TheChek News Flow

The SEC has unsuccessfully tried to subpoena information from the House Ways and Means Committee and a staffer, Brian Sutter, as part of an investigation into whether the funds traded on a tip about a change in Medicare reimbursements that resulted in a spike in share prices of big insurance companies.

Sutter, 34, set off a chain of events that could end up implicating some of the biggest hedge funds in the world in insider trading, according to the SEC’s memorandum for its inquiry.

At about 3 p.m. on April 1 last year, an hour before the markets closed, Sutter used his cell phone to call a lobbyist from Greenberg Traurig, where he allegedly talked about the upcoming Medicare rate changes, according to court documents.

The lobbyist then told an analyst at Height Analytics, a broker-dealer, who then sent a note to clients about how Medicare would increase payments to some companies ahead of the government announcing the change, according to the memorandum.

The inquiry, which the SEC has called the Humana investigation, concerns trading in four of the largest health-care companies in the US — Humana, WellCare Health Plans, UnitedHealth Group and Aetna.

The funds include “some of the largest hedge funds and asset management advisors in the nation,” according to a July 16 declaration letter from SEC lawyer Sanjay Wadhwa.

Sutter, as well as the Ways and Means committee, has refused to turn over documents or testify before the SEC, calling the subpoena “repugnant to public policy” and claiming they are “absolutely immune” from subpoenas from a federal regulator in an insider trading probe.

However, the SEC argues that Congress passed a law in 2012 that bars lawmakers from disclosing confidential nonpublic information about government matters that could move stock prices.

Should regulators pursue all the 44 funds that traded on the insider knowledge, the scope of the case would dwarf the next-biggest insider trading case against Steve Cohen’s SAC Capital.

A spokeswoman for the Ways and Means committee directed questions to House general counsel Kerry Kircher, who didn’t return multiple messages seeking comment.

That is the valuation investors have assigned to the new smartphone app whose sole purpose is to let people send text messages saying “Yo.” The app, appropriately named Yo, became an instant sensation in the technology world when news broke last month that it had raised $1 million from investors.

On Friday, Yo formally announced that seed investment round, which grew to $1.5 million. The investors included the technology incubator Betaworks and Pete Cashmore, the founder of the news website Mashable.

The company did not disclose its valuation in the round. But a person briefed on the matter, who was not authorized to discuss it publicly, said the investment came in the form of convertible notes, implying a valuation of $6 million to $10 million.

The challenge now for Yo will be to prove it is worth that much. The app, which debuted in April, has been downloaded two million times, according to Or Arbel, the chief executive. Betaworks said that more than 2,000 independent developers were working on projects built on top of the interface.

One such project emerged in Israel, where developers created a service using the Yo app to alert people to rocket strikes.

Mr. Arbel insists the possibilities are numerous.

“It’s not going to stay the same. It has a lot of potential,” he said of the app. The investors, he said, “invested in the potential.”

Betaworks, Mr. Arbel said, had been in discussions with Yo since May, “before anyone heard of the Yo app.”

The investors at Betaworks were early converts. Since the meeting in May, the app has “become part of our communications flow at Betaworks and in my life,” John Borthwick, the Betaworks chief executive, said in a blog post on Friday.

“We Yo with co-workers alerting them that a meeting is starting, I Yo with my wife as a hi during a busy day. I Yo with friends, without any more expectation or need than a Yo back,” Mr. Borthwick wrote.

“We are fascinated by these uses of simple yes/no on/off communications tools,” he added. “There is no payload in Yo — no pictures, no text, just a deceptively simple on/off state that over time has the potential to become a platform.”

Alstom plays down added layer of complexity in deal with GE

FILE PHOTO: Patrick Kron, chief executive officer of Alstom SA, pauses during a news conference to announce the company's results in Paris, France, on Wednesday, Nov. 7, 2012. General Electric Co. (GE) is in talks to buy Alstom SA, the French builder of trains and power plants, people with knowledge of the matter said, in what would be GE's biggest acquisition ever. Photographer: Balint Porneczi/Bloomberg *** Local Caption *** Patrick Kron©Bloomberg

It was not the deal Patrick Kron wanted. The chief executive of French industrial champion Alstom had planned a clean €12.35bn sale of its energy business to General Electric before the Socialist government got involved.

The state complicated the issue, forcing the creation of three joint ventures with GE and is also set to take a stake in Alstom, to the disquiet of investors. Shares in Alstom are down 6 per cent since the start of June as the new deal emerged.

“A simple deal has been blurred,” says Jean Medecin at French asset manager Carmignac Gestion. “A ménage à trois between Alstom, GE and the French government may not be the easiest way to manage a company.”

But Mr Kron says that despite the added layers of complexity, investors should not be worried. The fundamentals of last month’s deal are the same as GE’s initial offer in April: selling Alstom’s energy assets for €12.35bn and leaving the maker of the famed TGV trains as a pure play transport business.

The fact that it will also pay €2.5bn to have a 50 per cent equity stake, but no operational control, over three other joint ventures in grid, renewables and French steam and nuclear is by the by as it can sell the stakes with a floor price of €2.5bn.

“The current share price is not fairly reflecting the value of the company from any angle you look at it,” says Mr Kron. “As we move forward the shareholders will see there is no reason to put a discount on a scheme that makes sense.”

He says that in future the joint ventures could be sold in an initial public offering or in the open market, and because of the floor price Alstom could only gain from the success of the joint ventures.

In depth

Analysts at JPMorgan argue that the stake is in fact worth €2.1bn, partly because the government could object to it being sold, a charge that Mr Kron rejects. Mr Kron says he does not need GE or anyone’s permission to sell the shares.

“I get something that has upside potential, and which is protected against loss,” he says. “We will see where we are.”

Mr Kron also refutes the idea, highlighted by GE in a statement about the deal, that Alstom has in effect paid a higher multiple for the joint ventures’ stakes than GE did: “This is not true . . . It [the multiple] is in the same ballpark.”

Complexity of the revised deal aside, the big question is how the new transport-focused business will fare against larger players such as Bombardier, Siemens or the Chinese giants CNR and CSR.

Critics of the GE offer, when it emerged in April, said the deal would leave a transport-focused Alstom too small and weak to compete. But this claim is rejected by Mr Kron.

“When I was trying to organise an initial public offering of Alstom Transport [last year] they accused me of selling the family jewels. Now they are saying it has no long-term viability – why has this changed?” he says.

“I have no doubt about the viability of the transport business,” says Mr Kron, adding the business had more than “€5bn in sales, five years of [order] backlog and the potential to improve margin as well. Why should we have a problem there?”

Analysts tend to agree with Mr Kron on this point. “[The business] harbours the prospect of steady sales and margins growth, underpinning its status as a solid business,” says Alfred Glaser, analyst at Oddo Securities.

The group is also set to be strengthened by the proposed sale of GE’s signalling operations to Alstom, which had sales of about €400m last year, along with the plans for a broader global alliance with GE in the rail business.

The transport-focused group will also be left, assuming the regulatory hurdles can be cleared, with an undisclosed amount of cash which the company says it will use to help pay off debt and fund acquisitions.

“Transportation is strategically more strongly positioned than its energy businesses,” say Moody’s, the rating agency.

A critical JPMorgan note said it “liked” the transport story, if not the joint ventures.

Mr Kron says he is trying not to dwell on the deal that might have been, but looking at making the joint ventures and the transport business work. “There are things I like [about the deal], there are things I don’t like. That’s life,” he says.

Hedge funds split over AIFMD risk management rules

The bronze statue "Europe" stands outside the European Union (EU) parliament building in Brussels, Belgium, on Monday, May 13, 2013. British Prime Minister David Cameron ceded to the rebellion in his own Conservative Party, offering to support a bill authorizing a referendum by 2017 on the U.K.'s continued membership in the European Union. Photographer: Jock Fistick/Bloomberg©Bloomberg

The EU's Alternative Investment Fund Managers directive comes into force this week

Any hedge fund, private equity or real estate fund wishing to market its product in the European Union will, from this week, need authorisation under the Alternative Investment Fund Managers directive.

To the accompaniment of grumbling and complaints about overburdensome regulation, the alternative investment industry has reluctantly lined up and complied. There is even some evidence that it is costing less than previously expected.

Despite all this neat toeing of the line, which would imply business as usual once the forms are all filled out and the reporting software bedded down, some industry commenters predict that what happens next could alter the business structure and practice of hedge funds at a fairly basic level.

“The one thing I think has really changed with this legislation is the way they are forcing risk management on to the board,” says Peter Cripwell, chief executive of RiskSystem.

Among hedge funds, risk management has typically been a relatively low status job, explains Mr Cripwell, who used to be chief investment officer for Pioneer Alternative Investments, a $1.5bn hedge fund manager. “The risk manager is either going to be getting a big pay rise or they’ll have to hire someone new.”

An insider promoted to board level may well be deemed to have insufficient independence, while hiring a new risk manager with sufficient clout and experience could be expensive, as there is suddenly increased demand for such skills.

“The most direct consequence is likely to be people spending more in this area,” says Paul North, head of product for Europe, the Middle East and Asia at BNY Mellon.

“Hedge fund managers are very good at risk management in the investment function, but this is a much broader requirement.”

Managers will need to show that their risk function manages counterparty, liquidity and operational risk, as well as the investment risk traditionally the main focus of such functions. It will also have to be hierarchically and functionally independent of the portfolio management teams.

“We see a lot of clients asking ‘What are other people doing?’,” says Mr North. “What best practice may be is still evolving.”

Managers from outside the EU are also keeping their powder dry as they wait to see how the new regulatory framework develops in practice. “It will be easier when there’s more clarity,” says Stuart Kaswell, general counsel for the US Managed Funds Association, a trade body for hedge funds. “Nobody wants to get on the wrong side of this.”

Not everybody is staying calm and carrying on, however. A lawyer at a large US law firm, who requested anonymity, says: “There have been delays [with authorisations] and the system has gotten clogged up. Trying to get responses from the [UK’s Financial Conduct Authority] is a nightmare. AIFMD is not a very satisfactory piece of legislation. It was an emotional response to the perception that hedge funds caused the financial crisis.”

The lawyer adds that reporting requirements “are a really big deal”, to the extent that a dedicated full-time employee is needed to ensure compliance with them.

“US managers are not used to [fundraising] being more difficult in Europe and some are in denial. [Others] are asking why there is discrimination against them. Some have taken Europe off the agenda as it is too much of an issue [as AIFMD] might be a nightmare,” he says.

Mr Kaswell disagrees, saying the failure of US hedge funds to line up for authorisation under AIFMD (they are treated separately in line with co-operation agreements between national regulators) is about watching and waiting rather than a wholesale decision to step away from the European market.

“We’re not panicking, we’re not holding crisis calls with our members, but there are some issues that need clarifying,” he says. Primary among these is what activities will be permitted by managers that do not apply for authorisation.

They will be allowed to operate on a reverse enquiry or reverse solicitation basis, whereby investors that come to them can have access to their funds. However, the rules about exactly what is permissible under this regime vary from country to country.

Since the main benefit of the AIFMD, the pan-European passport, is not available to third-country managers, they will have to decide for each jurisdiction whether they want to apply for authorisation or just rely on reverse solicitation.

Back in Europe, opinion is equally divided on what is going on.

The chief executive of one UK asset management house, who asked to remain anonymous, says: “AIFMD has been terrible for everyone – the whole thing is a bloody shambles and utterly unnecessary.

“I think we in the UK were asleep at the wheel [when the directive was being drawn up] and fund management companies have had to absorb the costs,” he says.

“The more unnecessary regulatory burdens [there are], the higher the barrier to entry. AIFMD has stifled people from starting up which is a shame. Ironically you create a cartel through regulatory burden, and cartels put prices up,” he says.

“[The directive] has required enormous effort, time and costs.”

Chris Reddy, chief operating officer at Principal Global Investors Europe, is more positive, saying: “The industry has been focused on the detailed and difficult implementation process of AIFMD, without giving much thought to the opportunities the directive can create for both investors and fund managers.

“[These regulated funds] will allow investors to take more risk while providing them with better governance and oversight as well as new safeguards to increase investor confidence.”

A BNY Mellon survey shows asset managers are concerned the new regulations will choke off flows into their funds, but according to reports from Efama, the European industry trade body, and consultant Cerulli, this fear is ill-founded.

“This survey result is partly just expressing frustration with the paperwork they’ve been having to cope with,” says Mr North.

By Michael Mackenzie and Nicole Bullock in New YorkAuthor alerts

Investors have fled US biotechnology shares this month turning fund flows negative for the year to date as the Federal Reserve voiced concerns over high valuations in the sector.

Despite being among the riskiest stocks in the market, biotech has been a boom sector in recent years. Smaller companies on the cutting edge of research and development have attracted significant sponsorship from investors prepared to bet big on a major drug or medical breakthrough. If successful, they hold the potential to generate huge returns, but many fail.

Last week, the US central bank identified biotechs, small-caps and social media shares as a cause for concern, saying valuations “appear to be stretched”.

That triggered a slide of some 6 per cent in the Nasdaq biotechnology index, wiping nearly $40bn from the market’s value, before prices rebounded 3 per cent on Friday.

So far this year, the index is up 10.6 per cent and remains 16 per cent above its low in April, when a valuation scare previously shook the sector.

Investors were pulling money out of the sector before the Fed issued its warning, with the main exchange traded fund tracking the Nasdaq biotechnology index seeing $326m leave over the past week, according to ETF.com.

Since the start of July, outflows from the iShares Nasdaq Biotechnology ETF, known as IBB, have reached $445m, for a net decline of $77m this year. That comes after an inflow of $747m during 2013 when the biotech index surged 65 per cent.

The 3,100-square-foot store is the brand’s 10th dual-brand location combining the signature line and Kooples Sport, a concept that made its debut with the London store on Old Brompton Road last year.

Since launching The Kooples Sport line in 2012, the brand has opened 20 Sport-only stores in addition to its 115 The Kooples stores (for a total of 145 retail boutiques worldwide including the latest U.S. stores). The company has 350 points of sale worldwide, with direct operations in 13 countries and total distribution in 28 countries.

The Los Angeles store combines the signature all-black look of The Kooples stores with the all-white look of The Kooples Sport stores, with clean, luxe Italian marble walls floors and shelves and vintage furniture unique to each store.

Highly visible from the trafficked corner of Robertson Boulevard and Alden Drive, the clear glass facade and entryway show off the jumbo screens inside playing the black-and-white brand videos. Inside, a long, narrow layout with men’s on one side and women’s on the other gives way to an alcove dedicated to Kooples Sport and a seating area featuring a PK65 low table by Poul Kjaerholm, a pair of FK710 Skater chairs by Preben Fabricius and Jørgen Kastholm and a Jacques Charpentier leather sofa.

The meticulous details aren’t surprising to anyone familiar with the brand. Founded in 2008 in France by Elicha scions Laurent, Alexandre and Raphael (the family behind Comptoirs de Cotonniers) on the concept of blending French style with Savile Row tailoring (its suiting is made in partnership with Norton & Sons) for women and men, the business has seen rapid growth first in France, then Western Europe. Now it’s ready to tackle the U.S.

“It’s a strong concept and we know Americans like concepts. We can see from the data on the tax refunds [European valued-added tax rebates] that some of our first customers were Americans and we see couples often coming into stores to shop together,” said chief executive officer Nicolas Dreyfus.

He calls the U.S. strategy “step-by-step. “We wanted to open both coasts at the same time, with the latest collections.” The entire store is stocked with fall 2014 merchandise, comprising apparel, shoes, bags and watches, which are all produced in house in Europe. Retail prices range from $95 for a T-shirt to $900 for a men’s suit. The company delivers six collections per year, with about 1,000 stockkeeping units per season across both lines.

The New York flagship, on 14th Street in the Meatpacking District between the Apple Store and Hugo Boss, will mid-August and a second New York location on Mercer Street in SoHo (the former Phillip Lim space) will open in Oct. 1. A secondary California store on San Francisco’s Fillmore Street opened June 28. Other markets eyed are Miami and Chicago. The brand launched with 20 stores in France, followed by 40 in the U.K., it’s second largest market, then Western Europe. Currently, wholesale represents about 20 percent of the business, including accounts in Bloomingdale’s, Saks Fifth Avenue and Nordstrom, as well as Asia.

Dreyfus said he expects U.S. sales to total $100 million in the next three to four years, or about 25 percent of the company’s total business. Its fiscal year ending Aug. 31 is expected to tally global sales of $245 million, and earnings before interest, taxes, depreciation and amortization between $40 million and $42 million. Global overall growth for next year is expected to be 20 percent with the advent of the U.S. stores, or an estimated $300 million in sales.

Sabic's Second-Quarter Net Profit Rises 7%

Higher Sales Volumes and Prices Give State-Owned Saudi Basic Industries a Boost

The company better known as Sabic reported net profit for the three months ended June 30 of 6.46 billion Saudi riyals ($1.72 billion), up from SAR6.04 billion a year earlier, according to a statement published on the Saudi stock exchange website.

The quarterly result was broadly in line with analyst forecasts. Riyadh-based NCB Capital had expected Sabic to post a net profit of SAR6.36 billion, while Cairo-based EFG-Hermes analysts had penciled in a SAR6.7 billion result.

The petrochemical giant, which is 70% state-owned, attributed the increase in profits to higher production and sales volumes as well as higher sales prices.

Dean Foods Suffers as Consumers Sour on Cow Milk

Shoppers' zeal for healthier foods and beverages has turned the tables on a small soy-milk supplier and its former parent, America's largest milk processor.

A little over a year ago, Dean Foods Co. DF +0.63% , a nearly 90-year-old dairy giant, spun off its Silk plant-based milks and Horizon-brand organic milk into a separate company, The WhiteWave Foods Co. WWAV +0.60% In the past 12 months, WhiteWave shares have jumped 62% while Dean's are off 17%.

WhiteWave's profit and sales are climbing as U.S. consumers embrace plant-based milks. Dean has churned out losses on falling domestic demand and higher costs for raw milk. Today, WhiteWave's revenues are just a third of Dean's, but its market value is more than three times its former parent.

Getting drinkers back in the barn won't be easy. "It is going to be tough to buck the trend of declining consumption of [cow] milk in the U.S.," says Ryan Oksenhendler, an analyst with Arlon Group LLC, a New York-based fund manager that owns WhiteWave shares. He says shoppers quitting cow milk and embracing soy, almond and coconut milks are feeding WhiteWave's gains.

Dean executives aim to reverse its profit decline by cutting costs and expanding sales of flavored milks and higher-protein drinks, two niche products that are outperforming conventional, white milk. Dean shut eight of its roughly 80 plants last year and plans to close three more this year in an effort to navigate what its executives call the toughest industry conditions in memory.

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Eau Claire Leader-Telegram/Associated Press

"It's uncharted waters," Dean Chief Executive Gregg Tanner told analysts in May. Mr. Tanner declined to be interviewed for this article.

Dallas-based Dean won cheers from Wall Street in 2012 when it staged an initial public offering for WhiteWave to draw more value from investors for the fast-growing unit. Gregg Engles, who ran Dean for 18 years and built it through acquisitions, left to run the offshoot. Dean also sold its Morningstar Foods division, which made creamers, iced coffee and cottage cheese, to Canada's Saputo Inc. SAP.T -0.05% in January 2013 for $1.45 billion, before completing the WhiteWave spinoff that May.

The revamp was designed to make Dean a smaller company with a tighter focus, lower debt, and the dominant supplier in the $20 billion-a-year U.S. fluid-milk industry. It succeeded on those points, cutting Dean's total debt to $963 million as of March 31, from $1.8 billion a year earlier, and enabled Dean to return cash to shareholders, said Amit Sharma, an analyst with BMO Capital Markets. Dean today controls 36% of the U.S. fluid-milk business and hopes to boost its share further by being the lowest-cost producer, able to operate more efficiently than smaller competitors.

But it turned out to be a bad time to double down on dairy. Prices for raw milk in the past year have spiked, thanks to constrained supplies and surging demand overseas. That has crimped profits for Dean, which can't easily pass on the cost without risking lower sales.

In May, the price of milk used in beverage products reached a record $24.47 a 100 pounds, more than a third higher than a year earlier, according to the U.S. Agriculture Department. The agency, which sets minimum dairy pricing, pegged the price at $23.02 a 100 pounds for July.

Demand for milk powder, cheese and other dairy products in China and other Asian markets has soared. U.S. dairy exports for the first five months of this year jumped 29% in value over a year earlier, according to data from the U.S. Dairy Export Council. But Dean's sales are almost entirely in the U.S.

Global milk production fell in recent years after a 2009 drop in prices that forced out some smaller U.S. dairy farms and on droughts in the U.S. in 2012 and in New Zealand and Australia last year. European and U.S. output is expected to increase this year, easing costs for Dean.

But milk processors also face a longer-term challenge: U.S. milk consumption per person has dwindled for decades as consumers switched to flavored waters, juices, sodas and alternative dairy drinks.

Last year, U.S. retail sales volumes for skim and low-fat cow's milk, the biggest conventional-milk drinks, declined 4%, while dollar sales slumped 2.4%, says IRI, a Chicago-based market-research firm. The 2013 volume decline was worse than in each of the previous three years.

WhiteWave and other plant-based dairy suppliers including Blue Diamond Growers continue to nip at Dean's heels. WhiteWave's net income rose more than one-third over a year earlier to $32 million in its first quarter. Almond-milk sales have been especially hot.

The faster-growing products also yield higher margins. The Broomfield, Colo., company's gross profit margin reached 36% last year, compared with 21% at Dean.

Halsey Associates Inc., a New Haven, Conn.-based firm that owns about 355,000 WhiteWave shares, scooped up the stock shortly after WhiteWave was spun out. "We would not have looked at it as part of Dean Foods, just because the commoditized dairy business dominated the company's financial condition," said James Zoldy, the firm's chairman.

Dairy companies hope to rejuvenate milk sales by capitalizing on rising U.S. consumer demand for protein-rich foods. The national Milk Processor Education Program, which promotes milk products for Dean and others, dropped "Got Milk?" as its main advertising campaign earlier this year in favor of "Milk Life," emphasizing 8 ounces of milk has 8 grams of protein. The campaign will be backed by $50 million in advertising and social-media spending this year.

Dean this year intends to expand nationwide its TruMoo Protein Plus drink, a version of its TruMoo flavored milk with 25 grams of protein per 14 ounces. TruMoo, launched in 2011, has been a success for Dean, growing to $650 million in annual retail and school sales last year.

TruMoo accounts for less than 8% of Dean's $9 billion in annual sales, making it critical to improve results elsewhere.

"You are talking about a large conventional milk business that is in decline," said Deutsche Bank DBK.XE +0.36% analyst Eric Katzman. "It is hard to quickly offset that."