WSJ 7/26/04
When surgeon James Mault sought to take his fledgling medical-device company public in the summer of 2002, two investment banks balked. Goldman Sachs said it was too early. Credit Suisse First Boston was ready to try an initial public offering but halted a sale at the last minute because of weak investor interest.
Then Benjamin Lorello, the head of health-care investment banking at UBS AG, weighed in. He expressed confidence "we can still get the deal done," the client company's founder recalls. The new company, HealtheTech Inc., raised $30 million. And UBS collected an estimated $1 million fee.
Investors were less fortunate. Sales were anemic for HealtheTech's products, devices to measure metabolic rate, in part because of the company's heavy reliance on a customer that ran into trouble. HealtheTech's stock has plunged 95%, and the founder has left the company.
Over 15 years, no investment banker has been a more energetic promoter of health-care deals -- mergers and acquisitions, IPOs, follow-on stock offerings, bond offerings -- than Mr. Lorello, 51 years old. He has operated against a backdrop of great ferment in the U.S. health-care system, with the rise of managed care, complex new payment systems and efforts to commercialize scientific advances. As a volatile health-care private sector evolved and shifted, Mr. Lorello was in the thick of it, both fueling and benefiting from the changes.
His 95-member team at UBS brings in higher fees than any other health-care investment-banking group on Wall Street: $192 million last year, according to data firms Thomson Financial and Freeman & Co. Before joining UBS five years ago, Mr. Lorello, as the chief health-care investment banker at Salomon Smith Barney, led efforts to consolidate industry subsectors such as nursing homes. UBS hired him away with a package worth $70 million over 3 1/2 years.
Some of Mr. Lorello's deals have rewarded long-term investors. One such deal involved MiniMed Inc., a maker of medical devices, which he brought public in 1995. His UBS team handled a sale of the whole company in 2001 at $48 a share, nearly 15 times the IPO price, adjusted for stock splits.
Yet a considerable number of his client companies languished or collapsed with a thud -- victims both of the rapid changes in health-care economics and of speculative investment plays on an aging population. Mr. Lorello strung together nursing homes in acquisition binges that later had to be unwound in bankruptcy court. He helped turn doctors' offices into large networks -- businesses that often were short-lived. More recently, he has marketed biotech and specialty drug companies, some of whose profits remain far in the future and whose stocks have sunk. Mr. Lorello declined to be interviewed.
One longtime Lorello client has cast a particularly large shadow: HealthSouth Corp., where a massive, long-running fraud was revealed last year. Seventeen employees of the rehabilitation and surgery chain have pleaded or agreed to plead guilty, with the notable exception of founder Richard Scrushy, with whom Mr. Lorello worked closely on dozens of deals as the entrepreneur built the company in the 1990s. Mr. Scrushy says he is innocent. He has been indicted and is awaiting trial.
Now, say people familiar with the matter, a team of Securities and Exchange Commission lawyers is investigating whether any UBS bankers had knowledge of the fraud or did transactions with HealthSouth that made it appear stronger than it was. In addition, federal prosecutors are examining the role played at HealthSouth by Mr. Lorello and his former top UBS deputy, William McGahan. A former HealthSouth chief financial officer has told lawyers for suing investors that he disclosed the fraud's existence five years ago to Mr. McGahan.
UBS and lawyers for Mr. Lorello and his former deputy have vigorously denied having any knowledge of or involvement with the HealthSouth fraud. UBS says the guilty pleas and the indictment of Mr. Scrushy show that "the fraud specifically was designed to deceive outsiders, including its . . . investment banks." Like Mr. Lorello, Mr. McGahan declined to be interviewed for this article. Spokesmen for the Justice Department and the SEC declined to comment.
UBS says that some health-care niches where Mr. Lorello was active were hurt by unexpectedly sharp falloffs in Medicare reimbursement. In other cases, his stocks fell amid market declines that also pummeled health-care stocks underwritten by other firms, UBS says. The Swiss-based bank says that many of Mr. Lorello's client companies have "gone on to develop and commercialize breakthrough pharmaceuticals, medical devices and medical services, which were made possible in part by their ability to access capital."
One common measure of an investment-banking team's performance is how well the stocks it has brought public are doing six months later. Of the 10 underwriters that have handled the largest dollar volume of health-care stocks since Mr. Lorello joined UBS in 1999, his UBS team ranks near the bottom, in ninth place. The figures were compiled by data provider Dealogic.
UBS, using slightly different parameters, calculates that it ranks in sixth place out of 14 banks currently active in health care. UBS points out that other investment banks have also underwritten numerous health-care stocks that later declined more than 70%.
Although HealtheTech's stock has punished long-term shareholders, its former CEO is happy with Mr. Lorello. The banker saved the IPO "from the jaws of death," Dr. Mault says, calling Mr. Lorello's efforts on HealtheTech's behalf "Herculean from soup to nuts." He adds: "I would do another deal with him in a heartbeat." HealtheTech itself declines to comment.
The son of a machinery-plant worker in North Providence, R.I., Mr. Lorello got an M.B.A. from Massachusetts Institute of Technology. He did a stint at Lehman Brothers and in 1985 started a health-care investment-banking practice for Smith Barney, before that firm was merged with Salomon Brothers and became part of Citigroup Inc.
Associates recall him bringing a street fighter's tenacity to winning deals. He called subordinates "the family," a former colleague says, and so enjoyed impersonating "Godfather" Vito Corleone that he would superimpose his face over the don's in client presentations. UBS says that he uses the word "team," not "family."
"Ben was extraordinarily ambitious . . . . It was kind of like, no deal was too crazy for him to look at," says James Sweeney, who headed a company born in a four-way merger engineered in part by Mr. Lorello. The company, Coram Healthcare Corp., dealing in home infusion therapy, now is operating under bankruptcy-court protection. Mr. Sweeney blames that fate on a later acquisition handled by other bankers.
Mr. Sweeney says health care in the mid-1990s was gripped by acquisition fever that Mr. Lorello, among other bankers, helped foment. The attitude was "generate a fee," he says, "and it's not because the deal made sense in the long run." Federal law requires investment banks to examine and disclose known risks to a client company's future health, though it isn't a banker's job to police the client or prod it to perform.
Another Lorello client, nursing-home executive Rick Matros, says Mr. Lorello's aggressiveness "wasn't viewed as a negative" because clients thought he could get them more money in a sale or stock underwriting. "Everybody got a little greedy -- the companies and the bankers," Mr. Matros says. UBS says that "every successful investment-banking firm is aggressive in seeking business and retaining clients."
One theme linked much of Mr. Lorello's work: consolidating fragmented industry subsectors, like nursing homes and surgery centers. Health-care costs were soaring. As managed care gathered steam, providers sought to band together to cut costs and gain negotiating clout. In one push, Mr. Lorello sent members of his team calling on doctors, whose practices he then helped combine into big networks. Doctors' practices were a "$200 billion nascent industry that's going to get rolled up," Mr. Lorello told Investment Dealers' Digest in 1995.
While some bankers and big investors were skeptical and avoided the budding business, Mr. Lorello plunged ahead. He claimed in March 1997 to have handled about 70% of the dollar volume of deals in physician-management companies.
Mr. Lorello was selling "the future" more than business fundamentals such as cash flow, says Mr. Sweeney. In the euphoric investment climate of the day, "It was a big party, and he was a very good party-giver."
Hangovers followed. In the physician-management business, for one, some doctors chafed at centralized control. And they found that it didn't always mean they got better terms from health-maintenance organizations. Several physician networks amassed choking debt as they rapidly grew, and skidded into bankruptcy a few years after the consolidation binge Mr. Lorello helped engineer.
The biggest such company he brought public, MedPartners Inc., became embroiled in litigation after a planned merger that Mr. Lorello pushed collapsed in 1998. It got out of physician management almost entirely just 3 1/2 years after its IPO and focused on its other business, managing corporate drug benefits. In that arena, it now is a successful company under the name Caremark Rx Inc., still often advised by Mr. Lorello.
By the late 1990s, Mr. Lorello's investment-banking team was bringing in $150 million to $200 million in annual revenue, and he had a deal to take as much as 15% of the group's profits, a former colleague says. Yet Mr. Lorello was conservative about his own money. An ex-colleague recalls him saying the best neckties he ever got came from street vendors for $5 and boasting, "I owe nobody nothing."
A wave of failures also followed in another subsector where Mr. Lorello was active: nursing homes. One of the biggest nursing-home companies he helped expand and take public, Integrated Health Services Inc., had a risky strategy of seeking extra-high Medicare reimbursements by focusing on the frailest patients. But federal officials had made no secret that they might cap Medicare reimbursements, and they did just that in the late 1990s. Integrated Health, heavily indebted from its expansion, filed for Chapter 11 bankruptcy protection in 2000, just before Mr. Lorello came to UBS. It has since spun off or sold its assets. UBS says that in stumbling, Integrated was "similar to virtually all other companies in this sector."
The implosions didn't hurt Mr. Lorello's career. For one thing, many money managers who'd bought into his deals cashed out long before companies failed. For another, his biggest client, HealthSouth, was a lucrative generator of investment-bank fees as it pursued its acquisition strategy. HealthSouth sometimes bought properties from, or sold them to, other Lorello clients, giving the banker "deal flow." In all, Mr. Lorello handled more than $13 billion worth of deals for HealthSouth.
At the height of the late-1990s bubble, UBS, wanting to be a big-league U.S. investment bank, lured him away. It wowed Wall Street by signing Mr. Lorello with a guarantee of $50 million in pay over 3 1/2 years, plus $20 million to make up for deferred bonuses and stock left behind. Mr. Lorello's banking team and many clients soon followed him to UBS.
His 1999 arrival coincided with excitement about mapping the human genome. His UBS team soon was helping bring public companies such as Sequenom Inc., Genomic Solutions Inc. and GenVec Inc., in a field known as genomics.
Soon, genomics stocks also cratered. Investors realized that many gene therapies wouldn't be commercially viable for a decade. Sequenom has fallen 95% from its initial-public-offering price, and GenVec trades at a quarter of its initial value. Genomic Solutions was acquired in 2002 for a tenth of its initial public valuation. UBS says it played the lead role in only three of 50 genomics IPOs.
Although deal activity slowed sharply in 2002, Mr. Lorello remained able to push through stock offerings. A January 2003 UBS marketing binder boasted of his team's ability in 2002 to sell to the public the stock of a medical-technology firm "with neither meaningful sales nor an FDA approved product." One strength: UBS's network of stockbrokers eager to market new stock to their clients. Another factor was that many big investors in health care, particularly hedge funds, are in it just for the short term. Institutional health-care buyers tend to hold stocks only about six months, according to Morningstar Inc. data cited by UBS.
Money-management firm J.&W. Seligman & Co. bought some of the HealtheTech shares that Mr. Lorello's team underwrote two summers ago. Seligman portfolio manager Paul Wick says UBS persuaded his firm to buy partly by saying a lot of investors were in for the long haul. In fact, he says, many dumped the stock soon after the offering. Seligman finally sold its stake last year at a heavy loss. Mr. Wick says the deal has had "a chilling effect" on how Seligman views Mr. Lorello's IPOs.
UBS declines to comment on Seligman's experience but stresses that the deal "was sold almost entirely to institutional investors." UBS says HealtheTech initially exceeded its quarterly earnings expectations but then began to fall short.
For Mr. Lorello's team, there was money to be made even from his losers. In the case of some of his Smith Barney clients that ended up in bankruptcy court, UBS has won advisory fees restructuring the businesses. An example is Integrated Health Services, the nursing-home chain. Since Integrated Health slid into Chapter 11 in 2000, UBS has billed at least $16.3 million for advising on its asset sales and negotiating with its creditors, according to fee applications in federal bankruptcy court in Delaware.
The UBS health-care group has sometimes irked clients. Executives of Sunrise Senior Living Inc. say UBS invited the Sunrise CEO, Paul Klaassen, to speak at a February 2002 health-care conference. But Sunrise officials told UBS just before its conference that they were giving another bank the lead role in their next financing. By overnight mail, an unsigned note on UBS letterhead disinvited Mr. Klaassen, say Sunrise officials. When he didn't appear, investors began calling to ask if something was amiss at Sunrise. Its stock fell 14% in three days. Sunrise says no one at UBS acknowledged sending the note. UBS declines to comment.
A year ago, as congressional investigators looked into the HealthSouth matter, they became interested in Mr. Lorello's long relationship with Mr. Scrushy.
A cryptic voice mail described in federal court proceedings caught the congressional investigators' attention. In it, a former HealthSouth employee testified, Mr. Lorello said to a HealthSouth finance executive prior to the reporting of earnings: "We're expecting big things, you know. If you don't lay down for the family, you'll get whacked."
The investigators asked Mr. Lorello what that meant, say people with knowledge of a meeting the investigators held with Mr. Lorello last December. They say he replied that it was a joke and was taken out of context, mentioning his penchant for Godfather impersonations. Investigators asked him to do one. On his lawyer's advice, he declined. UBS had no comment.
In the first half of this year, Mr. Lorello's UBS investment-banking group again was at the top in both fees and number of deals, as measured by Thomson Financial and Freeman & Co. The Lorello team has lately won assignments as lead manager or co-lead manager in the IPOs of three more biotechs: Santarus Inc., Memory Pharmaceuticals Corp. and Immunicon Corp. The companies raised $137 million of public money during a jittery time for new biotech offerings. Total fees for UBS and its co-managers, says market-data provider Capital IQ, came to $9.6 million.
Vital Signs
How banks' health-care stock offerings* have fared from 1999 through 2003.
180-DAY RETURN
MANAGER DEALS RETURN** TO DATE***
CSFB 54 +18.5% +30.3%
Citigroup 22 +18.0% +3.8%
Goldman Sachs 26 +16.6% +21.0%
J.P. Morgan 41 +15.5% +26.6%
Merrill Lynch 38 +8.6% +10.1%
Morgan Stanley 34 +6.4% -12.4%
Bank of America 29 +4.8% -1.4%
CIBC 23 +4.5% +2.3%
UBS 65 +4.1% +3.6%
Lehman Brothers 33 +2.6% +9.5%
* Includes IPOs and follow-on offerings
** Change in value of stocks over first 180 days
*** Change in value of stocks from date of issue to the present
Source: Dealogic
JUST BEFORE THANKSGIVING last year, plaintiffs' lawyers suing HealthSouth Corp. crowded into a conference room at a law firm in Birmingham, Ala., to listen to an eye-popping story.
Former HealthSouth Chief Financial Officer Michael D. Martin, who recently had pleaded guilty to participating in the company's $2.7 billion accounting fraud, told the lawyers that years earlier he had tipped off a top investment banker at Zurich-based UBS AG about the scheme.
According to the plaintiffs' lawyers' rendition of the conversation, Mr. Martin said he did so one summer day in 1999 as he drove with the banker, William McGahan, to the sprawling lakeside home of HealthSouth founder Richard M. Scrushy. What's more, lawyers say, Mr. Martin claimed that he sought the banker's help in keeping the fraud hidden, by scuttling a planned acquisition by HealthSouth that Mr. Martin feared would expose the fraud. Mr. Martin said the banker promptly agreed to dissuade the founder and chief executive officer from doing the deal, the lawyers say.
The plaintiffs' lawyers now refer to the alleged tale as the "ride to the lake." They used his assertions in a lawsuit against HealthSouth this past January -- but didn't then identify Mr. Martin as the tipster or discuss the trip to Mr. Scrushy's lake house. The shareholder and bondholder lawsuit, filed in federal court in Birmingham, names former HealthSouth executives, board members, Wall Street securities firms and an accounting firm as defendants.
The suit also alleges that Mr. McGahan, who worked out of New York, briefed his boss, health-care investment-banking chief Benjamin Lorello, on all HealthSouth matters and says their briefings are "among the facts evidencing Lorello's knowledge of, and involvement in, the wrongdoing."
UBS, Mr. Lorello and a lawyer for Mr. McGahan vigorously deny the allegations. "Bill McGahan categorically and unequivocally states that he knew nothing about the fraud at HealthSouth," says Helen Gredd, his attorney, in New York. UBS says no one at the bank was aware of the fraud, pointing out that insiders who have pleaded guilty in the scheme say it "was designed to deceive outsiders, including its auditors and investment banks." All declined to discuss specifics of the Martin briefing, citing a court order in the HealthSouth court proceedings that restricts public comments.
The cooperation of Mr. Martin -- in a lawsuit in which he is a defendant -- is a rare coup for the plaintiffs' lawyers, who rarely succeed in tapping the knowledge of high-level executives in a fraud.
The vignettes obtained from Mr. Martin for the complaint are best described as "earth-shattering," says Sean Coffey, a plaintiffs lawyer representing HealthSouth bond investors including the Retirement Systems of Alabama pension fund. Mr. Coffey also represented WorldCom Inc. investors in a recent settlement in which Citigroup Inc. agreed to pay them $2.65 billion.
Mr. Martin's cooperation came as part of an unusual agreement between Justice Department lawyers and the plaintiffs' attorneys. The prosecutors and Mr. Martin's lawyer, Mark Hulkower, declined to discuss the specifics of Mr. Martin's assertions. But Mr. Coffey, a former federal prosecutor, says he believes the Justice Department saw Mr. Martin's participation as a way for HealthSouth investors to gain possible restitution.
At Mr. Martin's sentencing hearing last month in federal court in Huntsville, Ala., Doug Jones, a former federal prosecutor and now a plaintiffs attorney involved in the case, cited Mr. Martin's cooperation to the judge. Mr. Martin is one of 17 former HealthSouth executives who have agreed to plead guilty to participating in fraudulent schemes at the company. Mr. Scrushy awaits trial and has declared his innocence.
Mr. Martin was HealthSouth's chief financial officer from 1997 to 2000. According to court filings and testimony by Mr. Martin's lawyer, Mr. Martin left as finance chief because he didn't want to continue his role in the fraud. The two main schemes allegedly involved artificially boosting revenue by overstating the reimbursement the company expected to receive from payers such as Medicare and improperly recording expenses.
In addition to complicating the defense of UBS, Mr. Martin's session also has implications for HealthSouth's former auditor, New York-based Ernst & Young LLP. Mr. Martin, according to plaintiffs' lawyers, cited one instance involving the firm in 1994. The lawsuit alleges that in 1994 Ernst knew the company had wrongfully overstated 1993 earnings through improper accounting. Mr. Martin is referred to in the suit as the unnamed HealthSouth executive. According to the suit, the unnamed executive asserted that an Ernst & Young auditor told him that HealthSouth had to agree to the accounting treatment of $3 million in investment-banking fees because the accounting firm had acquiesced to accounting that resulted in a $27 million overstatement of earnings, related to the scheme of overstating what HealthSouth expected to be paid by third-party payers.
According to the lawsuit, the auditor allegedly said: "Don't question me on this; I turned my head on the $27 million." In 1993, HealthSouth recorded net income of $6.7 million, including a $49.7 million charge tied to an acquisition.
The accounting firm said in a statement, "We have no reason to believe that such a conversation took place. The problems at HealthSouth were the direct result of the unprecedented and collusive fraud by former management of HealthSouth."
Mr. Martin's interview with the lawyers, which lasted about an hour, began with Mr. Martin telling them that he planned to walk them through several anecdotes. One of those was the "ride to the lake" account, with Mr. Martin's purported request for help in halting the planned acquisition of a long-term-care company. According to allegations in the lawsuit, Mr. McGahan "promptly agreed to assist that executive in successfully talking Scrushy out of proceeding with the merger."
In the fall of 2002, according to the lawsuit and the plaintiffs' attorneys, the two men spoke again as Mr. Martin grew concerned the fraud was about to be exposed. Mr. McGahan told Mr. Martin, "in words or substance, `Someone is going to jail.' " Mr. Martin, "aware that UBS had helped sell billions of HealthSouth notes despite McGahan's personal knowledge of the fraud," replied, " `If I'm going, you are going too,' " the suit and the plaintiffs' attorneys allege.
Thomas Sjoblom, an attorney for Mr. Scrushy, the former CEO, says Mr. Scrushy "had no knowledge of the fraud in 1999, and Mr. Scrushy had no knowledge of Mr. Martin or any other executive making such comments to Mr. McGahan."
According to UBS, at least one court document shows that another former HealthSouth finance chief who has pleaded guilty for his role in the fraud, William Owens, didn't believe Mr. McGahan was aware of the company's legal troubles. "Now, he shouldn't -- he doesn't know anything that is going on," Mr. Owens said in a phone call to an unidentified person that was taped secretly by the Federal Bureau of Investigation on March 18, just before a Justice Department raid of HealthSouth. "But what concerns me is that maybe he's heard some conversations or second- or third-hand stuff, because Bill has his fingers on a lot of stuff . . . in New York." Mr. Owens succeeded Mr. Martin as finance chief in 2000. He was one of the first executives to come forward and plead guilty for his role in the fraud.
Last month, at Mr. Martin's sentencing hearing, Mr. Jones, the plaintiffs attorney, appeared before Chief U.S. District Judge U.W. Clemon and praised Mr. Martin. "I must say, your honor, it is somewhat unusual, I think, when a plaintiff lawyer who is suing a defendant for a lot of money stands before the court in order to explain briefly that defendant's cooperation," he said.
"I've been on the court for 24 years; I've not seen it before," Judge Clemon remarked. A few minutes later, he sentenced Mr. Martin to six months of home detention and ordered him to forfeit $2.4 million.
AT A TIME when U.S. trade deficits are growing to historic proportions, foreign interest in U.S. stocks and bonds may be fading. If this continues, there could be consequences for U.S. interest rates and the dollar.
Foreign purchases of securities in the U.S. in May came to $56.4 billion. While that was large enough to finance the current-account deficit, it was down 26% from April and represented the lowest monthly total in seven months. It also marked the fourth consecutive monthly decline of such purchases by foreigners.
The report on foreign purchases included bad news for U.S. stocks, revealing that May was the third consecutive month foreigners have been net sellers. That hadn't happened in nearly a decade.
Potentially more troubling was the slowdown in Asian purchases of U.S. debt -- especially in Japan, which holds 16% of all U.S. Treasurys. That country's nascent economic recovery has eased the government's concerns about maintaining a weak currency to boost exports, in turn reducing the Bank of Japan's need to intervene and buy dollars.
The result: Japan bought $14.6 billion in U.S. Treasurys in May and $5.5 billion in April, according to the U.S. Treasury Department. That is a significant drop from a monthly average of $25 billion for the seven-month period ending in March. If the Japanese economy continues to rebound, Tokyo's Treasury purchases are unlikely to return to those lofty levels. That has some economists concerned.
"Japan is to the U.S. financial markets what Saudi Arabia is to the world oil markets -- the primary provider of capital," Joseph Quinlan, chief market strategist for Banc of America Capital Management, wrote in a recent report. "Self-sustained growth in Japan could ultimately obviate the need for the Bank of Japan to purchase U.S. securities, leaving a buying void in the U.S. Treasury market, helping to drive yields higher." Bond prices and yields move in opposite directions.
Indeed, in the two months that Japanese buying of Treasurys slipped, the yield on the 10-year note jumped to 4.65% at the end of May from 3.88% on April 1, though it has since fallen to 4.43%.
The Bank of Japan and other Asian central banks have become an increasingly important pillar of support for the Treasury market, because their currency interventions and large trade surpluses with the U.S. have resulted in excess dollars to invest. Since these central banks are concerned less about a high rate of return than a stable and easily tradable investment, U.S. Treasury debt has been a major beneficiary.
Yet if recent trends toward lower U.S. investment persist, the U.S. eventually could have a tougher time funding its current-account deficit, which reached a record $144.9 billion in the first quarter. Any trouble financing that deficit would lead to higher borrowing costs through rising U.S. interest rates. It also could cause the dollar, which hit a three-week high against the euro on Friday, to resume its decline.
Indeed, problems with the current account could end up making the dollar "possibly quite a bit weaker," said John Llwellyn, chief global economist for Lehman Brothers.
For now, however, funding the current account shouldn't be a concern, said Rebecca McCaughrin, an economist for Morgan Stanley. She noted that in 2004 the U.S. needs to attract a monthly average of $50 billion to fund that deficit. After averaging $82 billion for the first four months of the year, the U.S. need attract only about $35 billion a month for the rest of the year. "Europeans alone could do it," Ms. McCaughrin said.
Still, foreigners now control 40% of U.S. Treasury debt, and their purchases are unlikely to return to peak levels seen at the start of the year, she said. "So U.S. interest rates could still go higher, even if the current account is funded," Ms. McCaughrin said.
Other foreign investors' appetites for U.S. securities also have been waning, in part because rising oil prices have forced some countries to spend more of their dollar reserves on energy. That leaves fewer dollars to invest in the U.S. markets.
Mr. Quinlan said that is the case for China, Asia's second-biggest buyer of U.S. securities, which bought $13 billion in U.S. assets through May, compared with $33.1 billion a year earlier.
The pullback in Beijing's interest in U.S. Treasurys was larger still: China was a net purchaser of $1.7 billion of U.S. Treasurys in the first five months of the year -- down 91% from the $18.4 billion in net purchases a year earlier.
Even the U.K., long a reliable buyer of U.S. securities, turned negative in May, with net sales of $4 billion. That was its first monthly net sale since October 1998 during the near collapse of giant U.S. hedge fund Long-Term Capital Management and the aftermath of the Russia financial crisis. Clear hints from the U.S. Federal Reserve that it would be raising interest rates likely caused U.K. investors to trim positions in U.S. Treasurys, Mr. Quinlan said. Anticipation of the Fed's first rate increase in four years also may have contributed to the three consecutive months that foreigners sold U.S. stocks.
By many accounts, however, Japan remains the critical buyer. Mr. Quinlan argued that Japan has become "America's de facto banker, helping to keep U.S. interest rates low over the past year." Currency traders say the Bank of Japan hasn't intervened in the currency market since March, and the pace of Japanese Treasury buying of the recent past looks unsustainable: Japan bought $175 billion in U.S. Treasury debt from September to March, a figure that exceeds Japanese purchases of Treasurys in the previous seven years combined.
Ms. McCaughrin said there has been anecdotal evidence that private Japanese investors, including banks and pension funds, also have been scaling back purchases of U.S. assets and have been investing more locally, to take advantage of a rebounding Japanese economy, or in other overseas markets, to capitalize on the global economic expansion.
NEW YORK -- Douglas Faneuil, a key witness in the trial of Martha Stewart and her stockbroker Peter Bacanovic, avoided jail time altogether Friday as he received a $2,000 fine and no probation.
Mr. Faneuil appeared relaxed as U.S. District Judge Miriam Goldman Cedarbaum imposed sentence. He smiled and shook hands with prosecutors shortly before the judge entered the courtroom.
The former Merrill Lynch & Co. brokerage assistant made a brief statement before the sentence was read in a small courtroom in Manhattan, across the street from the ceremonial courtroom where Ms. Stewart was sentenced a week ago. At one moment, he briefly choked back tears, but quickly recovered.
"I want to apologize for my mistakes," Mr. Faneuil said. "On Dec. 27, 2001, I should have listened to my gut feelings. Instead I suppressed them. In the months that followed, I should have offered the candor and honesty that are owed to the U.S. government, and to all decent people, by refusing to cover up a misdeed. Instead, I went along with my boss."
His boss, Mr. Bacanovic, received a sentence of 10 months, split between prison and home detention. He is to pay a $4,000 fine. Mr. Bacanovic, like Ms. Stewart, is free pending an appeal of his conviction.
Mr. Faneuil pleaded guilty to a misdemeanor in October for accepting property or services in exchange for not informing law enforcement of a crime.
He had faced a prison sentence of as long as a year. Mr. Faneuil agreed to cooperate with prosecutors when he entered his plea in the fall.
In imposing the sentence, Judge Cedarbaum noted that the probation department and prosecutors had recommended that Mr. Faneuil receive no jail time for his cooperation. As presiding judge in the trial of Ms. Stewart, the founder of Martha Stewart Living Omnimedia Inc., the judge said she was witness to Mr. Faneuil's cooperation with the government.