Knight trading loss shows cracks in equity markets

NEW YORK,  Aug 3, 2012 – The software glitch that cost Knight Capital Group $440 million in just 45 minutes reveals the deep fault lines in stock markets that are increasingly dominated by sophisticated high-speed trading systems. But Wall Street firms and regulators have few easy solutions for such problems.

Automated trading can handle massive volumes of transactions in milliseconds, something human traders could never do. But the benefits come at a cost: stock markets have become a jumble of exchanges, market makers, high-frequency traders, and investors using different systems that can interact in unexpected ways.

The May 2010 ‘Flash Crash’, in which U.S. stocks inexplicably sank in a matter of minutes, illustrated how technological problems can cascade. These sorts of problems may be more likely given that many market participants are under pressure to cut costs – including technology spending – as trading margins narrow and regulation costs increase.

Since April, a series of embarrassing and costly technology issues have rocked markets and shaken the confidence of investors.

BATS Global Markets, an exchange, was unable to complete its own initial public offering because of a technical problem. Nasdaq botched the market debut of Facebook due to technical glitches, costing it tens of millions of dollars, while UBS AG lost more than $350 million in trading Facebook shares and is blaming Nasdaq.

“The structure just may be too complicated to work,” said Larry Tabb, founder of Tabb Group, a consulting firm that focuses on capital markets.

Former Goldman board member Rajat Gupta guilty of insider trading

NEW YORK, Fri Jun 15, 2012 – Former Goldman Sachs Group Inc. board member Rajat Gupta was convicted on Friday of illegally tipping his hedge-fund manager friend Raj Rajaratnam with secrets about the investment bank, a major victory for prosecutors seeking to root out insider trading on Wall Street.

A Manhattan federal court jury found Gupta guilty of three counts of securities fraud and one count of conspiracy, ending the four-week trial. He was found not guilty on two other securities fraud charges.

The jury delivered the verdict on the second day of its deliberations. U.S. District Judge Jed Rakoff has set sentencing for Oct. 18.

The verdict marks a stunning fall for Gupta, who is also a former top executive at business consulting firm McKinsey & Co and a former director of Procter & Gamble.

Gupta’s one-time associate Rajaratnam, who was convicted of 14 counts of insider trading at a trial last year, is now serving an 11-year prison term.

Stock futures rise after six weeks of S&P losses

(Reuters) – Stock index futures edged higher on Monday after six weeks of declines for the S&P 500 left equities at more attractive levels.

The S&P 500 has tumbled nearly 7 percent on the back of a barrage of soft economic data after closing at its highest closing level in nearly three years on April 29.

Worries about a global economic slowdown have continued to hover over equity markets, with investors expecting the S&P 500 to slip toward its March low near 1,250 before the market can come back. The benchmark closed near 1,270 on Friday.

“I think we’ve come a lot closer to the end of the selloff,” said Rick Meckler, president of investment firm LibertyView Capital Management in New York. “We’ve retrenched quite a bit, and we seem to be finding considerable more support at these levels.”

In a sign that valuations are hitting enticing levels, insurer Allied World Assurance Co Holdings Ltd. agreed to buy Transatlantic Holdings Inc. for $3.2 billion in stock.

Also, VF Corp, owner of the North Face and Wrangler clothing brands, will buy shoemaker Timberland Co. in a $2 billion deal. Timberland shares jumped about 43 percent to $42.75 in premarket trade.

“Merger activity is likely (to continue) because of the low interest rates, and it’s also attractive from an operational point of view,” Meckler said.

“That will be a continued positive (for equities).”

In a positive sign for the consumer, U.S. crude prices fell more than $1 to near $98 per barrel. Growing investor concern about an economic slowdown combined with rising output from Saudi Arabia and have pressured prices lower.

S&P 500 futures rose 3.7 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Dow Jones industrial average futures gained 43 points, and Nasdaq 100 futures added 4.25 points.

The Fed said Friday it will buy $50 billion of U.S. Treasuries, the final series of government bond purchases that marks the last phase of a $600 billion program launched in November 2010 to help jump-start the economy.

European shares were up 0.3 percent as bargain hunters picked through the debris after six weeks of losses. Concerns over the health of the global economy and the lack of consensus from policymakers on how to tackle Greece’s debt crisis limited gains.

Wendy’s/Arby’s agrees to sell most of Arby’s to Roark Capital

DOW JONES NEWSWIRES − Wendy’s/Arby’s Group Inc. agreed to sell most of its struggling Arby’s chain for $130 million in cash to a group led by private-equity firm Roark Capital Group in a deal that leaves it with an 18.5% ownership stake in the fast-food restaurant.

Wendy’s/Arby’s turnaround efforts at Arby’s have helped improve sales, though the company had been under pressure to sell Arby’s because its performance had been lagging until recently. The company said recently it had received multiple bids for the chain.

Under the deal, expected to close in the third quarter, Wendy’s/Arby’s will receive about $130 million in cash, and the 18.5% stock interest in Arby’s is valued at about $30 million. Roark will assume about $190 million of Arby’s related-debt. The transaction triggers a tax benefit of about $80 million to Wendy’s/Arby’s. The parties said the deal has a total value of about $430 million.

Roark will invest about $180 million at the closing, covering the cash portion of the deal, transaction costs and capital for Arby’s. Roark also committed to spend up to an additional $50 million through 2013 in capital.

Wendy’s/Arby’s in May reported that its first-quarter loss narrowed as revenue edged up amid sales growth at Arby’s. However, it lowered its full-year earnings estimate owing to significantly higher commodities costs.

Atlanta-based Roark on Monday also said it has acquired Il Fornaio (America) Corp., owner of the casual-dining chain Corner Bakery Cafe and the upscale Italian Il Fornaio Restaurants & Bakeries business. Terms of the deal weren’t disclosed.

Roark’s food and restaurant holdings also include Focus Brands–parent of chains such as Cinnabon and Carvel Ice Cream.

Wendy’s/Arby’s shares closed Friday at $4.52 and were inactive premarket.

Goldman Sachs shareholder sues ex-director Gupta over trades

NEW YORK ― A Goldman Sachs Group Inc. shareholder sued Rajat Gupta, a former director of the investment bank, over trades revealed in civil and criminal insider trading cases against Gupta and convicted Galleon hedge fund founder Raj Rajaratnam.

The lawsuit, filed in Manhattan federal court Monday, said Goldman shareholder James Mercer of Kirkland, Washington, sought judgment for profits from millions of dollars in transactions. It said Mercer wrote to the Goldman board on March 11 explaining that Gupta failed to disclose the details of his conduct and relationship with Rajaratnam as required by statute.

Rajaratnam, 53, was convicted last month on charges of securities fraud and conspiracy for insider trading, including Goldman corporate secrets leaked to him by his friend Gupta.

The former director is an unindicted co-conspirator in the case and denies any wrongdoing. He faces civil charges in the Rajaratnam matter filed by the U.S. Securities and Exchange Commission and is fighting those allegations with his own lawsuit against the market regulator.

Gupta’s lawyer, Gary Naftalis, said the shareholder lawsuit “is without merit and we will vigorously defend it.”

A spokesman for Goldman Sachs declined to comment. The firm was identified as a nominal plaintiff by the shareholder.

During Rajaratnam’s two-month trial, U.S. prosecutors played secretly-recorded phone conversations in which Rajaratnam is heard discussing information he received from Gupta about Goldman Sachs. These and other conversations between the two men in 2008 are also cited in the SEC’s complaint against Gupta.

The shareholder lawsuit focused on short-swing trading ― trading within a period of less than six months. The SEC alleges that profits and loss avoidance amounted to $17 million from tips on Berkshire Hathaway’s $5 billion investment in Goldman at the height of the financial crisis and its second and fourth quarter financial results in 2008.

“Mr Rajaratnam/Galleon engaged in short-swing trading of Goldman Sachs securities, which generated substantial profits,” the lawsuit said. “Mr. Gupta was a beneficial owner of these securities because he had a pecuniary interest in the profits generated by this trading activity.”

It said Gupta “as a statutory insider and beneficial owner of securities traded profitably on the short swing, must therefore disgorge all profits from those trades to issuer Goldman Sachs.”