Judge hears claims BP lied about Gulf oil spill

NEW ORLEANS (AP) — A trial over BP's 2010 oil spill in the Gulf of Mexico has resumed with a federal judge hearing claims that the company misled federal officials and withheld information about the amount of crude spewing from its blown-out well.

During opening statements Monday for the trial's second phase, plaintiffs' attorney Brian Barr said BP failed to prepare for a blowout and compounded the problem by lying about how much oil was flowing from the well.

BP attorney Mike Brock said second-guessing the company's efforts to cap the well is "Monday morning quarterbacking at its worst."

The government and BP have different estimates; establishing how much oil leaked during the 86-day struggle to cap the well will help determine the penalties the oil company must pay.

Under the Clean Water Act, a polluter can be forced to pay a maximum of either $1,100 or $4,300 per barrel of spilled oil. The higher maximum applies if the company is found grossly negligent, as the government argues BP should be. But the penalties can be assessed at amounts lower than those caps. Congress passed a law dictating that 80 percent of the Clean Water Act penalties paid by BP must be divided among the Gulf states.

U.S. District Judge Carl Barbier is scheduled to hear four weeks of testimony for the second phase, which also is designed to help the judge determine how much oil spilled into the Gulf.

The second phase is divided into two segments. The first explores methods BP employed to cap the well. The second is designed to help Barbier determine how much oil spilled into the Gulf.

The first phase ended in April after Barbier heard eight weeks of testimony about the causes of the blowout.

BP insists it was properly prepared to respond to the disaster, but plaintiffs' attorneys will argue the London-based global oil company could have capped the well much sooner if it hadn't ignored decades of warnings about the risks of a deep-water blowout.

Who Gets the Beach House?: A How-To for Advisors on Helping a Family Decide

Beach houses are often perceived as the pinnacle of achievement for a high-net-worth family. Like the Bush or Kennedy family compounds in New England, they evoke thoughts of multigenerational ties and shared values, songs by the campfire and touch football on the lawn.

And then there’s the reality.

When Stacy Allred, a director in the wealth structuring unit of Merrill Lynch’s Private Banking and Investment Group, sat down to work with a West Coast family on preserving their cherished gathering spot along with a sense of multigenerational harmony, she quickly found herself dealing with a challenge that has cropped up for many baby boomers and their children. While a beach house, mountain retreat or European villa may be just a vacation home, it is also charged with emotions and family history that must be considered when the time comes for the next generation to take possession of that beloved second home.

A Small Cabin Becomes a Large House

In the case of Allred’s clients, a young couple living in San Francisco back in the 1960s bought a small cabin on a large piece of land on the coast, two hours from the city. What was at first a getaway for the young couple and their four small children became a place that the whole extended family enjoyed, including aunts, uncles and cousins. A series of renovations and additions turned the small cabin into a large house, and those four children now have adult children of their own.

“The original matriarch and patriarch have died, and the trust they left for upkeep and maintenance is dwindling,” recounts a Merrill viewpoint, “Who Gets the Beach House?,” published this August, just as many families were enjoying their final summer days on the shore. “After years of exposure to the elements, the home needs a new roof, new siding and other major repairs. Yet those physical upgrades, while significant, are merely symbolic of much larger challenges facing a family that longed for the home to be as meaningful for subsequent generations as it had been for them. Who pays the bills? Who oversees the upkeep? Who gets to use the house, and when?”

For the Northern California family, one son had done particularly well financially. While it might seem that his good fortune solved the family’s beach house preservation issues, it was only the beginning of a process that involved a meeting of siblings and their spouses plus nieces and nephews, featuring Allred as mediator.

“They didn’t want to come in as ‘deep pockets,’” Allred recalls of the son and his wife, who had asked her to help organize and run the meeting. “They wanted it to be collaborative. The biggest priority was maintaining family unity. They didn’t expect preferential weeks in the home, or an extra vote on matters pertaining to the house.”

For advisors who need to help their own clients resolve beach house estate planning issues, read on for a how-to from Merrill Lynch’s Private Banking and Investment Group.

Working with the northern California couple’s certified public accountant and estate attorney, Stacy Allred of Merrill Lynch’s Private Banking and Investment Group helped coordinate a strategy to create a trust to cover major capital improvements, ongoing maintenance and taxes for the family beach house.

The technicalities of the transaction look like this: The trust was structured to receive gifts as “current” gifts, meaning that the recipients had the right to withdraw the gifts from the trust within a limited window and use them for their own purposes. Thus, the couple was able to use their annual gift tax exclusion to fund the trust without having to cut into their lifetime gift tax exemption limit. This is because the government allows each spouse annual tax-exempt gifts of up to $14,000 per individual recipient, so the brother and his wife together were able to give a total of $28,000 to each of 18 relatives, for a total of $500,000. The couple can repeat this process each year until the trust has reached a level capable of maintaining the home for decades to come.

While every family situation is unique, the case of the California compound highlights “a universal point about the intergenerational issues surrounding the family vacation home,” according to the Merrill publication. “They should be handled with the same attention to detail you’d bestow on the succession of a family business.”

The Essential Master Plan

Michael Liersch, director of behavioral finance for Bank of America Merrill Lynch, acknowledges that such a view may seem counterintuitive, since a family retreat is supposed to be about feeling good and letting go. “People tend to think that a place of relaxation and fun is a place without rules,” Liersch says. “But a place of anxiety and uncertainty isn’t fun, and that’s what having no rules creates.”

Liersch advises creating a “master plan” that includes an online calendar that extended family members spread across the country or around the world can access through a file-sharing application. “That way people can request times for the home, and everyone knows who’s using the place and when,” he says. “The calendar can include maintenance schedules and track routine expenses.”

Wendy Goffe, a Seattle-based estate attorney, lays out the concept of the master plan in “From NASCAR Condominiums to Private Mausoleums: Keeping the Home in the Family,” noting that the first step in creating a master plan is to have a facilitator interview each family member.

To be sure, the master plan’s arguably most vital function is a clear directive on how the property will transfer from one generation to the next.

“The facilitator’s report provides sufficient information so that family members can make meaningful decisions with respect to the property jointly,” Goffe writes. “If the family is unable to reach an agreement, one or more family meetings guided by the facilitator could follow to resolve areas of dispute, further define areas of agreement, and continue building a consensus.  The development of a master plan with the assistance of a trained neutral third party is especially useful when the senior generation has already ceded control of the property to the next generation and questions and issues concerning actual management have arisen.”

How to Hand a House Down

The most efficient way to hand the house down is through an outright gift while the owners are still alive, according to Merrill Lynch’s Private Banking and Investment Group. “It’s relatively easy, inexpensive and can require minimal paperwork,” the viewpoint asserts.

Potential tax benefits also make this an attractive option. While 22 states impose estate and/or inheritance taxes, only Connecticut and Minnesota have a gift tax. At the federal level, gift and estate taxes stand at 40% for amounts greater than $5.25 million as of 2013, adjusted annually for inflation.

“There is, however, an advantage to giving the gift during your lifetime,” the viewpoint adds. “It’s analogous to being able to invest pre-tax versus post-tax dollars into a retirement account: When you write a check to cover gift taxes, you can simply pay the amount out of whatever available resources you have. But if you leave the home in your estate and wish to have your estate cover the tax bill, you may be drawing on funds that have already been nearly halved by the wealth-transfer rate as part of your taxable estate.”

Ways to ease the tax burden of a vacation house include:

1) A qualified personal residence trust (QPRT). A QPRT with a term of 10 years, for example, the house is given to the trust, thus removing it from a taxable estate. During the term of the trust, the original owner continues to use the home and pay taxes and other regular expenses. Once the 10-year term expires, the beneficiaries become the owners of the property, and from then on, whenever the original owner uses the property, he or she must pay fair market rent.

There are drawbacks to a QPRT, however. If the grantor dies before the trust term expires, the home reverts to his or her taxable estate. And then, says the Merrill viewpoint, there’s the potential emotional drawback: “The former owner may find it irksome to pay fair market rent topping $15,000 a week for a Martha’s Vineyard or Sun Valley retreat that still psychologically feels like home.”

2) To retain greater control and protect against hurt feelings, families can instead transfer ownership of the home to a family limited liability company. The grantors then gift shares in the LLC to transfer ownership. There is a tax benefit to this method, as well. While distributed shares are subject to gift taxes, because multiple people have shares, individual recipients don’t control the property and can’t sell it, so the value of their gifts can be discounted for tax purposes.

“Unlike a QPRT, an LLC offers the flexibility to maintain or share decision-making responsibility as you see fit,” the viewpoint notes. “As with a family-owned business, you might, for example, decide to distribute nonvoting shares to the kids, giving them a financial stake in the house while withholding their vote in major decisions until you feel the time is right.”

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Read Americans, and Their Money, Flee High-Tax States at ThinkAdvisor.

JPMorgan Top Stock Picker with Equities Out of Lockstep

Mike McGregor/Bloomberg Markets Howard Chen, left, and Craig Siegenthaler correctly predicted that AllianceBernstein stock would rebound.

Investors had declared the stock of AllianceBernstein Holding LP (AB) a loser. From Jan. 1, 2010, to Aug. 23, 2012, it had declined 43 percent compared with a 33 percent gain for the Standard & Poor's 500 Index. Nevertheless, on that day, Credit Suisse Group AG analyst Craig Siegenthaler lifted his rating on the New York-based money manager's shares to a buy.

"Many investors had left it for dead," Siegenthaler says. "It was a tough stock to even bring up in front of investors. Underneath the low valuation, the company was really in a transformational period."

Since his call, AllianceBernstein's shares have outperformed the S&P 500 by almost threefold, with the stock returning 73 percent for the year ended on Aug. 14. In recommending the shares to Credit Suisse customers, Siegenthaler said that the company was cutting expenses and that fixed-income sales were improving, Bloomberg Markets magazine will report in its September issue.

More from the September issue of Bloomberg Markets:

SPECIAL REPORT: Terrorism and Tungsten | Slideshow FAMILY OFFICES: World's Richest | Graphic QATAR: Money, Gas and Clout PHILANTHROPY: One Woman's Mission BILLIONAIRES: Charity, Russian Style | Slideshow MALAYSIA: Najib's Grand Plan

Siegenthaler's calls on stocks such as AllianceBernstein helped make him and his Credit Suisse partner, Howard Chen, the top U.S. analysts of brokerage and asset management firms in 2012, according to a ranking of stock analysts by consulting firm Greenwich Associates and Bloomberg Markets.

He currently has buy recommendations on private-equity firm Fortress Investment Group LLC (FIG) and Zions Bancorporation. (ZION)

Analysts Surveyed

To compile the ranking, Stamford, Connecticut-based Greenwich Associates surveyed 945 buy-side analysts at 190 investment management firms, mutual funds, hedge funds, pension funds and insurers from December to March. The analysts were asked to name the Wall Street research teams they considered their most important sources of advice on investments.

JPMorgan Chase & Co. (JPM)'s research unit, under Noelle Grainger, the bank's head of equity research in the Americas, scored the largest number of highly ranked analysts, making it the No. 1 firm in U.S. equities research for the fourth consecutive year, according to Greenwich Associates. Bank of America Corp.'s BofA Merrill Lynch Global Research unit was No. 2, followed by Morgan Stanley. (MS)

Research directors and analysts say the big news in their field is that the era of correlation -- when stocks move up or down in unison in reaction to macroeconomic events -- is finally ending. Weakening correlation signals that investors are less obsessed with big issues like Europe's debt crisis, the U.S. fiscal deficit and China's growth trajectory. They're looking instead at more stock-specific investment drivers such as earnings, technology innovations and market share, Grainger says.

Adding Value

"In 2012, people started to be willing to put a little more risk on the table," Grainger says. "It was a year where analysts could add more value based on their industry and company expertise."

It was also a year in which the tide lifted a lot of boats. More tha! n 300 of the stocks in the S&P 500 index saw returns in excess of 10 percent in 2012, including reinvested dividends. As the index surged, driven by four straight years of profit growth and three rounds of Federal Reserve stimulus, companies' stocks began to break away from the pack and move up or down on their merits.

"From the stock pickers' side, two things stuck out in the past year," says Brett Hodess, the head of Americas equity research at BofA Merrill Lynch. "It was still very important to look at macro events in order to see which sectors would be most favored. Then you had to figure out who the winners and losers would be. That was the way to outperform."

Calculating Correlation

The correlation among S&P 500 companies fell to an average of 0.59 last year, according to data compiled by Westport, Connecticut-based research firm Birinyi Associates Inc. A reading of 1.0 indicates they're all moving in the same direction by the same amount. In 2011, stocks had moved in unison by the most since at least 1980, reaching a record correlation of 0.86 in October as prices tumbled, according to Birinyi.

Heather Bellini, a software analyst at Goldman Sachs Group Inc. (GS) who ranked second in her industry, started coverage of Salesforce.com (CRM) Inc. in July 2011, putting the largest maker of customer-management software on Goldman's buy list. She saw cash flow rising on the continued success of Salesforce's Sales Cloud -- its core product -- as well as newer offerings such as the Service Cloud customer-support software. The shares fell after her July 12, 2011, buy recommendation and then gained 66 percent in 2012. The stock is up 6.3 perpercent this year as Aug. 14.

Bellini now has buy recommendations on Facebook Inc. (FB) and Oracle Corp. (ORCL)

Reassessing Private Equity

Credit Suisse (CSGN)'s Chen took a new look at publicly listed private-equity firms, including Apollo Global Management LLC, Blackstone Group LP (BX) and Carlyle Gro! up LP. (C! G) Investors are still struggling to properly value them, he says.

Private-equity firms lock up investor money for as long as a decade while they buy companies, overhaul them and, if all goes well, sell them for a profit. The firms, which use debt to finance the deals, typically charge an annual management fee of 1.5 percent to 2 percent and keep 20 percent of profits from investments.

Valuing the firms had traditionally consisted of a sum-of-the-parts analysis -- marking the value of investments every quarter, according to Chen. He argued in a February 2012 report to change that metric and judge the firms based on their longer-term cash earnings generated from management fees and profits from investments.

'False Precision'

"To me, sum of the parts has a false sense of precision," Chen says. "It doesn't get to the heart of how these companies create value and why they've been so successful."

Apollo and Blackstone were the best positioned in 2012 to deliver the biggest growth in cash earnings, Chen says. He maintained his buy calls on both firms throughout the year. From Chen's Feb. 7, 2012, note calling for a new valuation methodology, Apollo returned 129 percent as of yesterday's close and Blackstone, 46.6 percent.

Chen today has buy recommendations on IntercontinentalExchange Inc. (ICE) and asset manager State Street Corp. (STT)

The top analyst of large-cap banks in the Greenwich Associates/Bloomberg Markets ranking is Betsy Graseck of Morgan Stanley. In one of her best calls, she saw bad news for JPMorgan as good news for investors.

'Double Down'

On May 18, 2012, eight days after the biggest U.S. bank by assets announced a $2 billion trading loss in the firm's London chief investment office, Graseck published a note telling investors to "double down" on the shares, which had plunged 27 percent from their March 2012 peak. The trading losses were attributed to Bruno Iksil, known in the market as the London Whale, an! d ultimat! ely totaled at least $6.2 billion.

"We pounded the table post-Whale," Graseck says. "The view was that management had the skills to be able to work with the Street and get the portfolio risks reduced." JPMorgan stock returned 67.6 percent from her May report to yesterday's close.

Another Graseck winner was Atlanta-based SunTrust Banks (STI) Inc., which she upgraded to a buy on July 2, 2012, after digging into data that showed a recovery in the housing market in the Southeastern U.S. SunTrust is the biggest lender in Georgia and has branches in Florida, Maryland and North Carolina. She also saw that SunTrust would benefit from a new wave of refinancing following the extension of the federal Home Affordable Refinance Program, which allows Americans with little home equity to refinance. Shares of SunTrust rallied 42.9 percent from her call to Aug. 14.

Trade Routes

Graseck's Morgan Stanley colleague Bill Greene ranks No. 1 in transportation. One of his best calls was a sell in March 2010 on Expeditors International (EXPD) of Washington Inc., which assists companies in shipping goods across international borders. Most of Expeditors' business is on trade routes across the Pacific Ocean, especially between China and the U.S. Greene predicted that the company's growth would stumble as freight flows shifted to emerging markets -- between China and Vietnam, for example. In addition, companies were increasingly near-shoring, or relocating factories and offices closer to headquarters, resulting in fewer international shipments.

"All of these factors were head winds to growth," Greene says.

Starting in the fourth quarter of 2011, Expeditors' profits missed analysts' estimates for six straight quarters, sending shares down 2 percent in 2012. They've returned 3.2 percent this year as of yesterday.

One-by-One

While judging stocks one by one has become easier, what hasn't changed since the financial crisis is investors' demand for research o! n global ! investment themes. Analysts now collaborate across industries and regions in order to produce comprehensive reports that identify worldwide trends.

"Companies are competing across traditional lines," Goldman software analyst Bellini says. "One thing that's important for us is to make sure we break down the silos that are set up due to the way the industries are covered. This lets us present portfolio managers with research that's more unified and consistent."

Bellini teamed up with William Shope Jr., Goldman's technology hardware analyst, who's tied for third in his group in the Greenwich Associates/Bloomberg Markets survey, and Michael Bang, a Seoul-based analyst at the firm, on a December report that noted how Apple Inc. (AAPL), Samsung Electronics Co. (005930) and Facebook would all benefit from changing trends in how consumers use smartphones and tablets.

Defying the Crisis

Stephen Penwell, Morgan Stanley's director of North American equity research, says his firm did a report that featured companies whose profit margins had risen even as global economic events such as the European debt crisis had intensified. They included discount chain Dollar General Corp. (DG), Dunkin' Brands Group Inc. (DNKN) and Web services firm Rackspace Hosting Inc. (RAX)

"Good old-fashioned stock picking is coming back in vogue," Penwell says. "Clients are beginning to make more bets and bigger bets."

If investors are looking to make a big bet on AllianceBernstein, Craig Siegenthaler says they're late to the party. On July 3, he concluded the shares would no longer outperform relative to other asset managers and downgraded them to a hold.

How We Crunched the Numbers

To create rankings of the top U.S. analysts by industry, Bloomberg Rankings worked with Greenwich Associates, a consultant to financial services firms. From December through March, Greenwich Associates interviewed buy-side analysts who use Wall Street research, asking each responden! t to list! the 10 firms they regarded as the most important sources of information on the industries they cover.

About 60 percent of these discussions were in person; the balance were conducted online. Greenwich Associates interviewed a total of 945 analysts at 190 institutions, including banks, insurance companies, investment management firms, mutual funds, pension funds and hedge funds.

These accounts represent an estimated total of $4.7 billion in commissions, or an average of almost $30 million in commissions per buy-side institution. Participating institutions were placed in seven tiers based on the commissions they generated. The responses of top-tier accounts received the greatest weight.

Greenwich Associates received responses for 58 industries, and we included in the ranking the 34 industries that had at least 45 responses. For the final ranking, Bloomberg Markets researched and added the names of the sell-side analyst or analysts with prime responsibility for tracking each industry.

Commission Weighted

Greenwich Associates listed as many as five winning firms for some industries and as few as two for others. The number of firms selected was a function of their commission-weighted share of the institutional vote. Statistical ties occurred when the difference between weighted shares was small. When the difference between the second- and third-ranked firms was substantial, no No. 3 firm was named.