Former Credit Suisse Traders Plead Guilty to CDO Bonus-Scheme

February 01, 2012, 1:13 PM EST

By Patricia Hurtado

(Updates with Siddiqui’s allocution in 13th paragraph.)

Feb. 1 (Bloomberg) -- Former Credit Suisse Group AG traders David Higgs and Salmaan Siddiqui pleaded guilty to falsifying prices tied to collateralized debt obligations to meet targets and boost year-end bonuses.

Switzerland’s second-largest bank said in 2008 it would take writedowns on asset-backed securities after finding “mismarkings” by a group of traders. The bank said it would write down $2.65 billion after a review found pricing errors on residential mortgage-backed bonds and CDOs made “by a small number” of traders who were subsequently fired or suspended.

Higgs and Siddiqui said today in Manhattan federal court today they engaged in the scheme at the direction of their supervisor at the time, Kareem Serageldin. Serageldin, who the bank today said was fired along with the two defendants in 2008, was global chief of synthetic CDOs at Credit Suisse.

U.S. District Judge Alison Nathan asked Higgs why he committed the crime and whether there was a monetary benefit.

“Yes -- a year-end bonus, your honor,” Higgs responded.

The prosecution is one of only a handful brought over charges tied to the subprime-mortgage market. The government failed in its biggest prosecution tied to the 2008 financial collapse when ex-Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin were acquitted in 2009 in Brooklyn, New York federal court of charges they misled investors who lost $1.6 billion.

Pleaded Guilty

Higgs and Siddiqui pleaded guilty to one count each of conspiracy to falsify books and records and commit wire fraud. The count carries a maximum five-year term and three years supervised release. They are both cooperating with the probe.

Higgs, 42, said in his allocution that he worked as a managing director in the investment banking division at Credit Suisse bank in London in 2007 and 2008.

“Beginning in 2007, the real estate market began to deteriorate in the U.S. and the valuations of mortgage-backed securities faced significant reductions,” Higgs said. “As the mortgage delinquencies increased, the value of the securities backed by the mortgages decreased and the market became increasingly illiquid.”

Mark Down

Rather than mark the securities down to market “as we were required to do,” Higgs said, Serageldin allegedly directed him and other traders at Credit Suisse to manipulate and inflate the “cash bond positions markings of a trading book referred to as ‘ABN1’ in order to hide losses.”

Higgs said senior management at Credit Suisse was given the false impression that the ABN1 book was profitable and caused Zurich-based Credit Suisse to report false year-end numbers for 2007 in their books and records.

At his plea hearing, Siddiqui told U.S. District Judge Paul Crotty he mismarked the ABN1 book at the direction of superiors. His lawyer, Ira Sorkin, said Higgs was his client’s boss and that Serageldin allegedly directed the scheme.

Siddiqui, 36, said he attended Dartmouth College and was currently unemployed. He told the judge he was instructed to mark the ABN1 trading book in December 2007 “when my colleague whose job it was to do so was out of town.” The securities in the ABN1 book included asset-backed securities cash bonds, he said. During that time, he said, “I was directed by my boss and my boss’s boss at Credit Suisse to mark certain bonds on the ABN1 book according to a P&L directive not according to their mark to market value.”

‘A Minor Role’

“He played a minor role in the conspiracy,” Sorkin said of his client after the plea hearing. “As he said in his allocution, he was directed by his boss and his boss’s boss, two senior officials at Credit Suisse to mismark the book. He has been cooperating both with the Securities and Exchange Commission and the U.S. attorney.”

A person familiar with the case said yesterday that fewer than five people will be charged as part of the CDO scheme. The person declined to be identified because the investigation isn’t public. Credit Suisse won’t be prosecuted, the person said.

John Nester, an SEC spokesman, declined to comment yesterday on the case.

Higgs and Siddiqui were to be released on $500,000 bond each while they await sentencing. Higgs will live in the U.K. and Siddiqui, who lives in McLean, Virginia, was ordered to surrender his passport. Crotty said Siddiqui agreed to pay unspecified restitution.

Fired in 2008

Higgs, Siddiqui and Serageldin haven’t worked for Credit Suisse since their employment was terminated in 2008, said Steven Vames, a spokesman for the bank in New York.

Serageldin couldn’t be immediately reached for comment on the allegations. He hasn’t been charged with any wrongdoing.

In his State of the Union address to Congress last month, U.S. President Barack Obama said he would establish a financial crimes unit “to crack down on large-scale fraud and protect people’s investments.” Obama urged lawmakers to “make the penalties for fraud count.”

He also announced the creation of a unit to increase investigations into mortgage lending and securitization. The unit will probe bank conduct that created the housing bubble and bust, including the packaging of loans into securities, said New York Attorney General Eric Schneiderman, a co-chairman of the group.

Planning Probe

Last year, federal prosecutors said they were planning to step up probes of fraud involving CDOs and credit default swaps.

Christopher Garcia, chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office in Manhattan, told white-collar criminal-defense lawyers at a conference last March that his office would spend 2011 investigating possible fraud involving CDOs and CDSs.

“If there’s crime there, we’re going to find it and we’re going to pursue it,” Garcia said at an American Bar Association meeting in San Diego. Investigators won’t be deterred by the complexity of the financial instruments, he said.

CDOs are pools of assets such as mortgage bonds packaged into new securities. Interest payments on the underlying bonds or loans are used to pay investors.

Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Garcia said in an interview after his presentation that his office is “bringing in people with expertise in these areas.”

“It’s an enforcement priority,” he said.

U.S. prosecutors in Washington in 2010 decided not to bring charges against former American International Group Inc. executive Joseph Cassano after a probe into whether executives in the firm’s Financial Products Division misrepresented the value of a portfolio of “super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market.

The cases are U.S. v. Higgs, U.S. v. Siddiqui, U.S. District Court for the Southern District of New York (Manhattan).

--With assistance from Dakin Campbell in San Francisco, David Glovin and David Evans in New York, Joshua Gallu in Washington and Elena Logutenkova in Zurich. Editors: David E. Rovella, Patrick Oster

To contact the reporter on this story: Patricia Hurtado in New York federal court at pathurtado@bloomberg.net.

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

Freezing Siberian Winds Boost Europe Power Prices, Hit Crops

February 01, 2012, 1:03 PM EST

By Gregory Viscusi

(Updates French, German prices in fifth, 13th paragraphs.)

Feb. 1 (Bloomberg) -- Freezing weather across Europe sent wheat and electricity prices higher and disrupted some transport lines, with parts of the region preparing for their lowest temperatures in more than 60 years.

The cold snap has claimed 43 lives in Ukraine, 26 in Poland, 13 in Romania and five in Bulgaria. Temperatures fell to a 65-year low for the period in Bulgaria and the lowest in 60 years in some regions of Russia. France braced for temperatures on Feb. 3 to drop as many as 11.3 degrees Celsius below average for the time of year, while Hungary, is preparing for daytime temperatures as low as minus 15 this week.

“A wave of exceptional cold weather is on its way from Siberia, which will be at its peak this weekend,” Meteo.it, an Italian weather service, said on its website.

While the cold snap has hit eastern Europe harder so far, Siberian winds will also cover the western parts of the region this week, weather services said. The cold weather is caused by a high-pressure system across northern Russia that’s pushing Siberian air as far south and west as Morocco, MeteoFrance said on its website.

Electricity for tomorrow in Germany, Europe’s biggest market, jumped to its highest since Nov. 23, climbing 14 percent to 60.50 euros a megawatt-hour. Wheat climbed to the highest in more than four months amid concern that frost in parts of the Black Sea region may harm crops.

Colder Yet

Europe’s cold snap comes as the U.S. Northeast prepares for more seasonal weather. In recent days, temperatures have reached the high 50s across much of the region, including New York. The high in Central Park may be 59 degrees Fahrenheit (15 Celsius) today, according to the National Weather Service.

Temperatures will fall to as low as minus 25 degrees Celsius (minus 13 Fahrenheit) this week in one of Russia’s main wheat-growing regions of southern Rostov, the Federal Hydrometeorological Center said on its website. Wheat for March delivery rose as much as 1.4 percent to $6.75 a bushel on the Chicago Board of Trade, the highest price for a most-active contract since Sept. 21.

In Warsaw, temperatures were as low as minus 18 degrees Celsius today, and are set to fall to minus 21 degrees tomorrow, according to CustomWeather Inc. data on Bloomberg.

“An air flow from east of Poland and the Black Sea, associated with a powerful high pressure system over the north- west of Russia, is bringing colder and colder continental air,” MeteoFrance said.

Frozen Black Sea

The Black Sea has frozen as far as 100 meters into the sea and blizzards blocked roads and cut electricity to dozens of towns in Romania since Jan. 26. In the Ukraine, which is suffering the worst winter in six years, snow and wind disrupted electricity supply to 13 towns and villages in three regions.

Luka Koper d.d. halted shipping traffic into and out of Slovenia’s only port because of strong winds, Sebastjan Sik, the company spokesman said in a phone interview today.

The arrival of cold winds in western Europe comes after a mild start to winter. The average temperature in northern France ranged from 5 to 10 degrees Celsius in January, three to four degrees above normal. It will plunge to minus 10 this week. Trucks were banned starting last night on some highways in southern France because of icy roads.

Power prices for tomorrow in France, Europe’s second- largest market, rose as much as 29 percent to 73 euros a megawatt-hour, the highest since December 2010. French demand may rise to a record 97,000 megawatts on Feb. 3, the electricity network RTE said.

Disruptions

In Italy, the cold weather came with heavy snowfall after an unusually dry winter. The highway from Pisa inland to Florence was closed earlier today because of the snow, and trucks heavier than 7.5 tons have been banned in four central regions, Autostrade SpA said. Schools closed in Genoa and Pisa.

Last night’s Italian soccer championship match between Parma and Juventus was canceled because of snow, and at least two more matches scheduled for today have been scrapped.

In the Czech Republic, train traffic was disrupted in several areas as the frost damaged rails.

All flights out of Istanbul were canceled as airport workers struggled to clear the runways and ramps. Some of the city’s main roads were blocked. Heavy snowfall is expected across much of Turkey today, weather authorities said.

The Swedish Meteorological and Hydrological Institute today issued a warning for most of the eastern coastal region where thin ice may form in the Baltic Sea after an unusually mild December and January, it said on its website. February will start with temperatures under normal, SMHI said.

Gas Supplies

Polskie Gornictwo Naftowe i Gazownictwo SA, Poland’s dominant gas company, reduced supplies to three industrial customers, while pipeline operator Gaz-System SA will ask the government to release mandatory reserves of the fuel to stabilize the system as cold boosted demand.

The cold snap boosted Poland’s daily gas consumption to some 65 million cubic meters of gas per day, PGNiG said today. That’s 41 percent higher than average consumption in December, Polkowska said. Gaz-System expects the daily use of the fuel to rise to 70 million cubic meters.

Romania was forced to boost its natural-gas imports in the past week after consumption increased by 20 percent to a record and is expected to rise further in February, according to Deputy Economy Minister Claudiu Stafie.

OAO Gazprom, Russia’s natural-gas export monopoly, said it’s raising supplies to Europe from underground storage and pipelines.

Meeting Obligations

“The company has engaged all of its gas transportation routes and significantly boosted supplies from its underground storage facilities in Europe to meet export requests,” the Moscow-based gas supplier said today in a statement.

Gazprom said it is meeting contractual obligations to customers in Europe, which gets about 25 percent of its gas from Russia.

The Hungarian government called on public utility companies not to suspend services during the cold spell to people not paying their bills. Electricite de France’s local unit, EDF Demasz announced it won’t switch off electricity for non-paying households through Feb. 12.

-- With assistance from Phoebe Sedgman in Melbourne, Lars Paulsson and Elizabeth Konstantinova in London, Alexander Webb in Frankfurt, Edith Balazs in Budapest, Marek Strzelecki in Warsaw, Marco Bertacche and Dan Liefgreen in Milan, Ladka Bauerova in Prague, Sibel Akbay in Istanbul, Marina Sysoyeva in Moscow, Irina Savu in Bucharest, Boris Cerni in Ljubljana, Kim McLaughlin in Stockholm and Daryna Krasnolutska in Kiev. Editors: Vidya Root, Balazs Penz

To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net

CEO Heins Is Staying the Course

By Peter Burrows and Hugo Miller

Illustration by 731; Grave: Photograph by Alan Thornton/Getty Images

When tech giants fall, they rarely get up again. Onetime titans such as Digital Equipment, Compaq, Lucent, and Palm went cold and then were ignominiously acquired. Xerox and Nokia have limped along for years. Kodak just filed for bankruptcy protection. Only two tech companies have bucked the trend: Steve Jobs’s Apple and Lou Gerstner’s IBM.

The lessons of those exceptions are legendary. When Jobs returned to Apple in 1997, he winnowed its product line, replaced most of the board, and expanded into new markets such as music players. After arriving at IBM in 1993, Gerstner slashed more than 100,000 jobs, killed its uncompetitive OS/2 PC operating system, and began a massive shift from hardware to consulting.

The message was different when, under shareholder pressure, the board of BlackBerry maker Research In Motion finally replaced co-Chief Executive Officers Jim Balsillie and Mike Lazaridis with COO Thorsten Heins on Jan. 22. “I don’t think that there is some drastic change needed,” said Heins, a former Siemens executive, in his first conference call as RIM’s new boss. Staying the course, however, will be a challenge, and investors have already registered displeasure. After Heins’s comments, RIM’s stock fell more than 8 percent. RIM declined to make him available for this story.

The current plan is for RIM to continue investing in both hardware and software, scrapping its aging BlackBerry operating system for one called BlackBerry 10 based on software from a company acquired in 2010 and used to run nuclear plants. So far, the outlook isn’t encouraging. The PlayBook tablet, RIM’s first device based on an early version of the new operating system, has been a flop. And as RIM reboots in tablets, Apple’s iPad is dominating the first major new corporate hardware market in years. Veeva Systems co-founder Matt Wallach, who has sold pharmaceutical sales software for 14 years, says 95 percent of his customers are equipping employees with iPads, and the other 5 percent are considering it. “The iPad’s success in the enterprise means that RIM is dead, at least in pharma,” Wallach says.

To succeed against Apple, which reported more than twice as much in profits last quarter ($13.1 billion) as RIM did in revenue ($5.2 billion), the BB10 phones will need to do far more than match the quality of iPhones and Android devices. They’ll have to roll out some groundbreaking features—“and that’s a herculean task,” says Matt McCormick, an asset manager at Bahl & Gaynor in Cincinnati.

Of course, it’s possible that RIM could regain its position as a top choice for app makers, consumers, and corporate buyers. The Waterloo (Ont.)-based company still generates healthy cash flow and has 75 million subscribers worldwide. Its executives point to BlackBerry’s dominance in emerging markets such as South Africa and Mexico. The company plans to introduce a line of gadgets based on BB10 in the second half of this year, Lazaridis said last month. “We’re excited and confident in our future,” says spokeswoman Tenille Kennedy. “We’re willing to have shareholders judge Thorsten and RIM on its performance.”

Still, history shows that it would be difficult to stage a comeback. “Once you become a dinosaur, it’s hard to catch up,” says Richard J. Moroney, chief investment officer of asset management firm Horizon Investment Services. RIM’s stock price remains about 10 percent above its level at the end of 2011, a year in which the company lost three-quarters of its value. And its share of the smartphone market tumbled to 11 percent in the third quarter of 2011 from 21 percent two years earlier, according to Gartner.

RIM might fare better if it were allied with a larger company, but the list of potential suitors is short. Microsoft is busy building its own operating system and focusing on its partnership with Nokia. Samsung once seemed like a possibility: It has a thriving smartphone business but is reliant on Android software from Google, which bought a competing handset maker, Motorola Mobility. A Samsung spokesman said the company isn’t interested. With a market cap of about $8 billion, RIM is likely too pricey for private equity firms to swallow.

Apple Goes Corporate

By Peter Burrows

Apple Inc., without much effort on its part, is making rapid headway in selling to corporations.

After years of being the also-ran to Microsoft Corp. in the workplace, Apple has seen its iPad become a standard business tool. According to an IDG Connect survey, 51 percent of managers with iPads say they “always” use the device at work, and another 40 percent sometimes do. Seventy-nine percent of the respondents use the iPad for business when outside the office.

Even as Amazon.com Inc.’s Kindle Fire and other tablets play catch-up in the consumer market, the iPad faces little competition among corporations such as financial services and pharmaceutical firms. Apple’s iPhone, meanwhile, is the top-selling smartphone, forcing businesses to accommodate workers who use it. That has helped set the stage for Apple’s Mac computer to make its own inroads in the corporate world.

“We haven’t seen a single pharma deploy on anything but the iPad,” said Matt Wallach, co-founder of Veeva Systems Inc., a Pleasanton, California-based maker of sales software for drug companies. “I’ve seen a lot of devices come and go over the years. Nothing touches the speed of adoption of the iPad.”

Microsoft and Intel Corp. have dominated the office-technology market for three decades, accounting for almost all the personal computers on workers’ desks. The seeds for the “Wintel” hegemony were planted in 1981, when International Business Machines Corp. tapped the two companies to help create its first PC. That fueled an information-technology industry that now generates $3.8 trillion a year, according to research firm Gartner Inc.

Microsoft and Intel have struggled in their efforts to compete with the iPad, though that may change later this year when a tablet-friendly version of Windows debuts. Windows PCs also are under attack. While total PC shipments dropped 5.9 percent in the fourth quarter, the Mac grew almost 21 percent, according to Gartner.

The real threat to the corporate-technology industry is if Apple decides to pursue the market more aggressively, said Frank Gillett, an analyst at Cambridge, Massachusetts-based Forrester Research Inc. Apple can take advantage of its popular iTunes and App Store platforms to distribute software to companies in a user-friendly way, he said. That in turn would help promote the company’s hardware products.

Bill Evans, a spokesman for Cupertino, California-based Apple, declined to discuss the company’s corporate strategy.

Apple sold 3.8 million Mac computers to companies in the past fiscal year, according to data compiled by Bloomberg. That amounts to 3 percent of the market.

If Apple were to boost that to 18 million Macs a year, similar to the sales level of No. 3 PC maker Lenovo Group Ltd., it would bring in about $23 billion. Given workers’ desire to use Apple products, the company would probably be able to reach that point with far less investment than rivals such as Hewlett-Packard Co. or Dell Inc., said Anand Srinivasan, an analyst at Bloomberg Industries.

Because companies also pay for warranties and additional services, profit margins might be higher than for Apple’s consumer Mac business, he said.

“Apple has lots of room to grow in the commercial space,” Srinivasan said.

In any case, iPad sales to companies will accelerate this year, said Tom Mainelli, an analyst at Framingham, Massachusetts-based IDC, a sister firm to IDG Connect. Many large companies focused in 2011 on testing the device and running trials for ways to use the tablet, he said. Now, those pilot programs are turning into mass purchases by customers.

Mainelli expects iPad shipments into commercial markets, which includes education and health care, to rise to 52.6 million in 2013 from 38.3 million this year. The device was a common sight at last week’s World Economic Forum in Davos, Switzerland. Apple’s iPhone also has pushed into the business world, often supplanting Research In Motion Ltd.’s BlackBerry. The company shipped 37 million of the phones last quarter, making it the market leader in smartphones.

Amazon Shares Sink

Jan. 19 (Bloomberg) -- Bloomberg Businessweek Senior Editor David Rocks talks about the BBW50, a ranking of top-performing companies in the Standard & Poor's 500 Index. (Source: Bloomberg)

Italy's Balanced Budget `Engine' for Lowering Debt

Feb. 1 (Bloomberg) -- Italian Deputy Finance Minister Vittorio Grilli discusses the country's

Feb. 1 (Bloomberg) -- Italian Deputy Finance Minister Vittorio Grilli discusses the country's debt-reduction outlook and the importance of the European fiscal compact in boosting euro zone growth and competitiveness. He speaks with Bloomberg's Andrew Davis in Rome. (Source: Bloomberg)

Shah on Deutsche Boerse-NYSE Takeover Veto

Feb. 1 (Bloomberg) -- Sachin Shah, a special situations and merger arbitrage strategist at

Feb. 1 (Bloomberg) -- Sachin Shah, a special situations and merger arbitrage strategist at Tullett Prebon Plc, talks about a decision by European Union regulators to veto Deutsche Boerse AG and NYSE Euronext’s plan to create the world’s biggest exchange after concluding that the merger would hurt competition. Shah speaks with Dominic Chu on Bloomberg Television's "In Business with Margaret Brennan." (Source: Bloomberg)

Legg Mason's Robert Hagstrom on Amazon

Feb. 1 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Funds Management, talks

Feb. 1 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Funds Management, talks about the outlook for Amazon.com Inc. and its stock performance. Amazon, the world’s largest Internet retailer, fell the most in three months after sales missed estimates, signaling that its investments in media services, Kindle devices and shipping promotions have been slow to pay off. Hagstrom speaks with Betty Liu and Cris Valerio on Bloomberg Television's "In the Loop."

Jeffrey Sica on Facebook IPO, Share Outlook

Feb. 1 (Bloomberg) -- Jeffrey Sica, president of Sica Wealth Management, talks about Facebook

Feb. 1 (Bloomberg) -- Jeffrey Sica, president of Sica Wealth Management, talks about Facebook Inc.'s planned initial public offering and the outlook for the company's shares. Sica speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

London Mayor to Lure French Banks as New Tax Looms

Feb. 1 (Bloomberg) -- London Mayor Boris Johnson talks about French President Nicolas Sarkozy's

Feb. 1 (Bloomberg) -- London Mayor Boris Johnson talks about French President Nicolas Sarkozy's plans to unilaterally impose a tax on financial transactions, its potential impact on England's capital and executive bonuses. He speaks with Bloomberg Television's Linzie Janis in London. (Source: Bloomberg)

GreenCrest's Palit on Prospects of Facebook IPO

Feb. 1 (Bloomberg) -- Anupam Palit, senior equity analyst at GreenCrest Capital Management,

Feb. 1 (Bloomberg) -- Anupam Palit, senior equity analyst at GreenCrest Capital Management, talks about the prospects for Facebook Inc.'s initial public offering and the outlook for the company. Facebook, the world’s largest social-networking service, chose Morgan Stanley to take the lead on its planned IPO, four people with knowledge of the matter said. Palit speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Amazon Shares Tumble on Falling Profit

February 01, 2012, 11:35 AM EST

By Danielle Kucera

(Updates trading in second paragraph.)

Feb. 1 (Bloomberg) -- Amazon.com Inc. fell the most in three months after sales missed estimates, signaling that its investments in media services, Kindle devices and shipping promotions have been slow to pay off.

Amazon dropped 10 percent to $174.40 at 9:31 a.m. in New York after the Seattle-based company said yesterday that fourth- quarter revenue was $17.4 billion, trailing the $18.3 billion estimated by analysts in a Bloomberg survey. Earlier the shares tumbled 11 percent for the biggest intraday decline since Oct. 26.

Amazon, the world’s largest Internet retailer, got less revenue from digital media than anticipated, especially in the video-game market. The company also is relying more on third- party sellers, which can bolster profit but generate less revenue than direct sales. Amazon has conditioned investors to expect stronger growth, making the latest results disappointing, said Colin Gillis, an analyst at BGC Partners LP in New York.

“To miss on the top line, that’s what breaks the momentum,” said Gillis, who recommends selling Amazon stock.

Net income fell 57 percent to $177 million, or 38 cents a share, from $416 million, or 91 cents, a year earlier, the company said in a statement.

First-quarter operating income may range from a loss of $200 million to a gain of $100 million, the company said. Analysts were projecting a profit of $268.1 million. Sales will be $12 billion to $13.4 billion, Amazon said, compared with an estimate at the top of that range.

Hard to Explain

Chief Executive Officer Jeff Bezos is squeezing margins in search of growth, looking to add customers by pushing free shipping and offering its Kindle devices at cut-rate prices. While investors were expecting profit to take a hit, the sales slowdown is harder to accept, said Brian Nowak, an analyst at Nomura Securities International Inc. in New York. The reasons outlined by the company don’t seem to fully account for the sluggishness, said Nowak, who rates Amazon shares “neutral.”

Amazon’s third-party sellers use the company’s site to hawk their products and then provide a commission. Unit sales by outside retailers increased 65 percent during the holiday quarter and now make up 36 percent of units sold, Bezos said in the statement. Total sales rose 35 percent.

“Whenever there’s a mix-shift toward third party, it helps margins, but it reduces revenue,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco. He has an “outperform” rating on Amazon’s stock.

Earnings Top Estimates

The shift helped earnings top estimates last quarter, even with the sales shortfall. Analysts projected 16 cents a share. Still, the operating margin tightened to 1.5 percent in the period, from 3.7 percent a year earlier.

“Trying to predict during a seasonal Q4 is challenging,” Tom Szkutak, Amazon’s chief financial officer, said on a conference call. “That third-party increase is great for customers, great for sellers and helped our bottom line.”

Amazon’s Prime program, which offers unlimited two-day shipping for $79 a year, boosted expenses over the holiday shopping season, said Jason Helfstein, an analyst at New York- based Oppenheimer & Co.

“With shipping, if you look at that net loss number as a percentage of revenue, it keeps going up,” he said. “They’re trying their best to offset that in other ways.”

The money-losing Kindle Fire tablet also has raised expenses. At $199, the device is less than half the price of Apple Inc.’s cheapest iPad. The expectation is that consumers will spend the money they save on Amazon’s e-books and video content, Jordan Rohan, an analyst at Stifel Nicolaus & Co., said in a note this week. That eventually will more than make up for revenue lost selling the device, he said.

Video-Game Decline

For now, Amazon’s media sales aren’t growing as quickly as anticipated. U.S. media revenue climbed 8.1 percent last quarter, about half the 15 percent that Sebastian was predicting. The decline in video-game sales hurt the unit’s results, Szkutak said.

Investors had speculated that the company would get a bigger boost from a 15 percent gain in industrywide holiday e- commerce spending, which ComScore Inc. pegged at a record $37.2 billion.

Shareholders may now be wondering if the stock has become too expensive, Gillis said. It trades at 141.9 times earnings over the past 12 months, according to data compiled by Bloomberg. By comparison, Apple’s price-to-earnings ratio is 13.

“When you have revenue growth start to stall, then the valuation question marks start to rise,” he said.

--Editors: Nick Turner, Stephen West

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

Most Expensive U.S. Homes Sold in 2011

Overall, the U.S. housing market may have failed to dazzle in 2011, but this year did mark a new record in luxury real estate. In February, a 25,500-square-foot mansion in Los Altos Hills, Calif., sold for $100 million, the biggest known sale of a single-family home in the U.S. (many large transactions are not publicized). The seller, Fred Chan, who founded ESS Technology in Fremont, Calif., helped finance the deal by extending a $50 million loan to the buyer, Yuri Milner, the Russian-born founder of Digital Sky Technologies. This was also the year Candy Spelling sold her 14-bedroom mansion—on the market since 2008 for $150 million—at a discounted price of $85 million to Petra Ecclestone, the 22-year-old daughter of Formula One billionaire Bernie Ecclestone. “Prices have come down [over the past few years], so it’s an opportune time to buy,” says Philip A. White, president and chief operating officer of Sotheby’s International Realty.

To build a list of the most expensive homes sold in 2011, Businessweek.com asked Realogy (the parent company of such brands as Sotheby’s International Realty, Coldwell Banker, Corcoran, Better Homes & Gardens Real Estate, Century 21, and ERA), Christie’s International Real Estate (a network of high-end brokers), and Brown Harris Stevens for their biggest sales this year. We also collected sales data from real estate websites Trulia.com, Zillow.com, and StreetEasy.com, as well as from such real estate agents as David Kean at the John Aaroe Group in Beverly Hills, Calif., and Terry Baxendale at Shore & Country Properties near Greenwich, Conn.

Click here to see 26 luxury homes that sold for at least $27 million in 2011.

Note: These are the most expensive home sales as of Dec. 20, the last day Businessweek.com collected data. Sales of land, multifamily buildings, and commercial properties were not included.