DealBook: Doctor Tells of Leaking Data to a ‘Friend’ at SAC

The largest insider trading scheme on record started with an attempt at friendship.

That was the testimony on Friday of Sidney Gilman, an 81-year-old doctor who took the stand for the first time as the central witness for prosecutors in the trial of Mathew Martoma, a former portfolio manager at SAC Capital Advisors who is accused of trading on confidential information supplied by Dr. Gilman.

Dr. Gilman, who took the stand on the sixth day of the trial, testified that the passing of confidential information started by accident. The doctor said he "slipped" in giving Mr. Martoma details about side effects of an experimental Alzheimer's drug. But over time, because of Mr. Martoma's persistence and desire to become friends with him, he routinely gave details about a clinical trial he was not supposed to share.

"He said he wanted to be friends," Dr. Gilman testified. "He said that to me several times."

Early in Dr. Gilman's testimony, Arlo Devlin-Brown, an assistant United States attorney, asked him whether he recognized Mr. Martoma in the courtroom. Dr. Gilman scanned the room for a few moments and then said he needed to put on his glasses, at which point he stared at the table where the defendant was seated and proceeded to describe Mr. Martoma to the jury.

Dr. Gilman kept his eyes on Mr. Martoma for a few minutes after Mr. Devlin-Brown asked him another question. At times Dr. Gilman asked for questions to be repeated, saying he couldn't hear them and noting that he wears hearing aids.

The crux of the government's case against Mr. Martoma, 39, is that Dr. Gilman provided him with confidential information in July 2008 about negative results from the clinical trial for the Alzheimer's treatment, which was being developed by two drug companies, Elan and Wyeth. Prosecutors contend the inside tip helped SAC make trades that enabled it to avoid losses and generate profits totaling $276 million, the largest insider trading scheme on record. The trial is the most prominent case to come out of the government's long investigation into SAC, which has led to a guilty plea by the firm to insider trading and tarnished its owner and founder, the billionaire investor Steven A. Cohen.

Prosecutors contend that Mr. Martoma "seduced" then "corrupted" Dr. Gilman by encouraging him to leak confidential information that not even employees at Elan and Wyeth were privy to.

Dr. Gilman testified that he initially thought sharing information was inappropriate because he was being paid as a consultant to provide only general information about medical issues related to Alzheimer's and neurological ailments but, he said, the relationship changed over time.

Dr. Gilman, who held a longtime teaching position at the University of Michigan Medical Center, was chairman of the safety committee for Elan during the clinical trial and a consultant with an expert network firm, the Gerson Lehrman Group, which sets up meetings between hedge funds and industry and scientific experts. Mr. Martoma became acquainted with Dr. Gilman through his association with Gerson Lehrman, which began in January 2006.

In October 2006, Dr. Gilman said, he met Mr. Martoma in person for the first time at SAC's offices in New York. He said the meeting was arranged by Gerson Lehrman and he said he was impressed that Mr. Martoma had catered the meeting with sandwiches.

Dr. Gilman said Mr. Martoma was bright, friendly and inquisitive. "I wish I had students like him," he told the jury.

At moments, Dr. Gilman, who spoke with a firm voice and spoke with authority about medical terminology and disease of the brain, also showed signs of a faulty memory. For instance, he couldn't remember if the first time he had passed on information was late 2006 or early 2007. "I cannot be more specific than that," Dr. Gilman said, apologizing to Mr. Devlin-Brown.

In a sign of support, three friends of Mr. Martoma attended the trial on Friday, joining Mr. Martoma's wife, Rosemary, and his parents and his wife's mother. The family has been a constant presence in the courtroom.

Dr. Gilman testified about his job on the safety committee, saying that "all the material we saw was to be kept confidential." But he said he violated that when it came to passing information on to Mr. Martoma.

Dr. Gilman also said that he knew as a consultant for Gerson Lehrman he was not supposed to provide Mr. Martoma with specific details of the clinical trial, yet he did.

He testified that he provided Mr. Martoma with the dates of safety committee meetings, after which Mr. Martoma would arrange a meeting with Dr. Gilman through Gerson Lehrman so that he could pass on inside information.

"He wanted very specific information," said Dr. Gilman, who spoke to Mr. Martoma by phone. "It sounded like he was copying numbers down."

Dr. Gilman said at no point did Mr. Martoma tell him not to give him inside information, and no one from SAC's compliance office ever contacted him to find out what the two were talking about.

Dr. Gilman says he told Mr. Martoma about problems with the clinical trial in July 2008. Prosecutors contend that he sent a detailed presentation about the clinical trial to Mr. Martoma by email and that the two men talked about it on the phone. A few days later, Mr. Martoma flew to Ann Arbor, Mich., to meet Dr. Gilman.

After that meeting, prosecutors charge that Mr. Martoma called Mr. Cohen and had a 20-minute phone call with him. The next day, July 21, 2008, SAC began to dump its shares in Elan and Wyeth, unwinding a $700 million stake in the two companies.

Mr. Cohen has not been charged with any wrongdoing, but prosecutors and federal authorities remain interested in learning what Mr. Martoma said to his former boss during that 20-minute phone call.

Earlier this week, another doctor, Joel S. Ross, testified that he also provided Mr. Martoma with inside information over the years and said he was impressed by the level of detail Mr. Martoma knew about the clinical trials for the experimental drug. Dr. Ross testified that it was almost as if Mr. Martoma "was in the room" when the clinical trials were being discussed.

Both doctors are cooperating with the government and received nonprosecution agreements in return for their help and testimony against Mr. Martoma. Dr. Gilman testified in a settlement with regulators that he paid back $186,000 in consulting fees.

Dr. Gilman said on Friday that he retired from his teaching position after Mr. Martoma was arrested in November 2012 rather than be fired because of the disclosure he had provided insider information to him.

A version of this article appears in print on 01/18/2014, on page B1 of the NewYork edition with the headline: Doctor Tells of Leaking Data to a 'Friend' at SAC.

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DealBook: Judge Disallows Plan by Detroit to Pay Off Banks

A federal judge on Thursday rejected a deal that Detroit had negotiated to help it move forward in bankruptcy, but he did offer some hope, saying the city could borrow $120 million it says it urgently needs to provide services to its residents.

Judge Steven W. Rhodes of United States Bankruptcy Court, in a decision many viewed as a big surprise, said that Detroit had hurt itself with hasty and imprudent decisions in the past, and that the practice "must stop."

He ruled that Detroit could not proceed with a plan to pay $165 million to two big banks to extricate itself from some long-term financial contracts that have been costing the bankrupt city tens of millions of dollars a year.

"It's just too much money," Judge Rhodes said. He urged the two sides to try to negotiate a new settlement but also did not rule out a lawsuit.

The rejected deal stemmed from a plan by Detroit's emergency manager, Kevyn D. Orr, to obtain a special $285 million loan from Barclays to operate in bankruptcy. Without the loan, Detroit said, it would soon run out of cash and not be able to pay its workers.

But because Detroit is already in default on some of its bonds, it could not easily take on new debt without pledging collateral. It wanted to pledge the revenue it takes in by taxing local casinos — but that money was already pledged to the two banks, Bank of America and UBS, as collateral for the financial contracts, known as interest-rate swaps, that were used to help finance pensions.

Detroit planned to use $165 million from the Barclays loan to cancel the swaps contracts, which would free up the casino money. That would leave $120 million to help run the city.

But Judge Rhodes refused to sign off on the deal, saying it was "reasonably likely" that Detroit could succeed if it challenged the swap transaction head-on by suing the two banks.

Mr. Orr testified that he had in fact considered suing the two banks to get out of the swaps, and even had his staff draw up a complaint. But in the end, he decided that such a lawsuit had just a 50-50 chance of success and that it would take too long at a time when Detroit urgently needed the casino revenue to secure a fresh loan.

While the judge allowed the city to borrow $120 million, it was unclear on Thursday whether Barclays was still willing to make the loan without resolution of the swaps issue or what the terms of a smaller loan would be. Judge Rhodes also placed conditions on the borrowing, saying that the money could be used only for purposes approved by the Michigan Gaming and Revenue Control Act and that the city must file notice with the court when it wanted to use it, giving creditors 14 days to object.

In delivering his ruling orally on Thursday, Judge Rhodes said he had reviewed the arguments Detroit would have made had it pursued a lawsuit, and thought they had merit. He said $165 million was "higher than the highest reasonable number."

"If it were close, the court would approve it," he said. "But it's not close."

The ruling was seen as a vindication for Detroit's residents and its other main creditors, which stood to take a back seat to the new Barclays loan. They were arguing that the swap contracts appeared to have been illegal to begin with and should be voided rather than paid by the bankrupt city. Some even called for Detroit to claw back the millions of dollars it has already paid the two banks on the swaps.

"It's a recovery for the people of Detroit," said Abayomi Azikiwe of the Moratorium Now Coalition, who was outside the courtroom when Judge Rhodes made his ruling. "It's a major win that could have national implications as other cities undergo bankruptcy."

In a statement, Mr. Orr said: "We are reviewing today's decision and we are thankful the court has approved our ability to pursue quality-of-life financing for the benefit of the city's 700,000 residents. As recommended, we will continue to work toward a resolution of the pension swaps."

Interest-rate swaps have been widely used in municipal borrowing, and other cities and counties have learned to their dismay that the long-running contracts are almost impossible to get out of without paying the total market value. Even in bankruptcy, the law gives swap traders the ability to be paid in full. Congress exempted such contracts from the bankruptcy rules that normally keep creditors from hounding bankrupt debtors.

The so-called safe harbor for derivatives like swaps contracts has raised eyebrows in Chapter 11 corporate bankruptcies, but until now it had not surfaced in a Chapter 9 municipal bankruptcy.

Detroit entered into the swap contracts in 2005, when it tapped the municipal bond market for $1.4 billion to put into its workers' pension funds. Much of the deal was structured with variable-rate debt, and the swaps were intended to work as a hedge, to protect Detroit if interest rates rose. But rates fell, and under those circumstances, the terms of the swaps called for Detroit to make regular payments to UBS and Bank of America. The swaps cost Detroit about $36 million a year.

The 2005 borrowing also required an unusual structure to avoid violating the city's legal debt limit. In 2009, the debt was downgraded to junk, putting the city out of compliance with the terms of the swaps. So Detroit restructured the swap obligations, offering the two banks the tax revenue that it received from local casinos as a backstop.

When Detroit declared bankruptcy last summer, it estimated the cost of terminating its swaps at about $345 million. The amount changes according to fluctuations in interest rates.

Days before filing its bankruptcy petition, Detroit said Bank of America and UBS had given it a break, so that it would have to pay only about $250 million to cancel the contracts. In the months since then, the amount dwindled to about $220 million. But other creditors, facing bigger relative losses, complained that the two banks were still getting way too much. They argued, among other things, that the interest-rate swaps were invalid from the beginning because the use of casino taxes for financial hedges is not allowed under state law.

With complaints about the swap payment mounting last December, Judge Rhodes sent the parties back to renegotiate their deal with the help of another federal judge, Gerald E. Rosen, the chief justice for the Eastern District of Michigan. Judge Rosen is the lead mediator of the Detroit bankruptcy, trying to negotiate settlements among Detroit's more than 100,000 creditors to keep the huge bankruptcy from being mired in endless lawsuits.

It was Judge Rosen who persuaded Bank of America and UBS to agree to the $165 million figure just before Christmas. Creditors were by then so perturbed about the situation that they filed a complaint against him for misconduct when he announced the deal and said he would recommend that Judge Rhodes approve it.

Mary M. Chapman contributed reporting from Detroit.

A version of this article appears in print on 01/17/2014, on page A1 of the NewYork edition with the headline: JUDGE DISALLOWS PLAN BY DETROIT TO PAY OFF BANKS.

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DealBook: Big Offer for Time Warner Cable Unsettles the Cable Industry

Charter Communications sought to upend the cable television industry on Monday, offering $37.8 billion to acquire Time Warner Cable, the country's second-largest cable operator.

If successful, Charter would take control of a leader in the lucrative business of providing cable television, high-speed Internet and phone services to millions of Americans' homes, placing itself in direct competition with Comcast, the industry leader.

But Charter, a smaller cable operator, faces several hurdles in its pursuit of Time Warner Cable. And Time Warner Cable made it clear that it was not interested in doing a deal at that price.

By offering $132.50 a share for Time Warner Cable, Charter is essentially matching the current market price. Time Warner Cable shares closed at $132.40 on Monday.

Including debt, the offer is valued at $61.3 billion. Moreover, Charter has yet to win over Time Warner Cable's management, or its shareholders.

Charter, backed by Liberty Media, owned by the billionaire John C. Malone, has been courting Time Warner Cable for months. But efforts to enter into detailed discussions about a deal have failed.

So instead of pursuing negotiations, Charter is taking its case directly to shareholders. It will begin making its case to major owners of Time Warner stock, seeking to persuade them to vote for a deal. It has not started a tender offer for Time Warner Cable shares, however.

What is more, Charter faces the possibility that Comcast, the country's largest cable operator, will make an offer of its own for Time Warner Cable. The two companies have had talks about a deal in recent months.

"Charter has just put the ball in play," said Jim Nail, analyst at Forrester Research. "I would be very surprised not to see someone else come in."

Time Warner Cable said its board had unanimously rejected the proposal, which it called "grossly inadequate."

"Charter's latest proposal is a nonstarter," Robert D. Marcus, Time Warner Cable's chief executive, said in a statement on Monday. "Not only is the nominal valuation far too low, but because a significant portion of the purchase price would be in Charter stock, the actual value delivered to TWC shareholders could be substantially lower, given the valuation, operational and significant balance sheet risks embedded in Charter's stock."

Mr. Marcus went on to say that Time Warner Cable told Charter on Dec. 27 that it was open to a deal valued at $160 per share, with $100 of that in cash and the rest in Charter stock. A deal at that price would value Time Warner Cable at $45.7 billion, about 21 percent more than Charter's current offer not including debt.

Nonetheless, Charter's bid, which has been expected for months, kicks off a potential round of consolidation in the cable television industry at a time when the cable operators are seeking to increase their bargaining power with the cable and broadcast networks such as Fox, ESPN and CBS.

Charter says it believes its offer represents a significant premium. Thomas M. Rutledge, Charter's chief executive, said that after he approached Time Warner Cable about a potential deal last June, the company's shares shot up 40 percent, largely on expectations of a deal.

"We think a lot of the premium is already in the stock," he said in an interview.

Yet even as Time Warner Cable's stock has risen, performance at the company has faltered. It has lost more than 500,000 pay television subscribers in recent quarters, and had mixed results with its Internet and telephone services.

"We think the company could be more successful," Mr. Rutledge said. Though he would not detail the projected benefits of a deal, Mr. Rutledge said that cost savings from combining sales and customer service functions, plus tax advantages, would make the deal viable.

He also took aim at Time Warner Cable's notoriously poor customer service, suggesting it was part of the reason the company has been losing business. "We don't think they need to be losing TV subscribers," Mr. Rutledge said. "Turning that around and bringing the other benefits creates value for all shareholders."

A potential deal between Charter and Time Warner Cable, which serves customers from Maine to California, could face scrutiny from antitrust regulators because it would combine two of the biggest cable operators.

The two companies do not have many overlapping markets, however, and when counting DirecTV, the satellite television operator as a competitor, "Charter and Time Warner together are still the third-largest player in the industry," Mr. Rutledge said.

Antitrust scrutiny would likely be of much greater concern for Comcast should it choose to chime in with an offer.

Should Charter go ahead with a deal with Time Warner, it would most likely need to take on substantial debt. The proposed deal is structured as a mix of $83 in cash and $49.50 in Charter stock. Charter said it had fully negotiated financing for the deal, and could quickly sign commitment letters with banks including Band of America-Merrill Lynch, Credit Suisse, Deutsche Bank and Goldman Sachs.

"There is a substantial amount of debt," Mr. Rutledge said. "But we think we can borrow it and de-lever the company relatively quickly."

A combination, he argued, would benefit both Charter shareholders and Time Warner Cable shareholders, who would own about 45 percent of a newly combined company.

Charter made its offer in the form of a so-called bear hug letter addressed from Mr. Rutledge and sent to Mr. Marcus, who took over as chief executive of Time Warner Cable at the first of the year.

In the letter, Mr. Rutledge alluded to deal talks the two men and their chief financial officers had in December, and to offers made in June and October of last year. But Mr. Rutledge said there appeared to be "no genuine interest from Time Warner Cable management and board of directors to engage on this opportunity."

Instead, Mr. Rutledge, who took control of Charter in 2012, said his company would begin sounding out Time Warner Cable shareholders to gauge their interest in a deal at the offer price. Though Charter has not made a tender offer for Time Warner Cable shares, Mr. Rutledge did not rule out the possibility of making a hostile bid.

Even before Liberty Media invested in Charter last year, Mr. Rutledge said he was interested in striking a deal with Time Warner Cable.

But when Liberty, where Mr. Malone is chairman and known as the King of Cable, joined the board, discussions about how to strike a deal intensified. Along with Liberty Media's president and chief executive officer, Gregory B. Maffei, who is also on the Charter board, Mr. Malone supports further consolidation in the cable industry.

"John Malone is one of the most experienced investors in the cable industry and Greg is an experienced C.E.O.," Mr. Rutledge said. "Having them validate our point of view was a nice thing."

In recent years, broadcast and cable networks have been demanding higher fees from cable operators like Time Warner Cable and Charter for the rights to carry their programming. Spats between the two sides have led to numerous blackouts of popular content, most notably when CBS was unavailable to Time Warner Cable subscribers last year.

"Consolidation makes a huge amount of sense," said Mr. Nail. "In order for the cable operators to get some clout, they just need to get bigger, so they can have a credible threat of inflicting damage to the networks if they pull their content. It is a good moment to strike."

Goldman Sachs, LionTree Advisors and Guggenheim Securities are advising Charter. Wachtell, Lipton, Rosen & Katz and Kirkland & Ellis are providing legal advice. Bloomberg News was the first to report the details of Charter's offer.

Morgan Stanley, Allen & Company and Citigroup are advising Time Warner Cable, and Paul, Weiss, Rifkind, Wharton & Garrison is serving as legal counsel.

A version of this article appears in print on 01/14/2014, on page B1 of the NewYork edition with the headline: Big Offer Unsettles The Cable Industry .

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DealBook: Ex-SAC Trader Was Expelled From Harvard Law School

A federal jury will decide whether Mathew Martoma, the former hedge fund manager, cheated when he worked at SAC Capital Advisors, but there's no denying he cheated when he falsified his grades at Harvard Law School some 15 years ago.

In 1999, Mr. Martoma was expelled from Harvard for creating a false transcript when he applied for a clerkship with a federal judge, court papers unsealed on Thursday showed. Mr. Martoma used a computer program to change several grades from B's to A's, including one in criminal law, and then sent the forged transcript to 23 judges as part of the application process.

Then, during a Harvard disciplinary hearing to determine whether he should be expelled, Mr. Martoma tried to cover his tracks by creating a fake paper trail that included fabricated emails and a counterfeit report from a computer forensics firm that Mr. Martoma had created to help conceal his activities.

After Harvard expelled him, Mr. Martoma, who at the time was known as Ajay Mathew Thomas, legally changed his name to Mathew Martoma.

Nearly a decade after he was kicked out of Harvard, federal prosecutors contend, Mr. Martoma carried out one of the largest insider trading schemes while working at Steven A. Cohen's hedge fund. He is charged with using inside information to help SAC avoid losses and generate profits totaling $276 million by recommending the firm sell all of its holdings in two drug companies, Elan and Wyeth, in July 2008.

The disclosure of Mr. Martoma's expulsion from Harvard came as a jury of seven women and five men was seated for his trial after two days of selection. Lawyers for the prosecution and defense are expected to deliver opening statements on Friday in a Lower Manhattan federal courtroom. The trial is expected to last four weeks.

It is not clear whether the bizarre twist in the case will ever be introduced into evidence, because Mr. Martoma is unlikely to testify in his own behalf. Negative character evidence can generally be used at trial only to impeach a person's testimony or rebut a line of argument raised by the defense as a potential alibi.

The prosecution argues in court papers that Mr. Martoma's deception is relevant to show that he has the technical knowledge to alter computer files. That could be relevant, prosecutors say, if Mr. Martoma's lawyers seek to argue he never received a copy of a confidential report that discussed problems with a clinical trial for an experimental Alzheimer's drug being developed by Elan and Wyeth.

Prosecutors charge that Mr. Martoma recommended that SAC sell its shares in Elan and Wyeth after receiving the report from a key cooperating witness in the case, Dr. Sidney Gilman, and then flying to Ann Arbor, Mich., to discuss the results of the trial with him.

Mr. Martoma's lawyers at Goodwin Procter, in the run-up to the trial, have raised questions about the government's failure to find any email evidence that Dr. Gilman sent Mr. Martoma a copy of the report. Dr. Gilman, 81, who received a nonprosecution agreement from the government, is expected to testify that he sent the report to Mr. Martoma and discussed the findings both on the phone and when the two men met a few days before SAC began selling the companies' shares.

Prosecutors have conceded they have not found any email evidence to support Dr. Gilman's contention that he sent a copy of the report to Mr. Martoma. But they said Mr. Martoma's pattern of deception at Harvard is "evidence of the defendant's capacity to destroy or fabricate electronic forensic evidence."

Lou Colasuonno, a spokesman for Mr. Martoma, said: "This event of 15 years ago is entirely unrelated to, and has no bearing on, this case." He added that the prosecution, in raising the issue, was trying to "unduly influence the ongoing court proceedings."

James M. Margolin, a spokesman for Preet Bharara, the United States attorney in Manhattan, declined to comment.

When he was at Harvard, Mr. Martoma told the law school administrators that he had falsified his transcript as a joke and did it mainly to impress his parents.

A Harvard Law School spokeswoman said on Thursday that the university had no record of Mr. Martoma's graduating but could not comment further. She could not confirm whether he had attended or was expelled.

In the weeks leading up to the trial, Mr. Martoma's lawyers had sought to keep their client's expulsion from Harvard quiet, arguing the issue had nothing to do with the charges he faces.

But Judge Paul G. Gardephe rejected that argument and in a Dec. 28 decision ordered that the court papers be unsealed. The filings remained sealed until Thursday while Mr. Martoma's lawyers appealed unsuccessfully.

It is not clear whether SAC knew about Mr. Martoma's expulsion from Harvard or the reason he changed his name when he was hired as a health care portfolio manager in 2006. An SAC spokesman, Jonathan Gasthalter, declined to comment.

Erik M. Gordon, a professor at the University of Michigan Law School, said SAC had to be given the benefit of doubt that it did not know about Mr. Martoma's expulsion. But he said the fact that Mr. Martoma landed a job at SAC would seem to justify the government's contention that the firm has been a "magnet for bad people who do bad things."

To date, eight people, including Mr. Martoma, have been criminally charged with insider trading while working for Mr. Cohen. Except for Mr. Martoma, all of them have either pleaded guilty or been convicted at trial.

The jurors who will sit in judgment of Mr. Martoma come from the Bronx, Manhattan and Westchester and Rockland Counties. They include the chief executive of the Jones Group, the shoe and accessory company, and a New York City bus driver.

Some of the jurors have training in law and finance. One juror said she was an insurance underwriter for the American International Group, while another has a law degree and works at the accounting firm PricewaterhouseCoopers. Another juror is an employment and labor lawyer who said his firm's work included internal investigations for corporations related to the Foreign Corrupt Practices Act.

A version of this article appears in print on 01/10/2014, on page B1 of the NewYork edition with the headline: SAC Trader Falsified His Grades At Harvard.

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DealBook: Wall Street Predicts $50 Billion Bill to Settle U.S. Mortgage Suits

Wall Street could pay nearly $50 billion to buy peace from federal authorities who are taking aim at the banks over their role in the mortgage crisis, according to interviews and a confidential analysis of the industry's potential legal exposure.

Bracing for a potential reckoning, the banks and their outside lawyers are quietly using JPMorgan Chase's record $13 billion mortgage settlement in November to do the math and determine just how much each bank might have to pay to move beyond the torrent of government mortgage litigation that has dogged them since the financial crisis. Such calculations, people briefed on the matter said, have gained particular urgency among the banks' board members.

If the settlements materialize, they could yield, according to the analysis, $15 billion in relief for consumers — a mixture of cash payments and other assistance, like reductions in the size of homeowners' loan payments. A payment of $50 billion, made up of a string of separate deals, would amount to roughly half the total annual profit of large American banks in 2012.

The JPMorgan settlement has stepped up the pressure on other banks to strike their own separate deals in the coming months, some top bank executives say. When the JPMorgan settlement was announced, the Justice Department official who took the lead in brokering the deal, Tony West, said it could offer a model for other financial institutions being investigated in their sales of troubled mortgage investments. The government made JPMorgan a test case, knowing the nation's largest bank, facing a wide swath of legal woes, was vulnerable. The $13 billion deal has left some on Wall Street worried that the cost of their own deals will now be inflated, the people said.

The government is facing pressure of its own to make the banks pay for their role in the housing crisis, zeroing in on whether the banks duped investors into buying mortgages in the heady days before the financial downturn.

The analysis, which lawyers prepared for one of the financial institutions and which was reviewed by The New York Times, indicates that Bank of America could ultimately settle for $11.7 billion in penalties, with an additional $5 billion in relief to homeowners.

Morgan Stanley's combined tally, the analysis shows, could be around $3 billion, with roughly a third going to consumer relief, while Goldman Sachs's total could come to roughly $3.4 billion. For the Royal Bank of Scotland, the total price could be around $10 billion, which might prompt an outcry in Britain, where the government owns a majority stake in the bank. Citigroup could pay roughly $1 billion, the analysis shows. The potential penalties for other banks are under $1 billion, the analysis shows.

Some of the 16 banks under scrutiny could decide against striking deals altogether, while others could try to negotiate a lower settlement number. The lawsuits and investigations against the banks vary, which could affect their ultimate outcomes. Anticipating the potential pain, banks have also set aside large reserves to absorb the litigation costs.

The projected payments are based on analysis by lawyers sorting through the mortgage morass to get a firmer grasp on what it could cost to resolve years of investigations. The banks declined to comment.

Resolution would be greeted with resigned relief on Wall Street. The banks are facing investigations from government authorities including state attorneys general and federal prosecutors. The legal barrage has been generating mounting frustration among some top executives. The bankers, who spoke on the condition of anonymity, say the government has taken an arbitrary, one-size-fits-all approach that could force them to pay more than their fair share.

At the same time, a popular antibank sentiment makes it even harder for Wall Street to win court battles against federal authorities, the people said. Some critics of Wall Street — they point to the foreclosure-dotted neighborhoods, languishing property values in areas hard-hit by the housing crisis and other signs of wreckage lingering across the country — argue that even the large payouts from banks fall short. The scarce number of criminal actions filed in the aftermath of the financial crisis, with few top executives in the government's cross hairs, also fueled public frustration.

To arrive at the potential payouts for each of the 16 banks, the analysis examined JPMorgan's settlement payments as a percentage of the total amount of residential mortgage securities issued by the bank from 2005 to 2008, or those at the center of the government's lawsuits. Of the $13 billion, for example, $4 billion went to the Federal Housing Finance Agency, amounting to 11 percent of the mortgage securities at issue. That percentage was then used to determine how much the agency could get from the other banks.

The litigation is centered on the banks' mortgage machines, which churned out billions of dollars in securities from 2005 to 2008 that later imploded. Looking to go after mortgage fraud aggressively, President Obama formed a mortgage task force to investigate wrongdoing. The unit has already brought cases against some banks, accusing them of keeping investors in the dark about flawed mortgage securities. Adding to the legal fray, the Federal Deposit Insurance Corporation and the National Credit Union Administration have also sued some banks to recoup losses that the regulators shouldered after taking over lenders that failed under a glut of bad mortgages.

The lawsuits that could yield the heftiest settlements are from the Federal Housing Finance Agency, which oversees the housing finance twins Fannie Mae and Freddie Mac. The agency sued 17 financial firms in 2011, accusing them of selling shoddy mortgage securities to the housing giants. While some have settled, like Deutsche Bank, which struck a $1.9 billion deal in December, 10 firms remain locked in the costly litigation. The Royal Bank of Scotland, the analysis shows, would have to pay an estimated $5.4 billion.

As part of its settlement, JPMorgan paid the F.D.I.C., for example, roughly $515 million, or 0.11 percent of the total residential mortgage-based securities that JPMorgan or the flailing firms that it took over — Bear Stearns and Washington Mutual — sold from 2005 to 2008. Under that formula, the analysis shows, Morgan Stanley's exposure would come to more than $108 million, and Goldman Sachs could face roughly a $136 million payout.

Bank of America could face the highest tally, according to the analysis, in part because of its acquisition of the troubled subprime lender Countrywide Financial. According to the analysis, the bank, or the firms it acquired, sold roughly $637 billion in residential mortgage securities from 2005 to 2008. Using the JPMorgan settlement as a guide, that could leave Bank of America with a $713 million bill to the F.D.I.C. alone. Settling with the housing financing agency, the analysis shows, could be expensive, coming in at about $6.7 billion.

While the potential settlements could be painful for banks, they also would enable them to close a troubled chapter.

"Yes, $50 billion is a big number," Gerard Cassidy, a bank analyst with RBC Capital Markets, said. "But it is manageable for the 16 banks, and the industry wants to put this behind them."

A version of this article appears in print on 01/10/2014, on page A1 of the NewYork edition with the headline: Wall Street Predicts $50 Billion Bill to Settle U.S. Mortgage Suits .

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Judge Blocks Part of N.Y.U.’s Plan for Four Towers in Greenwich Village

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Vail Founder’s Grandson Killed in Colorado Slide

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Uncertainty in Utah as Appeals Process Plays Out Over Gay Marriage

Jim McAuley for The New York Times

Moudi Sbeity, left, and Derek Kitchen, two of the lead plaintiffs in the legal challenge against Utah's ban on same-sex marriage.

SALT LAKE CITY — Ever since it was a distant Western territory straining for statehood, Utah has been entwined in battles over what makes a marriage.

Before Congress would allow Utah to join the union, it required Mormon leaders here to adopt a state constitution declaring that polygamy and plural marriages — once a religious principle of the Church of Jesus Christ of Latter-day Saints — would be "forever prohibited." A century later, at the height of the AIDS crisis, the state passed a law — since overturned — barring people with AIDS from marrying and nullifying marriages if a partner had the disease.

And now, a legal struggle over Utah's voter-approved ban on same-sex marriage has catapulted this socially conservative state to the center of the national debate over who should be allowed to wed, and whether states have the right to limit marriages to one man and one woman.

The stakes grew increasingly urgent in the past two days as the United States Supreme Court put a halt to same-sex marriages while Utah appeals a lower court's decision allowing the unions. More than 1,000 gay couples have exchanged vows in Utah, but on Tuesday they wondered how the state would treat their marriages now that the ban was again the law of the land.

A spokeswoman for Sean D. Reyes, the state attorney general, said his office had been poring over Utah's laws and other legal cases to determine how to treat the newlyweds now floating in what he called a "legal limbo."

One of those is Randi White. Ms. White said that she and her partner, Laura, had been planning a "real wedding." But when Judge Robert J. Shelby of Federal District Court declared last month that gay couples had a fundamental right to marry, she said, they spontaneously decided to join the flood and wed immediately. Ms. White is seven months pregnant, and both women want to be the child's legal parents.

"I don't know what it means now," Ms. White said. "It's a little scary."

State offices and private employers have already begun extending spousal benefits to gay couples, many of whom have taken steps to list their husbands and wives on their health insurance and are planning to file joint state income-tax returns. Gay spouses are taking steps to adopt their children or be listed on their babies' birth certificates.

As Utah appeals its case to the United States Court of Appeals for the 10th Circuit, it could decide to honor the unions granted during the 17 days between the time Judge Shelby's decision opened the door to same-sex marriages and the Supreme Court closed it again. Or the state could decide those unions do not count, a move that could provoke a wave of legal action.

"Now, nobody knows," said Clifford J. Rosky, a law professor at the University of Utah and the chairman of the board of Equality Utah, a gay rights group. "The marriages were valid when they were entered, and they remain valid. The question is whether Utah will recognize them."

In Utah, the tangled history of what constitutes a marriage has infused the current debate. When supporters of same-sex marriage discuss the Mormon Church's opposition to expanding marital rights, they sometimes cite the church's 1890 disavowal of polygamy as evidence that church positions can change, sometimes profoundly. Opponents say that if Utah had the power to outlaw an entire class of marriages to gain statehood in 1896, it now has the right to define marriage as a heterosexual institution.

In December, another federal judge struck down part of Utah's antipolygamy law, saying its ban on "cohabitation" violated constitutional guarantees of the free exercise of religion. Some critics of same-sex marriage seized on the decision as evidence that the growing approval of same-sex marriage would weaken laws based on morality.

Utah has already warned gay couples that their marriages could be made void if the state's legal appeals succeed. And like Amber and Kimberly, a newly married couple who live in Salt Lake City with their baby daughter, many have been pondering what hangs in the balance.

Together for five years, the women married largely for their daughter, so that both could be her legal parents, which they say would have been impossible in Utah without a marriage license. Amber is the girl's biological mother; Kimberly said she had no legal rights.

"I wake up in the morning, and my daughter calls me 'Ma' and Amber 'Mama,' " said Kimberly, who spoke on the condition that her and her wife's last names not be used, for fear of jeopardizing the adoption. "This is our child. And she deserves the security of knowing that that's not going to be taken away."

The couple filed an adoption petition last month. But Kimberly said she now worried whether a Utah court would still consider her a legal spouse.

"Every day, whether I'm taking my daughter to the doctor or to music classes, I can't make decisions for her," she said. "I can't visit her in the hospital. And as she gets older and understands these things, the basic need for her to feel safe isn't going to be there. I'm a legal stranger."

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DealBook: JPMorgan and U.S. Settle in Madoff Criminal Case

Updated, 9:37 p.m. | Two men who occupy coveted roles in Manhattan's power elite, one the city's top federal prosecutor and the other its top banker, sat down in early November to discuss a case that was weighing on them both.

Preet Bharara, the United States attorney in Manhattan, and Jamie Dimon, the chief executive of JPMorgan Chase, gathered in Lower Manhattan as Mr. Bharara's prosecutors were considering criminal charges against Mr. Dimon's bank for turning a blind eye to the Ponzi scheme run by Bernard L. Madoff. Mr. Dimon and his lawyers outlined the bank's defense in the hopes of securing a lesser civil case, according to people briefed on the meeting.

But at the cordial meeting in Mr. Bharara's windowless conference room lined with law books, the prosecutors would not budge. Mr. Bharara — flanked by his own lieutenants, including Richard B. Zabel and Lorin L. Reisner — made it clear that he thought the wrongdoing was significant enough to warrant a criminal case.

On Tuesday, Mr. Bharara announced the culmination of that case, imposing a $1.7 billion penalty stemming from two felony violations of the Bank Secrecy Act, a federal law that requires banks to alert authorities to suspicious activity. The prosecutors, calling the amount a record for violating that 1970 federal law, will direct the money to Mr. Madoff's victims.

The outcome of the case and the tenor of the settlement talks underscore the significant leverage prosecutors wield when negotiating with Wall Street's biggest firms. Even though JPMorgan had defeated a similar private lawsuit just months earlier, bank executives were unwilling to gamble against the government.

Within weeks of meeting Mr. Bharara and recognizing their limited bargaining power, JPMorgan's lawyers accepted the $1.7 billion penalty, the people briefed on the meeting said, which was within the range that prosecutors initially proposed. The bank also agreed to pay $350 million to the Office of the Comptroller of the Currency, accepting the agency's only offer, one of the people said.

It could have been worse for the bank. At one point, prosecutors were weighing whether to demand that the bank plead guilty to a criminal charge, a move that senior executives feared could have devastating ripple effects. Rather than extracting a guilty plea, prosecutors struck a so-called deferred-prosecution agreement, suspending an indictment for two years as long as JPMorgan overhauls its controls against money-laundering.

Still, the size of the fine and the rarity of a deferred-prosecution agreement — such deals are scarcely used against giant American banks and are typically employed only when misconduct is extreme — reflect the magnitude of the accusations.

Having served as Mr. Madoff's primary bank for more than two decades, JPMorgan had a unique window into his scheme. In a document outlining the bank's wrongdoing, prosecutors argued that "the Madoff Ponzi scheme was conducted almost exclusively" through various accounts held at JPMorgan.

At a news conference on Tuesday, Mr. Bharara drew a direct line between Mr. Madoff's fraud and JPMorgan's failings, citing the bank for "repeatedly" ignoring warning signs.

"In part because of that failure, for decades Bernie Madoff was able to launder billions of dollars in Ponzi proceeds," Mr. Bharara said.

George Venizelos, a senior F.B.I. official, added that "JPMorgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards."

In a statement on Tuesday, a JPMorgan spokesman noted that the bank had poured significant resources into bolstering its controls, but acknowledged that it "could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time."

The spokesman, Joseph Evangelisti, also defended the bank's employees, saying, "We do not believe that any JPMorgan Chase employee knowingly assisted Madoff's Ponzi scheme." He added that "Madoff's scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses."

The charges against JPMorgan, the result of an F.B.I. investigation that spanned several years, are emblematic of a broader problem among giant global banks: ignoring the warning signs of fraud. The case comes a year after HSBC, the large British bank, paid a $1.9 billion fine for enabling Mexican drug cartels to launder cash through its branches.

The case punctuated a sweeping investigation into the movement of tainted money through the American financial system, a crackdown that ensnared other large British banks like Standard Chartered and Barclays. Each of the banks received a deferred-prosecution agreement.

For JPMorgan, the Madoff case is the bank's latest steep payout to the government. In November, JPMorgan paid a record $13 billion to the Justice Department and other authorities over its sale of questionable mortgage securities in the lead-up to the financial crisis. All told, after paying these settlements, JPMorgan will have paid out some $20 billion to resolve government investigations over the last 12 months.

The payouts, which all but entirely resolve JPMorgan's Madoff problems, represent a mixed outcome for the bank. While the big-dollar sums are an embarrassment to a bank that once wielded greater influence in Washington, the settlements also allow JPMorgan to put the cases behind it. As JPMorgan continues to report robust profits, the cases are a distraction that the bank is aiming to resolve in rapid succession.

Yet the comptroller's office also noted on Tuesday that its investigation remained open. In a statement, it declared: "We will continue our oversight efforts and take further action as warranted."

And critics of Wall Street are unsatisfied, noting that Mr. Bharara's office opted to defer prosecution and did not charge any JPMorgan employees with wrongdoing.

"Banks do not commit crimes; bankers do," said Dennis M. Kelleher, the head of Better Markets, an advocacy group.

In taking aim at JPMorgan, prosecutors reached back two decades to show how the bank ignored warning signs about Mr. Madoff. When one arm of the bank considered a business deal with Mr. Madoff's firm in 1998, an employee remarked that the financier's returns were "possibly too good to be true," and that there were "too many red flags" to proceed. While those concerns were enough the scuttle the deal, they were never shared with compliance officers or regulators.

"The bank connected the dots when it mattered to its own profit, but was not so diligent otherwise when it came to its legal obligations," Mr. Bharara said at the news conference.

Another bank, identified in the statement of facts only as "Madoff Bank 2," did cut off ties to Mr. Madoff in 1996 and brought its concerns to authorities. Although the bank, which people briefed on the matter identified as Bankers Trust, now owned by Deutsche Bank, told prosecutors that JPMorgan "was notified" of the concerns, JPMorgan continued to work closely with Mr. Madoff.

After that, JPMorgan's ties to Mr. Madoff expanded, even as skepticism mounted. In 2007, when JPMorgan was pursuing derivatives deals linked to Mr. Madoff's so-called feeder-fund investors, the hedge funds that invested their clients' money with him, one executive remarked that he had heard about a "well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme."

JPMorgan's private bank also issued internal warnings about Mr. Madoff when considering an investment on behalf of its clients. The unit, prosecutors say, balked when Mr. Madoff refused to meet as part of the bank's due diligence efforts.

On two occasions, in 2007 and 2008, JPMorgan's own computer system also raised red flags about Mr. Madoff, according to prosecutors. But both times, JPMorgan employees "closed the alerts."

It was not until October 2008 that JPMorgan alerted authorities — in Britain — to concerns that his firm's investment returns were "so consistently and significantly ahead of its peers" that the results "appear too good to be true." But JPMorgan never provided a similar warning to authorities in Washington, a violation of the Bank Secrecy Act.

On the day of Mr. Madoff's arrest in December 2008, a JPMorgan employee wrote to a colleague: "Can't say I'm surprised, can you?" The colleague replied: "No."

A version of this article appears in print on 01/08/2014, on page B1 of the NewYork edition with the headline: JPMorgan Is Penalized $2 Billion Over Madoff .

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