Samsung Forecasts Greater Earnings Decline Than Expected for the End of 2013

TOKYO — Samsung Electronics, the world’s biggest maker of smartphones, said Tuesday that its earnings in the last quarter of 2013 fell from the previous three-month period as well as from the same period a year ago, heightening investors’ concerns about competitive pressures in the industry.

As usual, the company, based in South Korea, released only a bare-bones forecast of its quarterly earnings, in advance of a full report later in the month, and provided no reasons for the expected decline in operating income. Analysts have said the company faced tighter profit margins on smartphones, along with higher employee bonus costs, during the quarter.

While the drop was expected, the earnings forecast was below analysts’ estimates. The company predicted operating income of about 8.3 trillion won ($7.8 billion) for the final three months of the year, down from 10.2 trillion won in the third quarter. In the fourth quarter of 2012, the company had  8.84 trillion won in operating income.

Revenue is expected to total about 59 trillion won, roughly even with the third quarter.

While Samsung controls more than one-third of the global smartphone market, it faces renewed competition from Apple, which recently added leading network operators like China Mobile and NTT DoCoMo of Japan to its roster of iPhone vendors.

Samsung also faces increased competition from low-cost manufacturers in China, some of which hope to challenge Samsung and Apple in developed markets.

Analysts say Samsung’s costs in the fourth quarter were lifted by a special bonus to some employees to mark the 20th anniversary of what the company calls its new management initiative. In 1993, the Samsung group patriarch, Lee Kun-hee, began a drive to raise the quality of the company’s products, telling managers to “change everything except your wife and children.”

Samsung will issue a detailed earnings report on Jan. 24.

No wonder Samsung Electronics is so busy looking for a new hit gadget. Its signature product, the smartphone, is facing unanticipated challenges.

Samsung, the world’s largest maker of smartphones, said Tuesday that its operating profit in the fourth quarter had declined from the third quarter of  2013, and also compared with the fourth  quarter of 2012. 

As usual, the company, based in  Suwon, South Korea, released only a bare-bones forecast in advance of a full quarterly earnings report later in the month. It provided no reasons for the expected decline. But analysts said softness in smartphones, which account for more than half of Samsung’s earnings, was probably a big reason.

Samsung still has a roughly one-third share of global smartphone sales, but it faces new challenges to its dominance. At the low end, a number of Chinese companies are offering phones with similar features at a lower price. More worrying for investors are new signs of vulnerability in premium-price phones, which account for the vast majority of the profit in the business. 

For several years, Samsung and Apple have been battling for leadership in high-end phones. Now Apple is making new gains. In November, it sold 65 percent of the smartphones priced at $400 or more worldwide, up from 35 percent a year earlier, according to Counterpoint Technology Market Research.  And that was before Apple added China  Mobile, the world’s largest network operator, as an iPhone partner, with sales set to begin this month.

In the same period, Samsung’s share of the premium market fell to 21 percent from 40 percent, according to Counterpoint.

‘‘One by one, players in the premium  price band have been squeezed out, and now it looks like Samsung may be  squeezed out as well,’’ said Tom Kang, an analyst at Counterpoint.

A year ago, Samsung had two strong entrants in this category, the Galaxy S3  smartphone and the Note 2, a so-called  phablet, or cross between a phone and a  tablet computer. But the current flagship smartphone, the Galaxy S4, has been a relative disappointment, leaving a new phablet, the Note 3, to carry the load.

Bits Blog: Emerging Markets Expected to Drive Device Sales

DealBook: Verizon Is Expected to Pay $130 Billion for Stake in Vodafone Joint Venture

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H.P. Earnings Are Higher Than Expected

H.P. reported that net income fell 31 percent to $1 billion, or 55 cents a share, from the year-ago quarter. Revenue fell 10 percent, to $27.6 billion, H.P. said.

“We beat the upper end” of company projections for the quarter, Meg Whitman, H.P.'s chief executive, said in a statement accompanying the earnings. “I feel good about the rest of the year.”

The net income was above the expectations of Wall Street analysts, who mark their revenue and earnings projections based on nonstandard accounting. By those measures, H.P. had net income of 87 cents a share.

Analysts had projected H.P. would make 81 cents a share, on revenue of $28.12 billion, according to a survey of analysts by Thomson Reuters.

H.P., the world’s largest maker of personal computers and printers, has struggled for years with a declining market for PCs, less printer demand and turmoil in its executive ranks.

Ms. Whitman, who took over in September 2011, has said that fixing the company will be a five-year process and has described 2013 as a year of rebuilding before growth accelerates in 2014.

Facebook Is Expected to Introduce Its Phone

But it needs to find a way to play a bigger role in delivering what consumers want from their phones: ways to communicate, find answers to questions, shop and be entertained. The company would especially like to become that workhorse for the vast majority of its users who live outside the United States and from whom, so far, it barely profits.

The company will make its biggest leap yet in that direction Thursday, when it is expected to introduce a moderately priced phone, made by HTC, powered by Google’s Android operating system, and tweaked to showcase Facebook and its apps on the home screen.

The Facebook phone adheres to two crucial product announcements in the last three months: A new search tool that encourages users to use their Facebook friend network to seek out everything from restaurants to running trails, and a news feed remade for mobile devices.

The details of the would-be Facebook-centric phone are under wraps. But the motivation is certain.

“Facebook would like to be, literally and figuratively, as close to its users as its users are to their phones, within arm’s reach when they are searching for information, news, time wasting, shopping, communication,” said Rebecca Lieb, an analyst with the Altimeter Group.

That can be especially attractive if the new phone is affordable to emerging market users: Brazil and India are home to the largest blocs of Facebook users after the United States, and their numbers are growing swiftly as smartphone penetration increases in those countries. Many Indian cellphone makers, for that reason, have Facebook already installed on their home pages.

But Facebook makes little money by advertising to those international users.

By partnering with HTC, a phone maker based in Taiwan, the social network is signaling that it is “making an international push,” says Michael Pachter, an analyst with Wedbush Securities.

“The more people you get to use it on phones, the more ads you can deliver,” Mr. Pachter said.

Facebook made a little more than $4 a user in North America and $1.71 in Europe, but barely more than 50 cents in the rest of the world, including large markets like Brazil and India.

Ads are its principal moneymaker, and Facebook is under intense pressure to show Wall Street that it can make more money, and fast. Its stock market value is still far below its initial public offering price, and many analysts blame the company’s belated push into mobile devices.

Mr. Zuckerberg announced last year that Facebook was retooling itself as a mobile-first company. He has consistently said that it is not in the company’s interest to manufacture a phone.

“It’s not the right strategy for us,” he told market analysts in an earnings call in January. He wanted rather to see Facebook integrated into every device that its billion users hold in their hands.

Two-thirds of Facebook’s roughly one billion users worldwide log in to the social network on mobile devices.

A study commissioned by Facebook and carried out by the research firm IDC found that those users checked their Facebook pages an average of 14 times a day; in short, users checked in two-minute bursts adding up to about half an hour each day. Mostly, the users check their news feed.

The new Facebook-optimized phone will use a modified version of the Android software, The New York Times reported last week. When turned on, it will display the Facebook news feed.

Facebook already functions much like a phone, allowing users to chat, send group messages and even, in one experiment with users in Canada, to make free phone calls over the Internet. Its platform hosts a variety of applications that deliver things like music and news, and its newsfeed has been tweaked to showcase photos, which is what Facebook users post by the millions everyday.

There are fledgling experiments with commerce. Facebook users can buy online and offline gifts on Facebook with their credit cards. Equally important, Facebook’s insistence on real names means that Facebook can be something like an identity verification service. It is well-positioned to be a kind of mobile wallet, containing the equivalent of an identity card and seamless way to buy things.

“They want to have all the services that consumers want to use in the mobile world,” said Karsten Weide, an analyst with IDC. “They want to be the major consumer Internet platform.”

The Thursday announcement, which Facebook has described as an opportunity to “come see our new home on Android,” illustrates a fundamental problem for the company. Facebook must accommodate itself to mobile operating systems controlled by Internet rivals, Apple and Google.

Mr. Weide described them as “frenemies, mutually dependent but competing.”

RIM Posts Smaller Than Expected Loss as Subscriber Base Slips

RIM, which hopes to revive its fortunes and reinvent itself via the launch of a brand new line of BlackBerry 10 devices next month, caught investors off-guard on its quarterly conference call, when it said it plans to alter its service revenue model - a move that will pressure the high-margin business that accounts for about a third of RIM's sales.

"RIM provided few details regarding the economics of these changes, thus adding a large cloud of uncertainty to the primary driver of its profitability, which we view as especially worrisome given risks already surrounding the firm's massive BlackBerry 10 transition," said Morningstar analyst Brian Colello.

Those subscribers who need enhanced services like advanced security will pay for these services, while those who do not use such services will generate much lower to no service revenue, RIM Chief Executive Thorsten Heins told analysts and investors on a conference call on Thursday.

"I want to be very clear on this. Service revenues are not going away, but our business model and service offerings are going to evolve ... The mix in level of service fees revenue will change going forward and will be under pressure over the next year," cautioned Heins.

The news startled investors, who had earlier in the evening pushed RIM's stock more than 7 percent higher in post-market trading, after the company reported a narrower-than-expected quarterly loss and said it boosted its cash cushion ahead of next month's crucial launch of the BlackBerry 10 smartphone.

RIM's shares have for weeks been on a tear as optimism around BB10 has grown. Following RIM's surprise announcement on service revenues, however, the stock ended 9 percent lower at $12.85 in trading after the closing bell.

Analysts also expressed concern about the decline in RIM's subscriber base.

"The early reaction was probably just 'Hey, numbers looked OK, better loss, the cash flow was good' but if you know the company, you're looking at the subscriber base falling off," said Mark McKechnie at Evercore Partners in San Francisco.

CASH BALANCE

One reason the shares rose earlier was RIM managed to build up its cash cushion to $2.9 billion from $2.3 billion in the previous quarter.

Analysts have been keeping a sharp eye on the size of RIM's cash pile, as RIM will need the funds to manufacture and effectively promote BlackBerry 10 in a crowded market.

RIM is counting on the new line to claw back market share lost in recent years to the likes of Apple Inc's iPhone and a slew of devices powered by Google Inc's Android operating system.

"They've done a great job at generating cash," said Raymond James analyst Tavis McCourt in Nashville. "They're certainly in a much better position than they were three or four quarters ago."

The Waterloo, Ontario-based company said it is now testing its BB10 devices with more than 150 carriers - up from about 50 carriers as of the end of October. RIM expects more carriers to come on board ahead of the formal launch of BB10 on January 30.

Positive feedback from developers and carriers around RIM's new BlackBerry 10 devices has buoyed the stock in the last three months. Despite the plunge in RIM's share price on Thursday, the stock has more than doubled in value the last three months.

SMALLER-THAN-EXPECTED LOSS

On an operating basis, RIM fared a little better than Wall Street had expected. It reported a loss of $114 million or 22 cents a share, excluding one-time items. Analysts, on average, had forecast a loss of 35 cents a share, according to Thomson Reuters I/B/E/S.

RIM also reported a surprise net profit of $9 million, or 2 cents a share, for its fiscal third quarter ended December 1, on the back of a one-time income tax related gain. That compared with a year-ago profit of $265 million, or 51 cents.

RIM said it shipped 6.9 million smartphones in the quarter, even as its subscriber base fell to about 79 million in the quarter from about 80 million in the period ended September 1.

In recent years, RIM's user base has grown, even as the BlackBerry lost ground in North America and Europe, boosted by gains in emerging markets. While eye opening, the shrinkage was not as bad as some observers expected during the last quarter before the BB10 launch.

"We're encouraged that the subscriber base only declined slightly during a very public transition, and BlackBerry sales were about what we expected," said Morningstar's Colello, who is based in Chicago.

(Reporting by Euan Rocha; Additional reporting by Alastair Sharp, Cameron French, Allison Martell and John Tilak in Toronto; Editing by Janet Guttsman, Frank McGurty, Jan Paschal and Chris Gallagher)

Samsung Expected to Reach End of Record Run

SEOUL — Samsung Electronics reported a record quarterly profit of 8.1 trillion South Korean won, nearly double the figure of last year, as strong sales of high-end televisions and Galaxy smartphones more than offset reduced orders for chips and screens from Apple, its main rival and leading customer.

Most analysts, however, expect a run of four record quarters — the most recent worth $7.3 billion — to end in December, as the South Korean group, one of the world’s leading makers of smartphones, televisions and memory chips, increases its marketing, countering the new Apple iPhone 5 and other products in a crowded smartphone market, valued at $200 billion globally.

Credit Suisse Group, an international financial services company, estimated that Samsung might have spent about $2.7 billion on marketing in July to September alone during the Olympic Games in London and on Galaxy promotions.

The expected record profit of 28 trillion won would mean higher payouts for performance to many of Samsung’s 206,000 staff members early next year. And Samsung may have to set money aside this quarter if it fails to overturn an appeal of a U.S. court verdict that awarded more than $1 billion in damages to Apple on Aug. 24 for patent infringements by Samsung.

“Fourth-quarter profit will be pressured by one-off expenses: performance payouts and some $1 billion in legal provisioning relating to the Apple litigation,” said Lee Sun-tae, an analyst at NH Investment & Securities.

“Excluding those, core earnings will remain solid, and a swing factor is how much Samsung spends on marketing.”

Analysts expect earnings to decline until the second quarter of next year as a slump in computer sales and a weak global economy sap demand for chips and electronics products.

“The biggest risk for Samsung is competitive product lineups from its rivals, such as the iPhone 5,” said Byun Han-joon, an analyst at KB Investment & Securities.

“Because handsets drive most of its profits, one misstep in handsets could result in losses for the whole Samsung group,” Mr. Byun said.

Profit at Samsung’s mobile division is likely to have more than doubled in the July-to-September period to about 5 trillion won as smartphone shipments topped 58 million, including as many as 20 million of the Galaxy S III.

Ahead of full quarterly results due Oct. 26, Samsung estimated that its July to September operating profit jumped to 8.1 trillion won from a year ago, beating an average forecast of 7.6 trillion won in a survey of analysts.

Strong handset sales made up for reduced profits from its chip business. Prices of dynamic random access memory, or DRAM, chips — used in computers and mobile phones — dropped 14 percent in the September quarter. Such chips now trade below what it costs most contract manufacturers to make them and will squeeze near-term earnings, analysts say. Tablets and smartphones, the real growth areas, use far smaller memory storage.

Samsung is expected to invest less in chips next year because of the drop in demand, which could be bad news for equipment manufacturers. Kwon Oh-hyun, who became chief executive of Samsung in June, said late last month that the group had yet to complete its 2013 investment plans.

Samsung is strengthening its product lineup, with its latest phone-tablet, the Galaxy Note, expected to go on sale in the United States this month; its ATIV smartphones, which run on Microsoft’s new Windows system, will compete with Nokia’s Lumia series.

Bits Blog: Google Says Motorola Cuts Will Cost More Than Expected

Google will cut deeper and spend more money on cuts than it originally expected as it restructures Motorola Mobility, the ailing cellphone maker it bought for $12.5 billion.

Google will spend $300 million on severance and other charges related to layoffs, the company said in a filing with the Securities and Exchange Commission on Thursday, an increase of $25 million from the $275 million that Google originally said layoffs would cost. But it does not plan to lay off more people than the 4,000 employees it originally announced.

It will also spend $90 million closing offices and factories and leaving certain markets, the company said, and plans to leave more areas outside the United States than it originally said it would. In August, it said it would close about one-third of its 94 offices worldwide, focusing on cuts in Asia and India.

The company did not provide more details beyond the government filing. In a statement, Google said, “This filing was made to provide updated information around Motorola Mobility’s cost reductions that were announced earlier this summer.”

In August, Google announced the layoffs and cuts as part of its broader plan to turn around Motorola Mobility, which has been unprofitable for 14 of the last 16 quarters. In addition to using Motorola’s patents to defend Google’s Android mobile operating system, the company said it planned to focus on just a few smartphones instead of dozens, stop making low-end devices and make its phones more cutting-edge with innovations like longer battery life and artificial intelligence.

The $300 million charge and $40 million of the $90 million charge would affect Google’s third-quarter earnings this year, the company said in the filing.

Germany Is Expected to Act to Curb High-Speed Trades

Chancellor Angela Merkel’s government approved draft legislation on Wednesday that foresees imposing additional controls on such trading. The proposed measures include requiring that all high-frequency traders be licensed, requiring clear labeling of all financial products traded by powerful algorithms without human intervention and limiting the number of orders that may be placed without a corresponding trade. Traders who violate the limits, which would be set once the law took effect, would face a fine.

“Computer-generated algorithmic transaction involves a variety of new risks,” Germany’s finance ministry said in a statement. “Germany is reacting to these risks with legislation that will create more transparency, security and a better overview.”

The legislation, which is subject to approval by both houses of Parliament, was written with an eye toward similar legislation being discussed in Brussels that could eventually apply across the European Union, which has 27 member nations, the official said.

Steps to pass the broader legislation on high-frequency trading are expected to proceed Wednesday, when the influential Committee on Economic and Monetary Affairs of the European Parliament will vote on how to update the law that governs securities trading to take account of new technologies.

The Europeans are not alone in their concern about high-speed computerized trading, which has led to several notorious market disruptions in recent years.

The latest occurred in early August in the United States, when problems with newly installed software caused the Knight Capital Group, a New Jersey broker that specializes in computer-driven trading, to lose $440 million. The problem led Knight’s computers to rapidly buy and sell millions of shares in more than 100 stocks for about 45 minutes after the markets opened on a Wednesday. Those trades pushed the price of many stocks up, and Knight lost money when it had to sell the shares back into the market at a lower price the next day.

The Knight episode raised alarms on Wall Street and in Washington, but no new curbs have yet been proposed for high-frequency trading in the United States.

In Berlin, German officials have acknowledged that the technological advances of recent years have led to irrevocable changes in the nature of trading and that the fast pace must be accepted. By adopting tighter controls, they say they hope to protect the interests of all market participants.

The German draft legislation “is deliberately arranged so that the Finance Ministry has the capability of making things more precise through provisions, and the stock markets are required by the law to be aware when the next trick from high-frequency traders pops up,” said a German government official who spoke anonymously on Tuesday.

While high-frequency trading firms are unlikely to welcome tighter rules, Deutsche Börse, the main German stock exchange, based in Frankfurt, said it would welcome the greater supervisory powers that regulators would have under the proposed law.

“It is good for all parties acting on the German financial market that we now have legal certainty how to deal with high-frequency traders,” the exchange said last week.

The European legislation under discussion, if approved in committee, is expected to become the basis for talks between representatives from the European Parliament and individual governments. Upon completion of that process, the draft measure would need the approval of the full European Parliament and all 27 of the European Union’s members before becoming law.

The legislation would seek even tighter controls on fast trading than the German proposal. Among the most closely scrutinized aspects of the European measure are rules aimed at limiting the ability of algorithm-driven trading to exaggerate volatility in financial markets.

Markus Ferber, the lawmaker appointed by the European Parliament to report on the proposal, has recommended including rules to slow trading by a half-second, require all trading venues to institute ways to halt trading immediately and make it more expensive for traders to cancel large volumes of orders.

Those rules were needed to “curb mere volumes brought by high-frequency trading” and “to restore genuinely liquid, orderly and fair markets,” said Benoît Lallemand, a senior research analyst at Finance Watch in Brussels. “Only such markets can serve the real economy.”

Mr. Lallemand said he expected the committee to approve Mr. Ferber’s recommendations on Wednesday. “The focus then should be that governments come up with an equally ambitious proposal,” he said, though he said the legislation still could be watered down.

Melissa Eddy reported from Berlin and James Kanter from Brussels. Jack Ewing contributed reporting from Frankfurt and Nathaniel Popper from New York.

DealBook: Errant Trades at Knight Capital Reveal a Risk Few Expected

The trading firm Knight Capital recently rushed to develop a computer program so it could take advantage of a new Wall Street venue for trading stocks.

But the firm ran up against its deadline and failed to fully work out the kinks in its system, according to people briefed on the matter. In its debut Wednesday, the software went awry, swamping the stock market with errant trades and putting Knight’s future in jeopardy.

The fiasco, the third stock trading debacle in the last five months, revived calls for bolder changes to a computer-driven market that has been hobbled by its own complexity and speed. Among the proposals that gained momentum were stringent testing of computer trading programs and a transaction tax that could reduce trading.

In the industry, there was a widespread recognition that the markets had become more dangerous than even specialists realized.“What is starting to become clear is that the costs in terms of these random shocks to the system are occurring in ways that people never anticipated,” said Henry Hu, a former official at the Securities and Exchange Commission and a professor at the University of Texas in Austin.

Knight, founded in 1995, is a leading matchmaker for buyers and sellers of stocks, handling 11 percent of all trading in the first half of this year, according to the data firm Tabb Group. Knight lost three-quarters of its market value in the last two days, in addition to losing $440 million from the errant trades, and was scrambling to find financing or a new owner.

While the turbulence on Wednesday hit scores of individual stocks, the broader market took the spasm in stride, closing down less than 1 percent on Wednesday and Thursday. The S.E.C., which has opened an investigation into potential legal violations at Knight, said it was “considering what, if any, additional steps may be necessary.”

Some S.E.C. officials are pushing new measures that would force firms to fully test coding changes before their public debut, according to a government official who spoke on the condition of anonymity. While the idea has long been discussed at the agency, it gained traction after the Knight debacle.

The S.E.C. applied limited safeguards on trading after the “flash crash” of 2010 sent the broader market plummeting in a matter of minutes. But big investors like T. Rowe Price, members of Congress and former regulators said Thursday that the S.E.C. and the industry had been too complacent and needed to do more to understand and control the supercharged market.

“Things are happening far too regularly,” said Ed Ditmire, an analyst at Macquarie Securities who focuses on stock exchanges. “It’s not nearly as solid a market as it should be, so there’s plenty of room for improvement.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, said that recent events “have scared the hell out of investors” and called for the agency to hold hearings.

“I believe this latest event was handled better than the flash crash, but the larger question is whether our markets are adequate to deal with the technology that is out there,” Mr. Levitt said. “I don’t think they are.”

Regulators have made changes to the markets over the last two decades that have taken it out of the hands of a few New York institutions and allowed dozens of high-frequency trading firms and new trading venues to dominate the stock market.

The high-speed firms like Knight, which connect directly to the servers of the exchanges and are capable of executing thousands of trades a second, are responsible for more than half of all activity in American markets. Companies that have benefited from the fragmentation and computerization of the markets have largely managed to fend off tighter controls by pointing to the steady decline in the cost of trading stocks.

Some large, institutional investors, like Vanguard, have said that the increased volume of trading has made it easier to get in and out of stocks, lowering the ultimate costs for individuals who invest in popular vehicles like mutual funds.

But even people who had previously defended the advances in trading technology said on Thursday that too many problems had been overlooked.

In Knight’s breakdown on Wednesday, as well as in the botched initial public offerings of Facebook in May and BATS Global Markets in March, the problems were caused by new computer programs that had not been adequately tested. Currently regulators have no protocol for signing off on new software programs like the one Knight rolled out.

“When they put these things out in the world they are really being tried for the first time in a real-life test,” said David Leinweber, the head of the Center for Innovative Financial Technology at the Lawrence Berkeley National Laboratory. “For other complex systems we do offline simulation testing.”

Mr. Leinweber has suggested to the S.E.C. that it do this work with the help of the supercomputing facilities at his center. The S.E.C. has recently moved in this direction by contracting with a high-speed trading firm that will provide it with more up-to-date market information.

Other changes to the markets would help slow trading during crises. Before computer trading became dominant, if a flood of unusual orders came in, they would usually be questioned by human order matchers, called specialists, working on the floor of the New York Stock Exchange.

To mimic that role, regulators are introducing a circuit breaker called the “limit up, limit down.” This forces a pause in trading of a stock if it starts occurring outside a normal price range. The mechanism will start in February.

“Quite literally, it could have stopped the flash crash,” said Gus Sauter, the chief investment officer at Vanguard.

The S.E.C. did introduce some circuit breakers after the flash crash but they stopped trading in only five of the stocks that were hit by Knight’s faulty program.

Some critics of the current market structure have said that much bolder reform is needed. One change that has been contemplated is a financial transaction tax, which would force firms to pay a small levy on each trade. At the right level, this could pare back high-frequency trading without undermining other types, supporters say.

“It would benefit investors because there would be less volatility in the market,” said Representative Peter DeFazio, a Democrat of Oregon. He introduced a bill containing a financial transaction tax last year.

Opponents of such a levy say that it could hurt the markets and even make it more expensive for companies to raise capital.

“I would be very concerned about unintended consequences,” said Mr. Sauter.

But Representative DeFazio, who favors a levy of three-hundredths of a percentage point on each trade, says he thinks the benefits of high-frequency trading are overstated. “Some people say it’s necessary for liquidity, but somehow we built the strongest industrial nation on earth without algorithmic trading,” he said.

Benjamin Protess and Jessica Silver-Greenberg contributed reporting.

DealBook: Technology Analyst Expected to Plead Guilty in Insider Case

Multnomah County Sheriff Office, via Associated PressJohn Kinnucan, an analyst, taunted federal investigators.

A technology research analyst who gained notoriety for taunting the federal government over its pursuit of insider trading is expected to plead guilty in United States District Court in Manhattan on Wednesday, according to people briefed on the matter.

John Kinnucan, founder of Broadband Research, based in Portland, Ore., is expected to plead guilty to sharing secret information about technology companies with money managers in exchange for cash.

People briefed on the matter spoke on the condition of anonymity ahead of the formal entering of the plea.

The government’s case against Mr. Kinnucan included wiretaps, phone records, instant messages and cooperating witnesses.

Mr. Kinnucan relied on a wide web of sources, including senior employees at SanDisk and Flextronics as well as insiders at the technology firm F5 Networks, who freely shared insider information with him in exchange for cash and gifts, according to prosecutors. Those gifts included investments in start-ups, sharing a beach house and lavish meals, prosecutors said.

After obtaining the tips, Mr. Kinnucan shared that information with hedge fund clients in Texas and California, the government’s complaint states. He charged his clients $30,000 a quarter, prosecutors said.

At one time, Mr. Kinnucan’s clients included the large hedge funds Citadel in Chicago and SAC Capital Advisors in Stamford, Conn. Mr. Kinnucan emerged as one of the government’s most vociferous critics during its wide-ranging crackdown on insider trading. He refused to cooperate with the authorities, disparaging the federal agents who came to his home in late 2010 as “fresh-faced eager beavers” in a letter to clients warning of the government’s investigation.

In its multiyear case, the government has ensnared a number of analysts and hedge fund managers. It won big victories against Raj Rajaratnam, the billionaire founder of the Galleon Group hedge fund, and Rajat K. Gupta, a former board member of Goldman Sachs. It has also involved low-level employees including Bonnie Hoxie, a secretary at Disney who tried to sell inside information about the company.

But the case against Mr. Kinnucan was among the most peculiar. His letter to clients about the investigation went viral, showing up in news accounts and on blogs across the country.

He began to grant dozens of interviews, where he continued to attack the government’s efforts. In commentaries, he styled himself as an individual willing to stand up against the government’s persecution of what he said were perfectly legal tactics.

But as the months wore on, his communications began to grow increasingly outlandish. He began to threaten the federal agents in charge of the case. He taunted them with racial epithets and expletives. He left a voice mail for one United States attorney stating: “Too bad Hitler’s not here. He’d know what to do with you,” according to a government motion to deny bail in the case.

In February, agents arrested him at his Portland home and charged him with insider trading.

While facing charges, Mr. Kinnucan retained and dismissed several lawyers. His current lawyer could not be immediately reached for comment.