commercial finance
Lehman Probe Stalls; Chance of No Charges
By JEAN EAGLESHAM And LIZ RAPPAPORT
The U.S. government’s investigation into the collapse of Lehman Brothers Holdings Inc. has hit daunting hurdles that could result in no civil or criminal charges ever being filed against the company’s former executives, people familiar with the situation said.
Richard Fuld Jr.
In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting maneuver to move as much as $50 billion in assets off its balance sheet, which made it appear that the securities firm had reduced its debt levels.
SEC officials also aren’t confident they could win any lawsuit accusing former Lehman employees, including former Lehman Chief Executive Richard Fuld Jr., of failing to adequately mark down the value of the large real-estate portfolio acquired in Lehman’s takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors, according to people familiar with the matter.
People close to the investigation cautioned that no decision has been reached on whether to bring civil charges, adding that new evidence still could emerge. Investigators are reviewing thousands of documents turned over to the SEC since it began its probe shortly after Lehman tumbled into bankruptcy in September 2008 and was sold off in pieces. Officials also have questioned a number of former Lehman executives, some of them multiple times, the people said.
But after zeroing in last summer on the battered real-estate portfolio and an accounting move known as Repo 105, SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn’t necessarily illegal.
In a possible sign that the probe has slowed, the SEC hasn’t issued a Wells notice to Lehman’s longtime auditor, Ernst Young, according to people familiar with the situation. The firm had concluded that the accounting in the Repo 105 transactions was acceptable. Wells notices are a formal signal that the SEC’s enforcement staff has decided it might file civil charges against the recipient.
An SEC spokesman declined to comment. In a statement, Ernst Young said the firm stands “behind our work on the Lehman audit and our opinion that Lehman’s financial statements were fairly stated in accordance with the U.S. accounting standards that existed at the time.”
The snags are the latest sign of trouble for the SEC and other U.S. regulators trying to punish companies and executives at the center of the financial crisis. So far, no high-profile executives have been successfully prosecuted. Last month, a federal criminal investigation of former Countrywide Financial Corp. Chief Executive Angelo Mozilo was closed without charges.
The U.S. government lost the only crisis-related case to go to trial when former Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin were acquitted in November 2009 of criminal charges related to the $1.6 billion collapse of their hedge funds.
If SEC officials decide not to take enforcement action against former Lehman executives, they likely would escape criminal prosecution, too. The Justice Department “tends to follow the SEC’s lead in these complex financial cases, so reluctance to pursue civil charges generally means the federal agencies won’t take a criminal case,” said Elizabeth Nowicki, a former SEC lawyer who is an associate professor at Tulane University School of Law in New Orleans.
A spokeswoman for the Justice Department declined to comment on Lehman. In a statement, she said the agency “will continue to root out financial fraud wherever it exists. When we find credible evidence of criminal conduct—by Wall Street financiers, lawyers, accountants or others—we will aggressively pursue justice. However, we can and will only bring charges when the facts and the law convince us that we can prove a crime beyond a reasonable doubt.”
A year ago, it looked as if the SEC and federal prosecutors had a road map to use against Lehman’s former top executives. Last March, the Repo 105 transactions were condemned by court-appointed examiner Anton R. Valukas, who said in a report that they enabled Lehman to “paint a misleading picture of its financial condition.”
In the transactions, Lehman swapped fixed-income assets for cash shortly before the securities firm reported quarterly results, promising to buy back the securities later. The cash was used to pay down the company’s debts. Emails sent by executives at the company referred to Repo 105 as a “drug” and “basically window dressing.”
Mr. Valukas concluded there were “colorable,” or credible, legal claims against Ernst Young, Mr. Fuld and former finance chiefs Ian Lowitt, Erin Callan and Christopher O’Meara.
All four former Lehman executives have been scrutinized by the SEC, according to people familiar with the matter. Their lawyers didn’t respond to calls seeking comment. They previously have denied any wrongdoing related to Repo 105.
A December lawsuit against Ernst Young by soon-to-depart New York Attorney General Andrew Cuomo drew heavily on Mr. Valukas’s findings. Mr. Cuomo, who became New York’s governor in January, criticized the Repo 105 transactions as a “house-of-cards business model, designed to hide billions in liabilities in the years before Lehman collapsed.”
Mr. Cuomo’s successor, Eric Schneiderman, is “fully committed” to pursuing the case, a spokesman said. Ernst Young has vowed to vigorously defend itself against accusations that the maneuver violated generally accepted accounting procedures.
In contrast, SEC officials generally have concluded that the transactions were consistent with accounting standards, according to people familiar with the situation.
And agency officials aren’t convinced that Lehman shareholders suffered material harm, since executives were trading one type of highly liquid asset for another, these people said. They said the SEC would face a far lower bar if Lehman had converted illiquid or damaged assets, such as Archstone’s real-estate holdings, into cash using Repo 105.
Mr. Fuld and other former executives could face charges of making misleading statements about the company’s health before it sank. That likely would be an uphill battle for the government, according to people familiar with the matter, partly because the executives relied on legal and accounting opinions.
British law firm Linklaters LLP signed off on the Repo 105 transactions, all done through the securities firm’s European arm. Linklaters declined to comment.
SEC investigators also have looked for evidence that Lehman overvalued positions held by Archstone, which it acquired in 2007. SEC officials aren’t convinced, though, that they can build a strong enforcement action around such claims. In his report, Mr. Valukas wrote that he didn’t find “sufficient evidence to support a colorable claim for breach of fiduciary duty in connection with any of Lehman’s valuations.”
It isn’t clear what the Lehman executives have said to SEC officials during the probe. Last year, Mr. Fuld told lawmakers he had “absolutely no recollection whatsoever of hearing anything” about Repo 105 at the time of the transactions. Lehman’s demise was caused by “uncontrollable market forces” and the U.S. government’s unwillingness to rescue the firm, he said.
Beyond the Crisis
Status of enforcement actions against some of the highest-profile names of the financial crisis
Executive and company
SEC
Justice Department
N.Y. Attorney General
Joseph Cassano, American International GroupDecided last year not to file charges Decided last year not to file chargesNo actionFabrice Tourre, Goldman Sachs GroupSecurities fraud charges filed in April 2010No actionNo actionRalph Cioffi and Matthew Tannin, Bear StearnsSecurities fraud charges filed in June 2008Acquitted in Nov. 2009 of criminal chargesNo actionAngelo Mozilo, Countrywide FinancialHe agreed in Oct. 2010 to pay $67.5 million to settle fraud and insider-trading chargesInvestigation closed without filing chargesNo actionKenneth Lewis and Joseph Price, Bank of AmericaNo action against individuals. Bank of America agreed to pay $150 million to settle fraud charges last yearNo actionCivil lawsuits alleging fraud filed Feb. 2010Gary Crittenden and Arthur Tildesley Jr., CitigroupThe two men agreed to pay fines totaling $180,000 to settle fraud charges last yearNo actionNo actionLee Farkas, Taylor, Bean Whitaker MortgageFraud charges filed in June 2010Arrested and charged with fraud in June 2010. Trial starts in April.No action
Write to Liz Rappaport at liz.rappaport@wsj.com
Quake, Tsunami Slam Japan
By CHESTER DAWSON in Sendai, Japan,
DAISUKE WAKABAYASHI
in Fukushima Prefecture and JURO OSAWA in Tokyo
WSJ’s Daisuke Wakabayashi reports from Northern Japan, where the extent of the devastation from a 8.9-magnitude earthquake and subsequent Tsunami became even clearer with the arrival of daylight Saturday morning.
Tens of thousands of Self-Defense Forces searched desperately for survivors in earthquake-ravaged northern Japan on Saturday as rescue and relief efforts went into full force, while more than 200,000 Japanese were ferried to relief shelters and millions of homes were left without power and water after the country’s most powerful quake ever struck on Friday.
Rescue efforts accelerated as police, fire department and defense forces deployed to severely affected areas. Low-flying government rescue helicopters, including Japanese Self Defense Force Blackhawks, hovered low over houses with roof tiles ripped asunder, looking for survivors. Further up the coast toward Sendai, entire roads and bridges were washed away. A few cars could be seen carefully navigating twisted and sand-strewn roads in an apparent attempt to flee, or survey the damage to their communities. No more than a handful of pedestrians could be seen for hundreds of miles up the coast.
An estimated 3,400 buildings have been partially or completely destroyed. In Sukagawa, a small town located in Fukushima Prefecture, about 200 people stood in line to receive water supplies through the night at an emergency distribution center, and water was rationed to a maximum of 10 liters per household.
“Power is cut in some parts of town, but what we need is water and food,” said Dai Iwaya, a 37-year old city project and fiscal planning officer. Homes are in various states of disrepair, with fallen roof shingles and concrete blocks strewn about.
Northeast Japan was a wasteland Saturday morning after the country’s earthquake triggered a 30-foot tsunami. The cascade of destruction killed hundreds, forced tens of thousands of people from their homes and raised fears of a radioactive release from damaged nuclear power reactors.
Sendai, a city of 1 million people, was among the hardest-hit areas of the nation. An aerial tour by helicopter Saturday morning near the local airport here showed a dead zone of small planes, helicopters and cars strewn half-submerged in green-brown water.
Along the coast north of the airport, oil-storage tanks burned brightly, sending a funnel of pitch-black smoke nearly a mile into the sky. Fires also burned in industrial parks ringing the area, nearly 24 hours after Friday’s 8.9-magnitude earthquake, one of the world’s five strongest over the past century, ground life across the country to a halt.
Japan’s northeast appeared to have been subject to the most severe damage, as powerful waves swallowed warehouses and fishing boats and swept across neighborhoods and rice paddies. Damage and disruption was aggravated by more than 100 powerful aftershocks in the hours after the first jolt.
As of 9 a.m. Saturday morning, Japan’s official toll stood at 236 dead, 725 missing and 1,028 injured. That number looked to rise as figures were coordinated across the country: Police said 200 to 300 bodies had been found in Sendai, the closest major city to the quake’s epicenter.
Strong Quake Strikes Japan
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Houses swept by a tsunami seen as residents walk in Kesen Numa, Miyagi prefecture on Saturday.
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Kyodo/Reuters
Worries mounted early Saturday over safety at two nuclear-power plants north of Tokyo, after power outages disabled the systems that cool fuel rods. Radiation levels in a control room of one reactor reached around 1,000 times the normal level early Saturday, Kyodo News reported the government’s nuclear agency as saying. Some 20,000 people had been evacuated from the area around that and another troubled plant by Saturday morning, Kyodo reported.
Japan Quake’s Effects
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See a map of post-earthquake events in Japan, Hawaii and the U.S. West Coast.
The impact of the quake’s first jolt, which hit at 2:46 p.m. on a clear Friday afternoon, was felt around the country, including in Tokyo. There, office buildings swayed. Trains, buses and phone service stopped. Millions of households lost power.
Japanese spent the rest of the day and night watching televised images of fires, collapsed buildings and deadly debris-filled waves, delivered by news anchors in hard hats. Powerful aftershocks emanating from off the eastern coast shook the country and its people.
The quake’s footprint spread at about 3 a.m. local time, as new seismic activity rippled through the center to the country’s western coast, raising the specter of a series of quakes extending throughout the country, which sits atop crisscrossing fault lines on the so-called Pacific Rim of Fire.
“I really thought I was going to die,” Yuhei Sakaibara, a reporter for the local Sendai newspaper, said in a telephone interview Friday night. “Dishes went flying in every direction and huge cracks ripped up the walls. When I got outside, I saw that several houses in the neighborhood had collapsed.”
In a town of about 12,500 residents in neighboring Fukushima prefecture—at the outskirts of the worst-damaged areas—roads were cracked. Goro Okawara, a 68-year-old farmer who said he was in the fields when the first quake hit, said he thought the temblor would last 30 seconds but “it just kept going and kept getting worse and worse.”
The traditional kawara tiles on Mr. Okawara’s roof “came flying off,” he said, crumbling and spraying red clay blocks in all directions. A glass door shattered. A crater appeared in his driveway. Nearby, he said, the crematorium where his family was planning a funeral for a relative Saturday had collapsed. At the local cemetery, many headstones were snapped in half.
Some 100,000 people had left Fukushima province by early Saturday, Kyodo reported.
The damage slammed a nation that has had its prolonged share of miseries. A long economic decline saw Japan recently slip behind China as the world’s second-largest economy. A series of scandals have not only discredited and paralyzed its political leadership, but also tarred institutions from elite universities to the ancient sumo sport.
Japan’s long-deadlocked parliament appeared initially to have set aside political bickering and rallied around calls for unity and new measures to keep the quake from further weakening the economy.
With damages estimates likely to mount quickly, news of the quake—which struck near the close of trading Friday on the Tokyo Stock Exchange—may pummel Japanese shares next week. Should the already debt-burdened government be forced to issues trillions of yen in reconstruction bonds, the move would affect the Japanese fixed-income market and weigh on Japan’s already-weakened credit rating from the world’s major rating agencies.
Yumiko Ono reports from Tokyo that more than 1000 people are dead or missing after a massive 8.9 magnitude earthquake and devastating tsunami struck Northern Japan Friday.
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Some economists have argued that a quake could actually lift the economy in the long run, by requiring a surge in rebuilding spending. But more immediately, the impact disrupted a spectrum of the nation’s industries, from auto and consumer-electronics makers to steel and beverage producers, forcing a number of them to shut factories.
Offers of sympathy were swift from around the world, with Japan’s foreign ministry saying it had received assistance offers from some 50 governments. These included China and Russia, which have recently had testy territorial disputes with Tokyo.
Chinese Premier Wen Jiabao expressed “deep sympathy and solicitude to the Japanese government and the people” and told Japanese Prime Minister Naoto Kan that China is willing to offer aid.
“Today’s events remind us of just how fragile life can be,” U.S. President Barack Obama said at a news conference. “Our hearts go out to our friends in Japan and across the region.”
Shaky Ground
View Interactive
Colliding plates under earth’s surface make Asia Pacific one of the most tectonically active region on earth.
Your Tsunami Photos
Were you there when the earthquake hit Japan, or were you among those evacuated along Pacific coasts? Email us your photos of the damage, at yourphotos@wsj.com.
Mr. Obama said he spoke Friday morning with Mr. Kan and offered assistance. He said the U.S. has an aircraft carrier in Japan now, with another is on the way. A third ship is en route to the Marianas Islands to assist as needed, he said.
Friday’s quake was the largest ever to hit the earthquake-prone country in terms of strength, but didn’t appear, at least in the early hours, to be as devastating as two great quakes of the 20th century. More than 100,000 people died or went missing in the 7.9-magnitude Great Kanto earthquake in 1923. The 1995 Kobe earthquake, which registered 7.3, killed more than 6,000 people in the region.
Disastrous Japan Earthquakes
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Associated Press
In September 1923, a 7.9-magnitude earthquake hit the Nihonbashi district of Tokyo.
See some of the most powerful earthquakes to have hit the island nation.
The World’s Biggest Earthquakes
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Associated Press
A photographer looked over wreckage as smoke rose in the background from burning oil storage tanks at Valdez, Alaska, March 29, 1964.
One reason for the lower death toll appeared to be a heightened readiness in Japan, raised particularly after the Kobe quake embarrassed the government and builders for weak preparedness.
The central bank quickly announced that it has set up a disaster-management team, headed by Bank of Japan Gov. Masaaki Shirakawa, and said it was standing ready to supply liquidity to ensure stability in financial markets. The government will likely first use roughly 200 billion yen ($2.41 billion) in emergency funding left in the budget for the current fiscal year ending this month, several Finance Ministry officials said.
Across Japan, ports, railways and airports shut down. Car-navigation systems indicated that almost every entry point in Tokyo to the nation’s highway system was closed.
In Tokyo, cellphone reception was down, causing long lines to snake around pay phones. Children walked home from school, some with protective head gear.
—James Mims
At 3:24 p.m., the first large aftershock could be felt by those standing in central Tokyo. Looking up at construction cranes shaking violently atop half-completed buildings, people gasped. As of early Saturday, at least 50 aftershocks had been recorded.
–Mariko Sanchanta, Kana Inagaki, Yoshio Takahashi and Mari Iwata contributed to this article.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com and Juro Osawa at juro.osawa@dowjones.com
Japan Officials Probe Nuclear Plant Collapse
By MARI IWATA And ANDREW MONAHAN
TOKYO—A building at a troubled Japanese nuclear power facility collapsed Saturday afternoon with smoke billowing out, and officials responded by expanding the evacuation perimeter and saying they were preparing to stockpile iodine supplies “just in case.”
Officials declined, however, to say whether the explosion had occurred specifically at the Fukushima Daiichi No. 1 nuclear reactor, or to confirm media reports that a sharp increase in radiation outside the site had been detected.
Earlier in the day, Tokyo Electric Power Co. had been taking emergency measures to avert a meltdown of a stricken nuclear power plant hit by Friday’s massive tsunami in northern Japan. Those steps appeared to be bringing down the dangerous pressures that had built up in the container, a Tepco spokesman said Saturday afternoon.
Previously, the utility had said there was a risk of a meltdown in the core after the quake cut off power to pumps providing cooling water. That, in turn, could lead to heating of the core, the risk of a meltdown, and the release of radiation.
The plant is located 150 miles, or 240 kilometers, away from Tokyo.
Nuclear Plants in the Zone
Three nuclear plants are close to the quake’s epicenter off the east coast of Honshu.
A portion of the reactor’s fuel rods, which create heat through a nuclear reaction, had become exposed due to the cooling-system failure. The spokesman for Tepco said 1.5 meters of the 4.5 meter long fuel rods were exposed. It was unclear Saturday afternoon whether the water added by workers had re-covered the rods.
Loss of cooling water resulted in a near meltdown of the Three Mile Island reactor in Pennsylvania in 1979, the worst nuclear incident in U.S. history.
If coolant isn’t restored, the result could be what’s known as a meltdown — extreme heat can melt through the reactor vessel and result in a radioactive release. Reactors have containment domes to catch any release. But there is always the chance that an earthquake could create cracks or other breaches in that containment system.
The Japanese government on Friday declared an emergency at the plant and ordered the evacuation of thousands of residents in the area. Officials steadily increased the evacuation perimeter and at about 6 a.m. local time, announced that anyone within 10 kilometers should leave the area—up from three kilometers a few hours earlier.
By Saturday morning, some 20,000 people had been evacuated from the areas around the two troubled nuclear power plants in the Fukushima prefecture, according to Kyodo News.
Shortly after that, the government nuclear agency confirmed the radiation level at the gate of the plant was eight times as high as normal after some mildly radioactive vapor was released by the plant in an effort to ease pressure. Fukushima Daiichi has six reactors, all built in the 1970s, and three were operating when the quake happened. The No. 1 unit, the oldest and smallest of the reactors, appears to be the main source of the problems.
Asked about the impact of radiation at eight times higher than normal levels, Naoto Sekimura, a professor of quantum engineering at Tokyo University, said on national broadcaster NHK, “This is a minuscule amount. This is not going to have negative impact on the human body.”
Inside the control room at Unit 1, the amount of radiation earlier Saturday reached around 1,000 times normal, the Nuclear and Industrial Safety Agency said, according to Kyodo.
Radiation levels aren’t supposed to rise in a control room, which is designed to allow operators to continue working during emergencies and is equipped with filtration systems and other design features to protect workers from radiation exposure. Nevertheless, experts said that a level that is 1,000 times normal probably isn’t immediately harmful.
Later on Saturday, Tokyo Electric said another nuclear-power plant nearby, Fukushima Daini, was experiencing rises of pressure inside its four reactors. A state of emergency was called and precautionary evacuations ordered. The government has ordered the utility to release “potentially radioactive vapor” from the reactors, but hasn’t confirmed any elevated radiation around the plant.
While officials were still scrambling to deal with the Fukushima reactor problem, at least two strong earthquakes hit near Japan’s—and one of the world’s—largest nuclear reactors early Saturday.
The strength of one of the two quakes on the other side of the Japan Sea coast measured 5 on the Japanese scale in Kashiwazaki City in Niigata prefecture, home to another large nuclear power plant. According to NHK, the national broadcaster, the quakes didn’t affect the operations of the plant where four reactors are in operation. In the past, Tokyo Electric’s seven-reactor Kashiwazaki-Kariwa plant has operated as much as 8,200-megawatts of generating capacity at the site, about 20% of the total energy supply of the company, which has 28 million customers in the Tokyo.
Meanwhile, the three reactors at Tohoku Electric Power Co.’s Onagawa plant in Miyagi, near the epicenter of the quake, also shut down automatically. A few hours later, the company said that it observed smoke coming from the building housing the No. 1 reactor at the plant. The company said it is still checking the safety of the reactor, but said there has been no leakage of radioactive substances reported. All nuclear plants have containment domes designed to capture any accidental release.
The International Atomic Energy Agency said it is ready to provide assistance if requested.
All other Japanese power companies operating nuclear-power plants said their facilities are operating normally.
Nuclear problems are particularly troubling in Japan, which has 56 nuclear reactors, providing about 20% of the nation’s electricity. Eleven reactors shut down as a result of the earthquake, as well as dozens of conventional fossil-fired or hydroelectric plants, leaving millions of people without electricity.
An earthquake measuring 8.9 on the Richter struck Tokyo Bay, Japan Friday killing and injuring hundreds. The quake touched off tsunami warnings as far away as Hawaii and the U.S. pacific coast.
To cope with a severe power shortage expected to result from reactor shutdowns, Tokyo Electric on Saturday asked industrial customers to close or reduce their operations to save electricity and ensure supplies to households, a spokesman said.
At Fukushima Daiichi, the three reactors that were operating when the earthquake struck shut down as they were designed to do, but pressure built up inside them due to malfunctioning of their cooling system.
When nuclear plants lose grid power, emergency on-site generation is supposed to furnish backup power. But some diesel generators at the Fukushima Daiichi plant reportedly failed a short time later. That forced the plant to resort to batteries to furnish electricity to critical instrumentation and controls for at least one of the reactors, experts said.
Reactors at the plant use a special cooling system, called the Reactor Core Isolation Cooling system, to take waste heat and run some critical systems. But experts said that even that system and batteries wouldn’t be able to furnish as much power as was needed, putting pressure on plant officials to quickly find additional sources of electricity.
Neil Wilmshurst, chief nuclear officer for the Electric Power Research Institute, a U.S.-based electric industry research organization, said Tokyo Electric has rigorous emergency procedures in place.
“The first thing you do is assure safe shutdown of reactors and continued cooling of the reactor cores and the spent-fuel pool,” he said. Next comes the process of assessing damage. He said seismic recorders at the site will be analyzed and the data will be compared against the level of shaking the plant is engineered to withstand. Employees examine every part of the plant searching for visible or hidden damage, a process that can take weeks or months.
Experts said that Tokyo Electric has improved its processes and communications since a July 2007 earthquake heavily damaged the Kashiwazaki-Kariwa plant. The entire plant was shut down for 21 months following that quake, and some reactors still aren’t back in operation.
Tokyo Electric was criticized after the 2007 quake for secrecy concerning how it was responding to problems at the Kashiwazaki plant and for rejecting inspection and assistance offers from the IAEA, which is intended to create confidence in the way an emergency is handled.
The Kashiwazaki plant suffered from seismic activity, in the 2007 quake, that exceeded the level for which it was designed, calling into question seismic assumptions made by regulators and the plant operator. There was a radioactive release when water sloshed out of spent-fuel-cooling pools and spilled into the Sea of Japan.
Experts said the global nuclear industry will try to learn from Japan’s experience this time as well.
“This is, no doubt, a significant event for Japan and the nuclear industry around the world” said EPRI’s Mr.Wilmshurst, especially since a new generation of nuclear plants is being built. He added it’s critical to determine whether plants performed as designed and what improvements should be made, such as to emergency power systems.
Tsunami fears spread to many nations with coastal nuclear reactors including Korea, China, Taiwan and the U.S. In Calfornia, PGE Corp’s Diablo Canyon nuclear plant went on alert.
Workers are bringing down dangerous pressures that had built up in the container for the Fukushima Daiichi No. 1 nuclear reactor, a spokesman for Tokyo Electric Power Co. said Saturday afternoon.
“The steps we have taken through relieving the pressure inside the container and adding additional water to cool the rods appear to be succeeding in averting any damage to the reactor core, which was our main priority,” said a Tepco spokesman.
Previously, the utility had said there was a risk of a meltdown in the core after the quake cut off power to pumps providing cooling water. That, in turn, could lead to heating of the core, the risk of a meltdown, and the release of radiation.
The company, known as Tepco, is the owner of the plant, which is located 150 miles, or 240 kilometers, away from Tokyo.
A portion of the reactor’s fuel rods, which create heat through a nuclear reaction, had become exposed due to the cooling-system failure. The spokesman for Tepco said 1.5 meters of the 4.5 meter long fuel rods were exposed. It was unclear Saturday afternoon whether the water added by workers had re-covered the rods.
Loss of cooling water resulted in a near meltdown of the Three Mile Island reactor in Pennsylvania in 1979, the worst nuclear incident in U.S. history.
If coolant isn’t restored, the result could be what’s known as a meltdown — extreme heat can melt through the reactor vessel and result in a radioactive release. Reactors have containment domes to catch any release. But there is always the chance that an earthquake could create cracks or other breaches in that containment system.
The Japanese government on Friday declared an emergency at the plant and ordered the evacuation of thousands of residents in the area. Officials steadily increased the evacuation perimeter and at about 6 a.m. local time, announced that anyone within 10 kilometers should leave the area—up from three kilometers a few hours earlier.
Zuma Press
An aerial-view of the Japanese nuclear power plant Fukushima Daiichi, Japan
By Saturday morning, some 20,000 people had been evacuated from the areas around the two troubled nuclear power plants in the Fukushima prefecture, according to Kyodo News.
Shortly after that, the government nuclear agency confirmed the radiation level at the gate of the plant was eight times as high as normal after some mildly radioactive vapor was released by the plant in an effort to ease pressure. Fukushima Daiichi has six reactors, all built in the 1970s, and three were operating when the quake happened. The No. 1 unit, the oldest and smallest of the reactors, appears to be the main source of the problems.
Asked about the impact of radiation at eight times higher than normal levels, Naoto Sekimura, a professor of quantum engineering at Tokyo University, said on national broadcaster NHK, “This is a minuscule amount. This is not going to have negative impact on the human body.”
Inside the control room at Unit 1, the amount of radiation earlier Saturday reached around 1,000 times normal, the Nuclear and Industrial Safety Agency said, according to Kyodo. Attempts to fix the problem at the plant—a buildup of heat and pressure inside the reactor—were going more slowly than planned, according to the government’s nuclear agency, quoted by the NHK broadcaster.
Radiation levels aren’t supposed to rise in a control room, which is designed to allow operators to continue working during emergencies and is equipped with filtration systems and other design features to protect workers from radiation exposure. Nevertheless, experts said that a level that is 1,000 times normal probably isn’t immediately harmful.
Later on Saturday, Tokyo Electric said another nuclear-power plant nearby, Fukushima Daini, was experiencing rises of pressure inside its four reactors. A state of emergency was called and precautionary evacuations ordered. The government has ordered the utility to release “potentially radioactive vapor” from the reactors, but hasn’t confirmed any elevated radiation around the plant.
While officials were still scrambling to deal with the Fukushima reactor problem, at least two strong earthquakes hit near Japan’s—and one of the world’s—largest nuclear reactors early Saturday.
The strength of one of the two quakes on the other side of the Japan Sea coast measured 5 on the Japanese scale in Kashiwazaki City in Niigata prefecture, home to another large nuclear power plant. According to NHK, the national broadcaster, the quakes didn’t affect the operations of the plant where four reactors are in operation. In the past, Tokyo Electric’s seven-reactor Kashiwazaki-Kariwa plant has operated as much as 8,200-megawatts of generating capacity at the site, about 20% of the total energy supply of the company, which has 28 million customers in the Tokyo.
An earthquake measuring 8.9 on the Richter struck Tokyo Bay, Japan Friday killing and injuring hundreds. The quake touched off tsunami warnings as far away as Hawaii and the U.S. pacific coast.
Asia Today: Japan Damage Mounts; Radioactive Fears
3:14
Japan’s strongest earthquake on record has killed hundreds and raised fears about radioactive leaks from damaged nuclear power reactors. WSJ’s Jake Lee and Mariko Sanchanta, deputy Tokyo bureau chief, discuss.
Asia Today: Massive Earthquake Strikes Japan
3:12
A devastating 8.9-magnitude earthquake has struck Northern Japan. What are the implications for a country already coping with slow economic growth and political instability? WSJ’s Jake Lee and Mariko Sanchanta, deputy Tokyo bureau chief, discuss.
Japan Quake’s Effects
View Interactive
See a map of post-earthquake events in Japan, Hawaii and the U.S. West Coast.
Shaky Ground: Regional Big Ones
View Interactive
Colliding plates under earth’s surface make Asia Pacific one of the most tectonically active region on earth.
Disastrous Quakes in Japan’s Past
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Associated Press
See a historical gallery of past earthquakes in Japan.
The World’s Biggest Quakes
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Associated Press
A photographer looked over wreckage as smoke rose in the background from burning oil storage tanks at Valdez, Alaska, March 29, 1964.
Meanwhile, the three reactors at Tohoku Electric Power Co.’s Onagawa plant in Miyagi, near the epicenter of the quake, also shut down automatically. A few hours later, the company said that it observed smoke coming from the building housing the No. 1 reactor at the plant. The company said it is still checking the safety of the reactor, but said there has been no leakage of radioactive substances reported. All nuclear plants have containment domes designed to capture any accidental release.
The International Atomic Energy Agency said it is ready to provide assistance if requested.
All other Japanese power companies operating nuclear-power plants said their facilities are operating normally.
Nuclear problems are particularly troubling in Japan, which has 56 nuclear reactors, providing about 20% of the nation’s electricity. Eleven reactors shut down as a result of the earthquake, as well as dozens of conventional fossil-fired or hydroelectric plants, leaving millions of people without electricity.
An earthquake measuring 8.9 on the Richter struck Tokyo Bay, Japan Friday killing and injuring hundreds. The quake touched off tsunami warnings as far away as Hawaii and the U.S. pacific coast.
Japan’s strongest earthquake on record has killed hundreds and raised fears about
To cope with a severe power shortage expected to result from reactor shutdowns, Tokyo Electric on Saturday asked industrial customers to close or reduce their operations to save electricity and ensure supplies to households, a spokesman said.
At Fukushima Daiichi, the three reactors that were operating when the earthquake struck shut down as they were designed to do, but pressure built up inside them due to malfunctioning of their cooling system.
When nuclear plants lose grid power, emergency on-site generation is supposed to furnish backup power. But some diesel generators at the Fukushima Daiichi plant reportedly failed a short time later. That forced the plant to resort to batteries to furnish electricity to critical instrumentation and controls for at least one of the reactors, experts said.
Reactors at the plant use a special cooling system, called the Reactor Core Isolation Cooling system, to take waste heat and run some critical systems. But experts said that even that system and batteries wouldn’t be able to furnish as much power as was needed, putting pressure on plant officials to quickly find additional sources of electricity.
A State Department spokeswoman said late Friday afternoon that, contrary to remarks made by Secretary of State Hillary Clinton earlier in the day, the U.S. Air Force didn’t provide assistance to the Japanese nuclear power plant stricken by the quake.
“I’m told that ultimately the Japanese Government handled the situation on its own,” said Julie Reside, a State Department spokeswoman.
Neil Wilmshurst, chief nuclear officer for the Electric Power Research Institute, a U.S.-based electric industry research organization, said Tokyo Electric has rigorous emergency procedures in place.
“The first thing you do is assure safe shutdown of reactors and continued cooling of the reactor cores and the spent-fuel pool,” he said. Next comes the process of assessing damage. He said seismic recorders at the site will be analyzed and the data will be compared against the level of shaking the plant is engineered to withstand. Employees examine every part of the plant searching for visible or hidden damage, a process that can take weeks or months.
Experts said that Tokyo Electric has improved its processes and communications since a July 2007 earthquake heavily damaged the Kashiwazaki-Kariwa plant. The entire plant was shut down for 21 months following that quake, and some reactors still aren’t back in operation.
Tokyo Electric was criticized after the 2007 quake for secrecy concerning how it was responding to problems at the Kashiwazaki plant and for rejecting inspection and assistance offers from the IAEA, which is intended to create confidence in the way an emergency is handled.
The Kashiwazaki plant suffered from seismic activity, in the 2007 quake, that exceeded the level for which it was designed, calling into question seismic assumptions made by regulators and the plant operator. There was a radioactive release when water sloshed out of spent-fuel-cooling pools and spilled into the Sea of Japan.
Experts said the global nuclear industry will try to learn from Japan’s experience this time as well.
“This is, no doubt, a significant event for Japan and the nuclear industry around the world” said EPRI’s Mr.Wilmshurst, especially since a new generation of nuclear plants is being built. He added it’s critical to determine whether plants performed as designed and what improvements should be made, such as to emergency power systems.
Tsunami fears spread to many nations with coastal nuclear reactors including Korea, China, Taiwan and the U.S. In Calfornia, PGE Corp’s Diablo Canyon nuclear plant went on alert.
–Yuka Hayashi and Rebecca Smith contributed to this article.
Judge Green-Lights Sale of Blockbuster
By JOSEPH CHECKLER and MIKE SPECTOR
NEW YORK —A judge Thursday cleared the way for movie-rental company Blockbuster Inc. to sell itself to a group of hedge funds, after lawyers spent all day in courthouse hallways brokering a deal with movie studios that had objected to the sale terms.
Bloomberg News
The ruling gives the movie studios a better deal and staves off immediate liquidation of Blockbuster’s assets.
Judge Burton R. Lifland of U.S. Bankruptcy Court in Manhattan approved procedures for the auction of Blockbuster, with a $290 million initial offer from a group of senior bondholders led by hedge fund Monarch Alternative Capital.
“The parties have come to an accord and presented us with a more palatable situation,” said Judge Lifland, who spent much of the day huddling with the various sides to improve on a sale that he earlier in the day called “totally unacceptable” and said “would not fly.” The judge agreed to hold the auction in his courtroom.
Several movie studios, who are owed money for DVDs they sold to Blockbuster, had objected to the sale, as the original terms of the deal didn’t offer them the recovery they wanted. One studio, Summit Entertainment, favored the conversion of the case to a Chapter 7 liquidation, as did the U.S. Trustee.
But on Thursday, Blockbuster’s lawyers and lawyers representing the movie studios worked out an arrangement that would steer payments to them from the proceeds of a sale in a way they found more palatable.
Tensions flared between lawyers negotiating the deal earlier in the afternoon in a hallway outside the courtroom.
“You want to blow up the case? Blow up the case!” said Robert Feinstein, a lawyer representing several movie studios, addressing other lawyers.
“The studios are blowing it up!” another lawyer shouted.
“Do it fairly!” Mr. Feinstein responded.
The Monarch-led group’s proposal could be topped by competing bidders in a bankruptcy court auction. “Hopefully, there will be an overbid so there will be [more] money available to pay these administrative claims,” said Stephen Karotkin of Weil, Gotshal Manges, a lawyer for Blockbuster.
“We’re obviously very happy with the ruling of the court,” said Dennis McGill, Blockbuster’s finance chief, just after the hearing concluded.
At least seven other suitors have expressed interest in Blockbuster, said Mr. Karotkin, reading testimony of one of the company’s bankers. Some of those possible bidders are different players teaming on potential offers. Some are interested in pieces of Blockbuster—its stores, vending business or digital operations. In those cases, Blockbuster hopes it can join those disparate interests in a single bid for the company.
Blockbuster will use proceeds from the sale to pay the studios for money owed, and the studios will continue shipping DVDs to Blockbuster stores.
A provision that would allow the Monarch group to convert the case to Chapter 7 has also been removed, said Mr. Feinstein of Pachulski, Stang, Ziehl Jones LLP, who outlined many of the changes.
“We certainly have a consensus among studios, unsecured creditors, with secured creditors and the stalking-horse purchaser,” Mr. Karotkin said, referring to the opening bidder.
Summit said it will withdraw its request to convert the case to a Chapter 7 liquidation now that the studio will receive better treatment. A lawyer for the U.S. Trustee still argued for a liquidation, although he said that didn’t mean the company would immediately be shut down. Judge Lifland overruled his objection.
Blockbuster bondholders—including the Monarch-led group and billionaire investor Carl Icahn—had said that the company should stay in Chapter 11 and run an auction to get the most money for creditors. The bondholders said half a dozen other suitors may bid on Blockbuster. Even most of the movie studios, while they originally objected to the Monarch-led deal, wanted the case to remain in Chapter 11.
Blockbuster Chief Restructuring Officer Jeffrey J. Stegenga, a managing director at restructuring firm Alvarez Marsal, testified that a sale of the company would be a better option than a Chapter 7 liquidation.
Throughout the day Thursday, Judge Lifland told both Blockbuster and its creditors to improve the deal, which last week he had called “one of the most aggressive documents that I have seen in my…31 years on the bench.”
He had also called the proposed plan a “garbage truck,” and had more strong words at the beginning of Thursday’s hearing, which was set to begin at 10 a.m. but started at around 3:45 p.m.
“The word should get out to tone it down, folks,” Judge Lifland said. “Everybody better play fair.”
Blockbuster filed for Chapter 11 protection in September 2010 with plans to reorganize, but lackluster holiday sales forced the company to put itself on the market. Between late September and January, Blockbuster posted a loss from continuing operations of $64.8 million.
The pro-liquidation camp had argued that the original Monarch plan ran afoul of bankruptcy law by steering sale proceeds to certain creditors and for other “critical” expenses, neglecting the studios that believe they have special repayment rights under post-bankruptcy filing agreements they made to continue shipping DVDs.
Write to Joseph Checkler at joseph.checkler@dowjones.com and Mike Spector at mike.spector@wsj.com
Trading Dispute Splits BNY Mellon, Fund
By CARRICK MOLLENKAMP
A large Los Angeles County pension fund has stopped funneling some currency trades to Bank of New York Mellon Corp., protesting the way the bank profits from the transactions.
The decision by the Los Angeles County Employees Retirement Association, detailed in correspondence reviewed by The Wall Street Journal under the California Public Records Act, is a rare example of a pension fund ceasing business with a custody bank. The dispute comes amid scrutiny by funds and investigators over currency-trade costs.
At the center of the clash is the role of custody banks, which act as custodians for investment firms’ securities, handling various back-office tasks for institutional investors. The Los Angeles County fund alleged in correspondence that BNY Mellon wasn’t permitted to profit from undisclosed foreign-exchange transactions.
The fight began last year when an official at the Los Angeles fund asked BNY Mellon for data to better understand how the banks profits on foreign exchange conducted on the fund’s behalf. In private letters and emails, the fund claimed that it expected BNY Mellon to be a “fiduciary” and provide real-time prices in handling currency transactions the fund uses to facilitate its investments in foreign securities. The correspondence, from October 2010 to February 2011, provides a window into concerns by pension funds into how custody banks profit from currency trades.
BNY Mellon denied the claim in the correspondence, noting that its contract with the fund says its role is that of a “principal,” which trades against the fund and its investment managers.
BNY Mellon, in a letter, said it “executed all foreign-exchange transactions with [the fund] … as a counter-party and acting as a principal, at the direction of [the fund] and its investment managers.” This essentially means that the bank doesn’t seek to generate profit for the pension fund; it seeks to generate profit for the bank.
The plan’s chief executive, Gregg Rademacher, declined to comment on the documents seen by the Journal and the decision to cease using BNY Mellon for certain foreign-exchange trades. In letters and emails, BNY Mellon said the fund and its investment managers “were solely responsible for choosing whether, how, and with whom, to execute foreign exchange.”
The bank also said in the correspondence that the fund always had known that the bank generated revenue from the currency trades.
BNY Mellon maintains it provides a valuable service and that “standing-instruction” clients are able to minimizes trade-execution costs and risk.
In a “standing-instruction” contract, clients allow banks to handle currency trades. Funds have the option to negotiate currency trades, which can produce a more-advantageous rate, but that requires staff and expertise in foreign exchange.
“We continue to enjoy very strong use of our FX services, including our standing-instruction program, among clients and their investment managers,” a BNY Mellon spokesman said.
“The pricing and terms of our ‘standing-instruction’ program are spelled out in various materials provided to clients and their money managers,” said the BNY Mellon spokesman. “They acknowledge and agree to those terms in writing. Our U.S. trading desks publish a guaranteed range of FX prices every morning. Clients and money managers can compare those guaranteed rates to other market rates, and they can easily switch to a different option or provider.”
Last October, the fund’s chief investment officer, Lisa Mazzocco, asked BNY Mellon in a letter for data to better understand how the bank profits on foreign exchange conducted on the fund’s behalf.
Ms. Mazzocco didn’t respond to requests for comment.
In a Nov. 19 letter, a BNY Mellon “relationship manager” told Ms. Mazzocco the bank traded with the fund as a “principal,” and that it didn’t apply a specific “markup” but instead derived prices from a currency’s daily range.
The matter heated up in January, when Ms. Mazzocco said BNY Mellon was obligated to provide real-time, or “best execution” pricing. She alleged in a letter that BNY Mellon was improperly marking up currency-exchange prices.
“As a fiduciary, the Bank has a duty not to make undisclosed profits at [the fund's] expense,” she wrote.
BNY Mellon executive Laurin Moorereplied on Jan. 12 that the bank wouldn’t comply with the request.
Ms. Moore later wrote that BNY Mellon “complied with all applicable provisions” of its contract with the fund. BNY Mellon said Ms. Moore wasn’t available to comment.
The fund on Jan. 21 ended its currency trading with the bank on “standing instructions” after more back and forth between the bank and the fund. BNY Mellon remains a custodian for the fund, a BNY Mellon spokesman said.
In a Jan. 25 letter, a BNY Mellon lawyer said the bank’s custody agreement with the fund includes account-management duties. In sweep accounts, funds are automatically managed between a cash account and separate investment accounts.
The lawyer wrote that currency trades never were included in those custody duties.
Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com
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