Latham & Watkins LLP’s Zachary Fardon was nominated by President Obama to be U.S. Attorney for the Northern District of Illinois in Chicago. He would replace Patrick Fitzgerald, who left last June and joined Skadden Arps Slate Meagher & Flom LLP.

Before joining Latham in 2007, Fardon was a former assistant U.S. attorney in the Northern District of Illinois where he was part of the team that tried former Illinois Governor George Ryan on corruption charges. He also worked as a U.S. Attorney in the Middle District of Tennessee, where he supervised about 30 assistant U.S. attorneys in all federal criminal and civil matters, his firm bio said. He attended Vanderbilt University for his undergraduate education and for law school.

“Zachary Fardon will be an exceptional U.S. Attorney for the Northern District of Illinois,” U.S. Senator Dick Durbin said in a statement. He said he expects him to focus on daily gang and gun violence “plaguing the streets of Chicago.”

Fardon, who is Latham’s Chicago litigation chair, was picked from a group of four finalists sent to the president. They included Jonathan Bunge, a partner at Kirkland & Ellis LLP; Lori Lightfoot, a partner at Mayer Brown LLP; and Gil Soffer, a partner at Katten Muchin Rosenman LLP and the co-chairman of that firm’s white collar practice.

The screening committee included co-chairmen David Coar, a retired U.S. district judge and Kirkland & Ellis partner, and Mark Filip, a former U.S. deputy attorney general.

At Latham, Fardon’s practice focuses on internal investigations, government investigations, white collar defense, and complex business litigation.

Latham spokeswoman Colleen Strasser said Fardon wouldn’t make any public statements.

“Zach has outstanding experience as a public servant and as a litigator in private practice,” the firm said in a statement. “He is an exceptionally talented attorney who practices with the highest level of integrity and ethical standards.”

Fardon’s nomination will be voted on by the Senate Judiciary Committee. If his nomination is approved, it will be sent to the full Senate for consideration. Until a nominee is confirmed, Gary Shapiro will continue as Acting U.S. Attorney for the Northern District of Illinois.

Lawyer Castor Proves White House Bane as Investigative Pit Bull

No one in the White House looks forward to a call from Steve Castor.

The lawyer in charge of the Republicans’ numerous probes of the Obama administration — the Internal Revenue Service targeting of Tea Party groups, the handling of the attack on the U.S. diplomatic mission in Benghazi — is known for inundating officials with demands for answers and documents.

His boss, U.S. House of Representatives Oversight and Government Reform Committee Chairman Darrell Issa of California, frequently goes on television to accuse the administration of stonewalling.

Behind the scenes, Castor and his staff of 35 assemble details, line up witnesses for the committee to question, and write voluminous, minutely footnoted reports that boil down shades-of-gray situations into black-and-white narratives with heroes and villains.

“We’re in the storytelling business, the business of putting the pieces together,” Castor says.

Coaxing whistle-blowers to come forward is one of an investigator’s most important skills, says Castor, who’s been with the committee for eight years.

Issa’s hearings “lack credibility,” says Representative Henry Waxman, a California Democrat who once led the committee.

“The purpose of an oversight investigation is not to simply try and make the president look bad,” Waxman says.

Castor rejects the notion that he’s pushing an anti-Obama story line.

“We follow the facts,” he says. “This administration is uncomfortable with oversight.”

Castor, who became the committee’s general counsel this year, obtained his law degree from George Washington University in 2001, joining Philadelphia-based Blank Rome LLP that year. In 1998, the Pennsylvania State University graduate earned a master of business administration from Lehigh University in Bethlehem, Pennsylvania.

Deals

Six Firms Advise on Rue21 Agreement to Be Acquired by Apax

Kirkland & Ellis LLP, Potter Anderson & Corroon LLP and Ropes & Gray LLP advised Rue21 Inc. (RUE), the operator of more than 900 teen apparel shops, on its agreement to be bought by private-equity firm Apax Partners in a $1.1 billion deal. Simpson Thacher & Bartlett LLP and Richards Layton & Finger PA advised Apax.

Kirkland advised the special committee of the board of directors of Rue21. The Kirkland team includes corporate partners David Fox and David Feirstein, debt finance partner Ashley Gregory. Potter Anderson’s team was led by partner Michael B. Tumas. Ropes & Gray partners included Daniel Evans and Christopher Green.

Simpson Thacher corporate mergers and acquisitions partner Ryerson Symons is leading his firm’s team advising Apax. Additional Simpson Thacher partners on the team include Ken Wallach, capital markets; Gary Mandel, tax; Brian Robbins, executive compensation and employee benefits; and Lori Lesser, IP. Richards Layton didn’t immediately respond to an e-mail seeking partner names.

Weil Gotshal & Manges LLP New York mergers and acquisitions partners Michael Aiello and Jackie Cohen are representing Perella Weinberg, financial adviser to the Rue 21 special committee.

The purchase price of $42 a share will be paid in cash, the companies said yesterday in a statement. That represents a 23 percent premium to Rue21’s closing price in New York yesterday. The deal has been approved by Rue21’s board and the company has 40 days to find a superior offer.

Rue21 has been expanding, with plans to open its 1,000th store by January and eventually boost its presence to more than 1,700 locations. The chain, based in Warrendale, Pennsylvania, is projected to more than triple its free cash flow this year, according to data compiled by Bloomberg.

“That price is pretty fair,” said Amy Hu Sunderland, a Hong Kong-based analyst at Grandeur Peak Global Advisors LLC, which oversees $950 million and owns shares of Rue21. “They can get a lot of cash flow out of it. These guys are not levered at all, they should be able to get much higher return because they can lever it up.”

Apax is paying about 9.2 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That compares with the median of 8.4 in a survey of about 30 comparable deals, the data show.

Firm News

King & Wood Names Kench New Australian Managing Partner

King & Wood Mallesons appointed Sue Kench as managing partner in Australia, the firm said in a statement.

She replaces Tony O’Malley, who agreed to resign immediately, Bloomberg News reported May 20. He will retire as a partner at the end of 2013. O’Malley had been with the firm for 13 years. The firm didn’t give a reason for the management change.

Kench is a partner in the Sidney office and the managing partner for the firm’s real estate, construction and infrastructure sector and real estate, construction and environmental law practice. She has been with the firm for 20 years and was a member of the board that oversaw the firm’s combination with Chinese firm King & Wood. Australia’s Stephen Jaques combined last year with King & Wood to form Asia’s biggest law firm, which now has about 2,200 legal professionals.

“Sue has a firm grasp of the key challenges and opportunities facing our clients and the right combination of expertise, experience and energy to lead the business in what is an increasingly dynamic market,” Stephen Minns, Australian chairman of King & Wood Mallesons, said in a statement.

Moves

Privacy and Data Security Partner Joins McDermott in Boston

McDermott Will & Emery LLP said Julia B. Jacobson joined the firm’s Boston office as a partner in the global privacy and data protection affinity group. She was previously with Bingham McCutchen LLP.

Jacobson focuses her practice on the legal and regulatory issues surrounding data and privacy security, including online privacy policies and terms of use. She advises clients on advertising law, including consumer and trade promotions, digital and e-mail marketing and the promotion and sale of goods across mediums, the firm said. Her practice also includes software, trademark and merchandise licensing.

“Businesses in every sector are faced with privacy and data security concerns that continue to grow in complexity and scope,” Heather Egan Sussman, co-chairwoman of the firm’s global privacy and data protection affinity group said in a statement. “These issues carry particular weight for healthcare and financial services, industries that are highly regulated. Julia brings a wealth of knowledge and experience in these fields.”

McDermott’s global data privacy practice includes more than 50 attorneys worldwide who help clients manage that risk. The firm has more than 1,100 lawyers at offices in the U.S., Europe and Asia.

Drinker Biddle’s Employee Benefits Practice Gains a Partner

Frances P. LaFleur joined Drinker Biddle & Reath LLP as a partner in the firm’s employee benefits and executive compensation practice group in Chicago.

LaFleur has been an in-house counsel for 10 years, most recently as senior legal counsel for Schneider Electric. Immediately before that, she was senior counsel for Hillshire Brands and its predecessor firm, Sara Lee Corp. She was an associate at Drinker Biddle’s predecessor firm in Chicago, Gardner Carton & Douglas.

LaFleur will focus her practice on advising clients on retirement, executive compensation and health and welfare plan issues, as well as ERISA fiduciary governance matters, the firm said. She will also be a leader of the firm’s employee benefits practice for health systems and other tax exempt entities.

Drinker Biddle has 650 lawyers in offices in the U.S. and London.

Michael Duffy Rejoins Baker & McKenzie in Chicago

Michael Duffy rejoined Baker & McKenzie LLP’s dispute resolution practice as a partner in Chicago. He was previously a partner in the Chicago office of Kirkland & Ellis LLP.

Duffy has been involved in international arbitrations, represented auditing firms on large malpractice claims and securities class actions, manufacturers against claims brought by their dealers and franchisees, the firm said. Duffy, a fluent Spanish speaker, has represented Latin American and Spanish clients in U.S. courts and arbitration proceedings.

“Michael’s fluency in Spanish and deep experience advising Latin American and Spanish clients in litigation matters are great additions to our growing practice,” Richard Franklin, chairman of Baker & McKenzie’s North American litigation practice, said in a statement.

Baker & McKenzie’s dispute resolution practice has more than 700 lawyers globally and more than 125 attorneys in the U.S. The firm has more than 4,000 lawyers in 72 offices in 45 countries.

Terrence O’Donnell Joins Dickinson Wright’s Columbus Office

Dickinson Wright PLLC announced that Terrence O’Donnell has joined the firm’s Columbus, Ohio, office as a member. He was previously at Bricker & Eckler LLP.

O’Donnell focuses his practice on public policy advocacy at the statehouse and regulatory compliance. He also has election law experience.

Dickinson Wright has more than 350 lawyers at 12 offices in the U.S. and Toronto.

Video

Dewey’s Bankruptcy Lawyer: More Big Law Firms Will Fail

While failed law firms make for notoriously difficult bankruptcy cases, Dewey & LeBoeuf LLP’s time in bankruptcy court was quicker and easier than other notable law firms. Joe Samet, head of restructuring at Baker & McKenzie LLP, and Al Togut, founding partner at Togut, Segal & Segal LLP, talk with Bloomberg Law’s Lee Pacchia about why Dewey’s case went so smoothly compared with others, the prospects for other large law firm failures and how managing partners can keep their firms out of bankruptcy. Both Togut and Samet agree that creating a culture of transparency goes a long way to avoiding a law firm failure. “Except for a select group of people at the very top, the rest of the people at the firm have no idea, none, of what’s going on,” Togut says.

This is a Bloomberg podcast. To download, watch or listen to this report now, click here.

To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York, ateamon2@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

Google Inc. (GOOG) is facing a new antitrust probe by the U.S. Federal Trade Commission into whether the company is using its leadership in the online display-advertising market to illegally curb competition, people familiar with the matter said.

Staff at Google’s Googleplex headquarters in Mountain View, California. Photographer: Alex Garcia/Chicago Tribune/MCT via Getty Images

The fresh inquiry, which follows the FTC’s decision to close a review of Google’s search business in January without taking action, is in the preliminary stages and may not expand into a larger probe, said the people, who asked not to be named because the matter hasn’t been made public.

FTC investigators are examining whether Google is using its position in U.S. display ads — a $17.7 billion industry that includes the sale of banner ads on websites — to push companies to use more of its other services, a practice that can be illegal under antitrust laws, the people said. Google has been drawing regulatory scrutiny around the world as it bolsters its market share of digital advertising.

Canada’s Competition Bureau is preparing to start a formal inquiry into Google’s search practices, the company disclosed last week. The European Union is investigating Google for the way it operates the search business and also has opened a probe into its handset unit, Motorola Mobility, over the licensing of its patents to rival device makers. Antitrust agencies inArgentina and South Korea are also scrutinizing the company.

Google Inc. Chairman Eric Schmidt speaks during a new digital age event at the London School of Economics (LSE) in London on May 23, 2013. Photographer: Chris Ratcliffe/Bloomberg

Niki Fenwick, a spokeswoman for Google, and Peter Kaplan, a spokesman for the FTC declined to comment on the probe.

Google fell almost 1 percent after the news of the probe was released and closed at $882.79, down $6.63, in New York trading.

Earlier Probe

Google, avoiding a potentially costly legal battle with U.S. regulators, ended a 20-month probe in January of whether it unfairly skewed search results by pledging to change some business practices and settling allegations it misused patents to thwart competitors in smartphone technology.

The company said it would voluntarily remove restrictions on the use of its online search-advertising platform and offer companies the option of keeping their content out of Google’s search results.

The FTC’s resolution of its search-practices probe came as a blow to Google’s competitors including Microsoft Corp. (MSFT), Yelp Inc. (YELP) and Expedia Inc. (EXPE) An alliance of such e-commerce and Web-search companies pressed the agency to bring a lawsuit, claiming Google’s dominance of Internet search, combined with the company favoring its own services in answers to queries, violates antitrust laws.

Microsoft isn’t involved in the FTC’s review of the display advertising market, one of the people said.

Justice Department

The FTC secured clearance to move forward with the new investigation in the display-advertising market from the antitrust division of the Justice Department under a process that ensures the two agencies don’t investigate the same matters at the same time, one of the people said.

For the past two years, the antitrust division and the FTC have split investigations of theMountain View, California-based company, with the FTC conducting a broad probe of whether Google’s business practices hurt competition and the antitrust division reviewing itsacquisitions.

In the new probe, the FTC is exploring concerns about Google’s growing market share with some of its digital advertising tools and services, including technology that places display ads on websites, the people said.

Competing Products

The FTC is looking at whether Google is using its tools to force companies to bypass competing products and use other Google properties, including a marketplace for buying and selling Internet display ads, and features that help companies maximize revenue, the people said. The agency is also reviewing Google’s potential to use its dominance in search advertising to squeeze out competitors in the display advertising market, the people said.

Some of the advertising tools came from Google’s purchase of DoubleClick Inc., which received antitrust approval at the end of 2007. The FTC, which voted 4-1 to approve the merger, said competition among display-ad networks was “dynamic,” according to a statement at the time.

“We will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the commission intends to act quickly,” the FTC said in the statement.

Market Share

Google’s share of the display ad market reached 24 percent during the first quarter in the U.S. with its closest competitors, Yahoo! Inc. (YHOO) and Facebook Inc., each holding less than 10 percent market share, according to research firm IDC.

Facebook, the largest social-networking service, lost its lead to Google last year and is expected to expand its market share at a slower pace. Facebook will grab 16 percent in 2015, up from 15 percent last year and less than 3 percent in 2008, EMarketer, another research firm, estimates.

Google took 47 percent of total U.S. digital ad spending in the first quarter of this year, according to IDC.

“The market positions of Google and DoubleClick suggest that the combined firm could engage in a number of potential anticompetitive strategies to further enhance its positions in the various markets at issue,” the FTC wrote in its DoubleClick statement.

The practice of tying, or bundling, products and services together may be a violation of antitrust laws if the company in question has the market power to force customers to acquire products or services together that they might prefer to buy from different providers, said Spencer Waller, an antitrust law professor at Loyola University Chicago.

Microsoft Case

One of the most high-profile tying cases was the lawsuit the U.S. brought against Microsoft (MSFT) in 1998, when it claimed the company unlawfully protected its Windows monopoly by keeping computer makers from promoting Web browsers that competed with Microsoft’s Internet Explorer.

The government contended Microsoft hindered access to the Netscape Navigator browser because its Java programming language let programmers write applications that ran on any operating system, not just Windows. The final judgment, a settlement in which Microsoft agreed to end the anticompetitive conduct, put the company under court supervision until 2011.

“Specialty producers may be very good at what they do, but if they can’t get access to their customers, that’s a legitimate harm that antitrust has addressed historically and should continue to address,” Waller said.

To contact the reporters on this story: Brian Womack in San Francisco atbwomack1@bloomberg.net: Sara Forden in Washington at sforden@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

Intuitive Surgical Inc. (ISRG) convinced a Washington state jury that it wasn’t negligent in its training of a doctor who performed a robot-assisted surgery on a patient who later died.

Jurors in Port Orchard, Washington, reached their verdict yesterday by a 10-2 vote after a five-week trial. Intuitive owes no damages based on claims that the patient, Fred Taylor, and his family suffered due to the company’s inadequate training of the doctor who removed his prostate gland in 2008, according to the verdict.

The case was the first to go to trial of at least 26 lawsuits against Intuitive alleging injuries tied to its da Vinci robotic system, which was used in more than 300,000 U.S. operations last year.

Robots and related products generated most of Intuitive’s $2.2 billion in revenue in 2012. The robots, which are in more than 1,300 U.S. hospitals, cost $1.5 million each and were used in 367,000 U.S. procedures in 2012. Operations done using the robot include prostate cancer surgery, hysterectomy and gall bladder removals.

“A win is a clear net positive as it may eliminate some of the overhang associated with pending litigation,” Andrew S. Zamfotis, an analyst at evaDimensions in New York, said in an e-mail. “The market’s expectations for future profit are very low and perhaps partially due to legal risks but there have been ongoing concerns for a while with respect to margin sustainability.”

Stock Jump

Intuitive jumped as much as 5.5 percent after the close of trading yesterday on the Nasdaq Stock Market. Shares had closed at $478.46 in New York before the verdict was announced.

Richard Friedman, who represented the plaintiffs in the case, said there are “thousands of good cases out there” against Intuitive, and that “plaintiffs’ lawyers are going to win some of those.”

Evidence revealed at trial shows how Intuitive encourages sales representatives to “manipulate surgeons” by “insinuating themselves into the operating room” and “overcoming physicians’ resistance” to traditional surgery to convert them into robotic procedures, Friedman said.

‘Steer Clear’

Patients contemplating robotic surgery need to ask their surgeons: “How many operations have you done?” Friedman said. “If it’s not in the hundreds, steer clear.” Friedman said he hasn’t decided if he’ll appeal the verdict.

Friedman argued at trial that Intuitive’s most egregious negligence was its recommendation that surgeons are prepared to perform robotic procedures alone after just two supervised robotic surgeries following a one-day session at company headquarters in Sunnyvale, California.

That recommendation, which appears in company documents describing “best practices,” was the idea of Gene Nagel, who was an executive in charge of training and development and “a former wine salesman with no prior training” in medicine or medical devices, Friedman said in his closing arguments.

Morbidly Obese

Intuitive’s lawyer, Allen Ruby, told jurors that Taylor was morbidly obese, and that his urologist, Scott Bildsten, ignored specific instructions that for his first several procedures with the da Vinci, he should choose simple cases and patients with a low body-mass index.

Taylor was five-feet, 11-inches tall (180 centimeters), and weighed 280 pounds (127 kilograms), giving him a body mass index of 39 — a measurement that should have precluded robotic surgery, Ruby argued.

Taylor experienced multiple medical complications following the surgery and died last year. Friedman sought $8.45 million in damages based on claims that Intuitive streamlined and compromised its training in a push to sell its robots.

Bildsten settled claims against him by Taylor’s estate, according to court documents, which didn’t provide specifics.

Bildsten had performed 100 successful prostatectomies using traditional methods. Taylor was his first patient using the da Vinci unassisted. After seven hours of difficulty, Bildsten and other doctors turned to traditional surgery and then emergency care to repair a rectal laceration.

‘Highest Standards’

“We are pleased with the jury’s verdict,” Angela Wonson, a spokeswoman for Intuitive, said in an e-mail statement. “Intuitive Surgical’s technologies have extended the benefits of minimally invasive surgery to over 1.5 million patients around the world. We will continue our commitment to patients, surgeons and hospitals to uphold the highest standards of safety.”

In robotic surgery, a doctor sits at a console several feet from the patient and peers into a high-definition display. Foot pedals and hand controls maneuver mechanical arms equipped with surgical tools, guided by a 3D camera that shows the work as it is done inside a patient.

The case is Estate of Fred E. Taylor v. Intuitive Surgical Inc., 09-2-03136-5, Superior Court, State of Washington, Kitsap County (Port Orchard).

To contact the reporter on this story: Joel Rosenblatt in San Francisco atjrosenblatt@bloomberg.net Patricia Guthrie in state court in Port Orchard, Washington, atpaddysuewho@gmail.com

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

Target Corp. (TGT) and Macy’s Inc. (M) joined with 15 other retailers in suing Visa Inc. and MasterCard Inc. (MA) over credit-card and debit-card fees after dropping out of a multibillion-dollar settlement of a similar case.

The biggest U.S. payment card firms illegally restrained competition for interchange fees by setting default rates and imposing almost identical rules for accepting cards, the retailers said yesterday in a federal court complaint in New York.

In the previous antitrust suit pending in Brooklyn federal court, dozens of large retailers including Target and Macy’s opposed a $7.25 billion proposed settlement, alleging it gave Visa and MasterCard too much freedom to raise rates in the future.

“Plaintiffs have paid and continue to pay significantly higher costs to accept Visa-branded and MasterCard-branded credit and debit cards than they would if the banks issuing such cards competed for merchant acceptance,” lawyers for the retailers said in yesterday’s complaint.

Visa, based in Foster City, California, and MasterCard, based in Purchase, New York, are former joint ventures of major banks that now act as agents of financial institutions that retain some ownership of the card companies, the retailers alleged.

Plaintiff Companies

Besides Target and Macy’s, the retailers that sued yesterday are TJX Cos. Inc., Kohl’s Corp. (KSS), Staples Inc. (SPLS), J.C. Penney Co. Inc. (JCP), Office Depot Inc. (ODP), L Brands Inc., Office Max Inc. (OMX), Big Lots Stores Inc., Abercrombie & Fitch Co. (ANF), Ascena Retail Group Inc. (ASNA), Saks Inc. (SKS), Bon-Ton Stores Inc. (BONT), Chico’s FAS Inc. (CHS),Luxottica Group SPA (LUX) and American Signature Inc.

A separate group of retailers opposing the settlement, including Wal-Mart Stores Inc. (WMT)and Costco Wholesale Corp., (COST) announced May 21 they would opt out and might file their own lawsuits.

The settlement in Brooklyn, estimated to be the largest-ever U.S. antitrust accord, was intended to cover more than 7 million retailers nationwide. Several retail trade associations also opposed the accord and encouraged other merchants to do the same.

The settlement received tentative approval from U.S. District Judge John Gleeson in November. A hearing on final approval is set for Sept. 12.

A spokeswoman for the Electronic Payments Coalition, which represents Visa, MasterCard and banks and credit unions that issue payment cards, said “no one is surprised” by the retailers’ new lawsuit.

‘Old Arguments’

“They were saying they were going to do this for nearly a year now,” Trish Wexler, the spokeswoman, said in a phone interview. “I find it hard to understand why they think they could do any better with a new lawsuit using the same old arguments that they’ve already exhausted over the course of this litigation.”

The coalition is confident that the settlement will receive final approval, she said.

A MasterCard spokesman, James Issokson, said in an e-mail that the firm is also confident that Gleeson will sign off on the deal. Paul Cohen, a Visa spokesman, declined to comment immediately.

K. Craig Wildfang, a lead lawyer for plaintiffs in the settlement, said the new suit probably won’t have a significant impact on approval. The credit card companies and other defendants might ask to have the new suit transferred to Gleeson in Brooklyn, he said.

The new case is Target Corp. v. Visa Inc. (V), 1:13-cv-03477, U.S. District Court, Southern District of New York (Manhattan). The previous case is In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-md-01720, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporters on this story: Christie Smythe in New York atcsmythe1@bloomberg.net;

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

Four senior executives at Steven Cohen’s SAC Capital Advisors LP received subpoenas as part of the U.S. multiyear probe into insider trading at the hedge fund firm, a person with knowledge of the matter said.

Subpoenas were sent to Tom Conheeney, president of SAC; Steve Kessler, head of compliance; and Phillipp Villhauer, head trader, said the person, who asked not to be named because the information is private. A fourth executive, Chief Operating Officer Solomon Kumin, also received a subpoena, the person said later.

SAC Captial Advisors LP Chairman and Chief Executive Officer Steven Cohen was sent a subpoena last week to appear before a federal grand jury. Photographer: Scott Eells/Bloomberg

A spokesman for the Stamford, Connecticut-based firm declined to comment yesterday on the subpoenas. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, also declined to comment, as did Adrienne Senatore, a spokeswoman for the Federal Bureau of Investigation’s New York office.

Cohen, SAC’s billionaire founder, was sent a subpoena last week to appear before a federal grand jury, a person with knowledge of the matter said earlier this week. After Cohen was summoned, SAC Capital told clients in a May 17 letter that it was no longer cooperating unconditionally with the government and it would no longer be updating clients on the matter. The firm expects “substantially more clarity” in coming months, according to the letter, portions of which were provided to Bloomberg News.

The Wall Street Journal reported the executive subpoenas earlier yesterday. Conheeney joined SAC in 1999 and was made president in 2008, while Kessler started in 2005, according to fund documents.

$276 Million Benefit

Villhauer helped SAC make or avoid losses of $276 million on trades that led to the arrest of former portfolio manager Mathew Martoma for alleged insider trading, two people familiar with the matter said in November. Martoma has denied wrongdoing.

The U.S. has already linked at least nine current or former employees to allegations of insider trading while at SAC Capital.

The subpoenas appear to show the government is putting renewed pressure on Cohen and hasn’t given up on attempting to collect information about his trading from top executives at the fund, said Anthony Sabino, a law professor at the Tobin School of Business at St. John’s University in New York.

“This collection of SAC people subpoenaed, especially the head of compliance, would have to be brought in if the government is doing their job to know what happened on these trades,” Sabino said in a phone interview. “Cohen has got to be fretting as to who are his friends and enemies.”

Deal Discussion

Cohen has discussed with the U.S. an agreement under which SAC would admit wrongdoing without being prosecuted unless it broke the law again, said a person familiar with his thinking who asked not to be named because the talks were private. As part of the deal, known as a deferred prosecution agreement, Cohen would close his firm to outside investors and make it a family office that manages his personal fortune. SAC Capital probably would also pay a fine.

“The government is squeezing Steve Cohen, they’re cutting off all of his avenues of escape,” Sabino said of the new subpoenas. “It appears to be a big show of force to Cohen to tell him in no uncertain terms, ‘We’ve got you in a corner, we’re now dotting our Is and crossing our Ts, and if you want a deferred prosecution agreement, well we know more and this is our deal.’”

Martoma was indicted in December in what prosecutors called a record-setting insider-trading scheme that netted as much as $276 million in illicit profits for the hedge fund firm. No trial date has been set for Martoma, who has pleaded not guilty to the charges.

Government Witness

In March, Michael Steinberg, a fund manager who works at an SAC unit was indicted by Bharara’s office, accused of earning more than $1.4 million based on illicit tips provided by his former analyst, Jon Horvath. Horvath pleaded guilty to insider-trading charges and is cooperating with the U.S. He will testify for the government against Steinberg, prosecutors said.

Steinberg, 41, who has pleaded not guilty, worked at SAC’s Sigma Capital Management unit and is the most senior SAC official to be charged in the government’s probe of insider trading at the $15 billion firm.

On March 15, SAC agreed to pay a record $616 million to settle U.S. regulatory claims that two of its units, including one involving Martoma and the second involving Horvath, engaged in insider trading.

CR Intrinsic

SAC and its affiliates settled the Securities and Exchange Commission claims without admitting or denying wrongdoing. SAC’s CR Intrinsic Investors LLC unit agreed to pay almost $602 million and Sigma Capital agreed to forfeit about $14 million, the SEC said. They settled for a penalty about equal to the disgorgement amount.

Settlement of the civil allegations against the units doesn’t preclude the SEC from pursuing Cohen himself in the future, George Canellos, the agency’s acting enforcement director, said the day the accord was announced.

Four current or former SAC employees, including Horvath, have pleaded guilty to criminal insider-trading charges, including Noah Freeman, Donald Longueuil and Wesley Wang.

The Steinberg case is U.S. v. Steinberg, 12-00121, and the Martoma case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel atcbaumgaertel@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

On July 22, 1998, President Bill Clinton signed into law a reorganization of the Internal Revenue Service designed to “give the American people an IRS that reflects America’s values and respects America’s taxpayers.”

That didn’t work out so well.

From left, J. Russell George, left, Treasury Inspector General for Tax Administration, Douglas Shulman former IRS Commissioner, Lois Lerner, director of exempt organizations for the Internal Revenue Service, and Deputy Treasury Secretary Neal Wolin, are sworn in to a House Oversight and Government Reform Committee hearing on the investigation of the IRS’s targeting of political groups. Photographer: Tom Williams/CQ Roll Call/Getty Images

As the Obama administration confronts a political crisis that has reinforced the worst imaginings of anti-Washington Republicans — and many others — the IRS instead has become an emblem of government dysfunction.

“The service is an amazing bureaucracy,” says Bryan Camp, a former attorney in the IRS’s chief counsel office. “Amazing in that it’s able to get done what it gets done and amazing in its incredibly byzantine and archaic chain of command.”

Lawmakers of both parties and President Barack Obama this week assailed the IRS for singling out for special scrutiny applications for tax-exempt status from anti-tax Tea Party groups. Republicans, including Utah Senator Mike Lee, leveled a broader indictment, saying the agency’s actions demonstrated the inherent dangers of runaway government.

The agency at the center of Washington’s latest political storm hardly lacked for institutional safeguards. The 1998 restructuring — the first such changes in nearly half a century — created a nine-member IRS Oversight Board designed “to oversee the IRS in its administration, management, conduct, direction, and supervision” of the tax laws.

Multiple Overseers

By 2010, when the IRS began struggling to process applications from groups seeking tax-exempt status, the support apparatus had expanded to include an IRS Advisory Council, the office of the National Taxpayer Advocate, the inspector general and several subject-specific advisory committees, including one for tax-exempt entities.

Elsewhere, six congressional committees monitor the IRS while the Government Accountability Office issues reports on its activities and the Treasury Department oversees it.

Those safeguards proved toothless, poorly designed or both when the agency needed them most, according to leaders from both parties.

“The first line of defense is the board and that board’s been weak from the beginning,” said former Senator Bob Kerrey, a Nebraska Democrat, who was co-chairman of a 1997 commission on IRS restructuring. “You need that strong oversight board.”

Senator Rob Portman, an Ohio Republican who was Kerrey’s co-chairman, said in an interview that he is considering legislation to resurrect the panel’s recommendation for a strong board with the power to hire and fire the IRS commissioner.

Additional Safeguards

“We do need to have additional safeguards,” he said. “It’s different in kind than most other federal agencies and therefore it requires this special level of scrutiny.”

Existing protections didn’t catch officials in an IRS office in Cincinnati, who over an 18-month period employed “inappropriate criteria” in identifying and slowing the applications for tax-exempt status from some groups, according to the IRS inspector general.

The inspector general’s May 14 report said “ineffective management” at the IRS was to blame for chronic problems that emerged with the processing of applications for tax-exempt status. Dozens of applications from Republican-leaning and other groups — including some founded by Democrats — remained in limbo for more than three years, longer than the agency’s 121-day goal for a final ruling, according to the IG report.

Lois Lerner, the official at the center of the controversy, is being replaced on an acting basis, the IRS said yesterday. Two other officials have submitted resignations or retirements.

Management ‘Breakdown’

In May 22 House testimony, former IRS Commissioner Douglas Shulman acknowledged “a breakdown” in management and suggested an expanding work load was to blame.

During his almost five years at the helm, Shulman said the IRS “was called upon to tackle a number of challenges,” including administering $300 billion of the economic stimulus program, combating offshore tax evasion and modernizing its information technology systems. The agency is gearing up to enforce the 2010 health care law’s mandate that Americans obtain insurance or pay a fine.

As it affects every household and business in the nation, the IRS is a bureaucratic titan. In 2012, it harvested $2.5 trillion from U.S. taxpayers, processing 237,345,000 separate individual and corporate returns.

IRS Culture

This week’s congressional hearings have zeroed in on the agency’s internal workings. Senate Finance Committee Chairman Max Baucus accused the IRS of a “culture of indifference to the American people.”

The agency’s unwritten rules may be partly to blame. By design, the IRS must be independent of outside influence to administer the tax laws fairly.

Major scandals over IRS operations in 1951, when more than 160 agents were fired or resigned amid allegations of corruption and favoritism, and in the early 1970s, when President Richard Nixon ordered IRS audits of his political opponents, demonstrated the need for the tax agency to be kept at a distance from the partisanship that permeates Washington.

Independence may have curdled into insularity. Portman said senior IRS officials misled lawmakers who sent letters to the agency in 2012 asking if Republican-leaning groups were being targeted. Then-deputy commissioner Steven Miller, who has been forced out as acting commissioner in the controversy, replied in writing that no such targeting was taking place, claims Republicans this week said were misleading.

‘Flagrant Disregard’

Portman said the IRS attitude amounted to “a flagrant disregard by senior officials of a congressional inquiry.”

Two days before the scandal broke, Nina Olson, the national taxpayer advocate, said in written testimony to Congress that budget cuts were imperiling the ability of the IRS to do its job.

Across-the-board belt tightening, coupled with this year’s automatic budget cuts known as sequestration, have lopped about $1 billion or 8 percent off the IRS budget. Employees also must take five furlough days this year — including today — because of the cuts.

Employee training, which the inspector general recommended be expanded to prevent a recurrence of the current scandal, has been especially hard hit.

By the end of the current fiscal year, such spending will have been reduced by 83 percent compared to fiscal 2010. “I have never been more concerned than I am today about the IRS’s ability to fulfill its mission,” she told the Senate appropriations financial services subcommittee.

Application Flood

The IRS’s 90,280 workers are 4,500 fewer than fiscal 2010. Over that same time, the number of applications for tax-exempt status rose in both main categories: 501(c)3s climbed to 66,543 from 59,486 and 501(c)4s rose to 3,357 from 1,735.

Still, as complaints from conservative-leaning applicants mounted, IRS higher-ups ignored obvious signs of trouble. “Once the cases started to back up, it should have been a red flag to management,” said Charles Lacijan, who retired last year after 11 years as the oversight board’s staff director.

In 1997, the Kerrey-Portman commission capped a year-long inquiry with a series of recommendations, including creation of a powerful “board of directors” with “overall responsibility for executive branch governance of the IRS.”

Kerrey described the board in 1998 as one “that has substantial powers over the IRS to manage this agency and to work with Congress.”

Weak Board

By the time legislation emerged from Congress, the board’s powers had been circumscribed. Clinton administration officials were reluctant to surrender Treasury Department control of the agency, according to Chris Rizek, who was associate tax legislative counsel at Treasury between 1995 and 1998.

The part-time panel, whose members are compensated, focuses on tax administration issues and approves IRS budget requests and strategic plans.

“They’re at such a high level, like a board of directors but without the powers of a board of directors,” said Camp, now a law professor at Texas Tech University. “They’re primarily a cheerleader for the service on budget issues.”

The president nominates seven tax experts to the board along with the Treasury secretary and IRS commissioner. Two of the seven non-government posts now are vacant. Four others, including chairman Paul Cherecwich, a corporate tax attorney who was appointed by President George W. Bush and who retired from the law firm of Miller & Chevalier in 2004, are continuing to serve though their terms have expired.

Stalled Nominations

On July 1, 2010, President Obama nominated Timothy Scheve, CEO of Janney Montgomery Scott in Philadelphia, as a member of the oversight board. After the Senate failed to act on his nomination, Scheve withdrew his name on January 24, 2012. The post remains vacant.

A more powerful board with greater independence may have been able to intervene as the IRS stumbled over management of the tax-exempt applications.

“There’s no question in my mind it would have caught it before it got to this point,” Kerrey said in a telephone interview.

Instead, when the targeting became public, the Oversight Board released a May 16 statement saying only that it was “deeply troubled” by the news and blaming a “breakdown in the business processing system of the IRS.”

The board said “IRS leadership” never notified it of the change in filtering criteria.

Cherecwich sees the IRS’s travails as evidence of the difficulty of managing a mammoth bureaucracy, and the current board wasn’t equipped to do much to help.

“Whistle blowers don’t come to us,” says Cherecwich, adding: “I don’t know how you mandate perfect management.”

To contact the reporters on this story: David J. Lynch in Washington atdlynch27@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editors responsible for this story: Jodi Schneider atjschneider50@bloomberg.net; Jeanne Cummings at jcummings21@bloomberg.net

The Internal Revenue Service has replaced Lois Lerner, the official at the center of the controversy over the agency’s scrutiny of small-government groups seeking tax-exempt status.

Lerner was placed on paid administrative leave after she refused to resign, Senator Charles Grassley, an Iowa Republican, said in a statement. The IRS named an acting replacement to oversee tax-exempt groups.

Lois Lerner, the director of the Internal Revenue Service’s (IRS) exempt organizations office, listens during a House Oversight and Government Reform Committee hearing in Washington, D.C. on May 22, 2013. Photographer: Pete Marovich/Bloomberg

“The IRS owes it to taxpayers to resolve her situation quickly,” Grassley said. “She shouldn’t be in limbo indefinitely on the taxpayers’ dime.”

Lerner refused to answer questions May 22 at a hearing of the House Committee on Oversight and Government Reform. She invoked her constitutional right against self-incrimination after giving a short statement in which she denied wrongdoing.

Over the past two weeks, Lerner moved from semi-obscurity into the middle of a national scandal. She became the third person at the IRS to step aside or be pushed into leaving, joining former acting commissioner Steven Miller and Joseph Grant, who was one level above Lerner.

The IRS announced that Ken Corbin, a deputy director in another division of the tax agency that processes individual and business returns, will be acting director of exempt organizations.

Corbin, who has been at the IRS since 1986, is a “proven leader during challenging times,” acting IRS commissioner Danny Werfel wrote in a message to employees yesterday.

‘Strong Management’

“He has strong management experience inside the IRS handling a wide range of processing issues and compliance topics as well as taxpayer service areas,” Werfel wrote. “Combined with his track record of leading large work groups, these skills make him an ideal choice to help lead the Exempt Organizations area through this difficult period.”

Werfel became acting commissioner May 22, assigned by President Barack Obama and Treasury Secretary Jacob J. Lew to come up with a strategy for improving the agency within 30 days.

“In naming Ken Corbin as acting director to replace Lois Lerner, the administration has taken a strong step to address serious mistakes made by the IRS Exempt Organization Division,” Representative Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee, said in a statement. “This and further corrective action are vital in restoring the confidence of the American people.”

Lerner’s Apology

At a tax conference on May 10, Lerner disclosed — in response to a question she planted — that the IRS had singled out for extra scrutiny groups with “Tea Party” and “patriot” in their names when applying for tax-exempt status. Lerner, a former Federal Election Commission official, apologized on behalf of the IRS.

According to an inspector general’s report released May 14, Lerner discovered what her employees were doing in June 2011 and ordered them to stop and use more neutral criteria. Employees then started using different though still problematic criteria, according to the report.

The report cited ineffective management and poor guidance as among the main reasons why the partisan criteria were used and why delays in processing occurred.

Lawmakers have heaped scorn on Lerner over the past two weeks, calling for her to resign and accusing her of misleading or lying to them in staff briefings over the past year. It’s a federal crime to make false statements to Congress.

Public Trust

“Ms. Lerner’s continued tenure in the office she holds, where she is responsible for overseeing 1.6 million tax-exempt organizations, would erode public trust and confidence in the IRS and its professional integrity,” Senators John McCain and Carl Levin wrote to Werfel just before Lerner’s replacement became public.

“We believe that the immediate removal of Ms. Lerner from office would be a vital step in helping to restore public trust in the agency,” wrote McCain, an Arizona Republican, and Levin, a Michigan Democrat.

Lerner’s former boss, then-Commissioner Douglas Shulman, questioned during his testimony this week why mid-level managers who knew of the problem didn’t run it up the chain of command.

As a federal civil servant, Lerner can’t be summarily fired.

The IRS will be closed today, the first of five days when employees will have unpaid furloughs because of government-wide spending cuts. The tax agency will reopen May 28 after the Memorial Day holiday.

Called Back

Lerner may be called back to testify at the oversight committee. Chairman Darrell Issa, a California Republican, said she may have waived her constitutional rights by making an opening statement.

“I am very proud of the work that I have done in government,” she said May 22. “I have not done anything wrong. I have not broken any laws.”

National Review Online, which first reported her move, quoted an e-mail Lerner sent yesterday to some of the 900 people who work for her in which she said she was going on administrative leave.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

Ally Financial Inc. (ALLY) agreed to pay $2.1 billion to avoid lawsuits by unsecured creditors of the auto-lender’s bankrupt mortgage unit, Residential Capital LLC, according to a court filing today.

Creditors who have agreed to settle include noteholder Paulson & Co., MBIA Insurance Corp. and a group of securitization trusts suing for losses related to bad mortgages written by ResCap.

The settlement doesn’t resolve claims against Detroit-based Ally that are not related to ResCap’s bankruptcy, including those brought by the Federal Housing Finance Agency and the Federal Deposit Insurance Corp., as receiver for certain failed banks.

ResCap, based in New York, filed for bankruptcy last year, partly to help it resolve lawsuits brought by purchasers of mortgage bonds backed by home loans. The investors claimed the bonds lost value because many of the loans were bad. Such losses account for much of the $25 billion in unsecured debt that the creditors committee claims ResCap owes.

The case is In re Residential Capital LLC, 12-bk-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Steven Church in Wilmington, Delaware atschurch3@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

“There’s been some legitimate criticisms about how we’re handling this” White House press secretary Jay Carney said yesterday. “We take the path we’ve taken and accept that it’s got some potholes in it. ” Photographer: Official White House Photo by Pete Souza

The almost daily disclosures by the White House about who knew about an IRS investigation before it became public has helped stoke the furor over the agency’s scrutiny of tax-exempt groups and given the president’s harshest critics an opening.

Over the past week, President Barack Obama’s aides have been amending and revising and offering sometimes conflicting accounts of how the administration learned that an audit found Internal Revenue Service employees improperly selecting “Tea Party” or other small-government groups for extra scrutiny.

Republicans such as House Ways and Means Committee Chairman Dave Camp have seized on the changing stories, accusing Obama of fostering “a culture of cover-ups” that also includes the administration’s reaction to the attack on a U.S. diplomatic outpost in Libya and the Justice Department’s secret subpoenas of reporters’ telephone records.

“They handled this miserably,” said Ari Fleischer, who was White House press secretary during President George W. Bush’s first term.

The man currently in the job, Jay Carney, suggested he wouldn’t dispute that analysis.

“There’s been some legitimate criticisms about how we’re handling this” Carney said yesterday. “We take the path we’ve taken and accept that it’s got some potholes in it.”

The series of revelations and congressional investigations are hitting as Obama is trying to get traction for his second-term domestic agenda, get an agreement on raising the federal debt limit and deal with the bloody civil war in Syria as well as confrontations with Iran and North Korea.

Dragged Out

So far, no evidence has emerged that Obama or anyone in the White House was involved in initiating IRS scrutiny of the groups seeking tax-exempt status or withholding disclosure of the inspector general’s investigation. Still, the administration has dragged out its account of how and when it learned of the findings.

Since Carney first disclosed, on a flight to New York on May 13, that the office of White House Counsel Kathryn Ruemmler was informed last month that the IG was finishing a report, the administration has made four revisions to the information.

Carney initially suggested Ruemmler was given general information regarding “a review about matters involving” the IRS office in Cincinnati, and that was reinforced by White House senior adviser Dan Pfeiffer in interviews May 19 on Sunday morning news interview programs.

The next day, Carney was forced to correct the record. “We knew of the subject of the investigation, and we knew the nature of some of the potential findings,” he said on May 20.

Corrected Date

He also corrected the date that counsel’s staff was first made aware of the pending report from the week of April 22 to a specific day, April 16, and revealed that Ruemmler was briefed on April 24 about IRS employees “improperly scrutinizing” the organizations. She then told White House Chief of Staff Denis McDonough as well as “other members of the senior staff.”

In a fourth revision, administration officials said this week that the Treasury department communicated with the White House about the IRS’s plans to disclose the IG’s investigation.

Carney yesterday acknowledged having to correct the record and blamed the tension between between the demands for immediate answers and the need to be accurate.

“Quickly and comprehensively are not objectives that always meet,” he said. “If it turns out that the information, new information we have requires a correction, we do that.”

Veterans of previous administrations had some sympathy for Carney’s predicament.

Assembling Information

“It’s sometimes very hard to assemble the information you need to have in one place so that you have coherent and comprehensive account of what happened,” said Mike McCurry, who served White House press secretary when President Bill Clinton was in the middle of impeachment proceedings. “They are struggling with that right now, but they’ll get to the right place.”

Fleischer said the White House “went off the rails” because Carney was put in an untenable position of having to questions without all the information.

“He gave an overly broad, sweeping statement that he later then had to back off of, which then has been contradicted by the steady drip, drip, drip — here’s who else was informed,” Fleischer said.

“It is impossible for the press secretary to interview each and every person at the White House about each and every contact” with the IRS or the Treasury Department, he said.

When that happens, the president should direct his staff to assemble a full summary of who knew what, when. “The press secretary can’t do it.”

To contact the reporters on this story: Hans Nichols in Washington athnichols2@bloomberg.net; Roger Runningen in Washington at rrunningen@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

A Florida man was shot dead in a confrontation with law-enforcement officers who were questioning him about a triple murder two years ago that has been linked to a Boston Marathon bombing suspect, according to two officials familiar with the matter.

One of the alleged bombers, Tamerlan Tsarnaev, is also being investigated in the murders, authorities have said. A 26-year-old ethnic Chechen, Tsarnaev died in a firefight with police in Watertown, Massachusetts, last month.

Investigators were interviewing Ibragim Todashev, 27, early yesterday in Orlando about the bombing when the subject turned to the Sept. 11, 2011, murders of three men in the Boston suburb of Waltham, according to the law-enforcement officials who asked not to be identified because the probe is continuing. At that point, Todashev became irritated and lunged at the officers, the officials said. Todashev was considered a suspect, they said.

Paul Bresson, a Federal Bureau of Investigation spokesman in Washington, said the fight was initiated by the man who died. An FBI agent, “acting on the imminent threat posed by the individual, responded with deadly force,” Bresson said. The agent was injured, he said.

Todashev knew Tsarnaev, according to the dead man’s friends and a law-enforcement official who asked not to be identified amid a continuing investigation. Tsarnaev is suspected of planting the bombs that killed three people and injured more than 260 near the marathon finish line April 15, acting with his brother, Dzhokhar, 19. The younger Tsarnaev is in custody.

Bombing Probe

FBI agents sought to talk with Todashev in connection with the bombing, said a person familiar with the matter who asked not to be identified because of the continuing investigation. The person didn’t say how the meeting turned to a confession about the Waltham murders. Todashev wasn’t named as a bombing suspect, while he hasn’t been ruled out, the person said.

Dzhokhar Tsarnaev has been charged with using and conspiring to use a weapon of mass destruction. The suspect, who is recovering from wounds received while fleeing arrest, may face the death penalty if convicted. The bombing was the highest-profile act of terrorism in the U.S. since the Sept. 11, 2001, attacks in New York and outside Washington.

One of the victims in the Waltham murders was Brendan Mess, 25, a sparring partner of Tamerlan Tsarnaev at Wai Kru Mixed Martial Arts in Boston. Mess, along with Erik Weissman, 31, and Raphael Teken, 37, were found in an apartment with their throats cut and sprinkled with marijuana.

Aborted Theft

NBC News, citing law-enforcement sources it didn’t identify, reported that the murders began with a drug ripoff that ended in the killings after Tamerlan Tsarnaev and Todashev realized the victims would be able to identify them.

Zubeidat Tsarnaeva, the bombing suspect’s mother, said by telephone from Makhachkala,Russia – near the Chechnya region – - that she recalled her older son talking about Todashev.

“He said he met this small boy whom he liked,” Tsarnaeva said. “He said he was also a sportsman. I told him, ‘This good; now you have someone to do sports together.’”

She said Todashev was, like her family, an ethnic Chechen. “We Chechens living abroad always try to stick together.”

Tamerlan Tsarnaev spoke with Todashev about a month before the Boston bombings, said Khusen Taramov, a friend of Todashev, in an interview aired by WESH-TV in Orlando. The dead bombing suspect lived in Cambridge, Massachusetts, and was a boxer.

MMA Fighter

Todashev also participated in Mixed Martial Arts, a contact sport similar to boxing. It isn’t clear where he trained when he lived in the Boston area. A man who answered the telephone yesterday at the Wai Kru gym, where Tamerlan Tsarnaev worked out, declined to comment.

It is unclear when, or why, Todashev moved to Florida. He trained for about two months more than a year ago at the Jungle MMA & Fitness in Orlando, said John Morehouse, the gym’s manager.

“He was pretty forgettable,” said Morehouse, 24. “He came in for some evening classes.”

Todashev wasn’t employed in Florida and had recently received a green card to work in the U.S. He was planning a trip to Chechnya to see family, Taramov said.

“I know everything about this guy,” the friend said. “He never had a gun. I know he didn’t do nothing.”

Todashev won a professional fight in July by using the “submission guillotine choke,” according to a record on the Mixed Martial Arts website, which said he was fighting out of Massachusetts.

Bombing ‘Shock’

Taramov said the Boston bombing came as “a complete shock” to Todashev.

He said he talked to his friend just before the FBI interviewed him May 21 and recalled Todashev was worried that he’d be taken into custody.

“He said, ‘Can you take my mother and father’s number? Just take the numbers in case something happens and I get locked up,’” Taramov said.

Yellow police tape hung around a group of three adjoining condominiums yesterday, including one where Todashev lived, in the Windhover neighborhood across the street from Universal Studios Orlando. Dozens of brown and green apartments and townhouses surround a duck pond and footbridges.

Todashev was quiet and often smoked cigarettes on his back porch and swam in the community pool, said Renee Jansky, 37, a neighbor.

Night Owl

“He was a late-night guy,” said Jansky, a bartender whose porch is about 25 feet from Todashev’s apartment. “He’d stick to himself.”

She said she’d see him outside in his pajamas when she got home from work. She said a boxing bag hung from the ceiling of the first floor of his unit.

Todashev was arrested in Orlando on May 4 after a dispute over a parking spot at an outlet mall, according to papers filed with the Orange County Corrections Department. The county includes Orlando.

A police officer wrote in a report that there was a “considerable amount of blood on the ground” where the altercation occurred and that a victim was unconscious.

Todashev told police he “was only fighting to protect his knee, because he had surgery,” according to court papers.

Todashev was charged with aggravated battery and released on a $3,500 bond.

He also had been arrested in Massachusetts, according to the Boston Herald, which reported he was apprehended in Boston in February 2010 after a car accident and a fight with another person involved in the crash.

To contact the reporters on this story: Phil Mattingly in Washington atpmattingly@bloomberg.net; Annie Linskey in Boston at alinskey@bloomberg.net; Michael C. Bender in Orlando at mbender10@bloomberg.net

To contact the editors responsible for this story: Steven Komarow atskomarow1@bloomberg.net; Stephen Merelman at smerelman@bloomberg.net