Tuesday, May 22, 2007

EU approves merger of Universal, BMG's music rights businesses (AFP)

EU regulators approved on Tuesday Universal Music's plans to take over the music publishing rights business of rival BMG after the two groups agreed to sell some choice assets.
The European Commission said it had "concluded that the proposed operation would not significantly impede effective competition" after the groups promised to sell rights catalogues, including stars like Britney Spears and Bryan Adams.

"Digital music has the potential to change the face of the music industry in Europe," Competition Commissioner Neelie Kroes said.

"I am satisfied that the significant remedies will keep these markets competitive and ensure that consumers will not be harmed by the merger," she added.

In early September, French media group Vivendi, which owns Universal, announced plans to acquire BMG Music Public Publishing, a unit of Bertelsmann of Germany, for 1.63 billion euros (2.19 billion dollars).

EU regulators have been keeping a close eye on the music sector recently with a consolidation wave in the industry increasingly concentrating market share in the hands of fewer companies.

The IMPALA association of independent recording and publishing firms welcomed the Commission's decision as a "clear message" that further consolidation would face tough scrutiny from regulators.

"We welcome the fact that this decision sends a clear message to all the majors that the 'halcyon' days of music mergers being simply waved through are well and truly over," IMPALA board member Michel Lambrot said.

In the Universal-BMG deal's original form, the Commission raised "serious doubts" about the impact on competition, forcing the companies to consider selling some assets so as to avoid a crushing market share.

EU regulators' blessing for the deal clears the way for the two companies to finalize their merger after already receiving backing from US and Australian authorities.

Universal president Zach Horowitz said the deal "will create a publishing business that is even better suited to serve our songwriters, composers and business partners in this challenging marketplace."

"We now look forward to closing the deal as quickly as possible so that we can focus on the successful integration of both companies," he added.

Music publishers manage the songwriters' rights, and not necessarily record companies or performers.

Google’s goal to organise your daily life (Financial Times)

By Caroline Daniel and Maija Palmer

Google’s ambition to maximise the personal information it holds on users is so great that the search engine envisages a day when it can tell people what jobs to take and how they might spend their days off.

Eric Schmidt, Google’s chief executive, said gathering more personal data was a key way for Google to expand and the company believes that is the logical extension of its stated mission to organise the world’s information.

Asked how Google might look in five years’ time, Mr Schmidt said: “We are very early in the total information we have within Google. The algorithms will get better and we will get better at personalisation.

“The goal is to enable Google users to be able to ask the question such as ‘What shall I do tomorrow?’ and ‘What job shall I take?’ ”

The race to accumulate the most comprehensive database of individual information has become the new battleground for search engines as it will allow the industry to offer far more personalised advertisements. These are the holy grail for the search industry, as such advertising would command higher rates.

Mr Schmidt told journalists in London: “We cannot even answer the most basic questions because we don’t know enough about you. That is the most important aspect of Google’s expansion.”

He said Google’s newly relaunched iGoogle service, which allows users to personalise their own Google search page and publish their own content, would be a key feature.

Another service, Google personalised search, launched two years ago, allows users to give Google permission to store their web-surfing history, what they have searched and clicked on, and use this to create more personalised search results for them. Another service under development is Google Recommendations – where the search suggests products and services the user might like, based on their already established preferences. Google does not sell advertising against these services yet, but could in time use them to display more targeted ads to people.

Yahoo unveiled a new search technology this year dubbed Project Panama – which monitors what internet users do on its portal, and use that information to build a profile of their interests. The profiles are then used to display ads to the people most likely to be interested in them.

Autonomy, the UK-based search company is also developing technology for “transaction hijacking”, which monitors when internet surfers are about to make a purchase online, and can suggest cheaper alternatives. Although such monitoring could raise privacy issues, Google stresses that the iGoogle and personalisation services are optional.

The Information Commissioner’s Office in the UK said it was not concerned about the personalisation developments.

Earlier this year, however, Google bowed to concerns from privacy activists in the US and Europe, by agreeing to limit the amount of time it keeps information about the internet searches made by its users to two years.

Google has also faced concerns that its proposed $3.1bn acquisition of DoubleClick will lead to an erosion of online privacy.

Fears have been stoked by the potential for Google to build up a detailed picture of someone’s behaviour by combining its records of web searches with the information from DoubleClick’s “cookies”, the software it places on users’ machines to track which sites they visit.

Mr Schmidt said this year that the company was working on technology to reduce concerns.

The New 401(k): A Guide for Users (Forbes)

By David Armstrong

Six changes that could be coming to your retirement savings account. Get ready.

Even if you've had the same 401(k) plan for years and are content with your current investment choices, pay attention: You may well have new decisions to make about how you pilot your tax-deferred, employer-sponsored retirement account. In response to Congress' rewrite of federal pension law last summer and other new federal edicts, employers are revamping their plans, adding new choices and eliminating others.

And while you're reviewing your plan, scrutinize the fees you're being charged. Complain if they seem out of line. With both politicians and class action lawyers attacking high (and hidden) 401(k) fees, you're more likely to get results than in the past.

The Roth Option
After Congress made permanent the Roth 401(k)--first allowed in January 2006 on a temporary basis--employers started getting on board. A Profit Sharing/401(k) Council of America survey early this year found 22% of companies (up from 7% in early 2006) offering a Roth K and another 48% planning to or considering it.

A Roth K works much like a Roth individual retirement account: You put already taxed money in and (after five years) all withdrawals in retirement are tax free. By contrast, in a traditional deductible 401(k) or IRA, pretax money goes in and all withdrawals are taxed as ordinary income. Whether the money is going into a traditional 401(k) or a nondeductible Roth or a blend, the most you can put in this year is $15,500 ($20,500 if you were born before 1958).

Two types of employees are likely to benefit from using the nondeductible option: young workers who expect their income tax rates to rise and high-income workers who have so much loose cash that they can shrug off the loss of the tax deduction. If you can afford one, a Roth beats a deductible account.

Suppose you are now and always will be in a 40% tax bracket (state and federal). And suppose you can double your money between now and when it's time to spend it. Put $20,000 into a Roth now and it becomes $40,000 of spending money at retirement. Alternatively, you could put the $20,000 into a deductible account and generate $8,000 in tax savings for investment outside the account. Come retirement, this strategy gets you $24,000 of aftertax money from the 401(k) and something less than $16,000 from the side account. Less, because this side account is not protected from taxes along the way. So the deductible strategy leaves you with something less than $40,000 of spending money during retirement.

Another Roth K advantage for the well heeled: When you leave your job, you can roll the money into a Roth IRA, which isn't subject to the same minimum withdrawal requirements, beginning at age 70 1/ 2, as a regular IRA. That allows you and your heirs to stretch out tax-free growth, potentially for decades.

If your tax rate is likely to fall in retirement (say, because your income will drop or you're moving from highly taxed New York City to Florida, which has no state income tax), stick with a deductible 401(k). Unsure of the future? Hedge your bets by splitting your contributions between a Roth K and a traditional account. (Note: your employer's contributions can't go in the Roth anyway.)

Autopilot 1: The Escalator
To promote savings, the new pension law encourages firms to automatically enroll new employees in 401(k) plans, forcing them to make the effort to opt out if they don't want to contribute. A Hewitt Associates survey found 58% of large companies plan to use automatic enrollment by the end of 2007, up from 24% at the end of 2005. At some, there will be escalators that jack up contributions over time unless you voice objections. Unless you're really strapped, put up with all this paternalism. Saving money is good for you.

Autopilot 2: Life-Cycle Funds
The government is involving itself not just in workers' spending decisions but in their asset allocation, too. Under proposed Department of Labor rules, employers will be encouraged to make something other than money-market accounts the default investment option for savers who are too lazy to specify a choice. The favored alternatives: balanced funds (more or less fixed-percentage blends of stocks and bonds), life-cycle funds (which shift from stocks into bonds as the saver ages) and managed accounts (custom blends created by computers).

Yes, there's a lot of inertia in investment allocations. A recent Wharton School Pension Research Council study of 1.2 million participants in 1,500 plans found that over two years 80% made no trades and another 11% just a single trade. So even if they started with a well-thought-out asset allocation, they allowed the market to skew it. The result: Account holders who "passively" rebalanced their accounts by investing in either balanced or life-cycle funds earned 0.84 percentage points more a year on their investments (on a risk-adjusted basis) than their inert brethren.

If you want to stay 60% in stocks and 40% in fixed-income investments, the right balanced fund can keep you there. If you want to shift into more bonds as you age, consider a life-cycle fund. The latter is getting very popular, but watch out for the fees, says Joseph Nagengast of Turnstone Advisory Group.

Another problem: Life-cycle funds treat everyone of the same age the same. But a 55-year-old midlevel worker five years from retirement should probably invest more conservatively than a 55-year-old executive planning on working 15 more years. If you're 55 and plan to toil until 70, pick a fund designed for 45-year-olds. (Make sure your plan doesn't automatically move you into the "proper" retirement age fund.)

Autopilot 3: Managed Accounts
While many more companies are making life-cycle funds their default, managed accounts are also a fast-growing--and intriguing--option. As of the end of April Financial Engines, the leading provider of this service, had signed up 174 employers with $170 billion in assets. Your company could be one of them; only half of those signed up had rolled the service out yet.

Cofounded by modern portfolio theory guru William Sharpe, Financial Engines charges 0.15% to 0.6% of assets a year, on top of normal mutual fund expenses, which vary, depending on what's offered in your plan. For its cut, Financial Engines picks your funds and rebalances your holdings quarterly, if needed.

While the allocation is heavily influenced by your age, there's more customization than in a life-cycle fund. The service will diversify your portfolio away from the industry you work in, particularly if you hold company stock, and will take into account how much you save, your holdings outside the plan and even your spouse's holdings. "Not all 50-year-olds should be treated the same," says Chief Investment Officer Christopher Jones.

Some other managed accounts services reallocate your portfolio more aggressively, based on changing market conditions. You'll be charged more for this market-timing approach--upward of 1.5% of assets--on top of fund fees. A bad idea.

Shrinking Choices
As of June General Motors is reducing from 73 to 39 the number of funds offered in its salaried workers' 401(k)--a move that should cut both company and participants' costs. Watson Wyatt pension consultant Robyn Credico reports that six of her largest corporate clients are reducing their offerings. GM and other sponsors are reacting to research showing that more fund choice doesn't lead to better asset allocation by average participants and may even paralyze them. Bounty is wasted on the ignorant.

What about those who know what they're doing or use professional advisers? Then a smaller smorgasbord is not a good development, argues financial planner David Kudla of Mainstay Capital in Grand Blanc, Mich., who has GM clients.

It you don't like your 401(k)'s new, pared-down menu, lobby for a brokerage window. For a fee of $80 or so a year (plus transaction costs), this service will allow you to buy any stock or fund you like. Some mutual funds even waive their loads if you invest through a window. Currently only about 8% of plans offer this escape hatch, says Hewitt Director of Retirement Research Pamela Hess. The companies say they don't see a demand; just 1% of workers offered a window use it.

Find Those Fees
Most employees (and some employers, particularly smaller ones) have no idea how much fees, both obvious and hidden, are eating into their retirement savings. Expenses are, on average, lower at big companies.

According to a study by HR Investment Consultants, fees consume an average of 1.59% of assets per year in plans with 25 participants and 1.07% of assets in plans with 5,000 participants. But costs vary widely. When HR examined plans with 100 participants and $5 million in assets, it found annual investment fees for fixed-income funds ranged from 0.2% of assets to 2.24%, for large-cap U.S. equity from 0.37% to 2.48%, for international equity from 0.48% to 2.95%. Overall costs can run even higher, if extra administrative fees are imposed.

Here's how to evaluate your plan. First look at the administrative charges, which should be modest. Are you charged for an annual account maintenance fee? For purchases? For fund sales? Many employers absorb all administrative costs--or think they do. One trick is for a plan administrator to woo sponsors with lower administrative fees, then charge slightly higher expenses for the funds, says David Campbell of financial planning firm Bingham, Osborn & Scarborough. "There's a migration away from companies picking up as much as they can toward putting it on the participants."

Then, assuming your plan offers individual mutual funds, examine the expense ratio found in the funds' prospectuses. Even if some offerings are pricey, you should have at least a few low-cost index fund choices--say, an S&P 500 or other broad stock market index fund costing around 0.2% of assets and a bond index fund at 0.4%.

Interested in more exotic or managed funds? Compare the fees charged by comparable publicly sold funds. Large 401(k) plans often use institutional funds that should, if anything, cost less than a retail fund. If a mutual fund fee is higher than the comparable retail product, that could be a tip-off that administrative and other costs are being shifted to you and hidden in the fund fee.

Also, check the fund's turnover, or how often the manager buys and sells stocks, in the fund's prospectus. Rule of thumb: A 100% turnover can nick your annual return by as much as 0.75% in commission costs and spreads, says Campbell.

Should expenses look high, talk to your company. Class actions against companies and plan administrators, as well as new federal rules in the works, are making employers more sensitive to their legal duty to try to get a good deal for workers.

If you can't make headway, consider cutting your 401(k) contributions to the minimum level needed (usually anywhere from 3% to 6% of salary) to snag your employer's full match. Then put your money in an IRA if you're poor enough to be eligible or a taxable account if you're not. Saving taxes isn't worth it when your savings get eaten up by fees.

BP Shuts 100,000 Barrels of Alaska Oil (AP)

By Alan Zibel

BP Shuts 100,000 Barrels of Output in Prudhoe Bay for a 'Few Days' Due to Water Pipeline Leak

WASHINGTON (AP) -- BP said Tuesday it will shut down 100,000 barrels, or one quarter, of its Alaskan oil production for a "few days" after discovering a water pipeline leak. Analysts said the temporary loss of output at Prudhoe Bay should not have a dramatic impact on world oil markets, but with supplies already tight and crude futures trading near $66 a barrel, any snag in the industry tends to make energy traders jittery. Light sweet crude for June delivery fell 32 cents to $65.95 a barrel in electronic trading on the New York Mercantile Exchange. London-based BP said the leak was discovered Monday in a 12-inch pipe that collects water separated from the oil and gas it produces. "We're putting together inspection and repair plans to return the facility to normal operations," BP spokesman Neil Chapman in Houston said. Alaron Trading Corp. analyst Phil Flynn downplayed the significance of the event for U.S. energy consumers. "It's not that (this lost production) can't be made up elsewhere in the world," he said, "but we would like to get production here rather than elsewhere."

U.S. refiners convert more than 15 million barrels a day of crude oil into gasoline, diesel and other liquid fuels -- and about two-thirds of that oil comes from abroad. The country imports an additional 2.6 million barrels a day of refined products, according to recent Energy Department statistics. BP's Prudhoe Bay shutdown was disclosed late Monday by Rep. Bart Stupak, D-Mich., who has been critical of the company's maintenance practices in Alaska, where two separate leaks occurred last year. BP confirmed the shutdown Tuesday morning. Internal company documents released at a hearing chaired by Stupak last week suggested that budget cuts by BP had put pressure on managers to ignore corrosion prevention at the oil company's North Slope pipelines. Corrosion, much of it hidden by development of high amounts of sludge, caused a leak and spill on a feeder line in March 2006, followed by another leak in August at a second line. After the second incident, the company shut down the affected lines, resulting in Prudhoe Bay production being cut in half. The company now is spending $250 million to replace 16 miles of questionable pipes.

Robert Malone, chairman of BP America Inc., BP Plc's U.S. subsidiary, acknowledged at the hearing that there were "extreme budget pressures at Prudhoe Bay" because of a sharp decline in production from the North Slope. But Malone disputed that the budget cuts were to blame for the pipeline breaks. Shares of BP dropped 52 cents to $68.92 in morning trading.

Goldman bets US$25B on wireless - Stunning Alltel deal

Peter Morton, Financial Post

WASHINGTON - The private equity parade of buyouts of publicly traded companies is showing no signs of slowing with the latest deal coming yesterday with a US$24.7-billion leveraged buyout of U.S. mobile communications giant Alltel Corp.

Goldman Sachs ' private equity arm, Goldman Sachs' Group Inc., is joining forces with TPG Inc., formerly Texas Pacific Group, to offer US$71.50 a share for the Little Rock, Ark.- based mobile telephone and network company.

The stunning offer, about 10% higher than Alltel's recent closing price and the largest potential leveraged buyout of a telecommunications company, helped boost U.S. markets yesterday and pushed the Standard and Poor's 500 index to its highest level since 2000.

Even BCE Inc., which is also being wooed by private equity companies with as many as three competing bids said to be in the works, saw its shares jump about 2.3% to US$36.46.

Canadian stock markets were closed yesterday because of the holiday.

"It's a very positive outcome for investors,'' said John Hodulik, an analyst at UBS AG in New York. "It's generous. It just shows you how difficult it is for private-equity firms to find attractive investments.''

The Alltel bid followed on the news that the Chinese government plans to buy 10% or US$3- billion of the non-voting shares of Blackstone Group LP in its upcoming initial public offering.

Also, the Daily Telegraph reported on the weekend that generic soft drink maker Cott Corp. is looking to join a private equity bid for the U.S drinks unit of Cadbury Schweppes PLC, pegged to be worth about US$15.8-billion.

The bidding for Alltel, the fifth-largest wireless company in the United States, may not even be over yet. Major private equity players such as Blackstone, Providence Equity Partners, and Carlyle Group together with Kohlberg Kravis Roberts, are still said to be interested.

Alltel put itself up for grabs in February and analysts had expected its shares to fetch around US$70. It is considered attractive since it has low debts and high cash flow. Last year it generated US$2.1-billion in cash flow from operations.

More low-profile than competitors Verizon and AT&T Inc., Alltel operates mainly in rural areas and carries calls on its network for both wireless giants as well as operating its own wireless system.

Alltel, under the leadership of Scott Ford, was transformed into a wireless provider through the takeover of Western Wireless Corp. in 2005 for US$4.5-billion and then the 2006 purchase of Midwest Wireless Holdings LLC for $1.08-billion.

There appears to be no slowdown yet in private equity takeovers. So far this year, some US$392-billion of takeovers have been announced, including US$13.9-billion in the telecommunications industry.

Private equity firms try to spot underperforming publicly traded companies, buy them, clean them up and then attempt to sell them again. Among some of the more high-profile takeovers have been companies like Burger King Corp. and Continental Airlines Inc.

New York-based Goldman Sachs said last month it raised US$20-billion for its sixth leveraged- buyout fund, the industry's largest. Its investments include Aramark Corp., which runs food concession stands at baseball stadiums, and Kinder Morgan Inc., the operator of more than 60,000 kilometres of oil and natural gas pipelines.

S&P may cut MGM deeper into junk on Tracinda talks (Reuters)

NEW YORK, May 22 (Reuters) - Standard & Poor's on Tuesday said it may cut its ratings on MGM Mirage Inc. (MGM.N: Quote, Profile , Research) after billionaire Kirk Kerkorian's Tracinda Corp. said it will enter talks to buy MGM's Bellagio and its $7.4 billion CityCenter development on the Las Vegas Strip.

Tracinda also said on Monday it is exploring options for its 56 percent stake in MGM. Tracinda said its move could result in a financial restructuring of the remainder of the casino company, which controls roughly a third of the famed Strip with properties such as Luxor, Mandalay Bay and Circus Circus.

S&P said it may cut MGM's corporate credit rating from "BB," two levels below investment grade.

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"In resolving the CreditWatch listing, we will monitor future developments pertaining to these announcements, and respond when we are able to better assess any implications to MGM Mirage's credit profile," S&P said in a statement.

MGM's 7.5 percent bonds due 2016 fell 0.13 cents to 99.375 cents on the dollar, according to MarketAxess.

Side Deals in a Gray Area (New York Times)


Global deal making is on a tear, accompanied by a surge of insider trading cases.

While regulators have focused on the buying of options or stocks on leaks about deals before they become public, there is another, more subtle way that big investors can trade while possessing information that the market does not have.

And it is — for now at least — all perfectly legal.

This little-known leeway comes in the form of “big-boy letters” — letters between buyers and sellers that say, in essence, “We are all big boys here, so let’s not sue each other.”

Big-boy letters are typically used when an investor has confidential information about a stock or bond and wants to sell those securities. By signing the letter, the buyer effectively recognizes that the seller has better information but promises not to sue the seller, much like a homebuyer who agrees to buy a house in “as is” condition.

But what happens when that security is then sold in the market and plummets in value? Put another way, what if that house collapses soon after it is sold to another buyer?

The use of big-boy letters is about to face its first significant legal challenge. In a lawsuit set to go to trial next month, a Texas hedge fund contends that it was on the losing end of such a letter in 2001, when Salomon Smith Barney, now Smith Barney, sold more than $20 million worth of World Access bonds to the Jefferies Group, the investment bank, using a big-boy letter.

Jefferies, in turn, flipped those bonds to the hedge fund, R2 of Fort Worth, through the Fimat Group, a service that matches trades. When World Access, a telecommunications company, announced that it was out of cash two days later, the bonds plummeted 30 percent, leaving the hedge fund holding the bag.

In a world of rapid trading, complex and arcane derivatives and secretive traders, the contours of what makes a level playing field for investors are sometimes hard to see.

Big-boy letters are a case in point. They are widely used and represent a private contract between presumably sophisticated investors.

Lawyers agree that big-boy letters do not technically shield either party from insider trading laws, but rather protect the two parties from suing each other. Still, the letters are widely used and have not — until now — been legally challenged. (The Securities and Exchange Commission has not weighed in on the letters.)

And lawyers do not agree on what happens when the securities at issue in big-boy letters are then put into the market with trades that might otherwise be deemed illegal.

Typically, insiders are barred from trading on significant information they have agreed to receive in confidence that gives them an advantage over other investors.

“With big-boy letters, we have a situation where the public at large can be exposed to tainted claims without knowing about it,” said Edward S. Weisfelner, the chairman of the bankruptcy and corporate restructuring practice group at the law firm of Brown Rudnick.

Big-boy letters are used in other situations. For example, companies might use them to sell stock when they are close to reporting earnings and clearly have an information advantage. Big-boy letters “avoid having to deal with the obvious, that someone knows more,” said Dennis J. Block, a senior partner at Cadwalader, Wickersham & Taft.

In another case involving big-boy letters, Barclays, the British bank, disclosed recently that the Securities and Exchange Commission was considering a civil enforcement action against it. According to government filings and a related lawsuit brought by Michael Econn, a former credit analyst at the bank, Barclays’ employees traded debt while simultaneously sitting on bankruptcy committees, giving them nonpublic information that would inform those traders about the value of the debt.

According to Mr. Econn’s lawsuit, Barclays supervisors told the employees the trades were acceptable because the bank was using big-boy letters, even though only a few big-boy letters were ever drafted.

Barclays says it does not comment on regulatory matters. Mr. Econn’s lawyer declined to comment.

In the lawsuit brought by the R2 hedge fund, which is scheduled go before a federal jury in Manhattan, the issue is whether Smith Barney and Jefferies worked together to unload toxic securities into the market and whether Jefferies was obligated to disclose the existence of the big-boy letters to the fund.

E-mail messages that have emerged in documents filed in a related suit in Texas indicate that traders were frantic to sell the World Access bonds before the company’s dire financial condition became known. The same day that Smith Barney received detailed confidential information about World Access, it asked Jefferies to find a buyer for its bonds, according to R2’s lawsuit. Buyers were scarce.

The following afternoon, as the market was nearing its close, a Jefferies trader sent an e-mail message to Fimat Group, which was helping Jefferies’ find a buyer: “I need an answer this thing is a mess.”

By the end of the day, the bonds were sold to R2 with Jefferies selling to Fimat minutes before buying from Smith Barney to cover the trade. Jefferies and Smith Barney completed their big-boy letter the next day.

“We believe it is clearly illegal for someone with material nonpublic information to dump securities on unsuspecting buyers in the marketplace by funneling the trade through a middleman who signs a big-boy letter,” said Andrew Cole, a spokesman for R2. “If we are proven wrong, then a giant loophole exists that essentially makes the insider trading laws meaningless."

A spokesman for Citigroup, which owns Smith Barney, said, “We believe the case is without merit and will fight it vigorously.” A Jefferies spokesman declined to comment.

Documents filed in the related Texas case suggest that Smith Barney may argue that it did not agree to protect the confidentiality of the information it received, making it free to trade. Jefferies may contend that it was unaware that Smith Barney had confidential information.

The genesis of the case was the popping of the bubble in telecommunications spending. In 2000, World Access, a Nasdaq-listed company, provided bundled telecom services, including voice, data and Internet to small and medium-size businesses in Europe.

At the end of that year, World Access was required by its lenders to buy back more than $160 million worth of bonds under terms of a previous covenant. In January 2001 it began the buyback. By February 2001, the stock of World Access hovered around $3 and its bonds, which were highly illiquid, were trading at about 64 cents on the dollar. It was a troubled company in a flailing industry.

On Feb. 8, World Access executives called investors at J.& W. Seligman & Company, another major bondholder, and said they needed approval to restructure the tender offer to buy back only $80 million worth of bonds. The company was running out of money and if the bondholders did not agree to the changes, it faced possible bankruptcy.

The next day, a Seligman executive called other bondholders. He made clear that the information was confidential, according to R2’s lawsuit, and over the next few days, sent the group detailed financial information, including a PowerPoint presentation with projections, all marked confidential. Three days later, the bondholders met with the company at Seligman’s office on Park Avenue in Manhattan to discuss the materials and the company’s prospects.

Soon after that meeting, a trader from Smith Barney called Jefferies, looking for bids on World Access bonds. The Jefferies trader, by e-mail, informed Smith Barney that there had been a buyer, but that the buyer had apparently got wind of the bondholder deal — information that had not been publicly disclosed — and had backed away.

By Feb. 13, the Smith Barney trader appeared agitated, anxious to unwind his position, according to the e-mail messages. As Jefferies tried to pry out more information about the deal, the trader said he was not authorized to say anything because the bank was restricted, meaning that it had nonpublic information.

As the afternoon wore on, the e-mail became more testy. At 3:30 p.m., seeking a buyer, the Jefferies trader e-mailed Fimat: “I need to execute 20mm — forget the rest — this is a prob if nothing gets done.” At 4:05, Jefferies sold $20 million of bonds to Fimat for $498.75 per $1,000 bond. Four minutes later, it covered the sale by buying $20 million of bonds at $487.50 for every $1,000. By the end of the day, R2 bought the bonds for $501.875. When the World Access news release came out, disclosing its true financial condition, the bonds dropped to $360 per $1,000.

In general, lawyers disagree as to whether the buyer of the securities, knowing that the securities were obtained via a big-boy letter, has an obligation to inform the next buyer.

Howard Seife, head of the bankruptcy practice at Chadbourne & Parke, said: “If I am the buyer and I want to resell, it would be prudent for the new seller to enter into a big-boy letter. You are protecting yourself to the new buyer in the chain.”

Others disagree. “The existence of a big-boy letter is not a material fact that needs to be disclosed in connection with a sale,” said Mr. Block from Cadwalader, Wickersham & Taft.

Interviews with more than a dozen law firms elicit a wide range of opinions on big-boy letters. “It’s a fairly gray area,” Mr. Seife acknowledged.