Bebault said.

Garvey did a three-level spinal fusion on Ross Tamminen in April 2006. Six months later, Tamminen, a heavy-equipment operator, reported severe pain again in his back and legs, according to documents from a case in state workers’ comp court.

As a treatment option, Garvey proposed more surgery to examine the fusion site, remove the implants in Tamminen’s spine, and perform decompression. His employer’s insurer denied a coverage request, saying surgery wasn’t warranted, according to court filings.

The rest of the story comes from Tamminen’s mother, Barbara Grove. Denied federal disability benefits and in intractable pain, Tamminen ran out of money for painkillers, she said, and began taking methadone obtained through friends.

He died of an overdose on June 20, 2008, 26 months after spinal fusion. He was 41.

--Editors: Gary Putka, Anne Reifenberg

To contact the reporters responsible for this story: Peter Waldman in San Francisco at pwaldman@bloomberg.net; David Armstrong in Boston at darmstrong16@bloomberg.net

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net

Facebook's Russian Campaign

Posted: 29 Dec 2010 08:00 AM PST

AstraZeneca's Risky Bet on Drug Discovery

Posted: 29 Dec 2010 08:00 AM PST

Wussy White House Needs Good Snowball Fight: Margaret Carlson

Posted: 30 Dec 2010 04:49 AM PST

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By Margaret Carlson

Dec. 30 (Bloomberg) -- Pennsylvania Governor Ed Rendell’s romp through the media following the cancellation of the Philadelphia Eagles-Minnesota Vikings football game shows why he is often mentioned as just the person to bring the rarefied West Wing of the White House down to Earth.

Having trouble connecting with real people over there in the Oval Office? Rendell’s a human switchboard -- and he’s available starting next month, when his term as governor ends.

His latest pronouncement came on Sunday after the National Football League’s rare postponement of a game due to a forecast of snow. In Rendell’s world, real men live to make a touchdown in the snow.

“This is football. Football’s played in bad weather,” Rendell said before the storm struck his city on Sunday but after the NFL had postponed the Sunday-night game. He predicted the major roads would stay open throughout the storm.

In a welter of other interviews, he waxed nostalgic over great games played under the worst conditions, from the 1967 NFL Championship game (the “Ice Bowl” in Green Bay) to the 2002 New England Patriots-Oakland Raiders “Tuck Rule” game to this month’s match between the Patriots and the Bears in Chicago.

Rendell is one of the few unmanaged politicians left. If he hadn’t been Philadelphia district attorney, then mayor for two terms, then Pennsylvania governor since 2003, Rendell might well have been a sports broadcaster. Oh, wait a minute! He is a sportscaster, giving commentary on Comcast SportsNet following Eagles games for years.

Snowing, Crowing

As the snow continued on Sunday, he didn’t stop at gloating that every roadway had been “treated, plowed and passable.” Grandmothers in Buicks could have handled the Schuylkill Expressway. “Not one accident,” Rendell crowed.

By Monday, the NFL’s decision to postpone the Eagles- Vikings game stood for, well, everything that ails us.

“We’ve become a nation of wusses,” Rendell declared. “The Chinese are kicking our butt in everything. If this was in China do you think the Chinese would have called off the game? People would have been marching down to the stadium, they would have walked and they would have been doing calculus on the way down.”

Though his football remarks got the most attention in our sports-crazed culture, the throw-away line about China provided the legs that carried the story to “NBC Nightly News” and the BBC. Just this month, U.S. education officials were surprised by a report that showed students in China outperforming American kids by a wide margin in reading, math and science.

Trophies for All

Pre-wussification, we were an economic powerhouse, and our children were the best-educated in the world, until we decided to sheathe our little princes and princesses in bubble wrap. We give them graduation ceremonies for getting through nursery school, a trophy just for showing up at soccer. We’ve removed play from the playground to keep them from scraping a knee. We intervene like lawyers in every dispute.

At school, where the teacher should always be right, parents quibble over grades and behavior and prefer longer summer vacations to a longer school year, the norm in other countries.

In Shanghai’s schools, which topped the international test results, neatly dressed and engaged students work long hours on a curriculum that is creative and intellectually rich. Take no comfort in the belief that they study to the test; that’s what we do now, to try to get accountability into a broken system.

Americans-as-wusses was a disturbing thought to drop on a holiday-dazed country, but Rendell is known for going rogue, even on himself.

Conceding 2000

Despite loving sports, he isn’t always a team player. He bucked his party’s establishment and their handpicked candidate when he ran for governor. He happened to be on television when the Supreme Court ruled in Bush v. Gore and said immediately that Al Gore should concede the 2000 presidential election.

During the 2008 campaign, referring to the space between Philadelphia and Pittsburgh -- known locally as Alabama -- Rendell blurted out that his state was full of “conservative whites” who were “probably not ready to vote for an African- American candidate.”

He became an enthusiastic supporter of that African- American candidate, Barack Obama, helping to deliver his swing state. But when Obama appointed Rendell’s good friend, former Arizona Governor Janet Napolitano, as Homeland Security secretary, he delivered this observation: “Janet’s perfect for that job. Because for that job, you have to have no life. Janet has no family. Perfect.”

He meant it as a compliment. Really.

Not Connecting

The criticism of Obama’s West Wing is that it is an elite, inbred crowd -- a little wussy, perhaps -- that fails to connect with people even when it delivers the goods, as it did in the final days of the lame-duck Congress. Rendell, a cross between a steelworker and a linebacker, could be a one-man corrective.

After he moves his sports memorabilia and his two golden retrievers out of the governor’s mansion in Harrisburg, the only job he tells friends he’s really interested in is commissioner of Major League Baseball.

When asked on TV about whether he might fill Rahm Emanuel’s shoes as White House chief of staff, Rendell’s reply is always that the best man for the job is Colin Powell. When Colin Powell is asked about it, he says the perfect choice would be Ed Rendell.

Gentlemen, let’s toss a coin and decide.

(Margaret Carlson, author of “Anyone Can Grow Up: How George Bush and I Made It to the White House” and former White House correspondent for Time magazine, is a Bloomberg News columnist. The opinions expressed are her own.)

--Editors: Laurence Arnold, Charles W. Stevens.

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this column: Margaret Carlson in Washington at mcarlson3@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

Private Trades of Facebook Spur Questions About Transparency

Posted: 30 Dec 2010 04:47 AM PST

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By Inyoung Hwang

Dec. 29 (Bloomberg) -- Private trading that helped spur paper gains of 50 percent or more in companies such as Facebook Inc. and Twitter Inc. is raising questions about how much investors know about their financial condition.

Facebook, Twitter and other venture-backed Internet companies have seen their combined value rise 54 percent since June, according to a report this month by Nyppex LLC that focused on so-called secondary transactions that involve buying stock from existing shareholders. The Wall Street Journal and New York Times reported that the Securities and Exchange Commission is seeking information about transactions in Facebook, Twitter, Zynga Game Network Inc. and LinkedIn Corp.

While backers of venues such as New York-based SecondMarket Inc. that match buyers and sellers in private companies say they meet a demand where no public market exists, Frank Mazzola of Felix Investments says it makes sense regulators would want a clearer picture of trading. Dixon Doll, co-founder of the venture-capital firm DCM, says regulators may be studying how the venues affect rules related to how many people own companies that aren’t registered for trading.

“Any time when you have something that’s growing and dealing with private investors, scrutiny is a good thing,” said Mazzola, a partner at New York-based Felix Investments LLC, which arranges pools to invest in nonpublic companies. His firm’s rivals in that business include EB Exchange Funds LLC and GreenCrest Capital LLC.

Letters

The SEC sent letters to several participants in the buying and selling of the stock and the focus of the inquiry is unclear, according to the New York Times, which cited two people with direct knowledge of the matter who declined to be named because they weren’t authorized to speak about it. The probe is at a preliminary stage, according to the Wall Street Journal, which cited people familiar with the matter.

John Nester, an SEC spokesman, said that the agency routinely makes information requests to search for trading that might push the boundaries of securities law, but that any such correspondence would not be released publicly.

“We have not received any inquiry, formally or informally, from the SEC,” said Mark D. Murphy, a spokesman for SecondMarket. Allison Bedard wrote in an e-mail that SharesPost Inc., a SecondMarket rival, “does not comment on any specific confidential discussion with any third parties.” Bedard represents the company at Schwartz Communications Inc.

Jonathan Thaw, a spokesman for Facebook, Jenna Sampson of Twitter, Dani Dudeck of Zynga and Julie Inouye of LinkedIn declined to comment when reached by telephone.

‘Extremely Sophisticated’

Broker dealer SecondMarket and SharesPost in Santa Monica, California, help owners of stock in closely held firms look online for buyers and negotiate the value of shares in private transactions. Buyers on SecondMarket must meet regulatory requirements on financial backing before signing up for an online auction, monitored by exchange managers, where registered sellers have posted shares. On SharesPost, users connect with counterparties on a bulletin board.

“Most of the leaders from the buying side I’m aware of fall into the category of extremely sophisticated institutional investors,” said Doll, co-founder of the venture-capital firm DCM, which he says doesn’t own shares of Facebook, Twitter, Zynga or LinkedIn. “Obviously these companies are not public from the standpoint of having a daily freely traded market, but if you ask, are they public? Can people get liquid? It’d be hard for any smart investor to say no.”

500 Shareholders

By creating pools through which investors can buy the stock, companies such as Felix, EB and GreenCrest have helped Facebook keep its shareholder count at 499 or less, the maximum number a company can have before it has to disclose results to the public. The SEC requires companies with more than 500 shareholders to increase disclosures about their finances.

Facebook requires employees to hold shares until it declares an open-trading period, a person familiar with the matter said earlier this year. Facebook instituted the policy to better comply with insider-trading laws and to protect the interests of the company and its employees and shareholders, Thaw said.

“As far as I see, everyone is doing things in ways that are fully compliant with current SEC regulations,” Doll said. “I hope that the SEC will eventually recognize that the initiatives like this are good for everybody in the industry.”

SecondMarket is regulated by the SEC and Financial Industry Regulatory Authority, an industry group, Adam Oliveri, a SecondMarket managing director, said in April. The company doesn’t target employees for its trades, and would rather work with startups to help them better manage share trades, including addressing worries about insider trading.

“Based on what I read in the New York Times article, it wasn’t an investigation, it was an inquiry,” said Mazzola. “In a situation like this where there’s a market that’s evolving, they need to get their hands around it and make sure they’re comfortable with the way this market is transacting.”

--With assistance from Ari Levy, Adam Satariano, Brian Womack, Joseph Galante and Douglas MacMillan in San Francisco, Jesse Hamilton in Washington and Lee Spears in New York. Editors: Chris Nagi, Nick Baker

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

For-Profit College Plunge Makes Sperling Rail at Obama

Posted: 30 Dec 2010 04:47 AM PST

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By Daniel Golden

(Updates stock prices starting in the ninth paragraph.)

Dec. 29 (Bloomberg) -- As a humanities professor at San Jose State University from 1961 to 1973, John Sperling pioneered remedial reading classes for Mexican Americans and courses in social problems for police officers.

Defying the education establishment, he expanded such programs into the for-profit University of Phoenix, now largely online and the biggest U.S. university, with almost 500,000 students. Sperling and his proteges transformed a backwater of mom-and-pop trade schools into a $30 billion industry attracting Washington Post Co. and Goldman Sachs Group Inc. as investors. For-profit colleges enroll 12 percent of U.S. undergraduates and consume 24 percent of U.S. Pell grants for low-income students.

Now those colleges, after flourishing under loosened regulations during George W. Bush’s presidency, are under attack from President Barack Obama’s administration, which wants to tighten the rules. Stock prices for the parent companies of for- profit colleges have plunged.

The colleges use deceptive practices to lure homeless people, veterans and individuals who aren’t prepared for college into unsuitable courses in order to obtain tuition funded by grants and also by federal loans that students have trouble repaying, according to advocates for the homeless, veterans’ groups and current and former students. Almost 90 percent of Phoenix’s students use federal grants or loans to pay tuition.

Defending Apollo

The 89-year-old Sperling, whose fortune peaked at $1.9 billion in 2005, and who had until recently been tending to non- educational interests ranging from cloning to longevity, has plunged back into the fight to defend his creation. As the value of his Apollo common stock plummeted by about $300 million this year, he traveled at least twice to Washington, drawing on his history of donations to Democrats to see Senate Majority Leader Harry Reid and other legislative leaders.

In one meeting with Congressional staff members, Sperling, leaning on a cane, railed against the Obama administration, saying it was manipulated by investors betting against higher- education stocks, according to an aide who attended. This person requested anonymity because the meeting was private.

Anticipating that Apollo’s growth would decelerate, investors stepped up short sales of Apollo stock early in 2008, to a level that was almost reached again in 2009 as the Obama administration embarked on tighter regulation, Trace Urdan, a Signal Hill analyst, said in an e-mail.

Apollo peaked at $97.93 in Nasdaq Stock Market composite trading in June 2004 as the company reaped more federal financial aid from the Bush administration’s easing of restrictions on the industry’s growth.

Share Decline

The shares traded as high as $89.22 in January 2009, days before Obama’s inauguration. Apollo has since declined 57 percent before today, compared with a 48 percent rise in the Standard & Poor’s 500 index, because of Obama administration proposals to limit recruiting and access to federal financial aid -- linchpins of the company’s strategy in the past decade.

In September, Sperling sent every member of Congress a 74- page PowerPoint presentation making the case that, while four- year public and private nonprofit colleges cost taxpayers $9,709 and $6,379 a student respectively, for-profit colleges pay taxes and save the government money.

He personally made almost $100,000 in campaign donations for the 2010 elections, while Apollo Group’s political-action committee gave $92,100 to federal candidates, including $15,000 to George Miller, the outgoing chair of the House education committee, and $14,000 to John Boehner, the incoming House speaker. Starting with the 2002 campaign, Apollo Group’s PAC has given Boehner $36,600, more than any other member of Congress.

‘Legacy at Stake’

“This is his legacy at stake,” Suzanne Helburn, an economist who is a longtime friend of Sperling, said in a telephone interview. “The thought of it being dismantled by some arbitrary government policy infuriates him.”

Sperling’s defense of his industry is based largely on the argument that for-profit colleges expand poor people’s opportunities to get degrees and jobs.

The administration’s “onerous” initiatives “would make it impossible for the sector to offer many programs” that prepare students to be teachers, nurses and police officers, and “would have a devastating impact on institutions that enroll low-income students,” Sperling wrote members of Congress on Sept. 1. “It would seem wiser to restore the status quo ante.”

Sperling himself says this lobbying has galvanized opposition to the proposed regulations and set the stage for a battle in the next Congress between the Obama administration and ascendant Republicans.

“Our hard work is paying off,” Sperling said in an e-mail relayed through Helburn.

‘Political Influence’

“John Sperling carries more political influence than I think a lot of people realize,” said Raul Grijalva, an Arizona Democrat and member of the House education committee. “When he comes to Congress, people listen. His word carries a lot of weight, and it’s been that way for a long time.”

Sperling sought to sway Grijalva in a meeting on Capitol Hill around the beginning of September.

“His pitch to me was that, by overregulating for-profit colleges, we are constricting the access of people of color to higher education,” Grijalva, who has received campaign donations from Sperling, said in a telephone interview.

“My response is, to have someone saddled with a debt they can’t pay back, and they don’t finish school, and put their financial lives in jeopardy, that’s a double-edged sword. The community colleges are there, that’s accessible and inexpensive.”

Union Organizer

An unlikely mogul, Sperling is a mix of pragmatist and populist, entrepreneur and social reformer, whose corporate interests don’t mesh neatly with his political views. He’s a former union organizer who runs a nonunion university, and a self-described ex-socialist whose company became a Wall Street darling. While he coauthored a book calling for an end to corporate welfare, his for-profit university depends on federal aid for 88 percent of its revenue.

A Democrat who has given almost $300,000 since 1994 to the party’s senatorial and congressional campaign committees, he owns a publishing house that attacks Republican politicians, and he supports the repeal of laws that criminalize marijuana. His restless brain generates a stream of unorthodox ideas, some of which fizzled, such as cultivating crops in salt water.

Sperling, who turns 90 next month, works out daily and keeps tabs on Apollo from his home office, former University of Phoenix president Jorge Klor de Alva said in a telephone interview. Sperling takes 30 pills a day, following a regimen set by a now-defunct longevity clinic that he established. After stepping down as chief executive officer in 2001 and chairman in 2004, Sperling returned as Apollo’s acting executive chairman in 2006 and now is executive chairman. He and his son control 100 percent of the voting stock.

‘Customer First’

Sperling was an early champion of online classes, shortened courses, electronic textbooks and marketing to adults -- innovations that traditional universities now are embracing.

“Sperling was probably the first university president to develop a model that was predicated on customer first,” Richard Chait, a professor of higher education at Harvard University in Cambridge, Massachusetts, said in an interview.

Armed with his blueprint, former Apollo and Phoenix executives converted religious schools into for-profit colleges such as Bridgepoint Education Inc.’s Clinton, Iowa-based Ashford University and Grand Canyon Education Inc.’s Phoenix-based Grand Canyon University. Under Sally Stroup, a former Phoenix lobbyist who headed federal higher-education policy, the Bush administration eased controls over for-profit colleges, spurring the past decade’s expansion.

Choosing Growth

“At critical junctures, John chose growth over academic integrity, which ultimately diminished a powerful educational model,” Robert W. Tucker, a former Phoenix senior vice president and coauthor with Sperling of “For-Profit Higher Education: Developing a World-Class Adult Workforce” (Transaction Publishers, 1999), said in a telephone interview.

Sperling’s industry has grown through misleading sales pitches from recruiters who are paid on the basis of how many people they sign up, according to Senate education committee reports and testimony and an Aug. 4 Government Accountability Office report.

For-profit colleges in 2008 graduated just 22 percent of their first-time, fulltime students seeking bachelor’s degrees, compared with 55 percent at public institutions and 65 percent at nonprofit private universities, according to the Washington- based National Center for Education Statistics. Only 36 percent of their students repay the loans, compared with at least 54 percent at traditional colleges, according to an analysis of government data by the Institute for College Access & Success, a nonprofit group in Oakland, California.

Stock Transactions

Alarmed by such disparities, the Education Department wants to cut off aid to for-profit colleges if their graduates don’t earn enough to pay off student loans.

Sperling and his son, Apollo Vice Chairman Peter Sperling, have collected almost $840 million in stock sales since 2003. The company disclosed in October that the Securities and Exchange Commission is looking at the company’s insider-trading policies.

Apollo gained 75 cents, or 2.1 percent, to $39.17 at 10:47 a.m. in New York. An index of 13 publicly traded for-profit education stocks declined 26 percent this year through yesterday.

For his part, Sperling, who declined to be interviewed and answered questions through Helburn, says Phoenix is investing hundreds of millions of dollars to improve graduation rates among low-income students.

‘New Legacy’

If Phoenix succeeds, it “will have a new legacy of solving a problem no one else has solved, significantly increasing the education level of the U.S. workforce, making it possible for a significantly larger percent of people to achieve post-secondary degrees,” Sperling said in an e-mail from Helburn.

Sperling divides his time between a Phoenix mansion with Andy Warhol paintings lining its entryway, and an Italianate home in San Francisco overlooking the Golden Gate Bridge. He keeps a 10-year-old Jaguar automobile at each place, Klor de Alva said in a telephone interview.

Twice divorced, Sperling has had an on-and-off relationship for 45 years with Joan Hawthorne, a memoirist who uses the pen name Candida Lawrence. He enjoys plays and operas, and reciting Emily Dickinson’s poetry. He dresses in khaki pants, a fisherman’s hat, and “the kind of shirts you don’t have to iron,” Klor de Alva said.

Birthday Revelry

Sperling was celebrating a personal milestone when he set the for-profit college industry on its track to accelerate growth. At his 80th birthday party, in 2001, a comic opera was performed to praise his accomplishments, and 125 guests were given mock money with his face on it. Amid the revelry, he proclaimed a new goal: increasing Phoenix’s enrollment fivefold to 500,000.

“It was intended as an inspirational message” rather than a formal plan, Sara Jones, an Apollo spokeswoman, who has since left the company, said in a 2009 e-mail.

Sperling faced an obstacle: The university’s market was too small to fulfill his vision. Nor could it satisfy what he called “the unrelenting pressure to grow” from Wall Street after Apollo went public in 1994.

Since Sperling founded the university in 1976, it had catered to middle managers whose employers paid for them to finish their degrees. Students had to be at least 23 years old and have two years of work experience as well as prior college credits. After his 2001 party, Phoenix discarded these requirements.

‘New Sectors’

“It couldn’t grow any faster in the sector it was in,” said Tucker, CEO of InterEd Inc., a higher-education consulting company in McCall, Idaho. “The only solution was to identify new sectors.”

Sperling did just that. Reflecting his commitment to expand college access for disadvantaged students, he conceived of a two-year program for high-school graduates from low-income and non-English-speaking families, who would take classes at inner- city campuses along with an online component, he said in an e- mail from Helburn.

Enrollment was projected to grow to about 15,000 in 10 years, said Lawrence M. Gudis, a former Apollo Group senior vice president who helped design the program, known as Axia College.

“John talked very passionately about having classes in malls in very, very poor neighborhoods in Los Angeles and Phoenix, where students wouldn’t normally have access to higher education,” and about recruiting faculty fluent in Spanish, Vietnamese and Cambodian, Gudis said in a telephone interview.

Online Unit

Plans changed when Apollo shares, after peaking in June 2004, slumped in the next two months. Apollo at the time was repurchasing Phoenix’s online unit, which had a separate tracking stock, and investors worried that the company was masking weakness in its ground-campus business, Signal Hill’s Urdan said. Todd Nelson, Apollo CEO from 2001 to 2006, then converted Axia into an online program in hope of boosting enrollment and revenue, said Gudis, now a consultant to for- profit colleges.

Axia’s student body soared to more than 200,000, increasing Phoenix’s enrollment to 470,800 students, more than the total at all for-profit colleges in 2000. While Phoenix has campuses in 39 states, the District of Columbia, and Puerto Rico, most of its students attend online.

Dropout Rate

Axia also boosted Phoenix’s dropout rate. The newcomers had “clearly different educational needs” that weren’t suited to Phoenix courses, which were designed to draw on students’ academic and work experience, Tucker said.

In 1998, 65 percent of Phoenix’s 53,200 students attained degrees, Klor de Alva said. By contrast, two-thirds of the associate’s degree students and half of the bachelor’s degree candidates who entered Phoenix from July 2008 to June 2009 withdrew by August 2010, according to a Senate education committee report. The median length of enrollment at Phoenix is about four months.

“I certainly would never recommend them to a young student over a community college,” David Breneman, a professor at the University of Virginia in Charlottesville and former dean of its school of education, who has studied the University of Phoenix, said in an e-mail. “For older adults with jobs, I think they provide a valuable option. For younger students without prior college experience or a job, I think they provide little value added.”

Nelson declined to comment. Axia’s conversion to an online program was driven by student demand, said Mark Brenner, an Apollo spokesman.

Biggest Funder

Because most of its students were low-income and qualified for federal grants and loans, Axia fostered Phoenix’s dependence on its biggest source of funds, the Education Department. Phoenix derived 88 percent of its revenue from federal student aid in the year ended Aug. 31, up from 48 percent in fiscal 2001.

Reliance on federal funds is “a bad business model,” Iowa Senator Tom Harkin, the chairman of the Senate education committee, said in a telephone interview. “You get the maximum return by recruiting the lowest-income students, and getting rid of them as soon as possible.”

Fanning Out

“I’ve been accused of being against private enterprise,” Harkin said. “This is not private enterprise. Ninety percent of their money is coming from the taxpayer.”

Phoenix executives trained under Sperling fanned out across the country, implementing Axia-like online programs for taxpayer-funded low-income students.

Founded in 2004 by a former Phoenix vice president named Andrew S. Clark, Bridgepoint Education Inc. had 77,179 students on Sept. 30, up from 1,063 at the end of 2005. Almost all took classes exclusively online. Bridgepoint, based in San Diego, had $521 million in revenue in the first nine months of this year, up 62 percent from the comparable period a year earlier, according to the company’s filings. Its flagship Ashford University derived 86 percent of revenue from federal aid in 2009.

Former Apollo Group president Brian Mueller is CEO of Phoenix-based Grand Canyon Education Inc., which had 42,300 students on Sept. 30, of whom 91 percent were enrolled online. Grand Canyon had 8,422 students at the end of 2005.

Goldman Stake

Todd Nelson, the former CEO for Apollo, now holds the same title at Pittsburgh-based Education Management Corp., the No. 2 higher-education company by enrollment, with 158,300 students in October. New York-based Goldman Sachs, Wall Street’s most profitable bank, owns a 39 percent stake in the company.

The sector also attracted Washington Post Co. Once known primarily for preparing high-school students for the SAT college-entrance examination, the company’s Kaplan unit derived 63 percent of its revenue in the quarter ended Oct. 3 from its higher-education division. Kaplan has 112,000 students, of whom about 70,000 attend online.

Jack Welch, former chairman and CEO of Fairfield, Connecticut-based General Electric Co., is an investor in Chancellor University in Cleveland, which named its online master’s degree program in business administration after him.

Sperling and his industry got a boost from the election in 2000 of George W. Bush, who in 2002 named the former Apollo lobbyist Stroup to oversee higher education.

Recruitment Curb

Congress had passed a law in 1992 that cracked down on trade schools in such fields as hairdressing and truck driving, which garnered federal aid by siphoning off students from welfare and unemployment lines.

The law banned colleges from paying recruiters on the basis of how many students were enrolled and capped the percentage of revenue that the institutions could receive from the government.

To deter fraud by correspondence schools, for-profit colleges that provided more than 50 percent of their courses or enrolled more than 50 percent of their students for distance education -- meaning that professors and their students are in different locations -- were prohibited from receiving federal aid.

The Bush administration diluted these restrictions, starting with the incentive-compensation ban. In 2002, officials put into place 12 exemptions, or “safe harbors,” allowing for- profit colleges to pay recruiters on the basis of enrollment as long as it wasn’t the sole criterion. The government also reduced the penalty for colleges’ violations of the incentive- compensation law to fines, from suspension or loss of eligibility for student aid, according to an Oct. 20, 2002, memo issued by William Hansen, then deputy secretary of education.

Lobbying for Apollo

Hansen, who left the administration in 2003, then lobbied for Apollo from 2006 to 2009, according to the Center for Responsive Politics, a Washington research group. Now president of Eagan, Minnesota-based Scantron Corp., a collector of student-performance data, Hansen declined to comment, as did Stroup, senior vice president at Scantron.

Apollo’s use of Hansen as a lobbyist was unrelated to his lowering of penalties for recruitment violations, said Brenner, the company spokesman.

Led by John Boehner, then chairman of the House education committee, Congressional Republicans scrapped the 50 percent limit for online courses in 2006.

“We are dealing with antiquated regulations that may have been well-intentioned when put in place but today are simply a burden,” Boehner said at a 2004 hearing on the issue.

Underdog Sympathizer

Sperling’s childhood ingrained sympathy for the underdog. He grew up in rural Missouri, the sickly child of a drifter who beat him often. His father’s death, when Sperling was 15, “was the happiest day of my life,” he wrote in “Rebel With a Cause” (John Wiley & Sons, 2000), his autobiography. “It still is.”

After graduating from high school, Sperling joined the merchant marine, where he read widely in his spare time. He earned a bachelor’s degree from Reed College in Portland, Oregon, followed by graduate study at the University of California at Berkeley. There he met Virginia Sperling, his second wife.

“We were beatniks and we loved it,” Virginia Sperling, 84, said in a telephone interview. “We lived in a co-op. We were all sort of outcasts.”

Sperling earned a doctorate in economic history from Cambridge University in Cambridge, England. He now funds scholarships for Reed graduates to study at Cambridge, according to Reed’s website. Reed and Cambridge will receive donations through Sperling’s will, Helburn said. “He has great affection for his alma maters,” she said.

‘So Driven’

Raising a family held little appeal for her ex-husband, said Virginia Sperling, a dancer and art dealer, who is Peter Sperling’s mother.

“He was so driven,” she said. “He always felt that a family would be a distraction. His theory is, you can’t be a genius and have a family.”

Nor did the academic career on which he embarked after Cambridge fulfill him.

“When we were at a party, he would often grab me by the arm and say, ‘My boy, there’s not a group on the face of the earth more boring than the professoriat,’” said Tucker, the former Phoenix executive.

Sperling led a faculty strike at San Jose State University in San Jose, California, in 1968, and the action’s failure cost him the presidency of a union at California public universities. The following year, he and his students celebrated Earth Day with a protest against air pollution. They bought a new Ford Maverick automobile and buried it in a grave they dug on campus.

‘Actively Engaged’

“John was unlike any other professor,” said John Murphy, who was a San Jose State student and later worked as a Phoenix executive from 1977 to 1997. “He was actively engaged in bringing the university to the community. He didn’t mind getting his hands dirty.”

Training that Sperling ran for police officers and teachers about juvenile delinquency proved so popular that he turned it into the Institute for Professional Development, which offered adult education under a contract with the University of San Francisco.

Sperling made the institute a for-profit corporation because, after his ouster from the union presidency, he was “quite wary of creating another nonprofit organization some board could yank away from me,” he wrote.

Arizona Bound

The Western Association of Schools & Colleges, the accrediting body for California, complained that San Francisco’s faculty hadn’t been consulted about the program. Faced with the threat of losing accreditation, the university cut ties with the institute in 1977. Sperling decamped to Arizona, with different accreditors, and established his own university.

There, Sperling barely staved off legislation giving control of private higher education to the state’s public universities.

Phoenix’s quest for acceptance was “was one nasty, brutal, bare-knuckled fight,” said Murphy, 64, a screenwriter and producer who is writing a history of the University of Phoenix during his time there. “Everything we did drove traditional education into absolute apoplexy. We didn’t know on Friday if we’d be open for business on Monday.”

At the urging of Phoenix’s vice president for product development, Sperling started an online campus in 1989 and stuck with it through unprofitable years.

“He persisted when virtually all of the institution was opposed to the idea,” Tucker said.

Ballot Measures

Once his gamble on for-profit higher education paid off, Sperling bet much of his newfound wealth on other interests. He invested more than $10 million on 20 state-ballot questions from 1996 to 2008, seeking to treat rather than incarcerate marijuana offenders and legalize the substance for medical purposes, said Ethan Nadelmann, executive director of the Drug Policy Alliance in New York, who worked with Sperling on the proposals. Fifteen of the measures passed.

Sperling had less luck achieving a “second green revolution” that he envisioned for deserts in poor countries. In 2001, after a disagreement with the government of Eritrea, he pulled out of a joint venture to raise shrimp in Red Sea water and use the runoff to grow a crop tolerant of salt water, Eric Rey, a consultant on the project, said in a telephone interview. Sperling now is majority owner of Arcadia Biosciences Inc., a Davis, California-based developer of technologies to reduce greenhouse-gas emissions, said Rey, the company’s CEO.

Anti-Aging Clinic

Sperling also shuttered an anti-aging clinic that he had opened in Phoenix and hoped would beget a for-profit growth industry. The Kronos center, which sought to slow degeneration associated with old age, charged patients thousands of dollars for comprehensive assessments that insurance rarely covered.

The Apollo founder owns Polipoint Press, a Sausalito, California-based publisher that put out books this year advocating a public option for health-insurance buyers and likening the Republican right to the Taliban. The press also published “The Great Divide: Retro vs. Metro America,” a 2004 manifesto -- coauthored by Sperling -- advising the Democrats to reduce defense spending and end corporate welfare.

“I’m one of the few surviving liberal economists, and he’s more liberal than I am,” Carl Hunt, one of Sperling’s coauthors, said in a telephone interview.

Reluctant to lose his beloved dog, Missy, Sperling funded pet-cloning research by Texas A&M University in College Station, Texas, and now-defunct Genetic Savings & Clone Inc. While GS&C’s successor, BioArts International in Mill Valley, California, succeeded in cloning the late Missy in 2007, it stopped replicating dogs in 2009 because of black-market competition from South Korea and unpredictable results, such as a clone born greenish-yellow instead of the expected white, according to the company’s website.

‘Not as Lovable’

The duplicate Missy lacks its predecessor’s personality, Sperling’s ex-wife said.

“The dog he paid millions to clone, he takes her to the park at the Presidio, she seems like a disappointment,” Virginia Sperling said. “She’s not as lovable as the original.”

As pressure from Washington on for-profit colleges mounts, Sperling has cut back other enterprises to fight for his main business.

“A disproportionate amount of his time in the last 9-12 months has really been back on Apollo,” said Josh Rosen, president and chief financial officer of Southwest Solar Technologies Inc., a Phoenix-based startup in which Sperling, its chairman and sole funder, invested $40 million. “As the political environment has gotten more challenging, that has taken up more of his bandwidth.”

He’s “not the least retired,” Joan Hawthorne wrote under her Candida Lawrence pseudonym in “Vanishing” (Unbridled Books, 2009). “He’ll run his company until he drops.”

--Editors: Robin D. Schatz, Jeffrey Tannenbaum

To contact the reporter on this story: Daniel Golden in Boston at dlgolden@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

JPMorgan Sued by Petters Trustee Over Polaroid Sale Proceeds

Posted: 30 Dec 2010 04:45 AM PST

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By Joel Rosenblatt

Dec. 30 (Bloomberg) -- JPMorgan Chase & Co., the second- biggest U.S. bank by assets, was accused with others in a lawsuit of getting more than $300 million from a scheme run by Thomas J. Petters that involved buying Polaroid Holding Co.

The trustee for Petters Group Worldwide LLC, in a complaint filed yesterday in federal court in Minnesota, said the New York-based bank and other defendants received more than $240 million from selling their stakes in Polaroid when Petters acquired it. JPMorgan was the majority owner of Polaroid at the time, according to the complaint.

In 2005, JPMorgan had the opportunity to conduct “extensive due diligence on Petters” in connection with his acquisition of Polaroid Holding for $426 million, of which JPMorgan received “in excess of $240 million,” according to the suit filed by the trustee and court-appointed receiver, Douglas A. Kelley.

The money Petters used to acquire Polaroid was derived from the Ponzi scheme, according to the complaint. JPMorgan also received about $40 million in fees and interest as financial adviser to Polaroid and due to $185 million in credit it provided to the company after Petters acquired it, according to the complaint.

“The windfall that JPMorgan would earn on the transaction gave JPMorgan an incentive to ignore red flags that would have revealed the massive Ponzi scheme,” according to the suit.

Petters was sentenced to 50 years in prison last year after being found guilty of running a $3.5 billion fraud. Petters conned investors into giving him money to finance phony consumer-goods purchase contracts. His Minnetonka, Minnesota- based businesses also owned Sun Country Airlines Inc.

Darin Oduyoye, a JPMorgan spokesman, declined to comment.

The case is Kelley v. JPMorgan Chase & Co., 10-04999, U.S. District Court, District of Minnesota.

--With assistance from Beth Hawkins in Minneapolis. Editors: Michael Hytha, Fred Strasser.

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

BJ’s Wholesale Rises on Report of Possible Hostile Bid

Posted: 30 Dec 2010 04:45 AM PST

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By Cotten Timberlake

(Updates share price in first, fifth paragraphs.)

Dec. 29 (Bloomberg) -- BJ’s Wholesale Club Inc. rose 7.1 percent in New York trading after the New York Post reported that Leonard Green & Partners LP may pursue a hostile bid for the chain.

The Los Angeles-based buyout firm may make a bid if no auction occurs in coming weeks, the newspaper said today, citing an unidentified person close to the situation. BJ’s planned an auction to sell itself after an earlier bid from Leonard Green, three people with knowledge of the situation said last month.

BJ’s, led by Chief Executive Officer Laura Sen, had a market value of about $2.4 billion as of yesterday and ranked as the third-largest U.S. wholesale chain behind Costco Wholesale Corp. and Wal-Mart Stores Inc.’s Sam’s Club. The Natick, Massachusetts-based retailer, founded more than 25 years ago, operates about 190 warehouse clubs across the U.S.

BJ’s hired Morgan Stanley to help sell the company, said two people last month, who declined to be identified because the matter is private. Leonard Green announced in July it had taken a 9.5 percent stake in the company.

The shares rose $3.16 to $47.63 at 4 p.m. in New York Stock Exchange composite trading. The gain was the largest since Nov. 10.

Cathy Maloney, a spokeswoman for BJ’s, didn’t immediately return a phone call today seeking comment. Leonard Green’s Michael Gennaro also didn’t immediately return a call.

A bid for BJ’s would add to Leonard Green’s retail spree since November, which includes offers for fabric seller Jo-Ann Stores Inc. and J. Crew Group Inc. The firm, which manages about $9 billion, has holdings in such retailers as Whole Foods Market Inc., the largest U.S. natural-goods grocer, Petco Animal Supplies Inc. and fitness-club operator Equinox, according to its website.

--With assistance from Chris Burritt in Greensboro, North Carolina, Laura Marcinek in New York and Jeffrey McCracken and Jonathan Keehner in New York. Editors: Julie Alnwick, Robin Ajello

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

Three Hedge Funds Got Data From Consultant, U.S. Says

Posted: 30 Dec 2010 04:45 AM PST

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By Bob Van Voris, Pamela MacLean and David Voreacos

(Updates with bail hearing in fifth paragraph.)

Dec. 30 (Bloomberg) -- A former Primary Global Research LLC expert-networking consultant was charged by U.S. prosecutors in Manhattan with selling inside information to portfolio managers at three unidentified hedge funds.

Winifred Jiau, arrested in Fremont, California, as part of a national probe of insider trading, was accused of selling data on Nvidia Corp. and Marvell Technology Group Ltd., makers of computer components, through Primary Global, according to a filing yesterday in Manhattan federal court. The hedge funds paid her $200,000 through the firm, prosecutors said.

Jiau, 43, is the seventh person connected to Primary Global to be charged in a U.S. insider trading investigation that has ensnared company employees and consultants.

The Jiau complaint shows prosecutors are gathering evidence of alleged insider trading against hedge fund employees. The probe became public last year with the arrest of Galleon Group LLC hedge fund co-founder Raj Rajaratnam. The FBI recorded thousands of conversations during their investigation of the firm, lawyers said at an October hearing. Rajaratnam, who denies the charges, is scheduled to go on trial in Manhattan next year.

Jiau is charged with one count each of conspiracy to commit securities fraud and securities fraud. She appeared yesterday in San Francisco federal court and was ordered held in custody by U.S. Magistrate Judge Nandor Vadas, who set a hearing for Jan. 12 on whether to transfer her to New York. She is scheduled to appear today to seek release on bail.

‘Strong’ Evidence

The evidence against Jiau is “strong,” Assistant U.S. Attorney Wilson Leung told the judge, adding that there is a “cooperating witness and audio recordings.” When asked by Vadas if she understood the charges, Jiau said “I not have a chance to know until now.” Barry Portman, her assigned public defender, said the complaint is a “lengthy document.” The first count carries a maximum sentence of 20 years in prison.

Prosecutors claim Jiau began getting paid for insider information in September 2006.

In May 2008, Jiau separately gave two hedge fund portfolio managers, one of whom worked for two hedge funds, “on point and accurate” data about the quarterly financial results at Marvell before it was released to the public, prosecutors said. One of the funds netted more than $820,000 in profits based on that inside information, the FBI said.

Jiau also gave quarterly financial data in August 2008 about Marvell to the same two managers, referred to as CC-1 and CC-2 in the complaint.

Inside Data

CC-1 founded a New York entity referred to as Hedge Fund A and CC-2 worked at two separate hedge funds, according to the complaint. A cooperating witness who pleaded guilty, CW-1, began working as a research analyst at Hedge Fund A in March 2008, the FBI said in court papers.

CC-1 told the cooperating witness to get inside data from various co-conspirators, including Jiau, the FBI said. She gave inside information to CC-1 and CC-2, and the cooperating witness listened to their conversations about Marvell, the FBI said.

CC-1 also recorded conversations with Jiau, and the complaint quoted Jiau in conversations about Marvel’s second- quarter earnings that the company announced on Aug. 28, 2008.

When CC-2 asked if she had data yet on the next quarter, she said: “As soon as I get it, I give you guys a buzz,” according to court papers.

CW-1 “understood that Jiau obtained the information about Marvell and Nvidia from a source who was not authorized to disseminate” it, according to the complaint.

‘Expert Consultant’

Marilyn Gerber, a spokeswoman for Primary Global, said in an e-mailed statement that Jiau served as an “expert consultant” with the company from September 2006 to December 2008, declining further comment.

Jiau was the fifth Primary Global consultant arrested in an insider-trading crackdown that also has led to criminal charges against two other employees of the company. One of the consultants, former Dell Inc. supply chain manager Daniel DeVore, pleaded guilty Dec. 10.

On Dec. 16, Federal Bureau of Investigation agents arrested three technology company workers who allegedly sold secrets about Apple Inc., Dell and Advanced Micro Devices Inc. The men, who worked at AMD, Flextronics International Ltd. and Taiwan Semiconductor Manufacturing Co., were arrested on securities fraud and conspiracy charges for a scheme that Manhattan U.S. Attorney Preet Bharara said operated from 2008 to early 2010.

James Fleishman, a sales manager at Primary Global, also was arrested the same day as the three men. If convicted, all four face as long as 20 years in prison.

Leaked Information

DeVore pleaded guilty to conspiracy to commit securities fraud and wire fraud. He said he worked as a paid consultant for Primary Global and, through the firm, accepted money from hedge funds for inside information. At his plea hearing, he said he leaked inside information to clients of Primary Global and New York-based consulting firm Guidepoint Global LLC, according to a transcript.

James Fingeroth, a spokesman for Guidepoint Global in New York, declined to comment yesterday.

The expert-network arm of the Galleon probe was revealed last month with the execution of search warrants at hedge funds on Nov. 22, and the Nov. 24 arrest of Don Ching Trang Chu, another Primary Global employee.

FBI Agents

FBI agents from New York and Boston executed warrants at the offices of Level Global Investors LP and Diamondback Capital Management LLC, hedge funds founded by alumni of SAC Capital Advisors. Agents that day also executed a search warrant at the offices of Loch Capital Management. None of the firms or their employees has been accused of any wrongdoing.

Expert-networking companies such as Mountain View, California-based Primary Global match investors with specialists who provide insight into specific markets. Prosecutors in the case have described in criminal complaints the links among Primary Global, the technology experts it employed and unidentified hedge funds willing to pay for inside information.

Santa Clara, California-based Marvell, which makes chips for the BlackBerry phone, declined to comment on Jiau’s arrest. Bob Sherbin, a spokesman for Nvidia, also based in Santa Clara, said Jiau was a contractor who left the company a year ago, declining further comment.

Lawsuit

A Winifred Jiau filed a sexual-harassment lawsuit against her former employer, San Francisco-based Adteractive Inc., in 2007. The complaint said she has an undergraduate degree from National Taiwan University and a Master’s degree in statistics from Stanford University. The plaintiff in the lawsuit matches the age and northern California residence of the Winifred Jiau charged by prosecutors.

Jiau founded a company that got funding from Intel Corp., according to the lawsuit. In the suit, filed in California Superior Court in San Francisco, the plaintiff claimed she worked as a senior statistician for Adteractive from April to July of 2006, when she was fired after refusing the alleged sexual advances of a supervisor.

According to the civil suit, the plaintiff had “over ten years of work experience building financial and economic models” and she “started her own company that was funded by Intel.”

The case was dismissed on Dec. 29, 2008, after the filing of a notice of a confidential settlement, according to court records. An Adteractive attorney, Aryn Pedowitz, declined to immediately comment on the case.

Theo Emison III, a lawyer who filed the civil suit, said he was unable to say whether his former client is the woman charged yesterday.

Wiretap Recordings

Recorded and wiretapped conversations have been at the center of the Galleon probe and its various arms. Investigators made consensual and wiretap recordings of an unidentified expert-networking firm’s phones, the land lines of an unidentified hedge fund and the mobile phones of two of the men arrested Dec. 16 -- Mark Anthony Longoria, who worked at chipmaker AMD, and Walter Shimoon, formerly of Flextronics, a Singapore-based maker of electronic components -- the U.S. said.

At least two hedge funds are described in the complaint against the men. Neither is identified by name.

The U.S. also made consensual recordings using five cooperating witnesses, had a tap on mobile phones used by Shimoon and Longoria, and recorded conversations at Primary Global in November 2009, a month after Rajaratnam’s arrest, according to court papers.

One Witness

Court papers indicate at least five people have been working with the government in the insider-trading probe. Only one witness was identified by name: Richard Choo-Beng Lee, a former partner at San Jose, California-based hedge fund Spherix Capital LLC. He began cooperating with the U.S. in April 2009, according to court records, providing information to Bharara’s office in the government’s case against Galleon. He pleaded guilty in November 2009.

His partner at Spherix, Ali Far, who also worked as an analyst and portfolio manager at Galleon, pleaded guilty and is aiding the U.S. in the Galleon probe.

The U.S. said Chu established a relationship with Lee and that Spherix paid Chu’s firm, Primary Global, for tips concerning Atheros Communications Inc., Broadcom Corp. and Sierra Wireless Inc., according to the government’s complaint.

At yesterday’s court hearing in San Francisco, Portman told the judge that Jiau is a U.S. citizen and has known about the insider-trading investigation since mid-December. She didn’t attempt to flee when FBI agents arrived at her home, the lawyer said in his argument that she be released.

Leung countered that Jiau is a “flight risk,” and that when agents went to her house, they heard her car running in an attempt to drive off. Leung said the agents found packed luggage inside her house.

Leung said that Jiau claimed she had just returned from a trip to Asia. The prosecutor said her Asia trip took place in October, and that she had traveled to Beijing and returned through Taiwan.

The case is U.S. v. Jiau, 10-Mag.-2900, U.S. District Court for the Southern District of New York (Manhattan).

--With reporting by Lisa Wolfson in San Francisco. Editors: Mary Romano, Michael Hytha.

To contact the reporters on this story: Bob Van Voris in U.S. District Court, Southern District of New York in Manhattan at rvanvoris@bloomberg.net; Pamela MacLean in U.S. District Court, Northern District of California in San Francisco; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

Storm Delays Reveal Flip Side of Aviation’s Drive for Efficiency

Posted: 30 Dec 2010 04:45 AM PST

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By Angela Greiling Keane, Mary Schlangenstein and Carol Wolf

Dec. 30 (Bloomberg) -- The U.S. aviation system’s struggles to recover from snowstorms that closed New York’s airports this week reflect the unintended consequences of airlines’ efforts to squeeze out costs.

Flights are so full and scheduled so tightly that there is no room for quick recovery when airports are closed, industry analysts said. Stranded passengers’ complaints about confusion and lack of communication may prompt reviews by air carriers and regulators about what happened and how to best respond the next time poor weather coincides with a busy travel period.

“When your planes are all 90 percent full and you cancel a flight, it’s going to take you another 10 flights to re- accommodate all those passengers,” said Darryl Jenkins, a Virginia-based aviation industry consultant. “We won’t be able to re-accommodate everybody.”

Airlines have reduced seating capacity by 9.1 percent and full-time equivalent employment by 14 percent in the past five years, according to the U.S. Bureau of Transportation Statistics. The capacity reduction and increased passenger demand, as the economy improved, have created the airline industry’s highest load factors since World World II.

That means that available seats are scarce for the as many as 1.2 million passengers who may have been affected by about 8,200 cancellations due to the snowstorm, and there are fewer employees at airports and reservation centers to assist those passengers.

Calls for Help

United Continental Holdings Inc.’s Continental Airlines, which fired 600 of its 2,600 reservation agents in February because more passengers were booking on the Internet, said yesterday that call volume was 2 1/2 times normal this week as passengers sought assistance in rebooking flights.

The airline, which has a hub at Newark Liberty airport, has brought in more than 300 additional customer service agents, increased overtime pay and deployed 45 volunteers from Houston to Newark to help rebook passengers, said Christen David, a Continental spokeswoman.

Tim Omaggio, a Morristown, New Jersey, father whose daughter was scheduled to fly from Newark to Phoenix on Dec. 28, filed a complaint with Continental after being unable to get help from airline employees at the airport or on the phone.

“That should have been all hands on deck, without a doubt,” Omaggio said in an interview yesterday. “I’ve been in a lot of these delays while traveling on business. If you’re communicated to and told what’s going on like an adult, people are a lot more understanding. But when you’re told nothing, or sent to something that turns out to be a dead end, it makes it that much worse. It was just a lot of poor communication.”

Newark, JFK

At least 332 flights were canceled yesterday, three days after the worst December snowstorm to hit New York City in six decades. The disruptions affected the nation’s largest and most congested air travel market during one of the busiest times of the year. Thousands of flights were canceled each day during the three-day storm and aftermath, spokesmen for U.S. airlines have said.

JetBlue Airways Corp., which has a hub at New York’s John F. Kennedy International Airport, canceled 120 flights yesterday and said its backlog of stranded passengers may not be fully cleared until Jan. 1. Flights coming into Kennedy were delayed by an average of 2 hours, 3 minutes at 7 p.m. New York time yesterday, according to the Federal Aviation Administration.

Continental also canceled 120 flights yesterday, primarily those operated by regional partners at Newark Liberty, David said.

Incoming flights to Newark were delayed by an average of 44 minutes as of 7 p.m. yesterday, according to the FAA. Additionally, the FAA said on its web site, thunderstorms in Houston delayed departing flights by up to 59 minutes as of 7 p.m. New York time yesterday, further hampering Continental’s operations.

Efficiency Drive

Because the initial cause of this week’s flight delays and cancellations was weather, customers will be more forgiving than with delays for other reasons, said Dean Headley, co-author of the annual Airline Quality Rating and an associate professor of marketing at Wichita State University in Kansas.

“With the load factors being what they are, the capacity reductions and everything, people have to understand that’s a good possibility even with good weather that flights get canceled,” Headley said in an interview yesterday. “If you miss a flight, you can’t just hop on the next airplane.”

David Swierenga, president of aviation consultant AeroEcon in Round Rock, Texas, said demand for low fares has forced airlines to cut costs by, among other things, leaving fewer empty seats.

“We deregulated the industry to improve the efficiency of the industry and the airlines responded to that in spades,” Swierenga said in an interview yesterday.

Return to Profitability

The eight biggest U.S. carriers as a group in July reported their first quarterly profit after 10 straight losses stretching back to the final three months of 2007. During the three-year period, the airlines faced surging fuel prices, a slump in business travel during the recession and the outbreak of the H1N1 virus that prompted the suspension of some international flights.

Airlines’ hands are tied, said Hunter Keay, a Baltimore- based airline analyst with Stifel Nicolaus & Co.

“There’s really not much the airlines can do at this point,” Keay said yesterday in an interview on Bloomberg Television. “They are sort of beholden to the weather. The airports are obviously working as hard as they can to clear the storms.”

The airline industry and regulators must evaluate what happened this week and make sure airlines, airports and government agencies have coordinated contingency plans, said Steve Lott, a spokesman for the Montreal-based International Air Transport Association.

‘Finger Pointing’

“We have to find out exactly what happened first,” Lott said in an interview. “It will take time. There are many parties involved, but primarily it’s the airlines, the airport and the government. There’s a lot of finger pointing that goes on, unfortunately.”

The U.S. Transportation Department is looking into details of the New York flight delays and will review other cases, Olivia Alair, an agency spokeswoman, said in an interview. Transportation Secretary Ray LaHood has been updated on the situation.

--With assistance from Nancy Moran, Will Daley and Scarlet Fu in New York. Editors: Bernie Kohn, Elizabeth Wollman

To contact the reporters on this story: Angela Greiling Keane in Washington at agreilingkea@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Carol Wolf in Washington at cwolf@bloomberg.net

To contact the editor responsible for this story: Bernie Kohn at bkohn2@bloomberg.net

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