DealBook: Failing Stress Test Is Another Stumble for Citigroup

Something didn't quite seem right to Citigroup earlier this week.

The banking behemoth could show that it had enough capital to ride out an economic storm, but a regulator was refusing to approve its plan to increase dividends and stock buybacks, steps intended to please shareholders and build confidence in the bank's turnaround.

Inside Citigroup, board members and senior executives expressed bafflement and anger as they prepared for the rejection to be announced by the Federal Reserve Wednesday afternoon, people briefed on the matter said.

Was the Fed punishing Citigroup for a costly fraud last month at its Mexican unit? Was the regulator trying to look tough? Or was the Fed subtly pressing for a breakup of the bank — a goal of some regulators, investors and analysts for years? A day after Citigroup's capital plan failed the Fed's stress test for the second time in three years, bank executives were still struggling to understand the decision and how best to respond, these people said.

Yet the regulator's displeasure shouldn't have been a total surprise. In its report, the Fed noted that Citigroup had failed to sufficiently correct deficiencies that the regulator had flagged to the bank previously. And it was the only one of the nation's five top banks that failed to persuade the Fed to bless its capital plan. Upon passing their tests, Citigroup's rivals JPMorgan Chase and Bank of America swiftly announced plans to increase dividends and buy back shares.

Since the rejection, some analysts and investors have been pushing for a management shake-up, specifically calling for a new chief financial officer. After all, the Fed criticized the "reliability" of the bank's financial projections under hypothetical situations aimed at testing the bank's resilience during times of financial stress. Investors were quick to register their disappointment, and Citigroup's shares tumbled 5.4 percent on Thursday.

The broader question hanging over Citigroup is the one that has dogged it since Sanford I. Weill created the sprawling global conglomerate in a burst of merger and deregulation fervor nearly two decades ago: that the bank may be simply too big to manage.

"It is a huge challenge at a company that is as big and as everywhere as Citigroup," said Fred Cannon, a banking analyst with Keefe, Bruyette & Woods.

In its rebuff of Citigroup's capital plan, the Fed singled out shortfalls in the bank's financial projections in "material parts of the firm's global operations."

While most of the nation's largest banks operate globally, few banks have the reach of Citigroup. The bank has a physical presence in more than 100 countries, drawing roughly half of its total revenue from countries outside the United States. By comparison, Bank of America operates in 40 countries, but draws only about 14 percent of its revenue from overseas.

More than many of its peers, Citigroup also lends directly to consumers and homegrown companies outside the United States. That strategy may have contributed to Citigroup's recent stumbles in Mexico, where bank officials said they uncovered a fraud involving a local oil services company called Oceanografía.

The $400 million fraud forced Citigroup to adjust its earnings and raised questions about whether the bank had consistent risk controls across its many global business lines.

Citigroup also runs a payment business in which the bank transfers money between different nations on behalf of large companies. That business can pose risks that could be hard to quantify for the Fed, former financial regulators say.

Federal prosecutors are looking into a Citigroup unit that was involved in transferring money between the United States and Mexico. Regulators have previously said Citigroup lacked effective governance and internal controls to oversee compliance against money laundering at the particular unit, Banamex USA.

Over all, the Fed said in its report that "Citigroup had made some considerable progress in improving its general risk management and control practices over the past several years, but its 2014 capital plan reflected a number of deficiencies."

The drumbeat from analysts seeking a breakup of the large bank is likely to grow louder now that Citigroup has failed another stress test. Since the financial crisis, Citigroup has shed about $600 billion of assets and exited undesirable businesses, but some read the Fed's ruling as a signal that the bank needs to sell more units.

Michael Mayo, an analyst with CLSA, said that Citigroup should sell Banamex, its highly profitable Mexican unit that until recently has been considered a crown jewel. But carving out other distinct business for sale is difficult in a company assembled through multiple, disparate acquisitions.

"There are a lot of pieces to the puzzle," said Mr. Cannon of Keefe, Bruyette.

As if to illustrate the sprawl of Citigroup's international operations, Michael L. Corbat, the chief executive of Citigroup, was in a hotel room in South Korea when he learned that the Fed had rejected the bank's capital plan again. Fed officials called Mr. Corbat before dawn on Wednesday to break the news.

It was a personal blow to Mr. Corbat, who has been lauded for improving the bank's relations with regulators. He came to the helm of the bank, not long after his predecessor, Vikram S. Pandit, failed to pass the stress test in 2012.

Mr. Corbat has vowed to restructure the bank by cutting costs and shedding unwanted businesses. This year, the bank submitted what Mr. Corbat called a "modest" capital plan, which included a dividend increase to 5 cents a quarter, from the current penny.

Even after paying that proposed dividend and buying back $6.4 billion in shares, Citi would still have had a comfortable capital cushion, according to the test. But the Fed objected to the bank's plans on "qualitative" grounds.

In South Korea, Mr. Corbat cut short the next leg of his trip and immediately flew back to New York, arriving in Citigroup's Park Avenue headquarters a few hours before the Fed released the results on Wednesday.

After discussing the results with Citigroup's board by phone, the chief executive traveled downtown to the Federal Reserve Bank of New York, people briefed on the matter said. He wanted to talk over the results with the New York Fed president, William C. Dudley, who did not vote on the stress test rejections.

The decision came from all four Fed governors in Washington, including the new chairwoman, Janet L. Yellen. It was the first time the Fed governors voted on any "qualitative" objections to banks' capital plans.

This year, Citigroup was one of five banks that failed to receive the Fed's blessing to increase dividends and buy back stock. The Fed governors' vote was unanimous. Three of the other rejected banks were American units of large foreign banks — HSBC, Royal Bank of Scotland and Santander — taking part in the test for the first time.

In the next few weeks, the Fed plans to send Citi a letter detailing the deficiencies cited in its report, a person close to the process said. But until then, the regulator doesn't have much more to say to the bank on the matter, the person said.

A version of this article appears in print on 03/28/2014, on page B1 of the NewYork edition with the headline: The Bigger They Are ... .

13.08 | 0 komentar | Read More

DealBook: Candy Crush Maker King Digital Set to Trade at $22.50

The game maker King Digital Entertainment scored a huge hit with Candy Crush Saga. Now the company will test how strongly public investors believe that it can find a new success story.

The game maker priced its offering at $22.50 a share on Tuesday, the midpoint of its projected price range. At that price, the company has raised $500 million, valuing it at more than $7 billion in one of the biggest initial public offerings so far this year. It will begin trading on the New York Stock Exchange on Wednesday under the ticker symbol KING.

It will remain to be seen if investors are convinced that King can come up with new hits — and continued revenue and profits — to back up that huge valuation.

But the company's much-anticipated offering comes during the continued hot streak of the I.P.O. market.

Companies have seized on buoyant stock markets and eager stock buyers, raising $31.2 billion in proceeds to date. That is up nearly 70 percent from the same time last year, according to data from Renaissance Capital.

Much of potential buyers' attention has revolved around fast-growing digital companies like Twitter, whose initial stock sale raised $1.8 billion. Others already attracting potential investors include Box, an online storage provider for corporations, and the Alibaba Group, the Chinese online commerce giant.

Drawing almost as much attention is King, an 11-year-old multinational company that has posted huge growth thanks to its one monster hit, Candy Crush. A version of a classic "match three" game in which players line up three or more same-color candies, the title became a global cultural phenomenon. Nearly 100 million users play Candy Crush every day, drawn, in part, by a seemingly endless supply of new levels and features. Its success has overshadowed King's other titles, including Farm Heroes Saga and Pet Rescue Saga.

King relies on a so-called freemium model: Its games are largely free to play, but additional content or virtual goodies cost money. Most players of freemium games never buy anything. The small percentage who do, however, spend a lot.

Candy Crush's addictive qualities have led to enormous profits for the company. Its earnings jumped 7,000 percent from the same time a year ago, to nearly $568 million.

And the game has propelled King from a relatively unheralded Swedish company into a global phenomenon, with offices in Stockholm, London and San Francisco.

Other game makers have benefited from freemium models, too. Supercell, a Finnish company that makes the popular Clash of Clans, reported a nearly 100-fold jump in pretax income last year. In October, it took an investment from the Japanese telecommunications company SoftBank that valued it at $3 billion.

But monster hits fade over time. Angry Birds, the once-inescapable smash hit, has fallen in popularity, though it remains the 19th most downloaded paid game on Apple's iTunes app store.

Candy Crush seems to be no exception to the trend. Its gross bookings, a nonstandard measure of how much users pay for virtual items and other goodies, fell in the fourth quarter last year.

Other King titles are proving popular, but their level of success appears to be much smaller. Farm Heroes Saga, which was developed in the company's London studios, currently ranks fourth on the iTunes app store's top-grossing games. But it draws 20 million active users each day, a fifth of what Candy Crush does.

"Companies like King are reliant on hits," said Mark Little, an analyst at the technology consultant Ovum in London. "It's an open question whether they can sustain their success."

King hopes to avoid the fate of Zynga, the company behind the FarmVille and Words With Friends franchises. After making a splashy market debut in 2011, Zynga has struggled to stay relevant, prompting a painful restructuring that included bringing in a new chief executive.

Its shares closed at $4.84 on Tuesday, less than half of its I.P.O. price. That values Zynga at $4.2 billion, well below its European rival.

King has already avoided some of its Zynga's problems. It keenly focuses on mobile devices while still encouraging users to link their Facebook accounts to the games as a way to keep players engaged.

Mindful of investor skepticism, King and its advisers deliberately sought a conservative valuation, especially compared to serial hitmakers like Electronic Arts and Activision Blizzard, according to people briefed on the matter.

Yet the company itself has emphasized that it is not going public because it needs money. In the I.P.O. prospectus, King's chief executive, Riccardo Zacconi, noted that the game maker had substantial cash flow and no debt.

Instead, the offering will give the company stock that it can use to make acquisitions and let investors cash out their holdings.

Those backers are still in for a potentially big payday. The investment firm Apax Partners stands to reap about $76.5 million from the sale of some of its holdings — more than double the $35 million it originally invested in the game maker nine years ago.

Apax will still retain a roughly 44 percent stake after the I.P.O., which will be worth about $3.2 billion.

And Mr. Zacconi will own a nearly 10 percent stake that is now valued at $675 million.

JPMorgan Chase, Credit Suisse and Bank of America Merrill Lynch are leading King's offering.

13.07 | 0 komentar | Read More

DealBook: I.R.S. Takes a Position on Bitcoin: It’s Property

Updated, 8:53 p.m. | The Internal Revenue Service may have just taken some of the fun out of Bitcoin. But that may mean that the virtual currency is growing up.

The I.R.S. announced on Tuesday that it would treat Bitcoin, the computer-driven online money system, as property rather than currency for tax purposes, a move that forces users who have grown accustomed to operating under the government's radar to deal with new tax issues and reporting requirements.

While that may seem like an expensive headache, some financial experts view the move as a way to push Bitcoin further away from the fringes and into the mainstream financial system.

"It's getting legitimacy, which it didn't have previously," said Ajay Vinze, the associate dean at at Arizona State University's business school. The ruling, he said, "puts Bitcoin on a track to becoming a true financial asset."

While many users already treat Bitcoin like a currency, the I.R.S. made it very clear that "it does not have legal tender status in any jurisdiction."

The industry had been expecting the government to come out with some sort of guidance on Bitcoin, so the announcement on Tuesday did not come as much of a surprise. But some users worry that treating it as an investment could discourage the use of Bitcoin as a payment method. If a user buys a product or service with Bitcoin, for example, the I.R.S. will expect the individual to calculate the change in value from the date the user acquired Bitcoin to the date it was spent. That would give the person a basis to calculate the gains — or losses — on what the I.R.S. is now calling property.

"People might just be tempted to hoard rather than spend, because as soon as they spend they would be liable to incur capital gains taxes," said Pamir Gelenbe, the co-founder of the CoinSummit conference and a partner at Hummingbird Ventures, a venture capital firm that recently invested in the online Bitcoin exchange Kraken.

The I.R.S.'s decision would treat Bitcoin as property subject to capital gains taxes. Long-term capital gains taxes are capped at 20 percent, a more favorable rate than the top rate of 39.6 percent on federal income taxes. Individual traders in the currency markets — the British pound, for example — are expected to treat gains or losses as regular income for tax purposes.

"From a tax perspective, this is really the best possible outcome," said Barry Silbert, the chief executive of SecondMarket, which is planning to introduce a new Bitcoin exchange.

Up until now, Bitcoin enthusiasts have been able to buy, sell and trade on their gains with few fees and little oversight, since the currency has no central bank and no government regulator. Over the years, the price of Bitcoin has also fluctuated wildly, from just a few cents to more than $1,000 to its current price of nearly $600.

At the same time, an increasing number of merchants, including Virgin Galactic and Overstock.com, have begun accepting Bitcoin, supported by a growing cottage industry of companies who will exchange Bitcoins for dollars for a small fee.

Created by an anonymous computer programmer, or group of computer programmers, Bitcoin has largely been the realm of technology enthusiasts and anti-establishment hobbyists, who often buy and sell Bitcoin on online exchanges. Programmers are also able to obtain them by "mining," or figuring out obscure algorithms to "unlock" new coins.

The I.R.S. now, however, says that these miners must report the fair market value of the virtual currency as part of their income.

The new guidelines also mean that online exchanges that buy and sell Bitcoin will now have to provide customers with annual reports of their transactions, just as stock brokerages and other investment firms do.

But some efforts may already be underway to ensure that the new reporting requirements will not discourage users from trading with Bitcoin.

"I can assure you that there are a number of companies that have come up with software to automate this entire process," Mr. Silbert said.

The Bitcoin start-up Coinbase also said it supported the new guidelines.

"Exciting to see clarity from the I.R.S. Coinbase will help both consumers and merchants to meet the guidelines," the company said in a Twitter message.

In the last year or two, however, the industry has attracted backing from venture capital and other investment firms who anticipate a wider adoption of virtual currency. But at the same time, regulators have become increasingly worried that online marketplaces could be used to facilitate drug deals and other illicit transactions.

All that has put more pressure on governments around the world to figure out some way to regulate the industry. That pressure only increased last month with the collapse of one of Bitcoin's largest virtual exchanges, Mt. Gox. The company filed for bankruptcy in Japan and the United States, leaving few options for users who had lost money with the exchange.

Mt. Gox claimed to have lost nearly all its 850,000 coins, although it announced last week that it found about 200,000. The I.R.S.'s guidelines might mean that users in the United States who lost money could now treat that as a capital loss on their tax forms.

Bitcoin has attracted many of its users precisely because it operated outside the established financial system and offered the promise of cheaper transactions. But many Bitcoin advocates and experts have said that regulation is necessary to make Bitcoin a viable currency.

"The people that feel ideologically that Bitcoin should be free of all regulation aren't going to be happy," said Gil Luria, a managing director at Wedbush Securities who has written about virtual currency. "If you're trying to replace an existing financial system, then you need to have all the features that are required of that financial system."

The few employers who pay in Bitcoin will have to report those wages just like any other payment made with property, and Bitcoin income will be subject to the normal federal income withholding and payroll taxes, the I.R.S. said.

Shortly after the announcement, Senator Tom Carper, Democrat of Delaware, praised the agency's decision. The guidance "provides clarity for taxpayers who want to ensure that they're doing the right thing and playing by the rules when utilizing Bitcoin and other digital currencies," he said.

A version of this article appears in print on 03/26/2014, on page B1 of the NewYork edition with the headline: I.R.S. Takes a Position on Bitcoin: It's Property.

13.07 | 0 komentar | Read More

Well: Exercising for Healthier Eyes

Phys Ed

Gretchen Reynolds on the science of fitness.

Age-related vision loss is common and devastating. But new research suggests that physical activity might protect our eyes as we age.

There have been suggestions that exercise might reduce the risk of macular degeneration, which occurs when neurons in the central part of the retina deteriorate. The disease robs millions of older Americans of clear vision. A 2009 study of more than 40,000 middle-aged distance runners, for instance, found that those covering the most miles had the least likelihood of developing the disease. But the study did not compare runners to non-runners, limiting its usefulness. It also did not try to explain how exercise might affect the incidence of an eye disease.

So, more recently, researchers at Emory University in Atlanta and the Atlanta Veterans Administration Medical Center in Decatur, Ga., took up that question for a study published last month in The Journal of Neuroscience. Their interest was motivated in part by animal research at the V.A. medical center. That work had determined that exercise increases the levels of substances known as growth factors in the animals' bloodstream and brains. These growth factors, especially one called brain-derived neurotrophic factor, or B.D.N.F., are known to contribute to the health and well-being of neurons and consequently, it is thought, to improvements in brain health and cognition after regular exercise.

But the brain is not the only body part to contain neurons, as the researchers behind the new study knew. The retina does as well, and the researchers wondered whether exercise might raise levels of B.D.N.F. there, too, potentially affecting retinal health and vision.

To test that possibility, the researchers gathered adult, healthy lab mice. Half of these were allowed to remain sedentary throughout the day, while the other animals began running on little treadmills at a gentle rodent pace for about an hour a day. After two weeks, half of the mice in each group were exposed to a searingly bright light for four hours. The other animals stayed in dimly lit cages. This light exposure is a widely used and accepted means of inducing macular degeneration in animals. It doesn't precisely mimic the slowly progressing disease in humans, obviously. But it causes a comparable if time-compressed loss of retinal neurons.

The mice then returned to their former routine — running or not exercising — for another two weeks, after which the scientists measured the number of neurons in each animal's eyes. The unexercised mice exposed to the bright light were experiencing, by then, severe macular degeneration. Almost 75 percent of the neurons in their retinas that detect light had died. The animals' vision was failing.

But the mice that had exercised before being exposed to the light retained about twice as many functioning retinal neurons as the sedentary animals; in addition, those cells were more responsive to normal light than the surviving retinal neurons in the unexercised mice. Exercise, it seems, had armored the runners' retinas.

Separately, the researchers had other mice run or sit around for two weeks, and then measured levels of B.D.N.F. in their eyes and bloodstreams. The runners had far more. Tellingly, when the scientists injected still other mice with a chemical that blocks the uptake of the growth factor before allowing them to run and exposing them to the bright light, their eyes deteriorated as badly as among sedentary rodents. When the mice could not process B.D.N.F., exercise did not safeguard their eyes.

Taken together, these experiments strongly suggest that "exercise protects vision, at least in mice, by increasing B.D.N.F. in the retina," said Jeffrey Boatright, an associate professor of ophthalmology at Emory University School of Medicine and a co-author of the study.

But obviously, mice are not people, so whether exercise can prevent or ameliorate macular degeneration in human eyes is "impossible to know, based on the data we have now," said Machelle Pardue, a research career scientist at the Atlanta Veterans Administration Medical Center, who is the senior author of the study. She and her colleagues are trying to find ways to determine the impact of exercise on human eyes. But such experiments will take years to return results.

For now, she and Dr. Boatright said, people who are concerned about their vision, and especially those with a family history of retinal degeneration, might want to discuss an exercise program with their doctor. "As potential treatments go," she said, "it's cheap, easy and safe."

Dr. Boatright agreed, adding that eye researchers have been trying for some time to find a way to externally deliver growth factors or drugs to aging eyes, but the available methods typically involve injections into the retina, a process that is complicated, chancy, pricey, and fundamentally objectionable.

Now, though, "it's beginning to look like we may have this other method" — exercise — "that costs almost nothing and results in you making your own growth factors, which is so much safer and more pleasant than having a needle stuck into your eyeball," he said, getting no disagreement from me.

13.07 | 0 komentar | Read More

DealBook: $80 Million for 6 Weeks for Cable Chief

Updated, 8:55 p.m. | Robert D. Marcus became chief executive of Time Warner Cable at the start of the year. Less than two months later, he agreed to sell the company to its largest rival, Comcast, for $45 billion.

For that work, he will receive nearly $80 million if the deal closes, a severance payment that amounts to more than $1 million a day for the six weeks he ran the company before agreeing to sell.

"It's not unprecedented, but it is rare and troubling," said Robert Jackson Jr., an associate professor at Columbia Law School. "There's something stunning about such big paydays for such a small amount of work."

The extraordinarily large exit package is just one more example of corporate America rewarding executives with outsize sums for sometimes minimal amounts of work, and it comes despite the growing debate over income inequality in America.

"The numbers are already big now between executives and regular people," said David F. Larcker, a professor at Stanford Law School. "This exacerbates those comparisons."

So-called golden parachutes are common features in the employment contracts for public company executives, and they often reach stratospheric heights. And though Mr. Marcus is in line to receive a huge sum, his payout will not be anywhere close to the largest golden parachutes of all time.

When John Welch left General Electric in 2001, he reaped rewards of more than $417 million, according to GMI Ratings, a corporate governance research firm.

Dozens of executives have received exit packages larger than $150 million, including Lee R. Raymond, who received $321 million when he left Exxon Mobil in 2005, and William McGuire, who took home $286 million upon leaving the UnitedHealth Group in 2006.

But the payment to Mr. Marcus, 48, which was disclosed in a regulatory filing on Thursday, is nonetheless spectacular because he was chief executive for such a short period, while Mr. Welch, Mr. Raymond and Mr. McGuire had been at their companies for years.

Most of the payment due Mr. Marcus is part of the so-called change of control clause in his contract, which is set off when a company is sold. Such golden parachutes can be among the biggest paydays for executives.

Perhaps the largest package was the $214 million John A. Kanas received after selling North Fork Bancorporation to Capital One Financial in 2006. That same year, James M. Kilts, chief executive of Gillette, received $185 million when Procter & Gamble bought his company. And in 2011, Sanjay Jha, chief executive of Motorola Mobility, was in line for $65.7 million after he sold his company to Google.

Other change of control clauses, which have not yet been invoked, are even bigger.

The chief executive of the mall developer the Simon Property Group would receive $245 million should his company change hands on his watch, according to the Standard & Poor's ExecuComp database. Steve Wynn of Wynn Resorts would receive $239 million if his casino company were sold. And David M. Zaslav, chief executive of Discovery Communications, would get $232 million if his collection of cable networks found a buyer.

Compensation experts contend that golden parachutes can be in the best interests of shareholders. Without one, a chief executive might not want to sell the company and lose his salary.

What is more, many golden parachutes are structured to reflect the total value of salary, bonuses and stock options that executives would receive over the duration of their employment.

But critics see the packages as distorting influences that create incentives for chief executives to sell their companies.

"I don't understand how these payments can be thought to align the interests of C.E.O.s with shareholders," Mr. Jackson said.

Executives can receive golden parachutes not only when they sell their companies, but also when they retire, and even when they are fired.

In January, Henrique de Castro was ousted as chief operating officer of Yahoo after clashing with the chief executive, Marissa Mayer. Despite his subpar performance during his 15-month tenure, Mr. de Castro walked away with at least $88 million and as much as $109 million.

Golden parachutes first appeared in the 1970s and proliferated in the 1980s. And while recent regulation has given shareholders a voice through say-on-pay votes, it has not damped executives' enthusiasm for big paydays.

Time Warner Cable shareholders can express their displeasure with the package when they vote on the deal, which they are almost certain to approve. But even if they voice their disapproval of the golden parachutes, it will not change a thing. Such votes are nonbinding.

Time Warner Cable and Comcast both declined to comment on the matter.

Should the deal close, Mr. Marcus will receive $56.5 million in stock, $20.5 million in cash and a $2.5 million bonus if Time Warner Cable meets its performance targets by the time of the deal's completion.

Mr. Marcus could argue that he did not go looking for a deal. Charter Communications began pursuing Time Warner Cable last year, when Mr. Marcus was the chief operating officer of the company. He earned $10.1 million in that job in 2012.

But in a rapid series of developments in January and February, Mr. Marcus negotiated to sell Time Warner Cable to Comcast, the largest cable operator in the country.

Mr. Marcus will not be the only Time Warner Cable executive in line for a big payday. Arthur T. Minson Jr., the chief financial officer, will receive severance pay of $27 million. Michael L. LaJoie, the chief technology officer, will receive $16.3 million. And Philip G. Meeks, the chief operating officer, will take home $11.7 million.

Left off the list of golden parachute recipients is Glenn Britt, who ran Time Warner Cable after its spinoff from Time Warner in 2009. Mr. Britt stepped down at the end of 2013, partly because of health issues, but not before he told Brian L. Roberts, the chief executive of Comcast, that combining their companies one day would be a "dream deal."

Executive compensation experts said that there were few ways to curb the practice of awarding golden parachutes, but that shareholders should voice their opinions nonetheless.

"If Time Warner Cable shareholders are sufficiently outraged, they can vote against it, and if executives are sufficiently embarrassed, it might discourage other C.E.O.s from doing the same thing," said Mr. Jackson. "But I'm not optimistic."

 

13.07 | 0 komentar | Read More

DealBook: In Hong Kong, Betting Big on Bitcoin

HONG KONG — By day, David Shin is an investment banker at a major financial firm. By night and in pretty much every other free minute, he is an entrepreneur looking to break into Hong Kong's growing Bitcoin scene.

Even as concerns swirl about the long-term viability of the virtual currency, Mr. Shin is raising money, courting clients and hiring staff to build a sort of stock exchange for Bitcoin-oriented companies. Mr. Shin, 38, plans to start his venture, CryptoMex, at the end of April.

"I believe Bitcoin will bring about a brave new world of money," he said. "The Internet started out as a revolutionary protocol, became more easy to use over time, and saw an explosive growth rate. The same is happening with Bitcoin."

Mr. Shin joins a growing field of technology experts, financial players and crypto-geeks who are betting that an unfavorable regulatory environment in mainland China has put this special administrative region — with its more laissez-faire attitude — on the edge of something big.

Bitcoin, digital money backed by no government and "mined" by computers performing complex algorithms, have been largely unregulated, creating a virtual Wild West of programmers and speculators. But as Bitcoin tries to gain greater mainstream acceptance, authorities around the world have begun eyeing it more cautiously, as they might a currency. The spectacular collapse of Mt. Gox, the Tokyo-based Bitcoin exchange, has only fanned regulators' concerns.

Regulatory moves in China have been among the more aggressive to date. In December, the Chinese authorities curtailed the use of Bitcoin by banks and payment processors, which helped halve the value of the virtual currency in two weeks. While the government said the general public was free to trade Bitcoin online, the broad fear is that China may eventually impose a sweeping ban on its use offline, as it did in 2009 to Q Coin, a virtual currency issued by Tencent.

But Hong Kong has so far remained relatively passive on the regulatory front. The former British colony has retained a separate political and economic system since it returned to Chinese rule, and the Hong Kong Monetary Authority, the city's de facto central bank, says it is not directly regulating Bitcoin, at least for now.

Entrepreneurs in Hong Kong are essentially playing regulatory arbitrage. Although firm data is scarce, China is widely seen as the world's second-largest market for Bitcoin, after the United States, and the restrictions have cooled its nascent Bitcoin scene. By virtue of proximity, businesses in Hong Kong are hoping to capture some of the demand.

"Like water, Bitcoin may take the path of least resistance and find its way into Hong Kong," said Michael Chau, a business professor at the University of Hong Kong. "Because of the city's proximity to China — and because it has become part of the country since 1997 — Hong Kong has the potential to absorb part of China's Bitcoin market."

The Chinese customer base of Laser Yuan, the founder of the Hong Kong-based exchange BitCashOut, doubled after the December notice. Three weeks ago, ANX, Hong Kong's largest Bitcoin exchange, opened what it said was the world's first brick-and-mortar store for the virtual currency, where customers can buy Bitcoin over the counter. It also set up a Bitcoin vending machine last week. Robocoin, a maker of Bitcoin automated teller machines, will set up its first A.T.M. in Hong Kong this spring, and plans 100 more around the world, none in China, said the company's chief executive, Jordan Kelley.

"We have hundreds and hundreds of Chinese businessmen and entrepreneurs contact us with the purpose of becoming Robocoin operators," Mr. Kelley said, adding that if China gave him the green light, the company would "have 200 A.T.M.s in China before the end of the year, if not more."

Mr. Shin said he first saw the promise of Bitcoin last year, when the coins were worth $25 apiece, compared with about $620 now. After raising $2.5 million, he and his business partners built IceDrill, an operation in Montreal where racks of speedy computers race to generate Bitcoin.

But he is now selling part of his stake in the Canadian mine and focusing on his start-up in Hong Kong, which he said could be "the capital of Bitcoin in Asia." Mr. Shin recently hired Jake Smith, a well-connected Bitcoin enthusiast who worked for Li Xiaolai — a Chinese investor who reportedly holds 100,000 coins — to get Chinese to buy into the companies listed on his platform.

"When the government comes out and puts constraints on Bitcoin in China, investors naturally look at Hong Kong — not Singapore, not Korea — for substitution," Mr. Shin said.

Hong Kong operates in a type of regulatory limbo, so uncertainty reigns as much as opportunity. If China clamps down further, Hong Kong may be forced to rethink its stance.

John Greenwood, chief economist at Invesco and architect of Hong Kong's exchange-rate system, said that whether the Chinese authorities would toughen measures depended on whether Bitcoin became so prevalent that it undermined China's capital controls.

"China's mainland residents can buy things with Bitcoin from Europe or North America or anywhere else in the world, or make transfers," Mr. Greenwood said. "It's a hole in the dike, a leakage from China's system of foreign-exchange control."

Entrepreneurs like Mr. Shin also face a legacy of past ventures that have proved problematic.

Two once-prominent Bitcoin crowdfunding platforms, BTCST and Bitfunder, are now defunct. BTCST, which offered Bitcoin-denominated securities that claimed to return up to 7 percent a week, has been charged by the United States Securities and Exchange Commission with fraud and with running a Ponzi scheme.

"The operating environment is much clearer," Mr. Shin said. "The Hong Kong government has acknowledged Bitcoin as a commodity, so we have clarity on both fronts here as well."

Then there is the need for better basic infrastructure and consumer awareness, a challenge for Bitcoin around the world.

For example, few businesses let customers make payments with the currency. In Hong Kong, they largely amount to a boutique hotel, a flower shop, a tailor, a music teacher and a Beijing-style crepe restaurant.

On the eve of the Chinese New Year in January, the three co-founders of the Bitcoin exchange ANX took to the bustling streets of the Lan Kwai Fong entertainment district to hand out 50,000 red envelopes, each carrying a little more than a dollar's worth of Bitcoin.

"I use Bitcoin to buy stuff online all the time," Ben Lau, an online marketer, said as he stood on the sidewalk using his smartphone to scan the QR code — an image that works like a bar code — on the voucher he had just received.

But Mr. Lau was in the minority. Even months after Bitcoin leapt into the limelight, most passers-by had little idea about what it does, and some associated it with drugs and fauds.

When the after-work crowd diminished, the co-founders went to a nearby bar to check on rumors that it had recently started accepting Bitcoin. A few beers later, Ken Lo, managing director of ANX, waved for the bill and asked to pay in the virtual currency.

"A customer's friend thought our bar had a matching name — Bit Point — with Bitcoin, so he helped us set this up," said Gaga Lam, the bar's manager. "We haven't really tried it out yet."

Her iPad Mini displayed the website of BitPay, the Bitcoin payment processor in which Asian billionaire Li Ka-shing was an early investor. But the group ended up paying with a credit card after a few unsuccessful tries.

"We can do better than that," Mr. Lo said, referring to his company's Bitcoin payment solution. "We clear faster than the banks, our transaction fee is lower than credit card companies, and there would be no chargebacks. And Bitcoin fans will flock to your bar in droves."

A version of this article appears in print on 03/20/2014, on page B1 of the NewYork edition with the headline: Placing Their Bets on Bitcoin.

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DealBook: Fortress, Benchmark and Ribbit Buy Stake in Pantera Bitcoin

Several prominent investment firms are joining forces to buy stakes in one of the biggest Bitcoin operations in the world.

The publicly traded New York private equity and hedge fund firm Fortress Investment Group and two other investors are buying a stake in Pantera Bitcoin Partners, a San Francisco-based hedge fund operator that buys and sells virtual currencies.

The creation of the partnership represents a significant step in the push to move Bitcoin into the financial mainstream at a time when several well-publicized claims of theft have pointed to potential weaknesses in the digital currency economy.

Pantera Capital, the parent of Pantera Bitcoin, was founded in 2003 by Dan Morehead, a veteran of the hedge fund giant Tiger Management. For most of its existence, Pantera was a macro hedge fund. But since 2011, Mr. Morehead has grown increasingly fascinated with Bitcoin, he said in an interview on Tuesday. In recent months, he said, the firm's staff of 16 has shifted its attention to work full time on investments in the virtual currency world.

"We're very excited about the promise of Bitcoin and how it can transform the way we move money," Mr. Morehead said. "The promise and possibilities here are very broad."

When Pantera made its first regulatory filing in December, its Bitcoin fund was worth $147 million. That is significantly larger than the Bitcoin Investment Trust, a $55 million fund run by the New York firm SecondMarket that holds virtual currencies on behalf of investors.

The big venture capital firms Benchmark Capital and Ribbit Capital are taking stakes in Pantera Bitcoin Partners, along with Fortress. All are committing to buy and sell Bitcoin and other virtual currencies through Pantera.

Michael E. Novogratz, an executive at Fortress, had previously talked about his interest in Bitcoin, but until now it has been unclear how the firm was approaching digital money as an investment. Moving forward, Fortress said that it would make all of its Bitcoin purchases through Pantera."This partnership brings together leading companies with a range of relevant expertise, well positioned to lead and capitalize on a potentially transformative evolution," Mr. Novogratz said.

In the years after the Bitcoin program was released by an anonymous founder known as Satoshi Nakamoto in 2009, most of the dominant players were small start-ups with few links to the traditional financial world. Part of the allure of Bitcoin was that it allowed users to move and store money outside the banking system.

Recently, however, a number of pioneers, like the Japanese exchange Mt. Gox, have run into trouble, shaking confidence in the entire Bitcoin network.

At the same time, investors and financial firms with more established credentials have been expressing their growing interest in Bitcoin. Last week, Goldman Sachs became the latest Wall Street firm to issue a research report on Bitcoin's potential to shake up different parts of the financial system.

Much of the research has been focused on Bitcoin not just as a form of digital money, but also as a new payment system, buttressed by the computers linked into the Bitcoin network. The system is run according to a prewritten set of rules, which determines how the coins are created and moved between digital wallets.

Mr. Morehead's management firm is giving up some of its ownership in Pantera Bitcoin Partners, which manages the Bitcoin fund. But all of the companies involved in Pantera Bitcoin Partners will continue to make their own investments in virtual currency start-up companies.

Earlier this week, all four firms teamed up to make a $20 million investment in Xapo, a start-up that offers to secure the information needed to unlock Bitcoins in guarded vaults so that they cannot be reached by hackers.

A version of this article appears in print on 03/19/2014, on page B3 of the NewYork edition with the headline: Investors Buy Stakes in Bitcoin Firm .

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Well: How a Warm-Up Routine Can Save Your Knees

Phys Ed

Gretchen Reynolds on the science of fitness.

Rupturing an anterior cruciate ligament in the knee is a nightmare. As the parent of a teenage son who is seven months out from A.C.L. reconstruction surgery, I can attest to the physical and psychological toll it can take, not to mention the medical bills. But a practical new study suggests that changing how sports teams warm up before practices and games could substantially lower the risk that athletes will hurt a knee, at a cost of barely a dollar per player.

Injuries to the A.C.L., which connects the tibia and femur and stabilizes the knee joint, are soaring, with an estimated 150,000 cases a year. The ligament is prone to tearing if the knee shears sideways during hard, awkward landings or abrupt shifts in direction – the kind of movements that are especially common in sports like basketball, football, soccer, volleyball and skiing.

Motivated by the growing occurrence of these knee injuries, many researchers have been working in recent years to develop training programs to reduce their number. These programs, formally known as neuromuscular training, use a series of exercises to teach athletes how to land, cut, shift directions, plant their legs, and otherwise move during play so that they are less likely to injure themselves. Studies have found that the programs can reduce the number of A.C.L. tears per season by 50 percent or more, particularly among girls, who tear their A.C.L.s at a higher rate than boys do (although, numerically, far more boys are affected).

But to date, few leagues, high schools or teams across the country have instituted neuromuscular training. That puzzled Dr. Eric Swart, a resident in orthopedic surgery at Columbia University.

Wondering what might motivate coaches and other interested parties to take up A.C.L. injury-prevention programs, Dr. Swart and his colleagues settled on naked self-interest. They set out to see what the financial savings involved in undertaking — or resisting — an A.C.L.-injury prevention program might be.

So, for a study presented last Friday at the American Academy of Orthopedic Surgeons annual meeting in New Orleans, he and his colleagues gathered recent clinical trials related to neuromuscular training and used them to create a model of what would happen in a hypothetical sports league composed of male and female athletes, ages 14 to 22, if they did or did not practice neuromuscular training. The researchers then began running the monetary numbers.

They first determined that, not surprisingly, the medical costs associated with a single A.C.L. tear are staggering, with the estimated price for reconstructive surgery and rehabilitation averaging $15,000. If the incidence of A.C.L. tears is about 3 percent among athletes not practicing neuromuscular training, as the clinical trials showed, then, the researchers concluded, the cost of these injuries per player was quite high.

"In our model, it worked out to something like $500 per player," Dr. Swart said. "Imagine if people collected that as a fee when kids signed up" for club soccer or basketball.

However, neuromuscular training changed that calculus, he continued, dropping the likely incidence of the injuries to about 1.5 percent of the athletes. More important for this study, the cost of the training was negligible, since several of the programs included in the analysis are available free on the Internet and require almost no equipment.

According to the researchers' calculations, the cost of starting a neuromuscular training program averaged $1.25 per player per year, "which is so much cheaper than visiting an orthopedic surgeon," said Dr. Swart, an orthopedic surgeon. The cost was the same whether the training was directed at both genders or only at girls.

Those parents and coaches who find that number enticing can begin neuromuscular training with their charges quite easily, Dr. Swart said. "Neuromuscular training is just a better way to warm up," he said.

Most of the scientifically studied programs consist of about 15 to 20 minutes of exercises including marching, jumping, squatting and side-to-side shuffling that, Dr. Swart said, "help to wake up the brain and nervous system" and get the entire body moving with sharper coordination. The programs also emphasize landing with knees bent and in the proper alignment.

Among the most thoroughly studied neuromuscular training options are the PEP (Prevent Injury, Enhance Performance) program, which was developed by the Santa Monica Sports Medicine Foundation, and the FIFA 11 program, created by the international governing body of soccer. Both programs are free, and coaches need no training to teach them to athletes.

It is important, though, that athletes perform the exercises correctly and in the order prescribed by the programs, Dr. Swart said, to avoid injuries during the training itself. You can find step-by-step, easy-to-follow videos of the workout routines for both the PEP program and the FIFA 11 program on each group's website. (A sample video from each program can also be viewed below).

Dr. Swart and his colleagues also evaluated the cost-effectiveness of screening young athletes to find those whose biomechanics place them at especially high risk of tearing an A.C.L. and train only them. But the costs of screening were too high to make it practical for youth leagues or high schools.

Instead, Dr. Swart said, universal neuromuscular training for athletes involved in high-risk sports seemed to be cost-effective and to significantly reduce the chance that you will be visiting his office this season.

A sample video from the PEP (Prevent Injury, Enhance Performance) program:

And a sample video from the FIFA 11 program:

FIFA 11+ Level A from Ben Brooks on Vimeo.

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DealBook: F.T.C. Inquiry Into Herbalife Prompts Big Share Selloff

The Federal Trade Commission said on Wednesday that it had opened an official inquiry into Herbalife, the nutritional supplement company that has been the focus of a 15-month crusade by the hedge fund billionaire William A. Ackman.

The commission's move, after more than a year of lobbying by Mr. Ackman, politicians and civil rights groups, could be a boon for Mr. Ackman's $1 billion bet against the company after a series of setbacks, in particular a strong run-up in Herbalife's share price.

The news of the investigation on Wednesday prompted a sell-off in the stock, which dropped more than 15 percent before recovering somewhat. It closed down 7.4 percent, at $60.57. The success of Mr. Ackman's wager depends on a collapse of Herbalife's stock price, and he gains ground when other investors sell their shares because they fear the consequences of a regulatory crackdown on the company.

Mr. Ackman began his public assault with a presentation in December 2012, contending that Herbalife is a pyramid scheme, which the company has repeatedly denied. He has lobbied members of Congress to press state and federal regulators, specifically the F.T.C., to investigate Herbalife.

While investigators at the Securities and Exchange Commission moved quickly, opening an inquiry into Herbalife just a month after Mr. Ackman's public presentation, the F.T.C. remained quiet until Wednesday. The commission confirmed the investigation only after Herbalife said it had received a letter from the agency.

The company issued a statement on Wednesday after The Financial Times called to ask about the letter. Herbalife said it welcomed the inquiry and would cooperate fully with the investigation. "We are confident that Herbalife is in compliance with all applicable laws and regulations," it said.

A spokesman for Herbalife declined to disclose the specific nature of the investigation but said the company's lawyers were notified on Tuesday afternoon that they would be receiving a letter from the F.T.C. on Wednesday.

In a memo sent around to Herbalife employees Wednesday afternoon, the company's chief executive, Michael O. Johnson, said the inquiry was a "positive development."

The commission acted after receiving letters from members of Congress urging it to investigate the company, as well as scores of civil rights and Latino advocacy groups, some of which have received financial donations from Mr. Ackman's team.

Mr. Ackman declined to comment on Wednesday.

Both Mr. Ackman and the advocacy groups have called on the F.T.C. to investigate Herbalife for what they say is a pyramid scheme that preys on lower-income Latinos and African Americans.

The F.T.C. has experience in spotting pyramid schemes that disguise themselves as legitimate multilevel marketers, the industry term for companies that sell through networks of sales representatives. These schemes operate by constantly bringing in new sales representatives who are required to buy products that are difficult to sell outside the network.

The commission has moved to close down several such schemes in recent years, asserting that they misled new recruits and existed to enrich a small number of senior sales representatives.

One key to deciding whether a company is operating a pyramid scheme is to assess what proportion of overall sales are made to people outside the network. If a company makes most of its sales to consumers out of its network — as Tupperware has said is the case with its business — it is a sign that real demand exists for the product.

In such companies, sales representatives stand a reasonable chance of making money. But if only a small amount of sales are made to people outside the network, regulators may see that as a strong indication that sales representatives are being coaxed into buying products that are almost impossible to resell. Such a company is a pyramid because it makes money only by recruiting unwitting sales representatives with empty promises.

Ana Arias, a resident of Scottsdale, Ariz., who said she was part of Herbalife's network from 2009 until 2012, asserted that new members did not stay in the network for long. "It was a revolving door," she said. "I recruited hundreds of people into the business, and they all eventually separated from the business."

It is hard from the outside to determine who actually buys Herbalife's products. Last year, Herbalife, citing an Internet survey, said more than 90 percent of its products were sold to "nondistributors." But the survey did not use Herbalife's actual sales data to reach that conclusion.

At the same time, Herbalife has said that many members of its network also consume its products. These people may join the network, the company says, to obtain a discount on the small amounts of Herbalife's products — shakes and vitamins — that they buy for personal use. In other words, if a large amount of sales are within Herbalife's network, that does not necessarily indicate it is a pyramid scheme.

Mr. Ackman's battle against the company has gained momentum in recent weeks. The most recent politician to join the fray was Senator Edward J. Markey, Democrat of Massachusetts, who sent a letter to the F.T.C. on Jan. 23 asking the agency to look into Herbalife's business practices. News of his letter sent Herbalife shares tumbling by more than 10 percent.

In a reply to Mr. Markey's request two weeks ago, Edith Ramirez, the chairwoman of the F.T.C., wrote that she could not disclose whether the commission had taken any measures to look into the company. "I can assure you, however, that the information you provided and the concerns you express are being carefully considered," she added.

Just one month ago, there was little indication that the F.T.C. would open an investigation. In early February, a group of about 30 people affiliated with advocacy and church groups flew to Washington to meet with Ms. Ramirez. In a sign of how Wall Street's interests have spilled over into the political realm, one of those groups paid for flights using money that Mr. Ackman had donated to help identify people who said they were victims of Herbalife.

The commission has held its cards so close to the vest that one participant at the February meeting said he had been unsure what to make of Ms. Ramirez's reaction to the group's complaints.

"From our meeting she didn't, in any way shape or form, give me any indication that she found any sympathy to what we said," said Horace Small, the executive director of the Union of Minority Neighborhoods, a civil rights group based in Boston.

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DealBook: Puerto Rico Gets a Break With Rates on Its Bonds

Puerto Rico is expected to sell roughly $3 billion in bonds on Tuesday at interest rates that are considerably lower than many investors in the municipal market had expected, providing a rare bright spot for the cash-squeezed island.

The lower yields, investors say, are being driven by a combination of factors, including a recent flow of investments in mutual funds that are large buyers of municipal bonds, Puerto Rico's progress in closing its chronic budget gap, its improved financial disclosures and a general sense of relief that the commonwealth still has access to the debt market.

"There's a very explicit, almost to the point of jarring, acknowledgment of many problems," said Robert Donahue, a managing director at Municipal Market Advisors, referring to a long-sought liquidity report issued last week by the Puerto Rican government. "Now the commonwealth has opened the curtain."

But the commonwealth's fiscal agent, the Government Development Bank, also has hired an affiliate of a well-known restructuring firm, raising concerns among some investors that Puerto Rico is weighing a revamping of its existing debt load, even as it prepares to raise fresh funds.

"I have to say it lends an element of discomfort as you look at the new deal," Joseph Rosenblum, director of municipal credit research at AllianceBernstein, said of the hiring of the restructuring firm Millco Advisers, an affiliate of Millstein & Company. The firm's founder is James E. Millstein, a former Treasury Department official who oversaw the government's revamping of the bailed-out insurance giant American International Group after the financial crisis.

At the moment, plenty of investors appear to be willing to look past the specter of a revamping as well as Puerto Rico's current liquidity issues. They are betting that the $3 billion in new debt — one of the commonwealth's largest bond sales in recent memory — will buy Puerto Rico the time it needs to turn around an economy that has been in a painful recession since 2006.

The tax-exempt debt is expected to be sold with yields from 8.62 to 8.87 percent, according to preliminary pricing documents circulated in the bond market on Monday. Those rates would prove far less expensive for the government than predictions ranging in the low double digits.

Many investors are calculating that any future losses from a revamping could be made up on the high yields that they can collect from the bonds, which will carry the commonwealth's general obligation pledge. That pledge is stronger than usual when it comes from Puerto Rico because the commonwealth's constitution states that all the island's available resources will be used to make investors whole.

The Government Development Bank has not said whether a revamping is under consideration. The agency says that Millco was hired as a financial adviser to help it analyze the size and timing of coming cash requirements and to evaluate financing options.

Mr. Rosenblum of AllianceBernstein said he feared a repeat of what occurred in Detroit, when Kevyn Orr, a bankruptcy expert from the law firm Jones Day, was hired as the city's emergency manager. It turned out to be a prelude to Detroit's bankruptcy filing in July 2013.

Like Detroit, Puerto Rico has been losing population, which can hamper economic growth and leave a smaller and poorer group of people responsible for repaying the debt.

"I am not disregarding the progress that they have made in terms of the budget, but the situation continues to be challenged," Mr. Rosenblum said.

As a United States territory, Puerto Rico cannot file bankruptcy under any existing chapter of the federal bankruptcy code, but many investors expect that the government may have to reduce some of its debt, dealing losses to investors.

Doubts about the credibility of Puerto Rico's general obligation bonds have been growing, especially since Detroit has proposed resolving its bankruptcy by sharply reducing its payments on such bonds. The Puerto Rican secretaries of the treasury and justice have added an unusual provision to their bond resolution, requiring that any legal disputes be settled in federal court in New York, rather than in Puerto Rico.

The provision, described in materials circulated by the Wall Street banks selling the bonds, is meant to reassure investors who believe they would find a more creditor-friendly judge in New York than in Puerto Rico, people briefed on the sale said. The offering circular notes that a New York judge would still have the power to send any bondholder complaints to a Puerto Rican venue if that would be "more suitable on grounds of judicial fairness to the parties involved."

For all investors' concerns about Puerto Rico's liquidity, many say they are heartened by the commonwealth's success at cutting its pension expenses and reducing its budget shortfalls.

Some of this optimism is reflected in a recent rally in Puerto Rico bond prices. Yields on Puerto Rico general obligation bonds have fallen to 7.54 percent from 8.9 percent at the start of the year, according to Thomson Reuters data.

Still, Puerto Rico's financial problems are complex and are not always immediately apparent — the result of multiple debt obligations of many government agencies. Sorting out those complexities will be a delicate task for Mr. Millstein and Millco.

Mr. Millstein was the architect of a complicated series of transactions that paid back the Federal Reserve Bank of New York for its initial bailout loans to A.I.G., which were extended before the Treasury got involved through TARP. Finding enough cash within A.I.G. to repay the loans, and separating A.I.G.'s various operating units from each other were operations that took months, and may prove relevant to Puerto Rico.

Since striking out on his own, Mr. Millstein has landed assignments like advising the merger of US Airways with the once-bankrupt American Airlines and some big creditors of Energy Future Holdings, the troubled Texas utility.

A.I.G. had to be revamped outside of bankruptcy, and A.I.G.'s operating units were woven together in ways that made them hard to separate without causing insurance insolvencies.

The Government Development Bank said Millco would also help it analyze the commonwealth's capital structure, including the relationships between the bank itself, the central government and various public corporations, "including understanding all direct and contingent liabilities."

A version of this article appears in print on 03/11/2014, on page B1 of the NewYork edition with the headline: Puerto Rico Gets a Break With Rates On Its Bonds.

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Bits Blog: Snowden Urges Tech Industry to Protect Customers

Michael Buckner/Getty Images for SXSW

AUSTIN, Tex. — Edward J. Snowden wants the technology industry to get serious about protecting the privacy of its users and customers.

"When we think about what is happening at the N.S.A. for the last decade, the result has been an adversarial Internet," Mr. Snowden told a crowd of developers and entrepreneurs at the South by Southwest conference here on Monday, speaking by videoconference.

"They are setting fire to the future of the Internet," he added. "You guys are all the firefighters. We need you to help us fix this."

Mr. Snowden, the former National Security Agency contractor who leaked classified documents that revealed a vast network of government surveillance, told the audience that they "can enforce our rights for technical standards."

Mr. Snowden said he chose the conference, known as SXSW, to speak directly to people with the skills to make mass surveillance significantly more expensive for government agencies — if not impossible. For the past decade, Mr. Snowden said, the N.S.A. had been given free rein to make the Internet less secure by engaging in large-scale sweeps of data.

Mr. Snowden fled the United States last summer and is living at an undisclosed location in Russia, where he has been granted temporary asylum. He faces charges in the United States of violating the Espionage Act.

Mr. Snowden appeared remotely at the conference with Christopher Soghoian, the principal technologist of the American Civil Liberties Union, and Ben Wizner, director of the A.C.L.U.'s Speech, Privacy and Technology Project and Mr. Snowden's legal adviser, both of whom were on site in Austin. The event was a rare live interview for Mr. Snowden, conducted by Mr. Wizner.

Using technology to mask his whereabouts, Mr. Snowden appeared through a Google Plus videoconference — the irony of which was not lost on Mr. Snowden or others, who joked about the fact that Google was involved in many of Mr. Snowden's revelations.

Appearing before a green screen that had been programmed to display the American Constitution, Mr. Snowden addressed a rapt audience that often broke into applause and cheers. Hundreds packed into an exhibition hall to hear him speak and those who could not find seats stood along the wall or sat on the floor.

At various points during the event, the Internet access in the convention center buckled under the burden of all the people trying to use their devices to tweet or go online. And at times, Mr. Snowden's connection dropped, in part because of the anonymity software he used to mask his location.

Mr. Snowden said he hoped to raise a call to arms to developers, cryptographers and privacy activists to build better tools to protect the privacy of technology users. The goal, he said, was that encryption would ultimately be considered as a necessary, basic protection, and not something easily dismissed as an "arcane black art."

Ultimately, Mr. Snowden said, that will "allow us to reclaim the open and trusted Internet."

He was referring to the many digital encryption protections that are cheap and widely available, but exceedingly difficult for people to use properly.

Mr. Snowden noted that encryption services like Pretty Good Privacy, or PGP software, and anonymity services, like Tor, are available, but are not as easy to use as Google's Gmail service or Chrome browser.

He also praised services like Open WhisperSystems, a suite of applications that aims to make secure communications tools usable, and commonly use.

Ultimately, the tech industry can help fix the problem of security, Mr. Soghoian said. "Most regular people are not going to download some obscure security app," he said. "They're going to use the tools they already have," like Google, Facebook and Skype.

Mr. Snowden repeatedly emphasized that he didn't want to block government agencies from doing their job to protect citizens, but was instead concerned about unwarranted surveillance. He said that if the American government and its technology industry are not held accountable for unwarranted oversight, foreign companies and agencies might feel free to adopt similar mass surveillance tactics and policies.

When companies collect data, he said, they should only "hold it for as long as necessary."

Mr. Snowden's comments Monday echoed his testimony to members of the European Parliament, released Friday, in which he said targeted surveillance was acceptable.

At one point here in Austin, Mr. Snowden answered a question sent via Twitter about whether any data was ever truly safe, from a malicious hacker or an agency like the N.S.A.

"Let's put it this way," he said with a bit of a laugh. "The United States government has assembled a massive investigation team into me personally, into my work with journalists and they still have no idea you know what documents were provided to the journalists, what they have, what they don't have, because encryption works."

Conference attendees applauded and cheered as Mr. Snowden spoke, but the event also drew criticism. Some questioned the format; half the time was devoted to Mr. Soghoian's comments.

Leading up to the event, Representative Mike Pompeo, Republican of Kansas, wrote a letter to SXSW organizers calling for them to cancel the event altogether.

SXSW's conference organizers have made privacy and surveillance a cornerstone of the technology portion of the event. Over the weekend, Julian Assange, founder of WikiLeaks, also gave a talk by videoconference.

Mr. Snowden, who was dressed sharply in a white dress shirt and gray blazer for his talk, said he had no regrets about his actions, even though he now faces prosecution and is thought by many to be a traitor, or worse.

"I took an oath to support and defend the Constitution and it was violated on a massive scale," he said.

Jenna Wortham reported from Austin, Tex., and Nicole Perlroth from San Francisco.

A version of this article appears in print on 03/11/2014, on page B1 of the NewYork edition with the headline: Snowden Tries to Rally Tech Conference to Buttress Privacy Shields.

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Weekend Kitchen

Robert Stolarik for The New York Times

At Alder in the East Village, Kevin Denton, the beverage director, makes three cocktails in two sizes, regular and "short."

Mini-cocktails, known by some as shorts, are offered at a few bars in the East Village.

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 </span> The Men of Atalissa

Editors' Choice - Times Documentaries

By Kassie Bracken and John Woo March 8th, 2014

For decades, a group of men with intellectual disabilities seemed happy living in a small Iowa town. Then their neighbors found out the truth. This film is being shown in collaboration with POV.org.

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DealBook: Former Leaders of Once-Mighty Law Firm Indicted

Updated, 9:07 p.m. | Several former leaders of the once-high-flying law firm Dewey & LeBoeuf apparently violated a cardinal rule that lawyers always tell their clients: Don't put anything incriminating into an email.

Yet four men, who were charged by New York prosecutors on Thursday with orchestrating a nearly four-year scheme to manipulate the firm's books to keep it afloat during the financial crisis, talked openly in emails about "fake income," "accounting tricks" and their ability to fool the firm's "clueless auditor," the prosecutors said.

The messages were included in a 106-count indictment against Steven Davis, Dewey's former chairman; Stephen DiCarmine, the firm's former executive director; Joel Sanders, the former chief financial officer; and Zachary Warren, a former client relations manager. They were charged with larceny and securities fraud. One of the men even used the phrase "cooking the books" to describe what they were doing to mislead the firm's lenders and creditors in setting the stage for a $150 million debt offering that was supposed to solve the firm's financial woes, according to the messages.

It is the kind of rogue language that one might expect to find in emails unearthed during a corporate fraud case from the Enron era, but not at a law firm that carried the name of Thomas Dewey, the former governor of New York, who began his legal career by prosecuting organized crime. The indictment is an unusual coda to the collapse of a firm that was created by the 2007 merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, and that filed for bankruptcy in May 2012.

"Those at the top of the firm directed employees to hide the firm's true financial condition from creditors, investors, auditors and even partners of the firm," the Manhattan district attorney, Cyrus R. Vance Jr., said at a news conference announcing the indictment.

The case is also surprising in that it stems partly from a revolt within the firm itself. Lawyers at Dewey ousted Mr. Davis, an architect of the merger, as chairman just as the firm was preparing to file for bankruptcy. Soon afterward, several of them went to Mr. Vance, urging him to investigate Mr. Davis and his administrative team.

Through their lawyers, all of the men denied the charges.

The indictment paints a portrait of a law firm being run like a criminal enterprise. Mr. Vance said his office had already secured guilty pleas from seven other people who once worked for Dewey. A person briefed on the investigation said several were cooperating with the two-year-old investigation.

"I can't say whether this is the Enron" of the legal world, Mr. Vance said. "Clearly this is the largest law firm bankruptcy that we know of in history."

At its peak, the combined firm had 26 offices around the globe and employed more than 1,300 people. The $550 million in claims against the firm's estate made it the largest bankruptcy filing by a law firm on record.

The bankruptcy revealed that while Dewey was a brand-name operation, it failed to generate sufficient revenue to pay the big contracts of its star lawyers and meet its expensive overhead. The firm struggled to keep up with loan payments during the worst of the financial crisis.

But the indictment and a parallel civil complaint filed by the Securities and Exchange Commission surprised even some who had worked at Dewey.

"If the allegations are true, then once again we see a cover-up giving rise to a crime, when the same people had the option of speaking up and being heroes for helping to solve a sympathetic debt problem at the height of the Great Recession," said Martin Bienenstock, a former Dewey lawyer and now chairman of the bankruptcy and restructuring practice at Proskauer Rose.

Roy D. Simon, a professor at the Hofstra University School of Law, who specializes in legal ethics, said it was ironic that far too many lawyers at Dewey were "uncurious about the management of their firm," until it was too late.

Prosecutors contend that the accounting games at Dewey began in November 2008, not long after the merger was completed, and continued until March 7, 2012, a little before Dewey filed for bankruptcy two months later. The firm found it could not meet provisions in bank loans that required it to meet certain cash-flow projections. To make it appear as though Dewey was meeting those conditions, the top executives schemed to make a series of fraudulent accounting entries that either increased revenue, decreased expenses or appeared to rein in distribution payments to partners, prosecutors said.

The authorities said the accounting scheme was laid out in a document called the "Master Plan."

Mr. Davis and his team had hoped that the firm's revenue would eventually increase as the economy recovered. But by the end of 2009, Dewey owed its bank lenders about $206 million, needed to make payments totaling $240 million to its partners, yet had just $119 million in cash.

The S.E.C. case centers on a 2010 private debt offering in which Dewey raised $150 million from 13 insurers and an additional $100 million from a line of credit placed with several large banks. The firm used the offering to refinance its existing credit lines and buy itself more time.

But the S.E.C. and prosecutors contend the offering document for the debt deal misrepresented the firm's financial situation.

The S.E.C. complaint charged Mr. Davis, Mr. DiCarmine and Mr. Sanders with making material misrepresentations. The commission charged two other former top executives — Frank Canellas, the director of finance, and Thomas Mullikin, the controller. Mr. Warren was not named as a defendant in the S.E.C. suit.

If the case goes to trial, defense lawyers are expected to attack the prosecution's reliance on emails. Legal experts said that email evidence was strongest when coupled with testimony from a cooperating witness who can bolster what is in writing.

That said, the emails in the indictment and S.E.C. complaint appear powerful on their face.

In an exchange in December 2008 among Mr. Davis, Mr. Sanders and Mr. DiCarmine, the men discuss the need to come up with $50 million to meet a loan provision. Mr. Davis responds "ugh" in one message. The answer to problems, the indictment suggests, was to devise the "Master Plan" for fudging the firm's accounting entries.

In another exchange in June 2009, Mr. Sanders and Mr. Canellas joke about the law firm's outside auditor, who was fired by his company for reasons unrelated to his auditing assignments. Mr. Sanders remarks to Mr. Canellas, "Can you find another clueless auditor for next year?" Mr. Canellas responded: "That's the plan. Worked perfect this year."

Even agents with the Federal Bureau of Investigation, which worked with Mr. Vance's office, were surprised by the brazenness with which Mr. Davis and his team discussed their plan in emails, a person briefed on the investigation said.

Elkan Abramowitz, the lawyer for Mr. Davis, 60, said that his client acted in "good faith in an effort to make the firm a success" and that the charges were "simply wrong."

Edward Little, the lawyer for Mr. Sanders, 55, said that his client broke no laws and that "despite what the district attorney's office apparently believes, the public does not need a scapegoat every time a financial disaster is reported in the media."

Austin Campriello, the lawyer for Mr. DiCarmine, 57, said that his client "did not commit any crimes" and that the district attorney's office "spins some inartful emails into crimes."

Of the indictments, Mr. Warren's was most surprising, partly because he is just 29 and was a rather low-level employee. Steven Hyman, the lawyer for Mr. Warren, said that Dewey was his client's first job after college and that the charges were a "travesty" because "he did nothing wrong."

William Alden and Floyd Norris contributed reporting

New York v. Davis, et al

S.E.C. v. Davis, et al

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DealBook: Bank of England Suspends Worker as Currency Inquiry Expands

Updated, 8:00 p.m. | The Bank of England said on Wednesday that it had suspended an employee as it escalated a review into whether bank officials had known about or condoned potential manipulation of the currency markets.

The British central bank also released minutes of meetings between officials and industry representatives that indicated that there were concerns about possible manipulation for rates like the 4 p.m. fix for the pound to the United States dollar as early as July 2006.

As regulators in Britain, the United States and other countries investigate whether traders at the world's largest banks colluded to manipulate foreign exchange rates, questions are being raised about the Bank of England's role as a watchdog. Two years ago, the Bank of England and other regulators were criticized by British lawmakers for failing to recognize the manipulation of the London interbank offer rate, or Libor, and taking steps to stop it.

"Alarm bells should be ringing when a central bank suspends staff in connection with market rigging," said Simon Morris, a partner at the law firm CMS Cameron McKenna in London. "This is serious because the whole basis of regulation is based on trust and integrity."

On Wednesday, the bank said that its oversight committee had begun an investigation to determine whether bank officials were involved in or knew about attempted or actual manipulation of the currency markets or any other improper behavior in the foreign exchange markets.

The law firm Travers Smith has been appointed legal counsel to the committee and will prepare a report on the investigation. The report "will be published in due course," the central bank said.

"The Bank of England does not condone any form of market manipulation in any context whatsoever," the bank said in a statement. "The bank has today reiterated its guidance to staff regarding management of records and escalation of important information."

The central bank said an extensive internal review of documents, emails and other records that began in October had found no evidence that Bank of England employees colluded to manipulate the currency market or share confidential client information.

"The bank requires its staff to follow rigorous internal control processes and has today suspended a member of staff, pending investigation by the bank into compliance with those processes," the bank said.

The employee was not identified, and the Bank of England declined to provide more details about the employee's role.

The central bank said it had examined about 15,000 emails, 21,000 chat room records and more than 40 hours of recorded telephone calls as part of its internal review.

"No decision has been taken on disciplinary action against any member of bank staff," it said.

The Bank of England has faced questions in recent months about communications between its staff members and traders who were part of an industry subcommittee that discussed issues affecting the currency markets.

In the minutes of a July 2006 subcommittee meeting that were released on Wednesday, "It was noted that there was evidence of attempts to move the market around popular fixing times by players that had no particular interest in that fix."

The subcommittee, which was made up of bank officials, industry leaders and trade group members, met three or four times a year to discuss developments in the markets.

Several traders who served on the subcommittee are among more than a dozen currency traders who have been placed on leave or fired as a result of internal investigations at several large participants in the foreign exchange markets, including Citigroup and UBS.

The last time the subcommittee met was in February 2013.

The $5 trillion-a-day currency markets are lightly regulated and have been seen as difficult to manipulate.

Many of the world's largest banks, including JPMorgan Chase, Barclays and the Royal Bank of Scotland, have acknowledged that they are facing regulatory inquiries into potential manipulation of the currency markets. Deutsche Bank, the largest player in the foreign exchange market, with a share of about 15.2 percent, and Citigroup have both fired employees as a result of their own investigations into the matter.

None of the banks and none of the traders who have been suspended or fired have been accused of wrongdoing.

Before last year, the Bank of England had no formal oversight role for the currency trading markets. It only provided input into voluntary guidelines on conduct adopted by the industry.

Instead, the companies participating in the foreign exchange markets and those companies' conduct were regulated by Britain's Financial Services Authority, which was split in two last year.

One of its successors, the Prudential Regulation Authority, falls under the Bank of England and oversees the safety and security of banks, which participate in the currency markets.

The other successor, the Financial Conduct Authority, now regulates the industry's conduct and is undertaking a separate investigation into the potential manipulation.

Martin Wheatley, the chief executive of the Financial Conduct Authority, has said the currency manipulation accusations are "every bit as bad as they have been with Libor."

Mark J. Carney, governor of the Bank of England, is expected to appear before the Treasury Select Committee next week, and British lawmakers have vowed to ask him about the currency trading investigation.

 

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DealBook: A Standoff of Lawyers Veils Madoff’s Ties to JPMorgan Chase

It remains one of Wall Street's most puzzling mysteries: What exactly did JPMorgan Chase bankers know about Bernard L. Madoff's Ponzi scheme?

A newly obtained government document explains why — five years after Mr. Madoff's arrest spotlighted his ties to JPMorgan and later led the bank to reach a $2 billion settlement with federal authorities — the picture is still so clouded.

The document, obtained through a Freedom of Information Act request, reveals a behind-the-scenes dispute that tested the limits of JPMorgan's legal rights and raised alarming yet unsubstantiated accusations of perjury at the bank. More broadly, the document highlights the legal hurdles federal authorities can face when investigating a Wall Street giant.

That dispute, which positioned JPMorgan against the government and ultimately one government agency against another, traced to the point after Mr. Madoff's arrest in December 2008. Around that time, JPMorgan's lawyers interviewed dozens of bank employees who potentially crossed paths with Mr. Madoff's company.

Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers' interview notes, the government document and other records show, hoping they would open a window into the bank's actions. The issue gained urgency in 2012, according to the records, when the comptroller's office conducted its own interviews with JPMorgan employees and discovered a "pattern of forgetfulness."

Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan's lawyers.

But JPMorgan, which produced other materials and made witnesses available to the comptroller's office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege, a sacrosanct legal protection that essentially prevents an outsider from gaining access to private communications between a lawyer and a client.

Even after the comptroller's office referred the issue to the Treasury Department's inspector general, which sided with the regulator, the fight dragged on for months. Invoking a rare exception to attorney-client privilege, the inspector general argued that the lawyers' interviews were essentially "made for the purpose of getting advice for the commission of a fraud or crime."

In other words, if the accusations were true, JPMorgan employees either duped lawyers into covering up wrongdoing, or, worse, the lawyers themselves helped obstruct the investigation.

The accusation, the government document showed, led to a debate in Washington over how far to press JPMorgan when the bank was sure to fight and a judge would be free to set a harmful precedent for future cases.

Those concerns, and skepticism about the Treasury inspector general's accusations, drove the Justice Department to reject the move to revoke attorney-client privilege. In the government document — a letter to the Treasury inspector general, or O.I.G., dated Sept. 12, 2013 — the civil division ruled that "unfortunately, O.I.G. has provided no basis — and we have not independently uncovered any basis — for suggesting that" the interview notes were "made for the purpose of facilitating a crime or a fraud."

While the ruling applied to the Madoff case alone, it could have broader implications as regulators weigh the costs of future fights and the likelihood of passing muster with the Justice Department. And despite being an exceptional case — banks and their regulators typically settle disputes over attorney-client privilege without the Justice Department getting involved — the ruling illustrated a persistent tension over the privilege that continues to shape the government's pursuit of financial fraud.

Even though the Justice Department is loath to undermine the privilege between a bank and its lawyers, a move that could prompt a reprimand from Congress and the courts, it also wants to appear tough on crime after the financial crisis. In the letter to the Treasury Department's inspector general, the civil division's leader declared that "I share your commitment to using all available tools to combat financial fraud," noting that the division had sued Standard & Poor's and Bank of America over their roles in the crisis.

And federal authorities worry that Wall Street might take the privilege too far — particularly in an era when banks facing a torrent of federal scrutiny are hiring dozens of law firms to conduct internal investigations alongside the government. As those investigations proceed, banks have invoked a number of protective firewalls, including attorney-client privilege and the work product doctrine, which shields interview notes and other documents that bank lawyers drafted in anticipation of litigation.

"Why hire a lawyer to do an internal investigation? It's because you get the privileges," said Bruce A. Green, a former federal prosecutor who is now a professor at Fordham Law School, where he directs the Louis Stein Center for Law and Ethics. "Otherwise, you'd save a little money and hire a consultant or accountant."

In a statement, a spokesman for the Treasury Department's inspector general said the office was "still considering if additional steps are warranted."

The Justice Department's civil division, which last year helped reach a record $13 billion settlement over JPMorgan's sale of questionable mortgage securities, said in the Madoff letter that it stood "ready to work with you to develop an alternative that might better address the relevant regulatory concerns."

JPMorgan, which served as the primary bank for Mr. Madoff's company, declined to comment for this article.

In the past, a JPMorgan spokesman, Joe Evangelisti, has noted that the bank poured significant resources into bolstering its controls since Mr. Madoff's arrest. He also remarked that "we do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme," which was an "unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses."

The Madoff case is not the only one on Wall Street to raise questions about attorney-client privilege. Bank of America and Citigroup have had their own run-ins with authorities over whether to waive the privilege in a limited way during litigation, though those matters were resolved without the Justice Department intervening. And in an investigation into JPMorgan's potential manipulation of energy markets, the Federal Energy Regulatory Commission challenged the bank's assertion that attorney-client privilege protected certain emails.

Regulators also have pushed for access to handwritten interview notes and other findings that arose from an internal investigation conducted by a bank's lawyers. While that push raises concerns about undermining the work product doctrine — and some bank lawyers have already reported a growing reluctance to be candid in private correspondence with bank employees — regulators say they are often unsatisfied with only a summary of the lawyers' findings.

"We remind the banks that we're your supervisor, you're not our supervisor," Thomas C. Baxter Jr., general counsel of the Federal Reserve Bank of New York, said at a recent panel discussion on attorney-client privilege held by Fordham Law School and the Cardozo School of Law.

Mr. Baxter added, however, that "we're reasonable people."

There are limits on what regulators can do if a bank balks at a demand for documents. If a fight ensues, the decision to challenge the privilege rests with the Justice Department.

In organized crime and terrorism cases, legal experts say, the Justice Department often exercises the so-called crime-fraud exception to the privilege. To do so, the Justice Department must show facts at the outset "to support a good faith belief by a reasonable person" that a judge's review of the communications in question might establish that the crime-fraud exception would apply.

The JPMorgan case was not so clear cut. When the inspector general argued for the crime-fraud exception to invalidate the privilege, the Justice Department concluded that the evidence did "not suffice to justify" pursuing that claim.

In the letter outlining its decision, the Justice Department noted that memory lapses among JPMorgan employees "occurred in only a handful of the dozens of interviews conducted" by the comptroller's office. The interviews, according to the letter, were conducted three-plus years after the events in question occurred. It is unclear why it took the comptroller's office so long to interview bank employees.

The letter further says that the inspector general "has not identified any evidence affirmatively suggesting that the lapses in memory resulted from perjury," adding that the "accusation of criminal collaboration depends entirely on speculation." If the Justice Department were to pursue the subpoena, the letter said, the action would "risk developing negative precedent that could result in harm to the long-term institutional interests of the United States."

Although the decision limited the view inside JPMorgan, the comptroller's office and federal prosecutors in Manhattan still penalized the bank for its failure to sound the alarms about Mr. Madoff. The settlements, announced in January, amounted to roughly $2 billion.

Peter J. Henning contributed reporting.

A version of this article appears in print on 03/05/2014, on page B1 of the NewYork edition with the headline: A Standoff Of Lawyers Veils Madoff Ties to Bank .

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Video: Times Minute | Obama’s Crimea Options

In the Video

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The Lede: Latest Updates on Ukraine Crisis

The Lede is following events in Ukraine and Russia on Saturday, following a unanimous vote in the upper house of the Russian Parliament approving a request from President Vladimir Putin to send a military force to Ukraine until, state media reports from Moscow, the "the socio-political situation in the country is stabilized." Updates below mix breaking news with dispatches from Times correspondents and firsthand accounts of events on the ground posted on social networks by bloggers and journalists in Crimea and other parts of Ukraine.

8:28 P.M. Post-Olympic Glow Fades Quickly

As David Remnick notes in a post on Ukraine, the Kremlin's pivot from Olympic harmony to the a war footing has been dizzying in its speed:

Vladimir Putin, the Russian President and autocrat, had a plan for the winter of 2014: to reassert his country's power a generation after the collapse of the Soviet Union. He thought that he would achieve this by building an Olympic wonderland on the Black Sea for fifty-one billion dollars and putting on a dazzling television show. It turns out that he will finish the season in a more ruthless fashion, by invading a peninsula on the Black Sea and putting on quite a different show—a demonstration war that could splinter a sovereign country and turn very bloody, very quickly.

The change has come so fast that the rapid-fire updates on military deployments and unrest in Crimea and eastern Ukraine being filed to the official Twitter feed of Russia Today, the Kremlin's English-language news outlet, are displayed against the multicolored tapestry backdrop of the Sochi Games.

The jarring contrast between the two types of spectacle, and two sides of Russia's new image, has not been lost on the Internet's meme-creators.

Definitely the best Crimea graphic I've seen circulating. #ukraine http://t.co/k4HXMcaq0g

— ian bremmer (@ianbremmer) 1 Mar 14

The Lede is signing off for the evening, but will return in the days ahead to keep following events in Ukraine. For new developments, please visit the home page of nytimes.com and The Lede's Ukraine Twitter list.

8:14 P.M. Video of Russian Troops in Crimea

Ben Solomon, a video journalist who frequently contributes to The Times, spent the day in Crimea and filed several short dispatches for GlobalPost that give a sense of how open the Russian military presence there is now, and how a segment of the population clearly welcomes the troops.

7:23 P.M. Russian Flag Over Kharkiv Raised by Blogger From Moscow

Video of pro-Russia demonstrators storming a government building in the city of Kharkiv on Saturday that protesters who support the new government in Kiev had occupied since last week.

Supporters of the new government in Kiev and the Russian state media have also offered widely varying accounts of events on Saturday in the eastern Ukrainian city of Kharkiv.

Dmytro Pylypets, a leader of the pro-European Maidan protest movement in Kharkiv, told my colleague Noah Sneider that "armed extremists" took control of the regional administration building which protesters had occupied since last week. "They stormed the building, and quickly overcame the police and the Maidan's self-defense forces," Mr. Pylypets said. After taking the building, the group raised a Russian flag.

Some of the battered supporters of the protest movement ejected from the building could be seen in video and photographs posted online, huddled together on the ground, surrounded by officers.

Побитих активістів у Харкові поставили на коліна #Євромайдан #Харьков http://t.co/Z6Aj4WgNHT

— Hromadske.TV (@HromadskeTV) 1 Mar 14

Video of protesters beaten in Kharkiv on Saturday by pro-Russia demonstrators.

Some time later, a dramatic Instagram self-portrait, taken by one of the demonstrators who had replaced the blue and yellow Ukrainian flag with the Russian tricolor atop Kharkiv's regional government building, began to circulate on social networks.

The same young man also posted video on an associated YouTube account recorded as he took down the Ukrainian flag and replaced it with the Russian one.

Video recorded by a young man who raised the Russian flag over Kharkiv on Saturday.

Later he also wrote an account of his actions on his Live Journal blog, where he claimed that the pro-European protesters who had been routed were "militants" armed with knives, and said that he was proud to have taken part in the "liberation" of the building. He then uploaded more footage to YouTube, showing what the clashes on the front steps of the building and the mob inside it looked like as events unfolded.

Video shot by one of the pro-Russia activists who stormed a government building in Kharkiv on Saturday, battering supporters of the authorities in Kiev.

Video shot inside the regional government building in Kharkiv on Saturday as pro-Russia demonstrators forced out supporters of the protest movement in Kiev.

Video of the day's pro-Russia rallies in eastern Ukraine posted on YouTube by the Kremlin-owned news network Russia Today even appeared to show how the young man took his self-portrait — with a camera mounted on a stick, as he stood beneath the flag pole above the distinctive facade of the Kharkiv government building.

Video of pro-Russia rallies on Saturday in Kharkiv and other cites in eastern Ukraine.

Another young Instagram user with the opposite political views, Dimitriy Makarov, posted video of the aftermath of the clashes at the government building and wrote in a caption that he was ashamed to see the Russian flag flying over Kharkiv.

Before long, however, the Internet-savvy protesters in Kiev who support the interim government noticed that the young man who bragged about raising the Russian flag over Kharkiv was, according to the profile he linked to on the Russian social network VK, not a Ukrainian resident of the city but a Russian from Moscow.

Man from Moscow install the flag of Russia in Kharkiv, there is no people in #Ukraine who want to do it http://t.co/dqhNPG2Aig

— Euromaidan PR (@EuromaidanPR) 1 Mar 14

The fact that the young man — who goes by the name Mika Ronkainen, but is clearly not the celebrated Finnish filmmaker, and pledges on his VK profile to "Stand Up for Mother Russia" — had come from Russia to take part in the clashes fit the counternarrative of the Maidan protest movement, that Russia was forced to stage the violent street battles that had failed to break out organically between Ukraine's ethnic communities and political groups.

While anti-Maidan protestors have been camped out for more than a week beneath a Lenin statue across Freedom Square from the regional government building, the clashes only came after local media reports on Saturday that buses with Russian license plates, filled with non-Ukrainian demonstrators, had arrived from the Russian city of Belgorod, just across the border.

TT @Mkarpofv: horror in central #Kharkiv. Buses with #Russia plates, aggressive ppl, shooting, explosions. Police doesn't react #Ukraine

— Olga Tokariuk (@olgatokariuk) 1 Mar 14

According to Twitter's geo-location feature, a tweet from the young Russian's account, pointing to his Instagram self-portrait, was sent on Saturday afternoon from Belgorod, Russia.

Прямо сейчас!

Нами освобождена Харьковская администрация. Над ней поднят флаг России.

Угадайте,… http://t.co/RBBotZT7Tc

— Mika (@venomancer_ru) 1 Mar 14

5:32 P.M. White House and Kremlin Accounts of Obama-Putin Call

A photograph of President Obama speaking to President Putin on Saturday posted on Flickr by the White House.

The White House and the Kremlin have now both released accounts of what President Obama and President Putin said in a 90-minute telephone conversation on Ukraine on Saturday.

Here is the full Kremlin version of the conversation, which is notably shorter:

Vladimir Putin had a telephone conversation with President of the United States Barack Obama on the American side's initiative.

The two presidents discussed in detail various aspects of the extraordinary situation in Ukraine.

In reply to Mr Obama's concern over the possibility of the use of Russian armed forces on the territory of Ukraine, Vladimir Putin drew his attention to the provocative and criminal actions on the part of ultranationalists who are in fact being supported by the current authorities in Kiev.

The Russian President spoke of a real threat to the lives and health of Russian citizens and the many compatriots who are currently on Ukrainian territory. Vladimir Putin stressed that in case of any further spread of violence to Eastern Ukraine and Crimea, Russia retains the right to protect its interests and the Russian-speaking population of those areas.

Here is the more detailed account released by the White House:

President Obama spoke for 90 minutes this afternoon with President Putin of Russia about the situation in Ukraine. President Obama expressed his deep concern over Russia's clear violation of Ukrainian sovereignty and territorial integrity, which is a breach of international law, including Russia's obligations under the UN Charter, and of its 1997 military basing agreement with Ukraine, and which is inconsistent with the 1994 Budapest Memorandum and the Helsinki Final Act. The United States condemns Russia's military intervention into Ukrainian territory.

The United States calls on Russia to de-escalate tensions by withdrawing its forces back to bases in Crimea and to refrain from any interference elsewhere in Ukraine. We have consistently said that we recognize Russia's deep historic and cultural ties to Ukraine and the need to protect the rights of ethnic Russian and minority populations within Ukraine. The Ukrainian government has made clear its commitment to protect the rights of all Ukrainians and to abide by Ukraine's international commitments, and we will continue to urge them to do so.

President Obama told President Putin that, if Russia has concerns about the treatment of ethnic Russian and minority populations in Ukraine, the appropriate way to address them is peacefully through direct engagement with the government of Ukraine and through the dispatch of international observers under the auspices of the United Nations Security Council or the Organization for Security and Cooperation in Europe (OSCE). As a member of both organizations, Russia would be able to participate. President Obama urged an immediate effort to initiate a dialogue between Russia and the Ukrainian government, with international facilitation, as appropriate. The United States is prepared to participate.

President Obama made clear that Russia's continued violation of Ukraine's sovereignty and territorial integrity would negatively impact Russia's standing in the international community. In the coming hours and days, the United States will urgently consult with allies and partners in the UN Security Council, the North Atlantic Council, the Organization for Security and Cooperation in Europe, and with the signatories of the Budapest Memorandum. The United States will suspend upcoming participation in preparatory meetings for the G-8. Going forward, Russia's continued violation of international law will lead to greater political and economic isolation.

The people of Ukraine have the right to determine their own future. President Obama has directed his Administration to continue working urgently with international partners to provide support for the Ukrainian government, including urgent technical and financial assistance. Going forward, we will continue consulting closely with allies and partners, the Ukrainian government and the International Monetary Fund, to provide the new government with significant assistance to secure financial stability, to support needed reforms, to allow Ukraine to conduct successful elections, and to support Ukraine as it pursues a democratic future.

4:49 P.M. Video of Statement From Ukraine's U.N. Ambassador

Following a closed-door Security Council meeting on Saturday, Ukraine's Ambassador to the United Nations, Yuriy Sergeyev, told reporters that Russia's military actions had violated the 1994 agreement under which Ukraine surrendered its share of the Soviet nuclear arsenal in return for guarantees of its security and territorial integrity from Russia, the United States and Britain.

"Now what we are doing is we are addressing for other guarantors… to perform their guarantees," Mr. Sergeyev said. "Still there is a possibility for world leaders to speak with President Putin and prevent the further deterioration of the situation," he added.

The second part of the "Memorandum on Security Assurances in Connection with Ukraine's Accession to the Treaty on the Non-Proliferation of Nuclear Weapons," signed on Dec. 5, 1994 reads:

The United States of America, the Russian Federation, and the United Kingdom of Great Britain and Northern Ireland, reaffirm their obligation to refrain from the threat or use of force against the territorial integrity or political independence of Ukraine, and that none of their weapons will ever be used against Ukraine except in self-defense or otherwise in accordance with the Charter of the United Nations.

When he was asked if his government had tried to contact the ousted president, Viktor Yanukovych, the ambassador replied: "For what? If you watched his statement, he's crazy. To speak with crazy people, only the psychiatrist should speak, not normal people."

3:36 P.M. Tense but Calm Crimea

Video of soldiers in masks outside the main government building in the Crimean regional capital of Simferopol on Saturday from Radio Svoboda, part of the American-financed Radio Free Europe network.

My colleague Alison Smale sends this report from Crimea's regional capital:

By nightfall, Simferopol was extremely quiet. There was no longer any sign of the heavily armed, khaki-clad mystery men who fanned out across the center of the city in the day. Outside the regional administration offices, a few dozen men who have built a self-styled defense force were lined up with shields like those seen on the Kiev barricades; two Russian flags were being waved but the men were largely silent.

At the Simferopol airport in the late afternoon, an official who did not want to be named said it was likely flights would resume by Saturday evening, or at the latest Sunday morning. The status of other airports in Crimea was unclear.

Earlier in the day, though, Ukraine's Channel 5 broadcast footage of unidentified armed men in black on the streets of Simferopol.

Video recorded Saturday in the Crimean city of Simferopol showed armed men in masks on the streets.

A Russian blogger from Irkutsk, who writes as Raymond Saint, drew attention to a photograph of the same men, but suggested that they might have been sent out onto the streets merely to create the appearance of disorder in the region to justify intervention by the Russian military.

Эти люди в черном играют "бандеровцев", хотя они почему-то приехали в Крым на автобусах с крымскими номерами. http://t.co/v5wIw16FOF

— Рэймонд Сэйнт (@raymond_saint) 1 Mar 14

The same blogger also noted that the men, whom he called "talented actors," were featured later in a report on Russian state television.

Elsewhere on the Crimean peninsula, the Ukrainian documentary filmmakers responsible for the Babylon '13 project recorded striking footage of Russian forces surrounding a Ukrainian coast guard base at Balaklava.

Footage of Russian forces surrounding a Ukrainian coast guard base at Balaklava on the Crimean peninsula on Saturday.

The same filmmakers, who documented the protests in Kiev's Independence Square in great detail on their YouTube channel, also posted video shot Friday night at a pro-Russian checkpoint on the road from Simferopol to Sevastopol.

Video of a pro-Russian checkpoint in Crimea shot by Ukrainian activists.

1:50 P.M. Russian Agency Reports Tymoshenko Plans to Meet Putin

As my colleague Ellen Barry, the former chief of the Times bureau in Moscow, notes on Twitter, the Russian state news agency Itar-Tass is reporting that Yulia Tymoshenko, the former prime minister released from jail last week following the flight of President Viktor Yanukovych, plans to go to Moscow on Monday to meet with President Putin to discuss the crisis in Crimea.

Although a spokesman for Ms. Tymoshenko then told our colleague David Herszenhorn in Kiev that she has not scheduled a meeting with Mr. Putin, the report, citing a Ukrainian news agency, was also picked up by Russian state television.

10 a.m. Monday morning, Moscow time: Tymoshenko & delegation to meet w Putin on "regulation of Crimean crisis." http://t.co/i36tdhvQKc

— Ellen Barry (@EllenBarryNYT) 1 Mar 14

Тимошенко направляется в Москву на переговоры по Крыму. ИТАР-ТАСС

— Первый канал (@channelone_rus) 1 Mar 14

As Ms. Barry reported in 2011, when the former prime minister was jailed following her loss to Mr. Yanukovych in the race for Ukraine's presidency, Russia "condemned the verdict in Ms. Tymoshenko's case — in part because her conviction centered on a deal she struck with Prime Minister Vladimir V. Putin in 2009, agreeing to pay what prosecutors called an excessively high price for Russian natural gas."

Video from 2009, when the then-prime ministers of Russia and Ukraine, Vladimir Putin and Yulia Tymoshenko, announced a deal on natural gas.

In light of that history, some analysts and bloggers suggested that Mr. Putin might be happy to engineer an end to the crisis that includes a restoration of Ms. Tymoshenko to power.

Tymoshenko is heading to Moscow – someone Putin likes much more than Yanukovych

— Leonid Ragozin (@leonidragozin) 1 Mar 14

Then again, as my colleague in Kiev notes, images of a cordial meeting with Mr. Putin might do more harm than good to the political prospects of Ms. Tymoshenko, who is already not universally loved by the protesters in the city's Independence Square.

Sergey Tigipko, a former deputy prime minister under President Yanukovych who publicly renounced him last week, confirmed on Twitter that he has flown to Moscow to seek a way out of the crisis.

Сергій Тігіпко вилетів до Москви для проведення переговорів з мирного врегулювання ситуації в Криму

http://t.co/xr3ZyLHzFG

— Сергей Тигипко (@SergeyTigipko) 1 Mar 14

12:38 P.M. Russian Troops on the Road to Balaklava

Here is an update from my colleague Andrew Higgins in Crimea:

Road from Simferopol to Sevastopol all calm and only checkpoint is one that has been there since last week — concrete barriers flying Russian flags and manned by a mix of ethnic Russian "self-defense" volunteers (all unarmed) and hairy members of a motorcycle gang. No sign yet of unusual Russian military movements in Sevastopol city, the headquarters of Russia's Black Sea Fleet.

I am on road at entrance to Balaklava, site of a Ukrainian customs and border post near Sevastopol, and the road is blocked by a long column of military vehicles with Russian plates: 10 troops trucks (30 soldiers in each), two military ambulances and five armored vehicles. Column not moving. Troops, in masks and automatic rifles, standing on road keeping people away. Few score locals, all apparently ethnic Russians, are gathered in a nearby square waving Russian flags and shouting "Russia, Russia."

Balaclava Bay meanwhile is all quiet.

The BBC correspondent Daniel Sandford also reported that the military vehicles outside the Ukrainian post at Balaklava had Russian license plates.

Balaclava now. The entrance to the coast guard base http://t.co/s2p6v157m5

— Daniel Sandford (@BBCDanielS) 1 Mar 14

Most Russian military plates we have seen were number 90. The APCs in Balaclava are number 21. Different unit

— Daniel Sandford (@BBCDanielS) 1 Mar 14

In an earlier dispatch from Simferopol, the regional capital of Crimea, my colleague Patrick Reevell reported that there was no sign that an armed attack on the interior ministry headquarters by pro-Kiev gunmen had taken place, as the Russian foreign ministry claimed in a statement early on Saturday:

The gate is blocked by two ranks of the self-defense volunteers, creating a barrier with long steel riot shields, painted in the colors of the Russian flag. No one here has heard of any attempt to seize the building. I have just spoken to the head of the Afghan veterans unit who's commanding in coordination with a retired police colonel. They say they have been here since 6 a.m. and have heard of no attempts to seize the building.

Earlier on Saturday, the BBC correspondent also posted an image online of apparently unmolested volunteers defending the interior ministry building in Simferopol.

Police HQ Simferopol http://t.co/iK4fTqfFTt

— Daniel Sandford (@BBCDanielS) 1 Mar 14

Despite a lack of visual evidence that any attack took place — in a region where even minor elements of the troop buildup have been documented by residents on Instagram and YouTube and Twitter — Russia Today, the Kremlin-owned news network, continues to report the claimed attack on the interior ministry as fact in broadcasts from Simferopol that cite Sergei Aksyonov, the newly installed Crimean prime minister.

A video report from Russia Today, a Kremlin-owned news network, on the situation in Crimea on Saturday.

Mr. Aksyonov, who became prime minister two days ago, belongs the Russian Unity party in Crimea, which, The Washington Post explains, "won about 4 percent of the vote in the last parliamentary election."

Russia Today later posted video online of a march in support of Russian intervention in Simferopol, using footage gathered by its subsidiary news agency Ruptly, which was also documented by the freelance journalist Lucian Kim.

Video of a march in support of Russian intervention on Saturday in the Crimean capital, Simferopol, posted online by Russia Today, a state-owned network.

Residents of #Simferopol celebrate Russian troops, march and wave #Crimea flags, chanting "#Russia! Russia!" #Ukraine http://t.co/WmctgZI4Eb

— Lucian Kim (@Lucian_Kim) 1 Mar 14

As evening fell, the Washington Post correspondent William Booth watched Russian soldiers take over the Ukrainian coast guard base in Balaklava in a somewhat surreal scene.

Russian soldiers without insignia take over #Ukraine coast guard base in Balaklava as orthodox priests sing hymns. http://t.co/NPgDv2a4pQ

— William Booth (@BoothWilliam) 1 Mar 14

11:44 A.M. Russian Council Urges Recall of Ambassador to U.S.

As my colleagues Alison Smale and David Herszenhorn report, the vote to approve President Vladimir Putin's request to use military force in Ukraine passed the upper house of the Russian Parliament, the Federation Council, unanimously. Max Seddon, a former Associated Press correspondent now reporting for Buzzfeed, caught an image of the vote tally, and a flavor of the pro-invasion fervor in the chamber, as the session was broadcast live on Russian state television.

"I think we're wasting the president's time!" says a senator. Then they vote for Putin's Ukraine invasion unanimously http://t.co/jGIal2xJa6

— max seddon (@maxseddon) 1 Mar 14

Christopher Miller, an editor at the English-language Kyiv Post who also reports for Mashable, noted that the language of the resolution authorized the use of force in any part of Ukraine, not just the Crimean peninsula where masked Russian troops had deployed on Friday after part of the region's Russian majority took to the streets in opposition to the new authorities in Kiev.

One thing to keep in mind: Putin's request to send troops to Ukraine, granted by parliament, was not only for Crimea, but nationwide.

— Christopher Miller (@ChristopherJM) 1 Mar 14

As the Global Voice blogger Kevin Rothrock explains, the Federation Council also urged Mr. Putin to recall the Russian ambassador to "the evil empire," of the United States, after what the deputy speaker, Yuri Vorobyov, called "a direct threat" and an insult to the Russian people in President Obama's remarks on Friday, in which he said that "the United States will stand with the international community in affirming that there will be costs for any military intervention in Ukraine."

Senator Vorobyov: "Obama made a direct threat. He crossed the line. He insulted Russian people" http://t.co/T3HHs7c1GT – via @KevinRothrock

— Leonid Ragozin (@leonidragozin) 1 Mar 14

https://t.co/cOw4Cq2qE8 Russian Senate now moving to recall Russia's ambassador from the "Evil Empire" (the USA). See what they did there?

— Kevin Rothrock (@KevinRothrock) 1 Mar 14

The standoff over Ukraine comes at an awkward time for the State Department, since Michael McFaul, the former American ambassador in Moscow, just left Russia and has not yet been replaced. Although he no longer holds an official post, Mr. McFaul has continued efforts to discourage of Russian military intervention this week on television and through his popular Twitter feed.

If gunmen in Crimea are not acting on Kremlin's behalf, it would calming for Russian govt. to say so. Silence fuels uncertainty, instability

— Michael McFaul (@McFaul) 28 Feb 14

Yes RT@natalie_ @McFaul Will you still be tweeting even though you're not ambassador anymore?

— Michael McFaul (@McFaul) 28 Feb 14

Russian companies and banks with business in the West will suffer as a result of reckless Putin decision. Will they speak up?

— Michael McFaul (@McFaul) 1 Mar 14

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