M&A leaks fall as regulators get tough, deals drop

By Alice Baghdjian

LONDON (Reuters) - Increased vigilance among regulators and a subdued market for takeovers have deterred investment bankers from leaking information about deals, according to an international study published on Wednesday.

Strategic leaks designed to flush out rival bids have fallen in the wake of the global financial crisis as the likelihood of drumming up another offer has declined, according to the study by London's Cass Business School.

"In the pre-Lehman period, the gain (of leaking) was bigger than the pain. Now there is a finer balance," said Philip Whitchelo, a former banker who is vice president of marketing at Intralinks, which commissioned the study.

"You have to take into account that you might not have the deal at all, plus you have regulators bearing down on you."

The study scrutinised more than 4,000 deals between 2004 and 2012 for significant pre-announcement trading (SPAT) in the stock of the target company, which would indicate a possible leak.

It detected SPAT in 7 percent of bids globally between 2010 and 2012, down from 11 percent in 2008-9.

The study showed leaks were more common in Europe than in the United States, and were particularly prevalent in Britain, even though its financial watchdog had vowed to crack down on market abuse and stepped up arrests and prosecutions.

Intralinks is a provider of virtual data rooms used to share sensitive information between parties, and supplies those in the M&A market.

REGULATOR CLAMPDOWN

Regulators in Britain and the United States, the main centres for deals globally, have taken a tougher stance on leaks but detection will be more difficult when the number of deals picks up again, one of the study's authors said.

"If we were to see a resurgence in M&A, more deals would mean there would be less ability for regulators to be vigilant on a deal-by-deal basis, and there would be more places to hide (leaks)," said Scott Moeller, director of Cass Business School's M&A Research Centre.

The annual market for takeovers has almost halved to around $2.5 trillion (1.6 trillion pounds) since the financial crisis broke out, according to Thomson Reuters data.

In Europe, the Middle East and Africa, 14 percent of bids displayed SPAT between 2004 and 2012, compared to 10 percent in the Asia-Pacific region and 7 percent in North America.

After peaking at 22 percent between 2004 and 2007, the number of leaks in Britain fell to 13 percent during 2010-2012.

Last April, Britain's Financial Services Authority fined Ian Hannam, one of London's most powerful investment bankers, 450,000 pounds for passing on inside information. Hannam is appealing that decision, and resigned from JPMorgan to focus on challenging the regulator.

Britain's Takeover Panel also adopted tougher merger rules in 2011, including banning break fees, following an outcry over Kraft's purchase of Cadbury. The Cadbury deal in 2010 sparked anger when Kraft reversed a promise to keep a plant open.

The United States takes a particularly tough line on leaks and insider dealing, dishing out large fines and long jail sentences.

SAC Capital Advisors, owned by hedge fund titan Steven Cohen, was last month told to pay $616 million to settle charges that it improperly traded in two stocks, in the largest ever insider trading settlement.

In a high profile case last year, Wall Street investor Rajat Gupta was sentenced to two years in prison and ordered to pay a $5 million fine for insider trading.

Gupta was convicted for leaking Goldman Sachs boardroom secrets to Raj Rajaratnam, a hedge fund manager targeted in a U.S. government crackdown on insider trading over the past four years.

The authors of the study said differences between the regulatory systems could partly explain the regional disparity in the number of leaks recorded, such as variations in deadlines by which a company must respond to a market rumour.

(Editing by Carmel Crimmins and Tom Pfeiffer)

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Political intelligence gathering tough to oversee: study

By David Lawder

WASHINGTON (Reuters) - Two lawmakers on Thursday renewed their bid to regulate the business of selling information gleaned from government contacts after a study said the political intelligence industry was difficult to define and would be hard to police.

Senator Charles Grassley and Representative Louise Slaughter said they would reintroduce a bill requiring political intelligence gatherers to register with the government and disclose information about their activities.

Such requirements were stripped from legislation passed last year to curb insider trading by lawmakers, their staffs and executive-branch employees.

The Stop Trading On Congressional Knowledge (STOCK) Act instead called for more study of the growing industry surrounding the collection and sale of non-public information about legislative, regulatory and executive branch matters to Wall Street investors and corporations.

The study released on Thursday by the Government Accountability Office came to few conclusions.

"The prevalence of the sale of political intelligence is not known and therefore difficult to quantify," the GAO said. "The extent to which investment decisions are based on a single piece of political intelligence would be extremely difficult to measure."

At the time the STOCK Act was being debated by Congress, Grassley, a Republican from Iowa, had suggested that the political intelligence industry could be racking up annual sales of $100 million, largely employing former congressional staffers and government officials.

Unlike lobbyists, who are subject to strict disclosure laws, people who collect information through direct, informal contacts with lawmakers, staffers and other government officials are not subject to any laws or guidelines.

The sale of such information is often bundled with industry research or policy analysis services, making it difficult to determine exactly what information clients use to make their investment decisions.

Often, multiple sources of information are combined when deciding to buy or sell securities, the study said.

"Even when a connection can be established between a discrete piece of government information and investment decisions, it is not always clear whether such information could be definitively categorized as material," the GAO said.

Still, Grassley and Slaughter, a Democratic congresswoman from upstate New York, said these professionals should be registered with the government and their activities disclosed, just like lobbyists.

"This report shows the dire need for transparency in the political intelligence industry, which profits from the cozy relationship between Washington, D.C., and Wall Street," the two lawmakers said in a statement.

WHAT IS 'DIRECT CONTACT'?

The GAO noted that insider trading laws now apply to both the executive and legislative branches of government, prohibiting officials and lawmakers from using or disclosing material non-public information for their own benefit.

Firms selling political intelligence maintain they have policies in place to ensure that they follow those laws.

If Congress chose to supplement these laws with disclosure requirements for political intelligence gatherers, it would have to deal with a lack of consensus on key definitions such as what constitutes "direct contact," or an "investment decision" or even what constitutes such intelligence, the study said.

On Capitol Hill, where information is used as currency among lawmakers, congressional staff, constituents, trade groups and the media, such requirements could make life more difficult.

The GAO said they could even prompt challenges based on perceived restrictions to free speech.

(Additional reporting by Susan Heavey; editing by Xavier Briand)

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Obama visit poses tough choices for Palestinians

JERUSALEM (AP) — President Barack Obama spoke grandly of big picture peacemaking Thursday, but the Palestinians are focused on a specific demand — that Israel freeze settlement building before they'll return to talks.

Stingingly rebuffed by Obama on this score, Palestinian President Mahmoud Abbas now finds himself at a crossroads: Fold and see his tattered credibility suffer further, or stick to his guns while peace efforts stay frozen and Israel continues to build on the land Palestinians — and Obama himself — want for their state.

Abbas signaled that he's not changing course, creating a moment of rare public friction between him and Obama at a joint news conference following their meeting Thursday. After Obama said neither side should set terms for renewing negotiations, basically siding with Israel, Abbas pointed out that most of the world deems Israeli settlements illegal.

"We don't demand anything beyond the international resolutions and it's the duty of the Israeli government to stop settlement activities to enable us to talk about all issues in the negotiations," he said.

Abbas also warned that growing numbers of Palestinians are losing faith in the possibility of establishing a Palestinian state alongside Israel because of the encroachment of settlements.

The Palestinians want a state in the West Bank, the Gaza Strip and east Jerusalem, territories Israel captured in 1967. Since that war, Israel has built dozens of settlements in the West Bank and east Jerusalem — now home to more than a half million Israelis — that make a partition deal increasingly difficult, some say impossible.

Abbas argues that he cannot negotiate the borders between Israel and a future Palestine while Israel unilaterally determines that line by accelerating settlement construction, particularly in east Jerusalem. Israel disputes the logic of this because it has dismantled settlements in the past.

Now Abbas' options are becoming more unappealing.

Abbas has been the most unwavering Palestinian advocate of establishing a Palestinian state through negotiations with Israel, saying it's the only path to independence.

If he rejects Obama's terms, it means negotiations will likely remain frozen, depriving Abbas of a credible political program and, as time goes by, legitimacy.

Abbas was elected in 2005 to a four-year term, but has stayed on because the bitter political split between him and the rival Islamic militant group Hamas, which seized Gaza in 2007, has prevented new elections.

Two senior Abbas aides provided conflicting interpretations of the Obama-Abbas meeting.

Veteran negotiator Saeb Erekat, gave a more upbeat assessment. He said Obama told Abbas that he remains committed a Palestinian state, considers a peace deal a priority and will send U.S. Secretary of State John Kerry to the region to follow up.

Abbas "came out more confident of the possibility of making peace after meeting with the president," Erekat said, but did not elaborate.

Another adviser, speaking on condition of anonymity because of possible diplomatic repercussions, said Abbas was disappointed in Obama and expects peace efforts to remain paralyzed.

Talks between Abbas and former Israeli Prime Minister Ehud Olmert broke down in 2008. Since then, Abbas and Olmert's hard-line successor, Benjamin Netanyahu, have been unable to find common ground for resuming them.

Erekat also said Obama told the Palestinian leadership that "Kerry will be really engaged in the next few weeks."

Top U.S. diplomats have made many shuttle missions in 20 years of intermittent U.S.-led negotiations, but all were ultimately unsuccessful.

Some analysts suggested that the U.S. could try to lure Abbas to talks by persuading Israel to agree to a partial settlement freeze, release Palestinian prisoners or hand more West Bank land to Palestinian control.

But it's unclear if Israel would be willing to make such gestures, which have been proposed in the past, and if Abbas would consider them sufficient.

Much of Obama's visit appeared to be aimed at building credibility with ordinary Israelis and convincing them that a deal with the Palestinians is in their interest and still possible, at times bypassing Netanyahu and his political allies.

Speaking to Israeli students Thursday, Obama urged them to imagine themselves in the place of Palestinians and outlined some of the daily hardships of living under Israeli occupation.

"Israelis must recognize that continued settlement activity is counterproductive to the cause of peace, and that an independent Palestine must be viable, that real borders will have to be drawn," he said. "I've suggested principles on territory and security that I believe can be the basis for talks."

But some warned that time is running out for a deal as settlements continue to grow.

"We are reaching the tipping point," said settlement watcher and Jerusalem expert Daniel Seidemann, an Israeli lawyer.

"A year from now, if the current trends continue, the two-state solution will not be possible. The map will be so balkanized that it will not be possible to create a credible border between Israel and Palestine," he said.

Palestinians also argue that after two decades of intermittent negotiations, the contours of an agreement have widely been established and it's time for decisions, not endless rounds of diplomacy. They suspect Netanyahu is seeking open-ended negotiations to give him diplomatic cover for more settlement-building, while being unwilling to make the needed concessions.

Netanyahu has said he is willing to negotiate the terms of a Palestinian state. He reiterated Wednesday, with Obama by his side, that he is ready to return to talks but also said there should be no "preconditions" — his term for the Palestinians' insistence on a settlement freeze.

The Israeli prime minister has also adopted a tougher starting position for negotiations than some of his predecessors. He refuses to accept the 1967 frontier as a baseline for border talks — even though two previous Israeli leaders, Ehud Barak and Ehud Olmert, did offer the Palestinians the overwhelming majority of the West Bank in previous rounds.

Netanyahu also says he will not relinquish any of east Jerusalem, an area Israel expanded into the adjacent West Bank and annexed immediately after the 1967 war.

Israeli governments have built many thousands of homes for Jews in east Jerusalem since then, creating a ring of Jewish settlement within the city's municipal boundaries that increasingly disconnects its Arab-populated core from the rest of the West Bank. Some 200,000 Jews now live in east Jerusalem, almost even with the Palestinian population in the city, which overall has about 800,000 residents.

In recent months, Netanyahu's government has approved construction plans for thousands more settlement apartments on Jerusalem's southern edge that would further isolate Arab neighborhoods in the city from the West Bank, including the nearby biblical city of Bethlehem.

There is strong consensus on the Palestinian side that a two-state deal must include a sharing of Jerusalem — resulting in total deadlock on this issue.

European diplomats warned in an internal report last month that if the current pace of settlement activity on Jerusalem's southern flank continues, "an effective buffer between east Jerusalem and Bethlehem may be in place by the end of 2013, thus making the realization of a viable two-state solution inordinately more difficult, if not impossible."

Henry Siegman, a leading critic of Israeli policy in the American Jewish community, said he believes Obama is fully aware of the corrosive effect of settlements.

Time for a deal is slipping away and Obama cannot make do with four more years of just managing the conflict, he said.

"They (U.S. officials) know that if they do nothing, they are sealing the doom of the two-state solution if it has not already been sealed," said Siegman. "It cannot survive another four years, given the rate of colonization that is taking place."

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Laub is the AP chief correspondent in the Palestinian territories. She has covered the Israeli-Palestinian conflict since 1987.

Daraghmeh has covered the West Bank for the AP since 1996.

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