DealBook: Reynolds in Talks to Acquire Lorillard in Merger of Tobacco Rivals

Photo Reynolds American is the parent company of R.J. Reynolds, the maker of Pall Mall and Camel cigarettes.Credit Keith Srakocic/Associated Press

Updated, 10:17 p.m. | Hoping to combat a decades-long slump in smoking, two of the biggest American tobacco companies said on Friday that they were in talks to merge and create a $56 billion cigarette colossus.

A deal between the second-biggest tobacco company in the United States, Reynolds American, and the No. 3, Lorillard, would unite the makers of the Camel and Newport brands and reshape the industry by creating a more formidable rival to the Altria Group, home of Marlboro.

Perhaps more significant, it would give the combined company a leading position in two of the fastest-growing products in a challenged industry: e-cigarettes and menthols.

But a merger, which could be announced as soon as next week, faces a number of significant obstacles.

Antitrust regulators in Washington are certain to scrutinize a deal that would effectively leave cigarette sales — and pricing — in the hands of a duopoly.

A combined Lorillard-Reynolds would control 42 percent of the tobacco market in the United States, according to Credit Suisse research, while Altria has nearly half of the market. And public health advocates have already raised concerns, worried that a merger would increase the influence of cigarette brands that have marketed to children.

Still, a takeover of Lorillard by Reynolds would represent the industry's boldest response yet to a declining, if still profitable, market. A general drop in smoking rates and aggressive public health campaigns aimed at curbing smoking have cut into sales in the United States.

About 42 million people in the United States, or nearly 18 percent of the adult population, smoke cigarettes, according to the Centers for Disease Control and Prevention. That compares with about 21 percent of the adult population nearly a decade ago and 43 percent of the adult population in 1965, according to the C.D.C.

What remains of the traditional cigarette industry is dominated by Altria, whose Philip Morris arm sells one out of every two cigarettes in the United States.

Opportunity has beckoned in the new business of e-cigarettes. A deal by Reynolds to buy the leading purveyor of e-cigarettes could spur other mergers within the industry as manufacturers jockey for position.

"This transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst," Wells Fargo analysts wrote in a note.

At the same time, Reynolds has coveted Lorillard's strong share of the fast-growing market for menthol cigarettes, which have proved more popular among younger smokers than traditional cigarettes. Lorillard's Newport brand dominates that business and represents roughly 12 percent of the overall cigarette market.

Under the proposed terms of the deal, Reynolds American would buy Lorillard. It would then sell several billion dollars' worth of brands and other assets to the Imperial Tobacco Group, the British company that makes Gauloises cigarettes and Montecristo mini-cigars, lifting Imperial to the No. 3 position in the United States.

British American Tobacco, which owns 42 percent of Reynolds American, would invest several billion dollars to maintain the same level of ownership in the combined company and help finance the transaction.

Shares of Reynolds fell 0.8 percent, to $61.75, on Friday, while those of Lorillard surged 4.6 percent to $66.01. Altria shares rose 1.1 percent to $43.43.

A Reynolds and Lorillard deal would combine two of the oldest names in the American cigarette industry. Lorillard traces its corporate ancestry back to 1760 and remains the oldest continuously operating tobacco company in the United States.

And Reynolds was formed from the merger of R. J. Reynolds Tobacco and Brown & Williamson a decade ago.

Talks have been going on for more than a year, with different deal structures contemplated, people briefed on the matter said. The presence of four companies and their particular demands complicated matters. Talks paused about two months ago as the difficulties of negotiating a four-way transaction took their toll.

Still, the companies persisted. The return of Susan M. Cameron as Reynolds's chief executive helped smooth the process. She had led the company following the merger of Brown & Williamson and R. J. Reynolds in 2004, before retiring in 2011.

While none of the four companies disclosed financial terms for a transaction, Lorillard has a total enterprise value of $24.6 billion, according to Standard & Poor's Capital IQ.

Given the influence on the market that a combined Lorillard-Reynolds could exert, the companies have long planned to sell some assets to win approval from regulators.

Bringing in Imperial is meant to assuage those concerns. Currently the fourth-biggest player in the American tobacco market with a single-digit percentage of market share, the British company would become a more robust competitor through such a deal.

Antitrust regulators will not be the only source of potential opposition. Public health advocates pointed to what they said was a history of traditional brands like Camel and Newport and e-cigarette brands like Blu marketing to children.

"Regulators beware," Matthew Myers, the president of the Campaign for Tobacco-Free Kids, said in an interview. "The problem isn't just antitrust. It's the increased power of these companies to market to kids."

While Reynolds describes the United States in regulatory filings as a "mature market" that has declined since 1981, Imperial still sees it as one of the world's biggest and most profitable markets.

Instead, Reynolds sees opportunity in e-cigarettes, which already have about $2.5 billion in annual sales. Though that is a tiny fraction of the overall tobacco market, e-cigarettes sales are expected to grow quickly in the coming years.

Lorillard is the early leader in the market, having bought Blu eCigs for $135 million two years ago. It spent about $40 million marketing Blu e-cigarettes last year, driving sales up to more than $50 million per quarter and gaining the biggest share of sales at gas stations and convenience stores.

In October, Lorillard purchased Skycig, a British e-cigarette maker, and introduced the Blu brand to the British market.

A Reynolds subsidiary, R. J. Reynolds Vapor, began selling its e-cigarettes last month. Reynolds showed off its device, called Vuse, at the Consumer Electronics Show in Las Vegas and made it the official e-cigarette sponsor of the South by Southwest festival in Austin, Tex.

Altria is also getting into the e-cigarette market with its own subsidiary, NuMark.

In the first quarter, Lorillard, based in Greensboro, N.C., had net sales of $57 million from its e-cigarette business; that accounted for about 45 percent of all such sales in the United States. Lorillard had net sales of $1.59 billion in the first quarter and net sales of $6.95 billion in 2013.

 

David Gelles contributed reporting.

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DealBook: Citi Is Said to Be Close to Settling Inquiry Into Mortgage Securities

Photo Citigroup is seeking to resolve issues from the financial crisis while it grapples with new challenges posed by a costly fraud in its Mexico unit and its failure to pass the Federal Reserve stress test.Credit Mark Lennihan/Associated Press

Citigroup and the Justice Department are nearing a deal that could cost the bank roughly $7 billion to settle a civil investigation into the sale of mortgage investments, people briefed on the matter said on Tuesday.

The settlement, which is expected to be announced within the next week, caps months of negotiations that grew so tense in June that the Justice Department threatened to sue if the bank did not agree to the government's proposed penalty. The deal, which would be made up of a monetary penalty and relief for homeowners, would remove a huge legal obstacle that has been weighing on the bank's share price and casting a shadow over its future.

At one point in the talks, the government demanded that Citigroup pay $10 billion. While the settlement will fall short of that demand, the bank will still pay more than once expected.

Photo Michael Corbat is the chief of Citigroup, which is talking with the Justice Department.Credit Jemal Countess/Getty Images

The two sides are still working out some details. Citi is expected to pay roughly $4 billion in cash, according to a person briefed on the matter. The remainder of the $7 billion would include so-called soft dollar penalties, including mortgage modifications and other forms of relief to homeowners, and possibly payments to state attorneys general involved in the case.

The total amount will almost certainly exceed the $2 billion that some Wall Street analysts initially estimated that Citigroup would be liable to pay, though more recent estimates have put the number closer to $6 billion.

In trying to divine a possible settlement amount, bank investors are trying to determine whether Citigroup has adequate legal reserves to cover the cost or whether this penalty could cut into its bottom line.

More broadly, the bank is seeking to put to rest the issues lingering six years after the financial crisis while it grapples with new challenges posed by a costly fraud in its Mexico unit and its failure to pass the Federal Reserve's so-called stress test.

The large settlement shows how the government has been able to ratchet up the amount of money it can demand from banks for their roles in selling securities tied to shoddy mortgages whose values plummeted during the financial crisis.

Citigroup was not nearly as big a player in this business as JPMorgan Chase, which agreed to a $13 billion settlement with the Justice Department last year.

Lawyers for the big banks say privately that federal prosecutors appear to have scrapped the model used in that case and are demanding penalties that are far more punitive than what JPMorgan paid.

The Citigroup deal raises the stakes for Bank of America, which is expected to be the next large bank to settle its mortgage case with the Justice Department. Talks between the bank and federal prosecutors have largely gone dormant in recent weeks as the Justice Department focused on resolving its case with Citigroup, people briefed on the matter said.

Bank of America also faced the threat of a lawsuit by the Justice Department when their settlement talks stalled over how much the bank should pay in penalties for mortgage securities sold by its Merrill Lynch unit. The bank has said that it tried to back out of its acquisition of Merrill in the depths of the financial crisis but felt pressured by regulators to go through with the deal.

Now, with the Citigroup matter almost settled, the talks between the government and Bank of America will most likely heat up, the people said.

The resolution of the Citigroup case comes as the bank prepares to release its second-quarter earnings on Monday. Analysts say the bank is benefiting from an improving economy in the United States but remains hamstrung by its legal issues.

"We would be more constructive on shares of Citigroup if the company could put outstanding litigation issues behind it in the near term," analysts at Keefe, Bruyette & Woods wrote in a research report on Monday.

The Wall Street Journal earlier reported the possibility of a $4 billion settlement.

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DealBook: Prosecutors’ Winning Streak on Insider Trading Cases Ends

Photo Rengan Rajaratnam, left, with his lawyer Daniel Gitner.Credit Brendan McDermid/Reuters

The scene that played out over and over again in Lower Manhattan in recent years — federal prosecutors enter the courtroom with an insider trading case and leave with a conviction — all began in 2007 with a tip about a little-known hedge fund trader, Rengan Rajaratnam.

The tip ultimately set off a chain of events that led prosecutors to secure 85 insider trading convictions and guilty pleas without one defeat, including the 2011 victory over Mr. Rajaratnam's older brother, the hedge fund billionaire Raj Rajaratnam. So when prosecutors under Preet Bharara, the United States attorney for Manhattan, indicted the younger Mr. Rajaratnam last year, the case appeared to be coming full circle.

But on Tuesday, with that perfect record at stake, prosecutors suffered their first insider trading loss to — of all people — the younger Mr. Rajaratnam. After just under four hours of deliberation, a federal jury of eight women and four men found Mr. Rajaratnam, 43, not guilty of conspiracy to commit insider trading with his brother.

The verdict was a stunning turn of events for the government, given the cloak of invincibility Mr. Bharara had assumed in recent years. The case also underscored a broader whiff of skepticism about the crackdown on insider trading, as a federal appeals court in Manhattan weighs whether to toss out two other recent convictions.

Yet the wider significance of the verdict — prosecutors are expected to lose every now and again — remains unclear.

Photo Rengan Rajaratnam, left, and Daniel Gitner leaving court on Tuesday. The wider implications of the verdict are not yet clear.Credit Rachel Abrams/The New York Times

From the beginning, prosecutors saw the younger Mr. Rajaratnam as a particularly challenging target, said lawyers briefed on the matter who were not authorized to speak publicly. And the case was not considered a high priority when his brother, the co-founder of the Galleon Group hedge fund, was arrested in 2009. In fact, some prosecutors at the time were reluctant to file the case without additional evidence of wrongdoing on the part of the younger Mr. Rajaratnam, who worked under his brother at Galleon.

That evidence never emerged. And when prosecutors indicted the younger Mr. Rajaratnam, they did so near a five-year deadline for filing the case.

"They took their time and they had this evidence years ago," said Richard J. Holwell, a lawyer in private practice and the former federal judge who presided over the criminal trial of Mr. Rajaratnam's brother, whom he sentenced to 11 years in prison. "You can say that the government in the final analysis overreached, and that's what the jury is for."

Isabel Tirado, the forewoman for the jury in the trial that began about three weeks ago, said after the verdict that she was not impressed with the government's case. "There was no evidence, period," said Ms. Tirado, a history professor at William Paterson University in New Jersey.

The government, however, did offer some of the same wiretapped communications that were played for the jury during Raj Rajaratnam's trial. In one of those taped conversations, the younger Mr. Rajaratnam boasted to his brother that he had a friend who was a "little dirty" who had information about a stock.

Some lawyers chalked up the verdict to an unexpected reversal last week, when the judge overseeing the case dismissed two insider trading charges against Mr. Rajaratnam. The judge, Naomi Reice Buchwald, said that no reasonable jury could conclude that Mr. Rajaratnam had engaged in insider trading in the stock of Clearwire, a wireless broadband company. But the judge said that she would let the jury decide whether he had conspired with his brother to obtain confidential information on the stock of Advanced Micro Devices.

That decision, which could not be appealed, laid the groundwork for Mr. Rajaratnam's lawyer to chip away at the case even further. The lawyer, Daniel M. Gitner, asked that prosecutors not be allowed to present evidence involving Clearwire to bolster the conspiracy charge.

In a letter to the judge over the weekend, prosecutors called the request "not only completely unprecedented, it is singularly unfair." But the judge, who at one point outside the presence of the jury told prosecutors that some of their legal arguments "don't make any sense," sided with Mr. Rajaratnam.

On Monday, in a sign of just how concerned prosecutors were about the case, Mr. Bharara attended a portion of the closing argument in the case — something he rarely does in white-collar cases. Richard B. Zabel, the deputy United States attorney, also visited the courtroom at times.

Mr. Bharara noted in a statement that his office was "disappointed with the verdict on the sole count that the jury was permitted to consider," but he added that "we respect the jury trial system whatever the outcome."

Judge Buchwald narrowed a case that was already pared down when the trial began. A year ago, prosecutors initially filed seven criminal charges, but then dropped four counts without explanation.

In dismissing the remaining insider trading charges, the judge said that prosecutors had not produced sufficient evidence that Mr. Rajaratnam knew his brother possessed inside information about shares of Clearwire in 2008. Nor did prosecutors, she said, prove that the younger Mr. Rajaratnam knew whether the people passing on that information to his brother had gotten any benefit for doing so.

The mid-trial ruling by Judge Buchwald echoed the concerns of the United States Court of Appeals for the Second Circuit, which recently signaled that it might overturn the convictions of two other hedge fund traders. The appellate court seemed receptive to a defense argument that a trader cannot be guilty without knowing whether the person providing the inside information has received some benefit for the leak.

Some lawyers and prosecutors, speaking on the condition of anonymity, doubted that the Rajaratnam case would have an impact when the United States attorney's office pursues other insider trading cases. But depending on the outcome of the appellate court decision, some cases could fall by the wayside.

Reed Brodsky, the federal prosecutor who tried Mr. Rajaratnam's older brother and is now a lawyer in private practice, said that until the appellate court ruled, he expected his former office to proceed more cautiously in bringing certain insider trading cases. He said the court's ruling could have a bearing on investigations involving so-called downstream tippees — traders who get inside information second- or third-hand.

"Federal prosecutors and the F.B.I. will likely be very careful about charging downstream tippees where evidence of the tippee's knowledge of the illicit benefit to the tipper is ambiguous or uncertain," said Mr. Brodsky, a partner with Gibson Dunn in New York.

For the younger Mr. Rajaratnam, the acquittal was a moment to relish after a year of having a cloud hang over his head. As the verdict was read, Mr. Rajaratnam, wearing a dark gray suit and dark blue tie, sat stone-faced in the courtroom. His lawyers patted him on the back. But later, he was seen giving an exuberant high-five to a colleague.

"In my experience, juries are extremely smart," said Mr. Gitner, the lawyer for Mr. Rajaratnam. "We were hopeful that the jury would see the case the same way that we did and recognize the lack of evidence."

A version of this article appears in print on 07/09/2014, on page B1 of the NewYork edition with the headline: A Winning Streak on Insider Cases Ends .

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DealBook: U.S. Scrutiny for Banks Shifts to Commerzbank and Germany

Photo American authorities have begun settlement talks with Germany's second-largest lender, Commerzbank, based in Frankfurt.Credit Michael Probst/Associated Press

A trail of illicit money led the American government on a hunt through the European financial system, generating criminal cases against banks in Britain, Switzerland and most recently, France.

Now the crackdown is bound for another European financial center: Germany.

State and federal authorities have begun settlement talks with Commerzbank, Germany's second-largest lender, over the bank's dealings with Iran and other countries blacklisted by the United States, according to people briefed on the matter. The bank, which is suspected of transferring money through its American operations on behalf of companies in Iran and Sudan, could strike a settlement deal with the state and federal authorities as soon as this summer, said the people briefed on the matter, who were not authorized to speak publicly.

The contours of a settlement, which the authorities have only begun to sketch out, are expected to include at least $500 million in penalties for Commerzbank, the people added. Although prosecutors were still weighing punishments, the people briefed on the matter said that the bank would most likely face a so-called deferred prosecution agreement, which would suspend criminal charges in exchange for the financial penalty and other concessions.

A potential deal with Commerzbank — which is expected to pave the way for a separate settlement with Deutsche Bank, Germany's largest bank — would pale in comparison to the case announced last week against France's biggest bank, BNP Paribas. The French bank agreed to pay a record $8.9 billion penalty and plead guilty to criminal charges for processing transactions on behalf of Sudan and other countries that America has hit with sanctions, a rare criminal action against a financial giant.

BNP is not the only French bank under the spotlight. Crédit Agricole and Société Générale also face investigations into whether they violated United States sanctions.

But those investigations are not expected to be completed until after the anticipated settlement with Commerzbank, the people briefed on the matter said. Commerzbank and Deutsche Bank, which have both previously disclosed the existence of the investigations but not the status or terms of settlement talks, declined to comment on Monday.

Collectively, the deals will provide a capstone to the decade-long investigation into banks that opened the American financial system to tainted money. The investigations into the European banks, which funneled billions of dollars through their New York offices on behalf of foreign clients, underscored the reach of the United States sanctions laws as well as the global demand to do business in dollars.

The investigations have involved both state and federal authorities. In the Commerzbank investigation, the Manhattan district attorney's office and New York State's banking regulator, Benjamin M. Lawsky, are collaborating with the Justice Department's criminal division in Washington, the United States attorney's office for the District of Columbia and the Federal Reserve, the people briefed on the matter said.

The BNP case involved Preet Bharara, the United States attorney in Manhattan, rather than the prosecutor for the District of Columbia.

Photo The headquarters of Commerzbank in Frankfurt, Germany.Credit Lisi Niesner/Reuters

The Commerzbank investigation features an added twist: The bank is 17 percent owned by the German government. It is unclear whether — as in the BNP case, which led French authorities to intervene on the bank's behalf — the settlement talks could inflame diplomatic tensions between Washington and Berlin.

Some critics have questioned why American authorities have set their eye on European banks. The answer, authorities say, is that American banks by and large avoided processing transactions for Iran and Sudan.

But American banks are not immune from touching dirty money. Citigroup's Banamex unit is under investigation for processing money linked to a drug cartel. And in January, JPMorgan Chase reached a roughly $2 billion deal with the authorities over ignoring signs of the Ponzi scheme orchestrated by Bernard L. Madoff, who held accounts at the bank for over two decades.

The criminal sanctions cases spreading through Europe began in 2009, when the British bank Lloyds struck a deferred prosecution agreement. Credit Suisse came months later. And by the end of 2012, HSBC, Standard Chartered and Barclays of Britain, as well as ING of the Netherlands, had struck settlements of their own.

The $8.9 billion penalty for BNP was by far the largest. It was more than triple the amount that the six other banks had collectively paid to resolve their sanctions cases.

The BNP deal also carried some added sting, as the bank was forced to plead guilty, unlike the other banks that reached deferred prosecution agreements. In addition, Mr. Lawsky took aim at a core business for BNP, partly suspending its ability to process payments in dollar denominations, an important function known as dollar clearing.

The extra punishments, authorities say, reflected the amount of wrongdoing at BNP.

"Together, we have helped to hold accountable France's largest bank for perpetrating what was truly a Tour de Fraud," Mr. Bharara said at a news conference announcing the deal last week, adding that BNP had done business with Sudan, Cuba and Iran, "a hat trick of sanctions violations."

A version of this article appears in print on 07/08/2014, on page B1 of the NewYork edition with the headline: Scrutiny For Banks Is Shifting To Germany .

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DealBook: U.S. Banks Curtail International Money Transfers

Photo A Viamericas CD Mega in Virginia. Viamericas is a money transfer company with a large focus on Mexico.Credit Drew Angerer for The New York Times

As government regulators crack down on the financing of terrorists and drug traffickers, many big banks are abandoning the business of transferring money from the United States to other countries, moves that are expected to reverse years of declines in the cost of immigrants sending money home to their families.

While Mexico may be most affected — nearly half of the $51.1 billion in remittances sent from the United States in 2012 ended up in that country — the banks' broad retreat over the last year is affecting other countries in Latin America and parts of Africa as well. The banks are being held accountable not only for the customers who directly use their money transfer services but also for their role in collecting remittances from money transmitting companies and wiring them abroad.

"This is transforming the business and may increase the costs of international money transfers," said Manuel Orozco, a senior fellow at the Inter-American Dialogue, a research group in Washington.

JPMorgan Chase and Bank of America have scrapped low-cost services that allowed Mexican immigrants to send money to their families across the border. The Spanish bank BBVA is reportedly exploring the sale of its unit that wires money to Mexico and across Latin America. And in perhaps the deepest retrenchment by a bank, Citigroup's Banamex USA unit has now closed many of its branches in Texas, California and Arizona that catered to Mexicans living in the United States and stopped most remittances to Mexico as it faces a federal investigation related to money laundering controls.

Regulators say the banking system was being exploited by terrorists and drug lords seeking to launder money. While they have not banned banks from engaging in higher-risk businesses like money transfers to certain countries, they acknowledge that banks must now invest significantly more to monitor the money moving through their systems or face substantial penalties.

But the government's efforts to root out illicit activity have effectively put the banks into a law enforcement role, industry experts say. And the result is undercutting another public policy goal — helping immigrants, who are primarily low income, move into mainstream banking. Even with the current relatively low remittance fees, the costs can still add up. Some Latin American immigrants say they regularly send three remittances a week to pay for last-minute school supplies or rent.

Manuel Santiago, a 48-year-old Mexican living in Queens, said he sometimes pays $4 to send as little as $20 at a time to his son and daughter in Mexico. "I am supporting my family and things come up irregularly," he said.

The pendulum has swung so far, participants in the industry say, that regulators are pushing banks out of some activities considered beneficial to the broader economy.

"The money transfer business has become the whipping boy of regulators who want to show how tough they are," said Paul S. Dwyer Jr., chief executive of Viamericas, a money transfer company based in Maryland with a large focus on Mexico.

Shut out by many large banks, more of Mr. Dwyer's customers are turning to large retailers in Mexico to pick up money sent from the United States, and some of those retailers charge money transfer companies as much as double the banks' fees, he said. Mr. Dwyer's company is recouping the additional costs by increasing the difference — or the spread — between what customers pay in dollars and what their family members receive in Mexican pesos.

A World Bank report on remittances found that the costs had been steadily falling over the last five years. But industry experts are expecting that trend to reverse.

A spokesman for Western Union, one of the largest remittance players, said the company was among those capturing business from the banks.

While immigrants say they have not noticed broad price increases from companies like Western Union, industry experts say higher costs are inevitable with fewer banks acting as middlemen for money transmitters.

"If you are the only game in town, you may be able to charge a premium," said Daniel Ayala, head of global remittance services at Wells Fargo, adding that the bank has not passed increased regulatory costs to customers, leading to a decline in profits.

Many banks had considered remittances an attractive business because they generated steady fees and required little capital. In some cases, remittances could satisfy Community Reinvestment Act requirements to serve a certain percentage of low-income customers.

But the regulatory pressures and increased costs of compliance have started to outweigh the potential profits.

JPMorgan stopped its Rapid Cash program in November, partly because the bank grew concerned about some of the risks, a spokeswoman said. As part of its program, JPMorgan had teamed up with the large Mexican bank Banorte. Many people picking up remittances in Mexico sent from Chase branches in the United States were not customers of Banorte, making it more difficult to monitor them.

Last year, Bank of America canceled its SafeSend product, regarded as one of the least expensive ways for immigrants to send money to Mexico. A spokeswoman said the bank canceled the product because of "limited demand" and would not elaborate. A BBVA spokesman declined to comment on the possible sale of its Bancomer Transfer Services unit.

Some banks still make certain wire transfers to Mexico, but the costs of such services can be five times as high as a typical remittance, making it prohibitive for many immigrants.

Even if banks invested in new software to screen for worrisome transactions, they would still have to manually investigate many suspicious activities and report them to regulators. Banks fear that a single mistake could lead to costly penalties like the $1.9 billion settlement that the British bank HSBC agreed to pay over money laundering issues in 2012. HSBC has stopped paying out remittances at its Mexican branches.

And the heightened diligence can slow, or even stop, vital payments.

Domingo Garcia, a 36-year-old limousine driver in Los Angeles, said he grew frustrated with Wells Fargo when one of his family's remittances totaling roughly $1,500 failed to clear. In the same week, he said, family members had tried to send another large remittance. His mother needed the money to pay for her chemotherapy treatment in Mexico. "The hospital was saying it would not give her the medicine until they were paid," Mr. Garcia said.

Wells Fargo declined to comment on a specific customer's transaction, but said there could be a number of causes for delays, including efforts to screen for fraud and the bank's limits on the amount of transfers allowed each month. While the bank remains committed to Mexico, it has slowed the expansion of its money transfer network to other high-risk countries.

Citigroup's Banamex USA, which has been ensnared in a criminal investigation related to money laundering, is an example of how compliance problems at an obscure affiliate can have serious consequences for a global bank like Citigroup. The New York parent has removed many of the veteran managers at Banamex USA and installed a "cleanup team" of executives to improve its compliance systems, according to a person briefed on the matter.

Citigroup inherited the small California bank when it acquired Banamex, Mexico's second-largest bank after BBVA Bancomer, in 2001. Because Banamex USA was overseen by executives at Banamex's headquarters in Mexico, it did not come under the same compliance systems as Citigroup's units in the United States, this person said. It also wired cash on behalf of money transfer companies in the United States to Banamex accounts in Mexico, people in the remittance industry say.

In reality, it may be nearly impossible to fully monitor money flowing through some parts of the world. Regulators worry, in particular, about remittances to Somalia, a haven for terrorist groups with no formal banking system. Banks in the United States have had to wire money to banks in Dubai. Much of the money is then moved into Somalia through a network of traders.

One of the few banks willing to take that risk is Merchants Bank of California. But in the face of scrutiny from regulators, the bank has told some money transfer companies in cities with large Somali enclaves like Minneapolis that it may no longer be able to provide them with banking services.

Merchants Bank's exit could be a big blow to Somalia, where remittances are a major source of income for a country that has suffered from recent famine, according to the antipoverty group Oxfam.

"We're looking for alternatives," said Abdulaziz Sugule, president of the Olympic Financial Group, a money transfer company in Minneapolis that Merchants Bank may drop, "but it's going to be tough."

Jessica Silver-Greenberg and Elisabeth Malkin contributed reporting.

A version of this article appears in print on 07/07/2014, on page A1 of the NewYork edition with the headline: Banks Curtailing Cash Transfers .

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DealBook: Jamie Dimon of JPMorgan Is Told He Has Throat Cancer

Photo Jamie Dimon, the chairman and chief executive of JPMorgan Chase, in Detroit in May.Credit Charley Tines/Detroit News, via Associated Press

Jamie Dimon, the chief executive of JPMorgan Chase, has throat cancer and will begin treatment shortly at Memorial Sloan Kettering Cancer Center, he said in a note to the bank's employees and shareholders late Tuesday.

Doctors discovered the cancer at an early stage, Mr. Dimon, 58, said, noting that his condition was "curable."

After a series of tests, he said the doctors confirmed that the cancer had not spread beyond the "original site" and the adjacent lymph nodes on the right side of his neck.

Mr. Dimon assured employees at JPMorgan, the nation's largest bank, that the prognosis from the doctors was "excellent."

Mr. Dimon, who has held the dual roles of chief executive and chairman at the bank since 2006, has been atop JPMorgan longer than any other bank chief.

The announcement of his diagnosis came on Mr. Dimon's 10-year anniversary at JPMorgan. That tenure, which began when JPMorgan acquired Bank One, has been marked by triumph — the bank emerged from the financial crisis in better shape than its rivals — and by tumult.

The bank has worked to mend its frayed relationships with regulators — a painful reconciliation that cost it roughly $20 billion. In November, JPMorgan reached a record $13 billion settlement with a range of government authorities over its sale of questionable mortgage-backed securities in the lead-up to the financial crisis. The bank also reached a $2 billion settlement over accusations that it failed to sound alarms about Bernard L. Madoff's Ponzi scheme.

JPMorgan has also been buffeted by the departure of several top executives. In the last two years alone, at least 10 senior executives have left JPMorgan.

Most recently, Michael J. Cavanagh, once considered an heir to Mr. Dimon, left the bank to join the Carlyle Group, a private equity firm.

And like its rivals, JPMorgan, which will report second-quarter earnings on July 15, is grappling with a slowdown in its trading business.

It has been a particularly grueling stretch for trading units across Wall Street. The sluggish trading revenue traces, in part, to a spate of rules passed in the aftermath of the financial crisis.

In the past, banks made some of their riskiest wagers — bets that sometimes translated into rich profits — through trading complex derivatives, bonds and commodities. In the new banking landscape, where interest rates remain persistently low, the role of those businesses has been diminished.

In his annual letter to shareholders in April, Mr. Dimon stressed that despite the "constant and intense pressure," he was proud of the bank's resiliency and its resolve. Last year, JPMorgan earned $17.9 billion in profit despite the legal costs.

Mr. Dimon reiterated his faith in the leadership of the bank on Tuesday. He did not outline any plans to cede the reins of the bank while he has treatment — a process that he said should last about eight weeks.

In his note, Mr. Dimon emphasized that the company would "continue to deliver first-class results for our customers."

The illness of any chief executive naturally prompts questions about who is prepared to take over, at least for a little while. But Mr. Dimon emphasized in his note that he would remain immersed in the day-to-day operations of the bank.

JPMorgan's board has remained firmly behind Mr. Dimon, redoubling support for him. The board awarded Mr. Dimon $20 million in annual compensation for his work in 2013. The raise came one year after the board had cut his compensation to $11.5 million.

Even before Mr. Dimon's diagnosis the board agreed on various succession plans.

"The board had already established a short-term, medium-term and longer-term succession plan," said a JPMorgan spokesman, Joseph Evangelisti.

Among the potential successors, people briefed on the matter said, are Gordon Smith, the head of JPMorgan's consumer bank, and Mary Erdoes, who runs the asset management business.

The inclusion of Mr. Smith and Ms. Erdoes reflected the changing fortunes of banking. JPMorgan's consumer business, for example, has taken on more prominence as the bank shifts its focus to credit cards and auto loans and away from intricate deal-making and trades that once were the hallmark of Wall Street.

A version of this article appears in print on 07/02/2014, on page B1 of the NewYork edition with the headline: Dimon Has Throat Cancer That He Calls 'Curable' .

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DealBook: BNP Paribas Admits Guilt and Agrees to Pay $8.9 Billion Fine to U.S.

Updated, 9:07 p.m. |

After months of heated negotiations, state and federal authorities on Monday announced a criminal case against BNP Paribas, taking aim at France's biggest bank for transferring billions of dollars on behalf of Sudan and other countries blacklisted by the United States.

BNP agreed to plead guilty to criminal charges and pay an $8.9 billion penalty, a record sum for a bank accused of doing business with countries that face United States sanctions. State and federal authorities portrayed BNP, the seventh bank to settle a criminal sanctions violation case but the first to plead guilty, as the worst offender.

Like other banks, BNP hid the names of Sudanese and Iranian clients when sending transactions through its New York operations and the broader American financial system. But the wrongdoing was more pervasive at BNP, the authorities found, stretching from at least 2002 into 2012, by which time the investigation was already in full swing.

"This conspiracy was known and condoned at the highest levels of BNP," Edward Starishevsky, an assistant district attorney in Manhattan, said in court on Monday when the bank pleaded guilty to one count of falsifying business records and one count of conspiracy.

The rebuke — from the Justice Department's criminal division in Washington, the United States attorney's office and district attorney's office in Manhattan, as well as the Federal Reserve, Treasury Department and New York's financial regulator, Benjamin M. Lawsky — provides a template for prosecuting other financial misdeeds. In the coming months, the focus will shift to a number of big banks suspected of manipulating foreign currencies.

In the BNP case, the authorities sought to send a message that no bank is immune from criminal charges, despite lingering concerns that financial institutions have grown so large and interconnected that they are "too big to jail." The decision to require BNP's parent company to plead guilty, coming six weeks after Credit Suisse pleaded guilty to helping American clients evade taxes, reflects a broader policy shift after decades of civil settlements and so-called deferred prosecution agreements.

"This outcome should send a strong message to any institution — any institution anywhere in the world — that does business in the United States: that illegal conduct will simply not be tolerated," United States Attorney General Eric H. Holder Jr. said at a news conference on Monday.

Preet Bharara, the United States attorney in Manhattan who accused BNP of "perpetrating what was truly a tour de fraud," has argued that no bank is too big to charge.

Still, criminal pleas could prompt regulators to revoke the license of a bank, the Wall Street equivalent of the death penalty. To prevent that outcome, prosecutors and regulators coordinated their actions months in advance.

Unlike Credit Suisse, which paid fines but faced few practical implications from pleading guilty, BNP was required to temporarily forfeit a core business operation in New York.

Mr. Lawsky announced on Monday that he would suspend its ability to process payments in dollar denominations, a function known as dollar clearing, which is essential to doing business with international clients. The deal with BNP will prevent certain units within the bank's headquarters in Paris, as well as its offices in Geneva, Rome, Milan and Singapore, from clearing dollar transactions for one year beginning in January 2015.

Mr. Lawsky also required the bank to part ways with 13 employees, including one of its chief operating officers. "It is important to remember that banks do not commit misconduct — bankers do," he said in a statement.

Still, not one BNP employee was criminally charged. And prosecutors have yet to demonstrate that their newfound enforcement muscle applies equally to American banks.

"Though we appreciate the magnitude of the BNP guilty plea, we believe this does not signify the end of 'too big to jail,' " Public Citizen, a nonprofit watchdog group, said in a statement.

In its own statement, BNP emphasized that it had "designed new robust compliance" measures to prevent a repeat of the wrongdoing. "We deeply regret the past misconduct that led to this settlement," said the bank's chief executive, Jean-Laurent Bonnafé.

BNP had initially hoped to fend off a guilty plea. It had proposed creating an entirely new subsidiary to plead guilty, according to people briefed on the matter.

When prosecutors rebuffed that idea, the bank enlisted help in the highest rungs of French government. President François Hollande made unusually direct and personal appeals to President Obama, while French financial officials questioned Mr. Lawsky about the dollar-clearing suspension.

Ultimately, Mr. Lawsky focused the suspension on the specific units that processed transactions at the heart of the case, a move that will most likely generate a logistical headache for the bank and undercut its revenue as it has to outsource the business to another bank. The bank's oil and gas units in Paris and elsewhere, for example, are subject to the suspension.

Some units tried to cover up the transactions, the authorities said. In the bank's Geneva office, "there was policy to strip, amend and omit" information identifying Sudanese clients.

At the time, Sudan was operating a genocidal regime. And as Mr. Holder noted, citing the words of a BNP compliance manager, the country "hosted Osama bin Laden."

Some BNP employees sounded the alarms. But at a September 2005 meeting, one of the bank's chief operating officers "dismissed the concerns of the compliance officials," Mr. Lawsky said, and requested that no minutes of the meeting be taken.

The bank's compliance staff in New York also failed to thwart the wrongdoing, the authorities said. When another bank settled a sanctions violations case, BNP's head of ethics for North America wrote in an email to a colleague, "The dirty little secret isn't so secret anymore, oui?"

William Alden contributed reporting.

A version of this article appears in print on 07/01/2014, on page B1 of the NewYork edition with the headline: BNP Admits Guilt and Agrees to Pay $8.9 Billion Fine to U.S..

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Bits Blog: Supreme Court Rejects Google’s Street View Appeal

The United States Supreme Court on Monday allowed a case accusing Google of wiretapping to proceed, undermining the search company's efforts to put a troublesome episode to rest even as it plans to become more deeply embedded in consumers' lives.

Google's annual developers' conference last week showcased the company's wide-ranging agenda to expand its technology from desktop computers and mobile devices to the home, the body and vehicles. Google's new devices will communicate and share data, requiring a great deal of trust by users that all this information will not be used in unauthorized or unexpected ways.

The prospect of a long-running case in which Google is accused of exploiting that trust and misappropriating data will work against this ambitious program. Google was sued for breaking federal laws by secretly collecting people's email, passwords and other personal information as part of its Street View mapping project, which began in 2007. The data was drawn from unencrypted household computer networks.

Google maintains it was not wiretapping as part of Street View. Its failure to persuade the Supreme Court to hear its appeal means the case will go forward in the lower court.

Following its usual practice, the Supreme Court gave no reasons for declining to take the case. Coming after the ruling this month that cellphone searches require a warrant, the decision adds to the court's developing reputation as a defender of privacy against technological intrusion.

The Street View decision "protects Americans' homes and private correspondence from intrusion for commercial gain," said Elizabeth J. Cabraser, a lawyer for the plaintiffs, in the same way that the cellphone ruling protects "the constitutional rights of those accused or under suspicion of crime from warrantless searches of the 21st-century equivalent of private papers and effects."

The Street View case was brought as a class action but has not been formally certified as such in court. That will be the next hurdle the plaintiffs face. A trial will not take place until late next year, at the earliest, Ms. Cabraser said.

A Google spokeswoman said, "We're disappointed that the Supreme Court has declined to hear the case." The company declined further comment.

Street View began as the usual ultra-ambitious Google project, an attempt to chart the inhabited world. The public face of Street View involved special cars that photographed streetscapes. But the cars were collecting wireless data too. Google said that part of the program was an unauthorized project by a rogue engineer, an assertion that regulators challenged.

The biggest investigation, by 38 state attorneys general, resulted in a modest fine of $7 million for Google as well as promises that the company would more aggressively monitor its employees. Google said the data collected was never used commercially.

Legally, Google contends it was in the clear. It said people were transmitting data on their home Wi-Fi networks as a form of radio communication, which is not governed by the wiretapping laws. An appeals court sharply rejected that notion last year.

"In common parlance, watching a television show does not entail 'radio communication,' " Judge Jay Bybee wrote. "Nor does sending an email or viewing a bank statement while connected to a Wi-Fi network."

Marc Rotenberg of the Electronic Privacy Information Center, which filed a brief in the appeals court supporting the plaintiffs, said Monday's decision was "a significant victory for Internet users," adding, "The Supreme Court left in place a decision that protects private residential networks from snooping by Google and others."

A version of this article appears in print on 07/01/2014, on page B4 of the NewYork edition with the headline: Top Court Won't Hear Privacy Case vs. Google.

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DealBook: A Grieving Father Pulls a Thread That Unravels Illegal Bank Deals

A bus bombing two decades ago — and a New Jersey father's quest for justice — inadvertently set off a chain of events that led American prosecutors to accuse some of the world's biggest banks of transferring money for nations like Iran.

On Monday, that crackdown culminated with the guilty plea of BNP Paribas, which admitted to doing billions of dollars in deals with Iran and other countries blacklisted by the United States and agreed to pay a record $8.9 billion penalty to state and federal authorities.

The trail that ultimately led to BNP began in 2006, when the Manhattan district attorney's office came upon a lawsuit filed by the father, who blamed Iran for financing the Gaza bus bombing that killed his 20-year-old daughter. Buried in the court filings, prosecutors found a stunning accusation: a charity that owned a gleaming office tower on Fifth Avenue was actually a "front" for the Iranian government, a claim that the prosecutors ultimately verified.

The prosecutors soon discovered that Credit Suisse and Lloyds, two of the world's most prestigious banks, had acted as Iran's portal to the United States financial system. To disguise the illicit transactions — the United States is closed for business to Iran — Credit Suisse and Lloyds stripped out the Iranian clients' names from wire transfers to the Fifth Avenue charity and affiliated entities. The findings led the Manhattan prosecutors and the Justice Department in Washington to announce criminal cases against both banks.

As those cases were coming to light in 2009, a whistle-blower stepped forward to point the finger at BNP, France's biggest bank. That tip has now materialized in a landmark criminal settlement, with BNP pleading guilty to criminal charges, capping a sweeping investigation into how the bank processed billions of dollars on behalf of Sudan and Iran.

The twists and turns leading to the BNP case — a series of whistle-blower tips and fortuitous discoveries recounted in interviews with current and former prosecutors — open a window into the interconnected yet shadowy world of global finance. At its center is New York City, the heart of American capitalism where banks process billions of dollars in payments on behalf of international clients.

It is a cautionary tale of how European banks, spotting a lucrative business opportunity that American rivals shunned, opened their doors to countries under sanctions and ultimately exposed their reputations to the stain of criminal cases. The interviews with prosecutors, some who spoke freely and others anonymously, also tell a story of how a local prosecutor's office in New York, perhaps better known for crackdowns on drugs and organized crime, landed in the middle of an international investigation into terrorist bombings and foreign banks.

"We're often asked why a local prosecutor is getting involved in a case of global financial crime, and my answer is how could we not," Cyrus R. Vance Jr., the Manhattan district attorney, said in an interview. "We're situated in the finance capital of the world. We just had to know where to look to connect the dots."

The district attorney's role in the case, which began under Mr. Vance's predecessor, Robert M. Morgenthau, was not always clear. Adam Kaufmann, a prosecutor who helped lead the investigations, once traveled to Washington to meet with officials from the Treasury Department's Office of Foreign Assets Control, the primary enforcer of American sanctions against Iran. The Treasury Department, he recalled, was baffled as to why a Manhattan prosecutor was investigating the case at all.

The investigation, Mr. Kaufmann explained, began in earnest back in January 2006. At the time, in a cramped office cubicle in lower Manhattan, a 32-year-old analyst for the Manhattan district attorney's office pored over the New Jersey father's lawsuit against Iran. The father, Stephen Flatow of West Orange, N.J., accused Iran of funding the terrorist group responsible for the suicide bombing in Gaza that killed his daughter, Alisa, in 1995.

A federal judge awarded Mr. Flatow, a lawyer at a title company, $250 million in damages. Iran never paid. And so Mr. Flatow sought to collect from the Alavi Foundation, the charity that he claimed was a front for the Iranian government.

The analyst at the district attorney's office, Eitan Arusy, took a keen interest in the father's accusations. Before joining the office, he was an Israeli soldier who happened to have responded to the scene of that very same bus bombing.

And the Alavi Foundation, it turned out, was in the heart of the district attorney's jurisdiction. It held an ownership stake in a Fifth Avenue skyscraper just steps from Rockefeller Center and the Museum of Modern Art. The 36-story tower, formerly known as the Piaget Building, was built in the late 1970s by a non-profit tied to the Shah of Iran.

One day in 2006, Laura Billings, a prosecutor in the district attorney's office who helped lead the Alavi Foundation investigation, visited the tower to see for herself whether anything suspicious was unfolding inside. But the building, which has housed the offices of Ivan F. Boesky, the famed Wall Street speculator who was convicted as part of the 1980s insider trading scandal, and is currently home to Godiva, the chocolate maker, was an ordinary office tower.

The prosecutors reached a breakthrough, however, during a visit to a Persian rug shop owner who had ties to Iran. Gathered around a table, picking at watermelon and pistachios, the shop owner and prosecutors discussed politics and family. At the end of the conversation came a revelation: the Alavi Foundation, the shop owner declared, was completely under the control of Iran.

Another confidential informant provided additional clues, specifically that the Alavi Foundation had received millions of dollars from Bank Melli, an Iranian state-owned bank. Get the payment records, the informant explained, and prosecutors would find the trail to Iran.

But when the prosecutors and the F.B.I. pulled the charity's bank records, Bank Melli was nowhere to be found. Credit Suisse and Lloyds were there instead.

The evidence against the Alavi Foundation was extensive, former prosecutors say, but pointed to a federal case rather than a local one. The district attorney's office ceded its Alavi investigation to the United States attorney's office in Manhattan. Under United States attorney Preet Bharara, federal prosecutors filed a civil complaint accusing the Alavi Foundation of "providing numerous services to the Iranian government." That action led to Mr. Bharara announcing a settlement agreement that forced the Alavi Foundation to forfeit its holdings in the office tower. When the government sells the building, the proceeds will flow to the families and estates of victims of terrorism.

With the Alavi Foundation case off its plate, the district attorney's office turned its focus to Credit Suisse and Lloyds. The prosecutors offered the banks a choice: turn over records related to Iranian banks or face a criminal case.

The banks chose to cooperate, producing reams of records that laid bare a scheme to disguise how Bank Melli was funneling money into the United States. To avoid detection, the records showed, Credit Suisse and Lloyds falsified money-transfer paperwork, replacing Bank Melli's name with their own.

"Please do not mention our name to any bank in the USA," Bank Melli wrote to Lloyds in one of the documents obtained by prosecutors.

Unbeknown to the prosecutors in Manhattan, the Justice Department's criminal division in Washington had its own investigation into Credit Suisse. The inquiry from the division's asset forfeiture and money laundering section, now led by Jaikumar Ramaswamy, began with a tip from an I.R.S. agent who had spotted a suspicious transaction.

The parallel investigations merged at a legal conference in 2007, when Mr. Kaufmann from the district attorney's office lunched with a Justice Department official. Out of the meeting came a plan to pursue not only Credit Suisse and Lloyds, but other foreign banks suspected of flouting United States sanctions. When Mr. Kaufmann left the office in 2013, he handed the cases to his successor, David Szuchman, and a senior prosecutor, Polly Greenberg.

The cases benefited from a trove of internal emails from Credit Suisse that showed how bank executives strategized ways to capture business from Iran once Lloyds left the market. If Credit Suisse did not act fast, the emails warned, it might lose out to other European banks.

In 2009, prosecutors kicked off a string of cases, first taking aim at Lloyds and then Credit Suisse. Barclays settled in 2010, laying the groundwork for ING, Standard Chartered and HSBC to strike their own deals in 2012.

"I felt strongly that banks should not be used as vehicles for transferring illicit funds or contraband on behalf of sanctioned countries," Mr. Morgenthau, who at 94 is now of counsel to the law firm Wachtell, Lipton, Rosen & Katz said in an interview.

The BNP case announced on Monday traces to these deals. As the deals were being negotiated, a whistle-blower approached a rank-and-file prosecutor at the Manhattan district attorney's office about BNP's ties to Iran. BNP was also doing business with Sudan at a time that the nation was operating a genocidal regime. The whistle-blower is not expected to receive any compensation for assisting the case.

The case — a collaboration among the Justice Department in Washington, the United States attorney's office and the district attorney's office in Manhattan, as well as the Federal Reserve, Treasury Department and Benjamin M. Lawsky, New York State's financial regulator — stood apart from the others. The volume of transactions reached tens of billions of dollars. And the $8.9 billion penalty is more than triple the amount that the six other banks collectively paid to resolve sanctions cases.

For Mr. Flatow, who ultimately received $25 million, the actions are vindicating.

"The fact that our case laid the groundwork for these actions is really a tribute to Alisa who would be 40 this year," he said.

Alain Delaqueriere contributed research.

A version of this article appears in print on 07/01/2014, on page A1 of the NewYork edition with the headline: Grieving Father Pulls a Thread That Unravels Illegal Bank Deals .

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ArtsBeat: Shia LaBeouf Arrested for Disorderly Conduct at Studio 54

The actor Shia LaBeouf was removed from the Studio 54 theater in Midtown on Thursday and arrested after disrupting a performance of the musical "Cabaret."

Mr. LaBeouf, the former star of the "Transformers" movie franchise, was smoking and yelling during the performance, the police said. Officers escorted him out of the show during intermission.

Mr. LaBeouf, 28, was charged with one count of criminal trespassing and two counts of disorderly conduct, according to the police. He remained in police custody Thursday night.

A spokesman for the producer of "Cabaret," the Roundabout Theater Company, said the actor was disruptive during the first act of the two-act musical.

Benj Pasek, who was nominated for a 2014 Tony Award for his work on the score of "A Christmas Story," wrote on Twitter that he saw Mr. LaBeouf handcuffed and in tears as six officers surrounded him outside the theater.

A lawyer for Mr. LaBeouf did not immediately return an email seeking comment on Thursday night.

The outburst on Thursday followed a string a erratic behavior attributed to the actor.

Mr. LaBeouf, whose films include "Indiana Jones and the Kingdom of the Crystal Skull" and "Wall Street: Money Never Sleeps," was set to make his Broadway debut in spring 2013 opposite Alec Baldwin in "Orphans," but withdrew before the show's opening because of creative differences with the show's producers.

In January, he wrote on Twitter that he was retiring from public life after he was accused of plagiarizing a comic in his screenplay, "HowardCantour.com." The film, which debuted at the Cannes Film Festival before it was released in December, contained uncredited passages from "Justin M. Damiano" by Daniel Clowes.

Mr. LaBeouf apologized on Twitter, saying that he got lost in the creative process and failed to credit the writer.

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