In a brief letter to investors, the $15 billion hedge fund did not elaborate but said it believes the next few months will be critical in the investigation.

The firm said that “over the coming months there will be more clarity about the outcome of these matters.”

The letter, which an investor in the fund who did not want to be identified read to Reuters over the telephone, also said while SAC believes in transparency, it may not be able to give frequent updates to investors.

“In the past we have tried to be as transparent as possible,” the fund said. But SAC Capital added that going forward it may “need to keep details confidential.”

SAC’s letter to investors comes a few weeks before outside investors have to notify Cohen and his fund whether they intend to redeem some of their money before the end of the second quarter on June 30. The hedge fund extended the deadline for submitting redemption requests to June 3 from May 16.

In the first quarter of this year, outside investors submitted notices to redeem up to $1.7 billion.

The investor in the fund said he was not concerned by SAC’s announcement. He added that the fund is up 5.96 percent so far this year.

An SAC spokesman declined to comment.

A spokesman for Blackstone Group, the largest outside investor in SAC Capital with roughly $500 million in client money invested, declined to comment.

“This is not going in a good direction,” said C. Evan Stewart, a partner at Zuckerman Spaeder in New York who has no connection to the case.

“In the middle of one of these situations when you reverse course and instead of embracing transparency you go in the other direction, that’s not a good sign for the purposes of resolving your conflict with the government.”

MOUNTING PROBLEMS

The government’s investigation into allegations of insider trading at Cohen’s fund has been heating up over the past several months.

But the firm also came close to settling a suit against it by the U.S. Securities and Exchange Commission for failing to adequately supervise its employees. SAC and the SEC reached a settlement agreement for a record sum of $616 million, but the judge on the case did not grant unconditional approval to the proposal.

To date, nine current or former SAC employees have been charged with or implicated in insider-trading while working at Cohen’s fund. In March, the firm agreed to pay the $616 million penalty to settle a lawsuit arising from one of the investigations.

The indictment in March of Michael Steinberg, the most senior employee of SAC to be charged with insider trading, put further heat on Cohen’s hedge fund. Steinberg, who pleaded not guilty to five counts of conspiracy and securities fraud, will begin his criminal trial on November 18.

Steinberg has been on paid leave from the firm after his suspension from SAC Capital’s Sigma Capital division last year.

Friday’s announcement could reflect new attempts to strategize about the settlement as both SAC and the SEC wait for clarity about its approval. Or it could be a defensive move to keep SAC from being accused of withholding material information, legal experts said.

Cohen also recently told investors that, beginning next year, the hedge fund would claw back compensation from employees who are found to use illegally obtained information in making trades.

SAC began changing the terms of its redemption policy following the November 2012 arrest of Mathew Martoma, a former portfolio manager at CR Intrinsic Investors, one of SAC’s funds. Martoma was charged with trading shares of Elan Corp. and Wyeth, which is now owned by Pfizer, based on non-public information.

The most recent extension of the withdrawal deadline followed an easing of liquidity terms for investors. SAC clients who waited to redeem from the fund in the second quarter would be treated no differently than ones who redeemed in the first three months of the year.

That is, investors who took requested money back in either the first or second quarter will get their money back by year end. Those more favorable redemption terms were made available to all the fund’s investors after SAC first negotiated the deal with the Blackstone Group LP, one of Cohen’s largest outside investors.

(Reporting by Emily Flitter and Katya Wachtel; Editing by Matthew Goldstein, Gary Hill and David Gregorio)

In a brief letter to investors, the $15 billion hedge fund
did not elaborate but said it believes the next few months will
be critical in the investigation.

The firm said that “over the coming months there will be
more clarity about the outcome of these matters.”

The letter, which an investor in the fund who did not want
to be identified read to Reuters over the telephone, also said
while SAC believes in transparency, it may not be able to give
frequent updates to investors.

“In the past we have tried to be as transparent as
possible,” the fund said. But SAC Capital added that going
forward it may “need to keep details confidential.”

SAC’s letter to investors comes a few weeks before outside
investors have to notify Cohen and his fund whether they intend
to redeem some of their money before the end of the second
quarter on June 30. The hedge fund extended the deadline for
submitting redemption requests to June 3 from May 16.

In the first quarter of this year, outside investors
submitted notices to redeem up to $1.7 billion.

The investor in the fund said he was not concerned by SAC’s
announcement. He added that the fund is up 5.96 percent so far
this year.

An SAC spokesman declined to comment.

A spokesman for Blackstone Group, the largest outside
investor in SAC Capital with roughly $500 million in client
money invested, declined to comment.

“This is not going in a good direction,” said C. Evan
Stewart, a partner at Zuckerman Spaeder in New York who has no
connection to the case.

“In the middle of one of these situations when you reverse
course and instead of embracing transparency you go in the other
direction, that’s not a good sign for the purposes of resolving
your conflict with the government.”

MOUNTING PROBLEMS

The government’s investigation into allegations of insider
trading at Cohen’s fund has been heating up over the past
several months.

But the firm also came close to settling a suit against it
by the U.S. Securities and Exchange Commission for failing to
adequately supervise its employees. SAC and the SEC reached a
settlement agreement for a record sum of $616 million, but the
judge on the case did not grant unconditional approval to the
proposal.

To date, nine current or former SAC employees have been
charged with or implicated in insider-trading while working at
Cohen’s fund. In March, the firm agreed to pay the $616 million
penalty to settle a lawsuit arising from one of the
investigations.

The indictment in March of Michael Steinberg, the most
senior employee of SAC to be charged with insider trading, put
further heat on Cohen’s hedge fund. Steinberg, who pleaded not
guilty to five counts of conspiracy and securities fraud, will
begin his criminal trial on November 18.

Steinberg has been on paid leave from the firm after his
suspension from SAC Capital’s Sigma Capital division last year.

Friday’s announcement could reflect new attempts to
strategize about the settlement as both SAC and the SEC wait for
clarity about its approval. Or it could be a defensive move to
keep SAC from being accused of withholding material information,
legal experts said.

Cohen also recently told investors that, beginning next
year, the hedge fund would claw back compensation from employees
who are found to use illegally obtained information in making
trades.

SAC began changing the terms of its redemption policy
following the Nov. 2012 arrest of Mathew Martoma, a former
portfolio manager at CR Intrinsic Investors, one of SAC’s funds.
Martoma was charged with trading shares of Elan Corp.
and Wyeth, which is now owned by Pfizer, based on
non-public information.

The most recent extension of the withdrawal deadline
followed an easing of liquidity terms for investors. SAC clients
who waited to redeem from the fund in the second quarter would
be treated no differently than ones who redeemed in the first
three months of the year.

That is, investors who took requested money back in either
the first or second quarter will get their money back by year
end. Those more favorable redemption terms were made available
to all the fund’s investors after SAC first negotiated the deal
with the Blackstone Group LP, one of Cohen’s largest outside
investors.

The warning puts Bank of Montreal in a growing category of financial institutions under pressure to do a better job of adhering to strict U.S. requirements for identifying potentially illegal activity by their customers.

The Fed entered into a written agreement requiring Bank of Montreal to strengthen its compliance after a recent inspection by the central bank’s examiners found deficiencies in Bank of Montreal’s anti-money laundering program. The Fed made the agreement public on Friday.

A spokeswoman for the Fed declined to describe the problems it found, saying its policy prohibits discussion of specific institutions.

“Our remediation activities are well underway,” said BMO spokesman Paul Deegan. “BMO is fully committed to the highest standards of regulatory compliance with Bank Secrecy Act/Anti-Money Laundering requirements and expectations in each of the jurisdictions in which we operate.”

The agreement said the Fed found Bank of Montreal’s Chicago branch “lacked effective systems of governance and internal controls to adequately oversee the activities of Bank of Montreal’s U.S. operations with respect to legal, compliance, and reputational risks.”

Banks operating in the United States, whether they are American or foreign, must closely monitor customer activity for signs of money laundering or other illegal acts. They must report unusual behavior in the form of “suspicious activity reports” to the U.S. Treasury Department.

The Treasury uses the reports – sharing them with the Federal Bureau of Investigation and other law enforcement agencies – to help track down criminals and terrorists.

The U.S. Treasury is currently building a system to more broadly share the banks’ reports with U.S. spy agencies as well.

The anti-money laundering rules were first defined by the Bank Secrecy Act and later strengthened by the USA Patriot Act after the attacks of September 11, 2001.

Scrutiny of these programs may get tougher this year, according to an April 5 note by Fitch.

Citing heavy fines the U.S. levied against HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) and Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) for lapses in anti-money laundering controls last year, Fitch analysts predicted banks could spend more this year on anti-money laundering compliance.

“For customers of affected banks, tougher AML scrutiny will likely lead to longer transaction times, increased documentation requirements, and potentially higher fees,” the analysts wrote.

JPMorgan Chase & Co and Citigroup (C.N: Quote, Profile, Research, Stock Buzz) have also run into trouble recently with anti-money laundering requirements. JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) is under fire from another regulator, the Office of the Comptroller of the Currency, which expected to issue a “cease-and-desist” order – a more serious citation than the Fed’s warning to Bank of Montreal – in the coming months.

The Fed told Citi in March to improve its money-laundering monitoring program.

(Reporting by Emily Flitter; Editing by Lisa Von Ahn and Peter Galloway)

Cyber security experts and industry analysts say the
burgeoning use of prepaid debit cards for everything from gift
certificates to disaster relief handouts is making it easier for
hackers to withdraw large amounts of money before detection.

Prepaid cards have fewer controls on them than on regular
credit and debit cards issued by banks. Each prepaid card issued
is like a blank slate: anonymous, new, and lacking any credit
history or individual behavior pattern against which bankers and
payment processors can measure activity to look for red flags.

They are also easier to hack. Raising a withdrawal limit on
a prepaid card involves hacking into a system at a third-party
payment processor, a company that is generally smaller than a
bank and, if based outside the United States, potentially
subject to looser cyber security standards.

“It’s usually prepaid debit cards. That’s the card of choice
in this. The bad guys know the system and they have been able to
exploit it,” said Joe Petro, a managing director at Promontory
Financial Group, who worked for 20 years as the head of fraud
prevention and investigations for Citigroup Inc.

“The vulnerability stems from third-party processors, who
may not have the same level of security systems that banks are
able to have,” he added. Petro was speaking generally and said
he did not have direct knowledge of the $45 million heist.

In a globally coordinated campaign, hackers broke into two
unidentified payment processing companies that handled the
prepaid debit cards for two Middle Eastern banks, U.S.
prosecutors said on Thursday.

Once inside the computer networks, they increased the
available balance and withdrawal limits on prepaid MasterCard
debit cards issued by Bank of Muscat of Oman
and National Bank of Ras Al Khaimah PSC of the United
Arab Emirates.

The criminal ring’s operatives then fanned out around the
world and used fraudulent prepaid cards to withdraw money from
thousands of ATMs. The global scope and speed of the theft was
unprecedented, cyber investigators said. In the case of Bank of
Muscat, $40 million was stolen in just over 10 hours.

Experts said the use of prepaid debit cards, instead of
credit cards, was not accidental. Credit cards are attached to
individuals whose spending habits over time give banks and
credit card companies clear patterns they can use when trying to
identify unusual or illicit activity.

EVADING DETECTION

A thief moving from ATM to ATM with a personal credit card
would likely quickly raise alarms, because his or her behavior
would look out of place compared to the credit card user’s
normal activity.

“The banks are using state-of-the art defenses, but the more
sophisticated actors are able to breach their networks,” said
Shawn Henry, the former head of cyber crime investigations at
the FBI, now president of professional services at security firm
CrowdStrike.

While the $45 million swindle is one of the largest ever,
security experts say banks deal with similar, albeit smaller,
thefts regularly – they are just rarely disclosed.

By 2013, the amount of money that was placed onto reloadable
prepaid cards reached about $201.9 billion from $28.6 billion in
2009, according to a report published by Mercator Advisory
Group.

“Of all the types of cards that are there, prepaid cards is
the fastest growing category,” said Scott Valentin, analyst
with FBR Capital Markets & Co.

“With cash payments slowing and an increase in mobile
payment and online commerce, the importance of these cards is
only going to increase,” Valentin said. “With credit cards you
need to be credit worthy and with debit cards you need a bank
account. Prepaid cards gets you past these two issues and as a
result are extremely popular.”

That has raised concerns about the need for better security
around prepaid cards, and the card processing companies that
service them.

For more than a decade, banks have been required by U.S. law
to ensure their electronic systems and those used by their
outside contractors meet certain safety requirement. U.S. banks
using payment processors must have a contractual agreement that
states the payment processor is meeting the same security
standards the bank does.

The problem, said Doug Johnson, vice president for risk
management policy at the American Bankers Association in
Washington, is that U.S.-based banks, don’t always find it easy
to ensure that what is agreed in the contract with an overseas
payment processor is really being implemented.

“I fully anticipate that regulatory agencies are going to
spend increased time looking at third-party providers,” Johnson
said.

In the case of the two Middle Eastern banks, one used a
U.S.-based credit card processor, while the other used one in
India. The U.S.-based company’s breach shows even third-party
processors close to home can make banks vulnerable.

The hackers likely used some of the most sophisticated
software available, said George Tubin, a senior security
strategist for Trusteer, a Boston-based cyber security firm.

Emails and other communications can bring malware into a
corporate computer system. Employees opening email attachments
unwittingly download spy software without even realizing it,
Tubin said. The software then collects and transmits information
back to the hackers who created it.

“Once they gain access to the right corporate network and
figure out how to get the right privileges, they can do whatever
they want,” Tubin said.

The agreement by Falcone and his hedge fund, Harbinger Capital Partners, to settle two lawsuits brought by the U.S. Securities and Exchange Commission was disclosed in a filing by Harbinger Group Inc (HRG.N: Quote, Profile, Research, Stock Buzz), the publicly traded investment company of which Falcone is chairman and chief executive. The settlement would also include the payment of $18 million.

While the dollar amount involved in the preliminary settlement is relatively small, the ban on new fundraising means Falcone will have to continue winding down his hedge fund.

It would, however, would permit Falcone to remain CEO of Harbinger Group, which has been acquiring stakes in insurance-related businesses. His hedge fund is one of the largest investors in Harbinger Group.

The agreement would bring to a close one of several major problems for the beleaguered money manager. Falcone, 50, a high-profile money manager who has not been shy about flaunting his success, began to see his reputation unravel last year after his big bet on wireless telecom company LightSquared went bad, with the company forced to file for bankruptcy. Harbinger Capital owned 96 percent of LightSquared.

In its lawsuits, the SEC accused Falcone of market manipulation, giving preferential treatment to certain investors and borrowing cash from his own fund to pay his personal taxes.

The government asserted that at the height of the financial crisis, when many of the fund’s assets were tied up in the collapse of Lehman Brothers, Falcone let select investors get out while denying that opportunity to others.

The SEC also claimed Falcone illegally loaned himself $113 million from the fund to pay his taxes, leaving investors unable to access their own money. Falcone eventually repaid the loan.

Falcone did not immediately respond to a request for a comment. The SEC declined to comment.

A federal judge and the SEC commissioners must still approve the settlement.

That bankruptcy and the regulatory issues that attracted SEC attention have tarnished Falcone’s reputation as a savvy debt trader, one who made billions betting against the U.S. housing market on the eve of the financial crisis.

The settlement is seen further damaging Falcone standing.

“Falcone’s high profile,” said Ron Geffner, a hedge fund lawyer who is not involved in the case. “Reputationally, it will follow Mr. Falcone for his entire career.

As part of the deal, Falcone will be barred for two years from associating with broker-dealers and investment advisers, with the exception of the nine investment advisers managing Harbinger’s hedge funds.

Through this exception, Falcone will be able to oversee a slow unwind of his hedge funds’ investments, which include private equity-style tie-ups overseas, and return money to investors as they submit redemptions.

He will continue to run Harbinger Group, which separately reported quarterly results on Thursday.

C. Evan Stewart, a partner at Zuckerman Spaeder who is not involved in the case, said he thought the SEC might have a hard time getting the deal approved.

“If someone has really done something in the SEC’s view that has created investor harm, leaving them in a position where they can commit further mischief doesn’t make a lot of sense,” he said.

“It’s an unusual settlement, I haven’t seen one like this. I suspect that a judge looking at this, and perhaps commissioners looking at this before it gets out of the SEC will be asking some tough question of the SEC lawyers.”

Falcone, in a press release accompanying Harbinger Group’s earnings on Thursday, said he had grown the business “from a shell company holding approximately $150 million in cash and short-term investments to a diversified holding company with over $27 billion in assets and four key operating subsidiaries in the consumer products, insurance, energy and financial services business. …

“I believe that HGI is well positioned for the next phase of its evolution, and we are excited about the future,” he added.

SOCIETY SET

Falcone grew up poor in Chisholm, Minnesota, an iron mining town of 5,000 near the Canadian border. The youngest of nine, he grew up in a three-bedroom home.

A smart student, he attended Harvard University where he was a star hockey player and graduated in 1984 with a degree in economics. After developing expertise in credit markets as a high-yield and distressed securities trader at Kidder Peabody, Falcone set off on his own, often returning to his roots and hiring former Harvard hockey players to work with him.

His big bet on the collapse of the housing market gave him the dollars to catapult himself and his wife, Lisa Maria, into New York society.

In 2009, he paid $49 million for a 27-room Manhattan townhouse that used to be the home of former Penthouse publisher Bob Guccione. The five-story mansion, where the couple lives with their twin daughters, boasts an indoor swimming pool.

Last summer, the couple was featured in Vanity Fair, in a story that focused on the risk of the LightSquared investment and their lavish lifestyle.

Falcone’s personal wealth has helped him return to his hockey roots. He is a minority owner of the National Hockey League’s Minnesota Wild. And more recently, he acquired an ownership stake in the Dubuque Fighting Saints, a minor league hockey franchise in Dubuque, Iowa.

In many ways, Falcone’s fall from grace in the $2.2 trillion hedge fund industry was ordained even before the SEC sued him.

A little more than a year ago, his hedge fund owned 96 percent of LightSquared, a venture that depended on government approval to build a high-speed, wireless network that tests eventually showed would risk interfering with the Global Positioning Systems.

When the Federal Communications Commission failed to give final approval to the venture, LightSquared was forced to file for bankruptcy which led to heavy losses at Harbinger in 2012.

Falcon’s assets under management, which peaked in 2007 at about $26 billion, have shrunk to roughly $3 billion this year.

The cases in the U.S. District Court, Southern District of New York, are: Securities and Exchange Commission v. Harbinger Capital Partners LLC et al, No. 12-5028, and Securities and Exchange Commission v. Falcone, No. 12-5027.

(Reporting by Emily Flitter; additional reporting by Jonathan Stempel and Nate Raymond; editing by Matthew Goldstein, Leslie Gevirtz and Leslie Adler)

Falcone and his hedge fund, Harbinger Capital Partners, have
agreed to pay $18 million to settle two lawsuits brought by the
U.S. Securities and Exchange Commission, according to a filing
by Harbinger Group Inc, a publicly traded investment
company where Falcone is chairman and chief executive officer.

While the dollar amount is relatively small, the deal would
require him to return money to his investors and effectively
prohibit him from starting a new hedge fund for the next two
years. It would, however, permit Falcone to remain CEO of the
Harbinger Group.

The agreement would bring to close one of several major
problems the beleaguered money manager has faced recently.
Falcone made a bad bet when last year, LightSquared, a wireless
telecom company he owned, was forced to file for bankruptcy.

That bankruptcy and the regulatory issues that attracted SEC
attention have come to tarnish the reputation of Falcone as
savvy debt trader, who made billions betting against the U.S.
housing market on the eve of the financial crisis.

A federal judge and the SEC commissioners must still approve
the settlement.

The SEC accused Falcone of market manipulation, giving
preferential treatment to certain investors and borrowing cash
from his own fund to pay his personal taxes.

The government asserted that at the height of the financial
crisis, when many of the fund’s assets were tied up in the
collapse of Lehman Brothers, Falcone let select investors get
out while denying that opportunity to others.

The SEC also claimed Falcone illegally loaned himself $113
million from the fund to pay his taxes, leaving investors unable
to access their own money. Falcone eventually repaid the loan.

Falcone did not immediately respond to a request for a
comment. The SEC declined to comment.

As part of the settlement agreement Falcone will be barred
for two years from associating with broker-dealers and
investment advisers, with the exception of the nine investment
advisers managing Harbinger’s hedge funds.

Through this exception, Falcone will be able to oversee a
slow unwind of his investments, which include private
equity-style, tie-ups overseas, and return money to investors as
they submit redemptions.

FALL ORDAINED

In many ways, Falcone’s fall from grace in the $2.2 trillion
hedge fund industry was ordained even before the SEC sued him. A
year ago, Falcone’s hedge fund had been the biggest investor in
Lightsquared, which filed for bankruptcy after failing to get
final approvals from the federal government to build-out its
national network.

The collapse of LightSquared was a big blow to Falcone and
his Harbinger Captial, which owned 96 percent of the company.
The bankruptcy filing led to heavy losses at Harbinger in 2012.

From the start, LightSquared was an ambitious and risky
idea, given all the competition in the telecom space from giants
companies like Verizon, AT&T and Sprint. But
if his investment in LightSquared had succeeded, it would been
another great success story for Falcone, whose savvy bet against
the subprime housing market bolstered his fund at its in peak in
2007 to about $26 billion in assets under management.

By this year, his hedge fund had shrunk to roughly $3
billion.

The cases in the U.S. District Court, Southern District of
New York, are: Securities and Exchange Commission v. Harbinger
Capital Partners LLC et al, No. 12-5028, and Securities and
Exchange Commission v. Falcone, No. 12-5027.

Falcone and his hedge fund, Harbinger Capital Partners, have
agreed to pay $18 million to settle two lawsuits filed by the
U.S. Securities and Exchange Commission, according to a filing
by Harbinger Group Inc, a publicly traded investment
company where Falcone is chairman and chief executive officer.

While the dollar amount is relatively small, the deal would
require him to return money to his hedge fund investors and
effectively prohibit him from starting a new hedge fund for the
next two years. It would, however, permit Falcone to remain CEO
of the Harbinger Group.

A federal judge and the SEC commissioners must still approve
the settlement.

The SEC accused Falcone of market manipulation, giving
preferential treatment to certain investors and borrowing cash
from his own fund to pay his personal taxes.

The government asserted that at the height of the financial
crisis, when many of the fund’s assets were tied up in the
collapse of Lehman Brothers, Falcone let select investors get
out while denying that opportunity to others

The SEC also claimed Falcone illegally loaned himself $113
million from the fund to pay his taxes, leaving investors unable
to access their own money. Falcone repaid the loan to the fund.

Falcone did not immediately respond to a request for
comment. The SEC declined to comment.

As part of the settlement agreement Falcone will be barred
for two years from associating with broker-dealers and
investment advisers, with the exception of the nine investment
advisors managing Harbinger’s hedge funds.

Bryan Shaw, the jeweler who took tips on Herbalife,
Skechers and other companies from his one-time golfing
buddy Scott London, agreed to pay at least $1.3 million in
restitution and will continue to cooperate with the government
as part of a plea deal he struck with federal prosecutors,
according to the documents.

Shaw’s lawyer, Nathan Hochman, a partner at Bingham
McCutchen in Los Angeles, did not immediately respond to a
request for comment.

London, whose 29-year career at KPMG ended in his firing and
arrest last month, had served as the head of the accounting
firm’s audit practice in Los Angeles.

According to information filed by the U.S. Attorney’s Office
for the Central District of California, London gave Shaw insider
tips and trading advice about five public companies over a
two-year period. When federal investigators caught up with Shaw,
who had traded on some of the tips, he agreed to cooperate in
the investigation.

Shaw recorded phone conversations in which he and London
discussed trading on non-public information from the companies
whose audits London oversaw. As agents from the Federal Bureau
of Investigation watched, Shaw met with London in a parking lot
to hand him an envelope full of cash as payment for the tips.

Harland Braun, London’s lawyer, did not immediately respond
to a request for comment.

In exchange for cooperating with the investigation and
pleading guilty, Shaw might get a lighter punishment. Under his
plea agreement, the government said that as long as prosecutors
are satisfied with Shaw’s cooperation, they will recommend a
two-level reduction in the offense level that dictates
sentencing guidelines.

A spokesman for the U.S. Attorney’s Office said the maximum
sentence for a conspiracy count was five years. He declined to
speculate on how much of a sentence reduction Shaw could get.

In addition to Skechers and Herbalife, London is accused of
leaking information about Deckers Outdoor Corp. as well
as plans for mergers between Pacific Capital Bancorp and Union
Bank and RSC Holdings and United Rentals

When the leaks became public, KPMG resigned as the auditor
for Skechers and Herbalife.

A spokesman for KPMG did not immediately respond to a
request for comment.

London’s formal arraignment is set for May 17. Braun has
said London will plead guilty.

The Canadian company, which has pinned its turnaround hopes
on its new BlackBerry 10 line of smartphones, went on the
offensive on Friday after the report from Boston-based research
and investment firm Detwiler Fenton sent its stock tumbling on
Thursday.

BlackBerry said return rates for its flagship Z10 devices
have been at, or below, its forecasts and in line with industry
norms.

“To suggest otherwise is either a gross misreading of the
data or a willful manipulation,” Chief Executive Thorsten Heins
said in a statement. “Such a conclusion is absolutely without
basis and BlackBerry will not leave it unchallenged.”

BlackBerry said Detwiler Fenton had so far refused to share
its report or its methods. It said it would present a formal
request for an investigation to the U.S. Securities and Exchange
Commission and to the Ontario Securities Commission, which is
Canada’s major securities regulator, over the next few days.

Detwiler has had run-ins with regulators in the past,
documents reviewed by Reuters show. But none of the cases
involved questions about the accuracy of Detwiler’s research or
were linked to BlackBerry.

The OSC said it would review the matter once it receives a
formal complaint.

“After the first 14 days, quality performance of the Z10 has
been in line with similar devices we’ve launched,” said Debra
Lewis, a spokeswoman for Verizon Wireless.

A spokeswoman for Detwiler did not respond to a phone call
and an email from Reuters seeking comment. The director of
research also did not respond to a call seeking comment.

“We believe key retail partners have seen a significant
increase in Z10 returns to the point where, in several cases,
returns are now exceeding sales, a phenomenon we have never seen
before,” its report said. Detwiler Fenton gave no details on how
it had gleaned this information.

While a number of brokerage firms have in recent weeks
published reports saying Z10 sales in the U.S. market are slow,
none of them have flagged any major concerns about returns.

Since 2007, the Financial Industry Regulatory Authority, the
industry body that oversees broker-dealers, has fined Detwiler
over $250,000 and has cited it for several compliance violations
over the past decade.

In December 2011, FINRA sanctioned Detwiler for failing to
properly supervise its employees and for allowing its brokers to
make more trades than necessary in clients’ accounts to boost
commissions during a period between 2006 and 2009.

In 2007, the firm, which was then called Detwiler Mitchell
Fenton & Graves, settled administrative proceedings that the SEC
brought against it for failing to supervise Bradford Bleidt, a
former employee who had been simultaneously running a $30
million Ponzi scheme.

TURNAROUND PLAN

BlackBerry is attempting to claw back market share lost to
rivals such as Apple Inc’s iPhone and Samsung
Electronics Co’s Galaxy line of smartphones with its
new line of devices, powered by the revamped BlackBerry 10
operating system.

The new Z10 touchscreen smartphone, the first of its new
devices, hit store shelves earlier this year. And the Q10, with
BlackBerry’s famed physical keyboard, will go on sale in Canada
and the United Kingdom before the end of April.

BlackBerry, which has changed its name from Research In
Motion, has yet to prove to the market that its new devices can
trigger a turnaround. The company expects to report break-even
results in the current quarter, but a true picture will not
emerge until later this year.

BlackBerry stock has remained highly volatile as analysts
are split on whether the turnaround plan will succeed. Research
reports often bring major swings in the company’s share price.

Shares of Waterloo, Ontario-based BlackBerry, which
fell 7.7 percent on Thursday, closed up less than a percent on
Friday at $13.64 on Nasdaq.

Referring to Icahn’s announcement that he had purchased a
large stake in the nutritional products company, one of the men
said: “I wish you would’ve known that he was going to release
that and we could’ve made some money.”

The other replied: “Yeah, that would’ve been nice.”

The conversation was part of a call California jeweler Bryan
Shaw recorded and later shared with the Federal Bureau of
Investigation to help in their investigation of his longtime
golf partner, Scott London. At the time, London was a senior
KPMG auditor who had been leaking inside information about his
corporate clients to Shaw.

U.S. authorities filed criminal and civil charges on
Thursday against London, who is accused of passing Shaw
non-public information about five of KPMG’s clients.

On Thursday afternoon, a federal judge in Los Angeles freed
London on a $150,000 bond, ordered him to turn over his
passport, and directed the former KPMG auditor not to make
contact with Shaw unless in the company of attorneys.

London’s attorney, Harland Braun, said his client intended
to plead guilty when he is formally arraigned on May 17.

“Had my client been asked to give information for cash, he
would have said no,” Braun told reporters in the courthouse
hallway after the proceeding. “This is that gray area, when you
talk at the country club. But once you take money, you’re dead.”

According to prosecutors, Shaw made about $1 million
trading on the tips and gave London roughly 10 percent of his
profits on each of the trades in the form of cash, jewelry,
concert tickets and free meals.

One gift for London was a Rolex Daytona Cosmograph watch
valued in 2011 at $12,000. Another, $10,000 wrapped into a
bundle of $100 bills. Shaw told the FBI he believed he spent
between $25,000 and $45,000 in concert tickets for the two of
them, including a Bruce Springsteen event.

Braun disputed the amounts, saying his client only received
about $35,000. London turned over $7,500 in cash and the Rolex
at the courthouse.

“I can’t understand why he took the money,” the attorney
said. “He didn’t need it.”

HOW TO PLAY IT

Prosecutors charged London, a Los Angeles-based auditor,
with one count of conspiracy to commit securities fraud for
giving Shaw information about public companies, including,
Herbalife Ltd, Skechers USA Inc and Deckers
Outdoor Corp.

Deckers did not respond to multiple calls and emails seeking
comment. Herbalife and footwear maker Skechers disclosed earlier
this week that KPMG had quit as their auditors in response to
the matter.

According to the complaint filed in federal court in Los
Angeles, London also advised Shaw on the best ways to trade on
the information.

For instance, he told Shaw about a merger between KPMG
client RSC Holdings and United Rentals Inc and reassured
his friend about trading on the takeover because “regulators
were not looking for ‘small fish,’” according to the complaint.

United Rentals spokesman Fred Bratman told Reuters by phone:
“We are not a party to this case, but we will obviously
cooperate and provide any assistance that we can to the
appropriate authorities.”

He did not confirm or deny that KPMG was the auditor of RSC
Holdings.

London also told Shaw about a takeover of Pacific Capital
Bancorp by Union Bank, according to the charges. Tom Taggart,
the spokesman for Pacific Capital’s current parent, Union Bank,
declined to comment.

The case has already cost London his job. It has also
prompted some public confessions rarely seen in insider trading
cases. Soon after news of the case broke earlier this week,
London admitted to the Wall Street Journal that he passed on
information to his friend, but did not know he would trade on
it.

Braun, London’s lawyer, told Reuters on Wednesday that
London’s statements to the press were incorrect and ill-advised.

Legal experts said it was rare for insider trading suspects
such as London to make public statements and it could cause more
problems for him.

C. Evan Stewart, partner at Zuckerman Spaeder in New York,
who routinely represents clients charged with insider trading
and who is not involved in the case, said it was hard to see a
reason for London’s statements.

“I’ve never seen anything like this in 36 years of
practice,” he said. “That’s certainly not a strategy I would be
employing under these circumstances.”

London’s attorney, Braun, told reporters on Thursday that
his client came forward to talk with the Wall Street Journal
about his involvement in the scheme because he was trying to
protect KPMG and its employees.

Shaw, through his lawyer, also spoke to the press earlier.
In a statement that lawyer Nathan Hochman emailed to Reuters on
Thursday, Shaw admitted he received non-public information from
London during a two-year period ending in 2012.

“I expect that my actions will result in significant civil
and criminal consequences, but I realize that this is the
painful price I will pay for my transgressions,” he added.

Of the two sets of comments, it is London’s that have
potential to do more damage, according to Stewart.

“Mr. London was a very senior KPMG guy who had been
counseled by very experienced lawyers on this subject, I’m sure
on numerous occasions, and then to be out there chatting with
the Wall Street Journal about this, it’s a very significant
setback for his now former firm.”

A spokesman for KPMG did not respond to a request for a
comment.