Today's Economist: Room for Small Deals on Tax Policy

Judge Considers Limits on Apple’s Future E-Book Deals

In a sometimes testy hearing in United States District Court in Lower Manhattan, Judge Denise L. Cote said that she was considering a plan in which Apple would negotiate contracts with publishers in a staggered fashion — possibly six to eight months apart — to prevent them from engaging in another price-fixing conspiracy.

Judge Cote ruled in July that Apple colluded with publishers to raise the price of e-books before the introduction of its iPad in 2010. Those charges were brought against Apple and five major publishers by the Justice Department in 2012. The publishers all settled, but Apple held out and went to trial.

The judge’s proposal was a scaled-back version of the guidelines put forth by the government last week, when it suggested that Apple be forced to end its agreements with the five settling publishers and avoid entering similar agreements with producers of movies, TV and music. Apple responded by calling the proposal a “draconian and punitive intrusion” into its business.

The publishers who settled also objected to the Justice Department’s proposed remedy, saying that it would fundamentally change their existing settlements.

In court on Friday, Judge Cote said that she wanted an injunction to be tailored so that it would encourage innovation in a rapidly changing e-book business and yet prevent collusion on price in the future.

“I have no desire to regulate the App Store,” she said.

But Judge Cote also slammed the publishers for lacking “contrition” and said that she feared future collusion in the e-book market. Although the publishers eventually agreed to settlements, none of them admitted wrongdoing.

Judge Cote said that the publishers had played “a rough and tumble game” and engaged in “blatant price fixing.”

“None of the publisher defendants have expressed any remorse,” she said. “They are, in a word, unrepentant.”

Lawyers for Apple and the government said in court that they would meet in the next week and discuss the judge’s proposal. Another hearing is expected later this month.

Apple and the Justice Department declined to comment.

Hachette Book Group, HarperCollins and Simon & Schuster settled in April 2012; Penguin Group USA and Macmillan settled later. Penguin has since merged with Random House, which was not named in the lawsuit.

DealBook: The Sun Valley Conference Rolls Around, With Deals in the Air

Rick Wilking/ReutersRupert Murdoch arrived on Tuesday for Allen & Company’s annual media and technology conference.

SUN VALLEY, Idaho – “Well, folks, we talked to dispatch, and we have to go to Boise,” said the pilot of the Alaska Airlines flight on Tuesday afternoon.

The reason? About 12 planes were ahead in the queue for the tiny airport in Sun Valley, Idaho. About eight of them were private jets.

“There’s apparently a business conference,” the pilot said.

It was a sign that Allen & Company’s annual media and technology conference here was kicking into high gear.

For about three decades, many of the biggest movers in the media and technology worlds have gathered here to schmooze, to hear from special guest speakers and, on occasion, to put together potentially big transactions.

Long regarded as the birthplace of prominent mergers, the conference will play host to a number of industry giants who have made moves toward deals. Among them are Rupert Murdoch of the News Corporation, who recently cleaved his media empire in two and may be on the hunt for newspaper acquisitions; John C. Malone, the Liberty Media chairman and onetime cable tycoon who is weighing a potential takeover pursuit of Time Warner Cable (whose chief executive, Glenn A. Britt, is also on the guest list); and Michael White of DirecTV and Peter Chernin of Chernin Entertainment, who are both said to have bid for the online video service Hulu.

By Tuesday evening, many had arrived, attending a dinner hosted by Allen & Company’s Herb Allen. Spotted so far:

Mark Zuckerberg of Facebook, shaking hands and chatting with Eric Schmidt and Nikesh Arora of GoogleBrian Chesky of Airbnb, the home-sharing giant, and Ben Silbermann of Pinterest, the fast-growing social networkDick Costolo, the chief executive of Twitter, and his wife, LorinMarc Pincus of Zynga, not long after he gave up the chief executive role at the game companyJohn Donohoe of eBay, getting a bourbon at the Sun Valley InnJames Murdoch, walking back to the innMax Levchin, the serial entrepreneur and a Yahoo director, and his wife, NellieSebastian Thrun, the founder of the Google X Lab and now chief executive of Udacity, an online education providerHarvey WeinsteinWesley R. Edens of Fortress InvestmentDaniel L. Doctoroff of Bloomberg L.P.Brian C. Rogers of T. Rowe Price

DealBook is on hand at the conference to gather tips, gossip and possibly be tossed into the duck pond by an irate mogul. I’ll be posting both here and to my Twitter feed. Stay tuned.

DealBook: Oligarchs Assemble Team for Oil Deals

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Supreme Court Lets Regulators Sue Over Generic Drug Deals

In a 5-to-3 vote, the justices effectively said that the Federal Trade Commission can sue pharmaceutical companies for potential antitrust violations, a decision that is likely to increase the number of generic drugs in the marketplace and benefit consumers.

Specifically, the justices threw out lower-court rulings that said the agreements were legal, provided that a deal did not keep a generic drug off the market beyond the term of the brand-name drug’s patent.

The decision is likely to create considerable uncertainty in the drug business and shift an important balance of power to the generic companies, industry analysts said. Drug developers may now find it harder to ward off generics, which typically cost about 15 percent of the brand-name’s price and cause the original to quickly lose up to 90 percent of its market share.

Consumer groups, drug retailers, wholesalers and insurance companies, which all benefit from the lower prices of generic drugs, could also step up their challenges to the agreements under antitrust laws.

The court did not address whether the agreements, called pay-for-delay or reverse payments, were unlawful on their face. In a standard patent infringement lawsuit, a settlement payment would be made by an infringer to the patent holder.

In the case, Federal Trade Commission v. Actavis, No. 12-416, the agency said that a payment to Actavis by Solvay Pharmaceuticals, the holder of a patent on a testosterone gel known as AndroGel, represented an unlawful restraint of trade because it was intended to keep Actavis from producing its generic version of AndroGel for a certain number of years.

Solvay’s deal with Actavis is known as a reverse-payment agreement because payment flows from the brand-name drug company to the generic competitor that is challenging the patent.

Justice Stephen G. Breyer, writing for the majority, said that “a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent.”

The stakes in the case are significant. Pharmaceutical sales in the United States totaled roughly $320 billion in 2011, according to IMS Health, a research company whose statistics the trade commission cited in its arguments. Brand-name drugs accounted for 18 percent of the total prescriptions written by doctors in 2011 but 73 percent of consumer spending, IMS reported.

“No other decision this term will have as much impact on consumers’ pocketbooks,” said David A. Balto, an antitrust lawyer and a former Federal Trade Commission policy director.

“It clearly maps out how the F.T.C. can use the law to stop these anticompetitive schemes and make sure consumers receive the full benefits of a competitive marketplace,” Mr. Balto added. “At the same time it permits the broad range of settlements that pose few competitive concerns.”

Officials at the trade commission, which has fought against the pay-for-delay agreements for several years, were predictably enthusiastic.

“The Supreme Court’s decision is a significant victory for American consumers, American taxpayers and free markets,” said Edith Ramirez, chairwoman of the F.T.C. “With this finding, the court has taken a big step toward addressing a problem that has cost Americans $3.5 billion a year in higher drug prices.”

Executives at Actavis played down the decision’s significance. “The F.T.C. did not win anything with this decision,” said Paul M. Bisaro, president and chief executive of Actavis. “We think these settlements will continue, and we will continue to enter into these kinds of settlements. We believe all of our agreements were pro-competitive.”

Justice Breyer’s decision, which was joined by Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan, reversed a decision of the 11th Circuit Court of Appeals, which had thrown out the F.T.C.’s case. The appeals court said that because the exclusion of the generic drug did not extend beyond the term of the brand-name drug’s patent, a “quick look” could determine that there was no anticompetitive effect.

The Supreme Court’s decision adopted a different standard, known as the “rule of reason,” which states that the agreements must be considered in the context of their possible benefits for consumers.

Chief Justice John G. Roberts Jr. wrote a dissenting opinion, which was joined by Justices Antonin Scalia and Clarence Thomas. Justice Samuel A. Alito Jr. recused himself from the case.

In their dissent, the justices pointed out that the agreement between Solvay and Actavis allowed for the generic drug to come to market five years before the scheduled expiration of Solvay’s patent. The majority’s decision will discourage the settlement of patent litigation, the justices said.

Congress has encouraged generic drug makers to challenge the patents protecting lucrative brand-name drugs through the 1984 Drug Price Competition and Patent Term Restoration Act, also known as the Hatch-Waxman Act.

Media Decoder: Apple Is Said to Be Pressing to Complete Deals for Internet Radio

After months of stalled negotiations over its planned Internet radio service, Apple is pushing to complete licensing deals with music companies so it can reveal the service as early as next week, according to people briefed on the talks.

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Apple’s service, a Pandora-like feature that would tailor streams of music to each user’s taste, has been planned since at least last summer. But Apple has made little progress with record labels and music publishers, which have been seeking higher royalty rates and guaranteed minimum payments, according to these people, who spoke anonymously about the private talks.

While it is still at odds with some music companies over deal terms, Apple is said to be eager to get the licenses in time to unveil the service — nicknamed iRadio by the technology press — at its annual developers conference, which begins June 10 in San Francisco.

Apple has signed a deal with the Universal Music Group for its recorded music rights, but not for music publishing — the part of the business that deals with songwriting. Over the weekend, Apple also signed a deal with the Warner Music Group for both rights. It is still in talks with Sony Music Entertainment and Sony’s separate publishing arm, Sony/ATV, whose songwriters include Taylor Swift and Lady Gaga.

Representatives for Apple and the music companies declined to comment.

Apple’s Internet radio feature is expected to be free and supported by advertising, and would represent a relatively late arrival by the company into what has become a fast-growing — if low-margin — sector of the music business. Pandora has more than 70 million regular users, the vast majority of whom do not pay, and similar features have been introduced by Google, Spotify and the radio company Clear Channel Communications.

The licensing fees paid by Pandora have been a sore spot for music companies, which see promise in Apple’s service, particularly since it can be linked to sales through Apple’s iTunes store, but want higher rates. Publishers, for instance, are paid about 4 percent of Pandora’s revenue, but want as much as 10 percent from Apple.

Apple is said to be negotiating directly with the music groups because it wants more extensive licensing terms.

On the Road: Hotel Industry Deals With Its Online Critics

Now there are scores of major online travel and social media sites sprouting hundreds of thousands of customer reviews. And the hotel industry is frantically trying to stay on top of the commotion.

What appeared to be one such effort by a hotel executive drew attention last week. Tnooz.com, a site that specializes in travel technology, reported that an executive based in Sydney, Australia, with the worldwide hotel chain Accor, had anonymously posted more than 100 reviews on TripAdvisor.com, the consumer travel site that features millions of customer reviews of travel services, including hotels around the world.

The reviews of various Accor hotels were positive. A few took shots at competing hotels. Tnooz said that the executive, Peter Hook, admitted posting the reviews in a statement in which he explained that most of his reviews were for tourism activities and restaurants rather than just hotels. I could not reach Mr. Hook for comment.

Accor hotels around the world include the brands Sofitel, Novotel, Pullman, Mercure and Ibis. Kerrie Hannaford, an Accor spokeswoman, told me Friday she was unaware of the controversy involving the anonymous reviews. She did not respond to further calls for comment.

Knowing how busy most hotel managers are, I’m somewhat sympathetic to the pressures they have come under in recent years because of the tsunami of online reviews. Many hotel companies expect managers to respond personally to negative reviews, a time-consuming chore.

Olery, a company that offers brand reputation management for hotels, said in a report that about 78 percent of travelers used online reviews to help decide which hotel to book.

As the importance of online customer evaluations grows, an increasing number of hotel reviews are suspect. Big travel review sites like TripAdvisor say they try to monitor reviews to weed out the ones from customers clearly acting in bad faith, or from competitors simply out to torpedo a rival.

One global hotel company, Small Luxury Hotels of the World, not long ago created its own review system open to members of its loyalty program, called The Club. It allows review privileges only to members who have had more than one stay at a given hotel. Still, the reviews are open to honest evaluation, including criticism, said Paul Kerr, chief executive of Small Luxury Hotels, which represents more than 520 boutique luxury hotels in about 70 countries around the world.

Members overwhelmingly say that reviews are an important consideration in booking a hotel, he said. But for his group’s hotels, which do about 25 percent of their trade in business travel, it is important to cull the rampaging herd, he added.

“I didn’t believe that TripAdvisor provides a necessarily very good indicator of quality for high-end hotels because some of the people writing reviews may have only been to a luxury hotel once or twice, and don’t really know what they are talking about,” he said.

That can cut both ways, because an uninformed rave has minimal value to a discerning customer. “Someone might say, ‘Oooh, it’s so great; they have these fluffy towels’ — but that’s the sort of thing you expect in a luxury hotel,” he said. “On the other hand, you can get some unfair and unfounded criticism from people who don’t understand what a luxury hotel is about.”

He added: “We have about 450 reviews at about 250 of our hotels now. The customers love it. The hotels don’t. Some hotels don’t understand that it’s so important to have these reviews because it increases your rankings in Google. Your search-engine utilization is much better when it’s honest and transparent.”

I compared online reviews, chosen at random from the TripAdvisor and Small Luxury Hotels Web sites, for two of the group’s high-end hotels, the Huntington in San Francisco and Le Pavillon de la Reine in Paris.

Both hotels got mostly rave reviews, many using the word “superb.” The few criticisms were similar, but different in tone.

A review of the Huntington on the group’s Web site said, “I didn’t enjoy that Wi-Fi was charged ... really? Also, I thought the room could have used fresh paint, and the furniture looked a bit tired.” On TripAdvisor, an otherwise favorable review of Pavillon said, “Our room was in need of a thorough update.” It added, “The bathroom makeup mirror was held to the stem by duct tape.”

Mr. Kerr said that there was genuine value in providing reliable reviews, including those with criticism, for discerning and knowledgeable customers — even on a Web site managed by an organization that represents hotels, not the general public. “Our customers are not stupid people at all. They know what it’s all about,” he said.

On the other hand, he added, there is a desire for perspective. “If a hotel has only one review and it’s not a great one, that’s really not fair to that hotel,” he said. “So to make sure there are balanced reviews, we’ve got to have at least five reviews of a hotel before we put it all up on the system.”

DealBook: In Venture Capital Deals, Not Every Founder Will Be a Zuckerberg

Harry Campbell

It’s the dream of entrepreneurs to sell their company for millions of dollars. But the dirty secret of venture capital is that the dream can be dashed as the venture capitalists make millions in a sale, leaving the founders with nothing.

A recent Delaware court case arising from the 2011 sale of Bloodhound Technologies illustrates how this happens.

Bloodhound was founded in the mid-1990s by Joseph A. Carsanaro to create fraud-monitoring software for health care claims. After several years of going it alone with a handful of colleagues, Mr. Carsanaro was able to raise Bloodhound’s first venture capital round for $1.9 million in 1999, followed by a second $3.1 million round in 2000.

When the Internet bubble burst, the company underwent rocky times. It was then that the venture capitalists seized control. Mr. Carsanaro was pushed out as chief executive. By 2000, he was gone from the company, as were four other members of his founding team.

For the next decade, Bloodhound recovered and slowly grew, raising seven more rounds of financing. In April 2011, the company was sold for $82.5 million. It was a time for Mr. Carsanaro and his founding team to celebrate their millionaire status.

But venture capital investments are structured to ensure that the venture capitalists are paid before founders and employees. When venture capitalists invest, they typically demand preferred shares that accrue a yearly dividend of about 8 percent. The dividend goes unpaid until the company is sold. In a sale, the original amount and the interest all come due. It must be paid out before the common shares, which are typically held by the founders and other employees.

The requirement that the venture capitalist be paid first, and with interest, can sometimes hit founders and employees in a brutal manner, as Mr. Carsanaro and his colleagues discovered.

The venture capitalists took almost all of the sale price. Bloodhound also paid a $15 million bonus to its current management team. The five founders of Bloodhound were paid in total less than $36,000. One received all of $99.

There is not much information on payouts to founders and employees when a company backed by venture capital is sold. But from the few studies on the subject, it appears that the situation involving Bloodhound is all too common.

The most recent study, by Profs. Brian J. Broughman and Jesse M. Fried, found that among a sample of venture capital deals, the common investors in roughly half the cases were entitled to nothing when the company was sold, even when the sale was for tens of millions. And in all but one instance, the majority of the sale proceeds went to the venture capitalists and other holders of preferred shares.

An unpublished study by Shikhar Ghosh at the Harvard Business School found that three out of four companies backed by venture capital did not return the investment. Again, it is in these cases where the founders and employees typically are entitled to receive no payment.

For those entrepreneurs who think they will be the next Mark Zuckerberg and ride their company to riches, think again. A number of studies have found that most chief executives of companies that take venture capital investments end up being replaced.

These are the successful businesses. The rule of thumb among venture capitalists is that some 20 percent to 30 percent of companies fail, returning nothing to any investor, including the venture capitalists.

The Bloodhound case is a reminder that the founders of start-ups backed by venture capital often end up nothing like Mr. Zuckerberg. Instead, they find themselves thrown out and without significant profits even if their company is sold.

Venture capitalists will argue that this is the price to pay to get their money and services. Cash is king, and in order to survive, venture capitalists will demand a high price and return.

Yet entrepreneurs can protect themselves. Professors Broughman and Fried found in their study that founders who negotiated greater control rights ended up receiving on average $3.7 million more. They did this even when the common shareholders were not entitled to a dime. By negotiating board seats or other representation, the founders were able to ensure that a sale happened only with their approval and a demand for some payment in return.

In other words, the rights negotiated by entrepreneurs when taking venture capital money really matter. Many entrepreneurs are so excited to get money that they don’t push for such rights or just don’t know to ask. Yet those who negotiate to keep a say in their company have a future, while those who don’t are more likely to be tossed aside. And it can be that this happens even in lucrative situations. Remember that Mr. Zuckerberg would have been forced by his venture capital investors to sell Facebook had he not kept control.

In the case of Bloodhound, its founders were pushed out of the company about eight years before the sale. During that time, they lacked control or ability to stop the venture capitalists from financing the company on the venture capitalists’ terms. The only substantial communication the founders had after they left was when they found out that the company had been sold for a huge price and that they would receive almost nothing.

The five founders sued in Delaware court, claiming that Bloodhound’s board and the venture capitalists had structured later rounds to favor themselves and dilute the payout of the founders. In a motion, the defendants countered that they acted fairly and that the plaintiffs’ claims were untimely because they were brought years later.

J. Travis Laster, vice chancellor of the Delaware Chancery Court, found that the claims that the venture capitalist had favored themselves to the detriment of the founders could be a viable claim claim if the facts they stated were true.

If Bloodhound’s founders are successful in their lawsuit, the case could change practices. It might require boards that take venture capital money to consider the founders and their interests before taking the next round. This could force boards to lean against diluting the payout of the founders and employees to avoid litigation.

Yet even if Bloodhound’s founders prevail, other entrepreneurs will sometimes find that their company is sold with nothing going to them. The sad reality is that there are times when the price demanded by the venture capitalists for the company to survive means that the founders will lose. Let’s face it, sometimes the company survives only because of that money and the skill and effort that the venture capitalists put in. This may have been the case in Bloodhound.

But the Bloodhound case publicizes this practice and will perhaps push boards to think harder before the founders are discarded. This may foster caution among venture capitalists, but the only thing that will truly save entrepreneurs is negotiating harder in the beginning. They may otherwise find themselves like the Bloodhound founders, left with nothing.

Judge deals setback to NJ's sports gambling effort

NEWARK, N.J. (AP) - A federal judge upheld a 21-year-old law prohibiting sports betting in all but four states, dealing a setback to New Jersey's attempts to revive its struggling casino industry by grabbing a piece of what has become a multibillion-dollar industry, both legal and illegal.

DealBook: Discovery Strikes 2 Deals in Bid for International Growth

Suzy Allman for The New York TimesDiscovery Communications, the owner of Animal Planet, has struck two deals aimed at international expansion.

Discovery Communications struck two deals on Friday aimed at expanding its reach in Europe, including buying the Nordic arm of the German broadcaster ProSiebenSat.1.

The deal for SBS Nordic, which has an enterprise value of $1.7 billion, will give Discovery 12 television networks and several radio stations, expanding the company’s reach in a fast-growing market. Discovery, known for documentary shows, will also acquire its first-ever portfolio of scripted and sports programs.

Discovery, based in Silver Spring, Md., also agreed to pay about $221.6 million to take a 20 percent stake in Eurosport, the pan-European sports network owned by France’s TF1. The American company has the right to raise its stake up to 51 percent after two years, and eventually has the chance to buy all of Eurosport from its French partner.

Discovery also agreed to increase its existing stock buyback program by $1 billion.

The deals are aimed at furthering Discovery’s reach into international markets, which have been the company’s fastest-growing business. International networks generated about $1.5 billion in revenue last year, up 16 percent over the prior year. That was faster than the company’s core domestic operations, which reported an 11 percent rise in revenue during the same period.

“It’s serendipitous to have two important deals come together at the same time,” David Zaslav, Discovery’s chief executive, said on a conference call with analysts on Friday.

Citigroup and the law firm DLA Piper advised Discovery on the SBS Nordic transaction.

Deal Professor: Reading the Fine Print in Abacus and Other Soured Deals

A common refrain from the financial crisis is that poor disclosure was a big contributor, if not the cause, of the financial crisis. Buyers of even the most complicated financial instruments were misled or were not provided full information concerning their investments. The results were catastrophic when the mortgage market crashed.

The story sounds convenient: investors were deceived! That would imply that all we need to do to prevent a similar problem in the future is to provide better disclosure.

The problem is that when you actually look at the documents from some of the troubled investments during the financial crisis, in many cases the disclosure was copious. There were warnings of the risks; investors just failed to heed the warning signs that should have led them to further investigation. In other words, the disclosure failed to work.

In a new paper, “Limits of Disclosure,” Claire Hill and I examine the types of disclosure that were made before the financial crisis. Specifically, we examine disclosure made in connection with the sale of synthetic collateralized debt obligations, or C.D.O.’s, where the reference securities were mortgage-backed securities. These were synthetic bets on the value of mortgage securities with one party taking the long side and the other the short.

The investments had names like Timberwolf and Class V Funding III. The now infamous Abacus C.D.O. promoted by Goldman Sachs was also a synthetic C.D.O. And these products were at the epicenter of the financial crisis. One analysis estimates that asset-backed C.D.O. write-downs alone will be $420 billion, or 65 percent of the original balance, with C.D.O.’s issued in 2007 losing 84 percent of their original value.

In the wake of this colossal failure, allegations have been made that the banks promoting these financial instruments did not disclose that they also had short positions in them. Alternatively, in the Abacus case, the allegation was that Goldman allowed John Paulson’s hedge fund to hand-select the securities to bet against, thereby creating an investment that was “doomed to fail.”

But a review of the offering documents for these deals shows that there were ample warning signs, had buyers looked deeper. Take the Abacus C.D.O., for example. The pitch book for the deal stated specifically that Goldman Sachs “shall not have a fiduciary relationship with any investor.” That is, Goldman was not bound to see if the investment was suitable for an investor or to act in investors’ best interest.

Not only that, these materials warned investors that they should do their own investigation. Again, the Abacus pitch book stated that “Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information.” It continued, “Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.” In other words, Goldman told its customers to do their own investigation and not rely on the firm.

As for allegations that Goldman’s trading arm was simultaneously taking a short position in the housing market, there is disclosure on that too. The Abacus offering memorandum stated that “Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions” adding that the firm may have “potential conflicts of interest.”

Despite the warnings, the evidence is that the buyers of these synthetic collateralized debt obligations did not do a thorough investigation into the securities themselves, let alone follow up on the above disclosure.

The recent S.E.C. case against the Citigroup employee Brian Stoker shows this. The S.E.C. contends that Citigroup had sold another such investment, the Class V Funding III C.D.O., while simultaneously planning to short the security, a fact it did not disclose to buyers. Citigroup settled the action, but Mr. Stoker disputed the allegations.

The largest buyer of Class V Funding III was Ambac, the mortgage-backed security insurer, which was a very sophisticated investor. When David Salz, the Ambac manager who made the decision to invest in this security, was asked at trial whether he had done an investigation of the securities underlying the C.D.O., he claimed that Ambac had not because it had relied on the work of the portfolio selection manager, Credit Suisse Alternative Asset Management.

Yet, the offering memorandum for Class V Funding III stated that the Credit Suisse unit was not acting as “advisors” or “agents” to the buyer, and that any buyer should make its investment decision determine “without reliance” on either. The memorandum further stated that not only could Citigroup and Credit Suisse have conflicts, but also that the firms’ “actions may be inconsistent with or adverse to the interests of the Noteholders.” And the offering memorandum had the same disclosure as the Abacus that place the onus on the investors to do their own homework.

All these various offering memos did not even acknowledge that the mortgage market was heading downward. This disclosure taken from Timberwolf C.D.O., a residential mortgage-backed security and another Goldman deal that has resulted in litigation, began to appear in 2007: “Recently the residential mortgage market in the U.S. has experienced a variety of difficulties and changed economic conditions that may adversely affect the performance and market value of R.M.B.S.” It continued: “In addition, in recent months, housing prices and appraisal values in many states have declined or stopped appreciating. A continued decline or expected flattening of those values may result in additional increases in delinquencies and losses on R.M.B.S. generally.”

Yet, not only did investors ignore this disclosure, they ignored it despite reading it. At the Class V Funding III trial, Mr. Salz of Ambac was asked at trial about the risk factor disclosure in the Class V Funding III offering memo. Asked if he read it, he replied: “Yes. It’s boilerplate language. . . . it was standard language.”

In other words, Ambac felt comfortable to ignore it because it the language was commonly appearing in documents. Furthermore, Ambac’s legal counsel even marked up the offering document and made comments on the offering memorandum.

Ambac lost $300 million on this deal. Mr. Stoker was acquitted by a jury of the civil charges against him.

What is so troubling about all of this is that the investors in these C.D.O.’s were the most sophisticated investors with considerable money — $100 million or more — under management. Class V Funding III’s buyers included not only Ambac but also the Koch brothers and a number of hedge funds.

These were not the “stupid” sophisticated investors that Michael Lewis depicted in his book “The Big Short.” These were investors who should have known that this disclosure should have prompted further inquiry. In particular, these investors knew that for them to take a long position on the C.D.O. there had to be someone on the short side.

So why did these investors make these investments if they did not do their due diligence or even pay real attention to the disclosure? From the testimony given at the Class V Funding III trial, it appears that these investors made macroeconomic bets on housing, following the herd, which thought housing would go up. In this regard, arguments that the securities were too complex to understand don’t bear out.

This is a problem. Sophisticated investors are supposed to read the documents. We all know that retail investors don’t often take the time to read disclosure, but the securities laws are based on the idea that information is filtered into the markets through disclosure to sophisticated investors who then set the real price of the security.

This is a form of the efficient market hypothesis. If sophisticated investors can’t be bothered to read the documents and act on them, then we have a real gap in the entire disclosure regime and asset pricing generally.

Unfortunately, this is what the evidence from the C.D.O. market before the financial crisis shows. And because of this, the idea that requiring still more, better or clearer disclosure is likely to be unfruitful in many cases.

I have no great solution to this. Until we better understand how sophisticated investors process and read disclosure, regulators should be wary of trying to solve the problem by simply requiring more disclosure.

This post has been revised to reflect the following correction:

Correction: November 2, 2012

An earlier version of this article misstated the name of the financial products that were in part blamed for the financial crisis. They are collateralized debt obligations, not credit-default obligations.

With 2 Big Deals Approaching, Rosneft Stands to Become a Global Oil Power

At the heart of the maneuvering is the country’s third-largest oil company, articles about TNK-BP." href="http://topics.nytimes.com/top/news/business/companies/tnk_bp/index.html?inline1=nyt-org">TNK-BP, which is a joint venture between the British oil giant BP and four Russian billionaires. Rosneft is negotiating to buy out one or both partners.

If either or both of the sales are concluded, Rosneft, whose headquarters is a mansion across the Moscow River from the Kremlin, is sure to expand its power on global oil markets. If both deals get done, Rosneft would become the world’s largest publicly traded oil company in terms of crude oil production, with the Russian government as the majority owner. The transactions would also lift the fortunes of Igor I. Sechin, a former spy and close aide to President Vladimir V. Putin, who has championed them as Rosneft’s chief executive.

The company has been trying to play down negative associations with state ownership. Rosneft is like a teddy bear, Mr. Sechin told a group of investors in London this month, in a video posted on the company’s Web site. “We love our teddy bear. We clean it, look after it and take care of it.”

The shift of BP’s Russian operations from private to state hands is fraught with risks, both for the company and the Russian industry more broadly.

BP’s partnership with private sector billionaires has yielded a return of 34 percent annually since it began in 2003. BP has earned $19 billion in dividends on an $8 billion investment and is now poised to sell its stake for a reported $25 billion to $28 billion.

BP’s investment in Rosneft stock from 2006, when the state company held an initial public offering, brought BP a loss.

“The state is tempted to milk the oil industry as a cash cow,” Peter Westin, the chief equity analyst at Aton, an investment bank in Moscow, said by telephone, referring to both high taxes and expanding government control.

The Kremlin, eager for investment to maintain the flow of oil that props up Mr. Putin’s popularity and the improved living standards of ordinary Russians, has sought both control and market-oriented policy changes under Mr. Putin.

Rosneft is listed on the London Stock Exchange and is among a group of oil companies that are owned or closely affiliated with governments that control access to oil reserves but are also open to private sector investment, like Petrobras in Brazil and Statoil in Norway.

The company has taken pains to emphasize that it will be run efficiently, hiring former executives from Exxon Mobil and TNK-BP in anticipation of the deal with BP. It has also reaffirmed its privileged access to new exploration sites in the Arctic Ocean after Mr. Sechin blocked a proposal by a liberal wing of the Russian government to open offshore drilling to competition.

Cliff Kupchan, an analyst at the Eurasia Group, which conducts risk analysis on Russian politics and economic policy for large investors including oil companies, wrote in a research note that Rosneft’s expansion could tempt the Russian government to use it strategically, just as Aramco, the Saudi Arabian company, is used to influence oil prices. This would come with a distinction: unlike Saudi Arabia, Russia would be unlikely to coordinate such moves with the United States.

Rosneft, if the acquisitions are completed, would pump about four million barrels of oil a day, or about 40 percent of the output of Saudi Arabia.

Oil analysts say Russia is unlikely to withhold oil, even as this becomes more feasible, because shutting down continent-spanning oil pipelines is too expensive. Also, many Siberian oil wells cannot be stopped without destroying them because permafrost surrounding their upper portions would freeze the well bore solid.

BP is hoping a deal with Rosneft might follow a similar arc of profit as its deal with the oligarchs.

BP made a fortune in Russia by applying Western oil field techniques to Soviet-era wells and infrastructure, which worked well despite BP’s blundering technical reputation after the Gulf of Mexico spill.

Sometimes, engineers made adjustments as simple as opening the spigot wider at the mouth of a well because the previous owners, following the Soviet axiom that they would pretend to work for pretend pay, had never bothered to check if more oil could flow.

From the mid-1980s to mid-1990s, Russian oil output dropped by half to just more than six million barrels a day, before deals like the creation of TNK-BP helped reverse the trend.

Overall production is now at about 10 million barrels a day, about tied with the levels of Saudi Arabia, but again in decline.

But future growth from fixing sloppy late Soviet work is unlikely, and a new chapter is opening in the history of the Russian oil industry.

“The landscape going forward looks a lot less attractive than the experience of the last 10 years,” said Peter Hutton, an analyst at RBC Capital Markets. Referring to the revival of old fields in Siberia using Western technology, he said: “TNK-BP has been able to get fairly low-hanging fruit in the brownfield revolution. Getting additional reserves is going to be a lot more difficult.”

One senior oil company executive close to BP said the partnership could similarly transfer know-how to Rosneft.

“Mr. Sechin and Mr. Dudley have known each other for years,” he said, referring to BP’s chief executive, Robert W. Dudley, a former director of TNK-BP. “There is a willingness on the part of the leadership of Rosneft to get expertise and people from BP to improve the capability of Rosneft.”

Andrew E. Kramer reported from Khanty-Mansiysk, Russia, and Stanley Reed from London.

Deals Competition Turns Into Free Online Transactions Class

It started in 2009 with a first-of-its kind transactional law competition in which small teams of law students competed to negotiate the best deals for fictional clients.

The meet was popular enough that its creator, Drexel University Earle Mack School of Law professor Karl Okamoto, took the idea a step further in 2011 by launching LawMeets, a free website that presents law students with transactional simulations. The students are presented with a business scenario and then submit videos in which they offer legal advice. The videos are rated by their peers and the best are evaluated by experts, who offer video feedback for all participants to view.

With a fresh grant of $500,000 from the National Science Foundation, LawMeets in October will expand its offerings with the first in a series of free online courses that combine lectures and simulations exploring the finer points of transactional law.

Okamoto hopes the LawMeets programs will help to fill a curricular void at law schools, where many business law courses focus on legal doctrine and precedents rather than the nuts-and-bolts of deals.

"Very few of these courses talk about how to get a deal done," Okamoto said. "Even in most business organizations classes, there's limited discussion on how to form an LLC and draft an operating agreement."

The first LawMeets course, the Basics of Acquisition Agreements, will last for two weeks -- from October 23 to November 7. The course is what is known as a MOOC -- massive open online course, a technology that law schools are only beginning to experiment with.

The course will include four video lectures, four interactive simulations and two panel discussions moderated by LawMeets faculty and transactional lawyers. Participants may view the lectures online at their own convenience, although there are cutoff dates for the student video submissions.

The lectures will be delivered by Okamoto; DLA Piper partner Jay Finkelstein; University of California, Davis School of Law professor Afra Afsharipour; and Cornell Law School professor Charles Whitehead.

Sixty participants have already signed up for the inaugural class in the few days since it was announced, some as far away as the United Kingdom and Australia. Okamoto hopes that 500 students participate, but the online platform can support thousands of users, he said.

Individual students can participate, but Okamoto hopes that law professors will incorporate its mini-courses into their own classes.