Transcript: Thursday, August 22, 2103

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and
Susie Gharib, brought to you by —

(COMMERCIAL AD)

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: NASDAQ freezes, the
Dow thaws. A massive system glitch stops all NASDAQ trading for three
hours as the Dow scores its first gain in more than a week. Can today`s
trading systems be trusted? And is your money safe?

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Hewlett-laggard. The
world`s largest maker of personal computers has its worst day in two years,
feeling the heat of soft PCs sales. Is the company`s turnaround strategy
in trouble?

MATHISEN: And the American worker. Wages have been flat for a decade
even as corporate profits rise. And experts say the impact is showing up
in a critical area of the economy.

All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday,
August 22nd.

GHARIB: Good evening, everyone.

If you wanted to buy or sell shares today of Apple (NASDAQ:AAPL),
Google (NASDAQ:GOOG), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) or any
other stock listed on the NASDAQ, you couldn`t. The reason: for more than
three hours, trading on the NASDAQ was halted because of a major computer
glitch. The unprecedented shutdown froze out thousands of securities and
raised new questions about the safety of electronic trading and the impact
on investor and business confidence in U.S. markets.

This is the latest in a series of technical snafus that have paralyzed
the market, like the botched initial public offering of Facebook
(NASDAQ:FB) last year and the so-called “flash crash” at the New York Stock
Exchange back in 2010.

Bertha Coombs joins us now from the NASDAQ with more.

Bertha, what an extraordinary day.

BERTHA COOMBS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Quite an
extraordinary day, Susie, and a lot of folks on Wall Street are saying,
thank goodness it happened on a quiet Thursday in August. Essentially, if
you look at the day`s chart for the NASDAQ composite, it essentially flat-
lined for three hours because none of those stocks listed here in the
NASDAQ was trading.

What appears to have happened was a glitch in the system where you get
the prices and quotes on trading stocks. With an inability to see those
prices, they had to shut the system down.

Let me give you the timeline.

About a quarter after 12:00, the NASDAQ says they are seeing some
problems with the system, in terms of price quoting.

A few minutes later, around 12:25, they stopped not only trading on
options, which is where the pricing problem first appeared, but then all of
the NASDAQ stocks and they were unable to trade stocks not just on the
NASDAQ system but on other systems across different platforms.

Then at 1:00, they updated and said we are getting ready and preparing
to restart trading. What we will do, they said, is start out with a few
stocks that we will trade as a test for a few minutes to get pricing
information and then we`ll open things up without giving an actual timeline
for when that would happen.

As it turns out, the testing was just three different stocks. It
started at about 3:00 in the afternoon and then it wasn`t until about 3:25
with 35 minutes left to go until the opening bell that they opened up all
of the stocks here on the NASDAQ. The stocks acted fairly resiliently,
really didn`t move very much from where they had been before the overall
NASDAQ halt.

This comes just 15 months after the massive trading glitch that
prevented the smooth opening of the Facebook (NASDAQ:FB) IPO back in May
2012. That debacle, as people call it, on Wall Street, resulted in the
NASDAQ being fined $10 million by the Securities and Exchange Commission
because they felt that the NASDAQ had not done enough to upgrade its system
to make sure it could handle the volume that day.

The SEC is investigating this glitch but at the moment, from what we
know, it appears to be just a software glitch in that particular data
stream.

MATHISEN: All right. Thank you very much, Bertha Coombs, reporting
from NASDAQ for us tonight.

Joining us to talk about more about the impact of the NASDAQ shut down
on investor confidence is Richard Repetto. He`s a principal at Sandler
O`Neill.

Richard, good to see you.

Can today`s trading systems really be trusted? We asked at the top of
the show. And is my money safe?

RICHARD REPETTO, SANDLER O`NEILL PRINCIPAL: Well, I think, you know,
today`s systems are strong, but these little glitches are, you know, blips
that we have and I think is going to bring more let`s just say oversight
from the regulators and great effort by the industry to reduce these
problems that we`re having.

GHARIB: You know, for investors at home watching all of this going on
and listening to our news, they just throw up their hands, I`m sure many of
them say, you know, this keeps happening and that`s why many are staying
away from the stock market. Is that just the way it`s going to be, or is
there a way to simplify the system so we can keep the individual investor
in?

REPETTO: Well, I think the industry and regulators are going to take
a hard look at it this time. I think this is a, you know, call to arms, so
to speak.

But the one thing I sort of highlight is at least with this one, it
doesn`t appear like there was a lot of damages or the monetary damages to
people because everybody was shut down. It wasn`t like you were held in
position while the stock traded away — the stock just didn`t trade.

So, it is a crisis of confidence. But as far the damages, I think
they were limited in this problem.

MATHISEN: What if I put in, Richard, an order to buy or sell a stock
right around that time? What happens to me? Did that order get executed?

REPETTO: When the system shut down, I think that was the quote period
when they started back up, what Bertha was explaining, when they started
back up, they allowed people to cancel quotes or orders or to put new ones
in. So, they allowed for that 15-minute window so people could get, you
know, reposition themselves if they wanted to.

You weren`t going to get stuck with an order that you put in at
whatever time this happened, you know, three hours earlier and still have
to live up to that order three hours later. There was that grace period.

GHARIB: Richard, let me ask you a little bit about the business of
being in the exchange business. We know that there have been glitches of
both the New York Stock Exchange and also the NASDAQ, maybe more at the
NASDAQ. But this also knocks down business confidence in the exchanges.

And so there are a number of, you know, big companies that want to
offer stock to the public, Twitter, a lot of talk about Twitter offering
stock. Do you think they would feel more comfortable of listing at the New
York Stock Exchange, rather than the NASDAQ after today`s episode?

REPETTO: I mean, you have a good point. I look at this as an
industry issue because it could happen to anybody.

And just so you know, the problem was with this price dissemination
stream and in complex terms, it`s called UTP SIP. But NASDAQ operates that
for NASDAQ listed stocks. The NYSE operates it for NYSE list of stocks and
ETFs as well. So, it could have happened to anyone.

What the industry needs to do, they need to go through this airplane
accident, you know, analogy where — when there is a problem, that you have
to really take a serious look. You know, the transportation board comes in
and investigates. Here, the FCC or a regulator needs to come in and take a
hard look, as well as the industry come together to put in remedies and the
fixes.

It just doesn`t feel like there was a lot done after the flash crash,
and I think that`s the level of, you know, response that`s needed to regain
the confidence that you both speak of.

MATHISEN: Richard, thank you for joining us tonight. Richard Repetto
of Sandler O`Neill.

GHARIB: Despite those massive troubles at the NASDAQ, it turned out
to be a solid day on Wall Street. All the major averages, even the NASDAQ
posted gains. Stocks got help from a surprise list of manufacturing both
in China and here in the U.S.

Also helping: leading economic indicators, a gauge of the country`s
economic health rose in July, pointing to stronger growth in the second
half of this year. And even though first-time jobless claims edged up last
week, the government reported home prices surged again in June, up nearly 8
percent from the same period a year ago, giving home builder shares a
boost.

The Dow today gained 66 points, breaking six straight sessions of
losses. The NASDAQ, which was up 31 points when trading was halted, ended
the day up 39 points. And the S&P 500 added 14 points.

The yield on the benchmark 1 0-year treasury note rose above 2.9
percent. This is the highest in two years.

MATHISEN: Well, despite those gains in the Dow today, Hewlett-Packard
(NYSE:HPQ), which has been the biggest gainer in the blue chip index so far
this year, dropped sharply today. That`s after sales of PCs fell again
last quarter and companies sold fewer computer servers.

Now, investors are wondering if CEO Meg Whitman`s five-year turn-
around plan for the company may be in jeopardy.

Jon Fortt has our story.

(BEGIN VIDEOTAPE)

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hewlett-Packard`s
come back has hit a bit of a snag. CEO Meg Whitman saying last night she
no longer expects to see revenue growth in fiscal 2014. That disappointing
news sent the stock down about 12 percent in its worst trading day in two
years.

Now, that made HP just the latest big business-focused tech company to
give a disappointing report. Revenue came in short at IBM and Oracle
(NASDAQ:ORCL), and Cisco (NASDAQ:CSCO) announced layoffs last week after
offering shaky guidance. Whitman in an interview today said things are
still on track, closing out year two of what she`s called a five-year
turnaround.

MEG WHITMAN, HEWLETT-PACKARD CEO: The reason I said five years is
that is what I actually thought. I didn`t say five because I thought it
was three. When you do turnarounds, there are bumps in the roads, there
are ups, there are downs, these things are not usually linear.

FORTT: Whitman said yesterday things went especially awry in Q3 with
pricing pressure on servers, slow sales of PCs and other factors taking a
toll.

WHITMAN: My view is we`ve got a lot more work to do on supply chain,
on logistics, on our enterprise group side and then, frankly, we have to
make sure we have the right product for the right market segment.

FORTT: The question now, can HP fix those problems with new
leadership? Whitman replaced the head of the enterprise group Dave
Donatelli with chief operating officer Bill Veghte yesterday and brought
marketing under communications chief Henry Gomez.

Now, there are plenty of challenges in the year ahead still,
especially since Whitman has promised to push into smartphones and get more
ambitious in tablets, areas where the company has been a non-factor so far.

For NIGHTLY BUSINESS REPORT, I`m Jon Fortt.

(END VIDEOTAPE)

GHARIB: President Obama was in Buffalo, New York, today unveiling a
sweeping new plan for rating the nation`s colleges. The idea here: to
evaluate schools on a host of metrics with the goal of linking those
ratings to the amount of federal financial aid that students at those
schools receive.

John Harwood joins us now from the White House with more on all of
this.

So, John, let`s start by asking what criteria is the administration
going to be using when they rate these schools?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: They`re going to
be looking at things like graduation rates, how fast people graduate, what
kinds of jobs they get after they graduate, and, of course, also the
tuition rates. Administration is trying to push down the core inflation
rate of college cost.

This isn`t about putting more aid in the hands of students. It`s
taking the aid that`s out there, about $150 million a year. In fact, they
use that as a lever to get colleges to try new things, online courses,
other strategies to get costs down and they will need some help from
Congress to do it.

MATHISEN: I suspect, John, that a lot of schools are going to really
bristle at these kinds of metrics to measure performance.

HARWOOD: Well, certainly, colleges that come out on the wrong side of
the metrics are going to bristle at those. The winners will like it a lot
better and you can expect some opposition in the Congress from Republicans
who don`t like the heavy hand of the federal government coming in and
trying to steer aid dollars this way. So, the president has got a big
fight on his hand.

What he can do on his own hook without Congress is develop these score
cards and try to use transparency to put it out there so parents and
students can make decisions and try to affect some change that way as well.

GHARIB: And what about the role of Congress in all of this? I mean,
what can Congress do?

HARWOOD: If Congress — if you`re going to change the way federal
financial aid flows and change the colleges that get that financial aid,
Congress is going to have to say yes. The administration had some
difficulty getting Congress to go along with their plans for secondary
education with a small amount of federal aid there.

This is another case where the federal aid is not the preponderant
amount of money that`s spent by colleges. States control state
universities and, of course, private colleges are private. But they`re
going to try to do what they can on their own and see if they can get
Congress to go along, if not in this administration, pave the way for a
future administration to make some headway.

MATHISEN: All right. John, thank you very much. John Harwood,
reporting from Washington tonight.

Well, still ahead, a lost decade for wages. A new report shows that
pay hasn`t budged for American workers for a long time, and that could
start pressuring a key area of the economy.

First, though, let`s take a look at how the international markets did
today.

(MUSIC)

MATHISEN: Here is something you may not have expected to hear. Yahoo
(NASDAQ:YHOO) got more web traffic last month than Google (NASDAQ:GOOG).
It`s another feather in the cap of Yahoo`s CEO, Marissa Mayer. ComScore
reports that Yahoo (NASDAQ:YHOO) attracted 4 million more unique visitors
to its own Web sites in July than Google (NASDAQ:GOOG), where Mayer used to
work. This comes after Yahoo (NASDAQ:YHOO) redesigned its signature Web
site and after going on an acquisition tear, buying up small Web sites that
are quite popular with younger customers.

GHARIB: We begin our market focus tonight with another retailer
reporting a troubling quarter. Abercrombie and Fitch (NYSE:ANF) reported
profits well below expectations, blaming a drop in in-store visits by
shoppers. And that`s not all. The chain says business will decline even
more during the crucial back to school quarter and it issued a weak profit
forecast. Shares plummeted nearly 18 percent to $38.53, making it the
worst performing stock on the S&P 500 today.

Aeropostale (NYSE:ARO) is also experiencing team angst. The retailer
posting disappointing earnings after the close today. It also issued a
week outlook and increased the number of stores it plans to close. The
company blamed its problems on heavy discounting. Shares of Aeropostale
(NYSE:ARO) dropped almost 4 percent during the regular session to $10.98
and then fell as much as 10 percent in after-hours.

The good news beat out the bad for GameStop. The video game retailer
said second quarter profit fell 50 percent but the company was bullish on
its prospects for the rest of the year as new game consoles from Sony
(NYSE:SNE) and Microsoft (NASDAQ:MSFT) are slated to hit the market just in
time for holiday sales, prompting GameStop to raise its outlook for full
year earnings. The stock jumped 9 percent to close at $51.91.

MATHISEN: J.C. Penney`s board adopted a shareholders rights plan
aimed at preventing new investors from gaining control of the company. The
move comes after activist investor Bill Ackman, Penney`s largest
shareholder, said he may exit his entire stake in the retailer. The plan
is also known as a poison pill. The stock finished 1 percent lower today.

Investors in Sears (NASDAQ:SHLD) aren`t seeing its softer side but
rather its weaker side. A rough day for the stock after the retailer
posted a wider than expected second quarter loss. Revenue fell, margins
pressured as fewer people entered the store. The stock down 8 percent to
$39.72.

GHARIB: Do you feel like you`re earning less money now than you did
four years ago when the recession officially ended? Well, if you said,
yes, you have plenty of company. A new survey shows that the average
household income in the U.S. is currently lower than it was back in 2009.
What does that mean for the American middle class and for the overall
economy?

Hampton Pearson gets some answers.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
President Obama is back on the road, this time in Upstate New York, telling
a large crowd at the University of Buffalo, five years into his presidency
reviving the middle class remains his highest domestic priority.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Any middle class family
will tell you, we`re not where we need to be at, because even before the
crisis hit and it sounds like Buffalo knows something about this, we were
living through a decade where a few at the top were doing better and
better, most families were working harder and harder to get by.

PEARSON: A new study of census data shows how much earning power the
middle class lost since the recession began. In June, median household
income was $52,100, down $2,400 or 4.4 percent from 2009, when the
recession ended. But if you go all the way back in 2007 when the recession
began, median income is down 6.1 percent or $3,400 according to Sentier
Research.

A separate study from the economic policy institute says wages have
been stagnant for a decade, leaving economist say a small-growth economy
with a tight labor market leaves workers with little leverage when it comes
to wages.

JARED BERNSTEIN, FORMER WHITE HOUSE ADVISER: The fact that not only
are jobs too hard to come by, but also, if you`ve got a job, the fact there
is so much slack in the labor market means that your earnings have been
flat or falling after you adjust for inflation.

PEARSON (on camera): The same economist say lost wages and lost
purchasing power translates into less consumer spending, even though the
overall economy is growing and unemployment rate is declining.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN: Although wages of many average workers haven`t grown over
the past few years, it`s a different story with chief executives. And now,
federal regulators are proposing a role that will require companies to
disclose just how much those CEOs earn showing the gap between their
salaries and those of the average rank and file worker.

Mary Thompson has more.

(BEGIN VIDEOTAPE)

(APPLAUSE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Three years after President Obama signed Dodd-Frank into law, the SEC is
now set to propose a rule next month requiring companies to disclose the
ratio of their CEO`s pay to the median pay of the company`s workers.

An advocate of the ratio, the AFL-CIO`s Brandon Rees notes, with the
average CEO of an S&P 500 company, making $12.25 million last year, a CEO
now makes 350 times more than the average worker.

BRANDON REES, AFL-CIO: That ratio is up from 42 times to one 30 years
ago. So, we`ve got dramatic escalation of inequality within our
corporation and that`s hurting employee morale, that`s hurting
productivity, that`s leading to increased turnover and that`s what this
disclosure rule is meant to fix.

THOMPSON: Rees also claims the ratio gives director who determine a
CEO`s pay a new invaluable tool that lessens the focus on what a CEO makes
relative to other CEOs, and more on how much he or she makes relative to
their employees.

The soon-to-be proposed rule appears somewhat less stringent than
expected. First, firms will be able to calculate median pay using a
statistical sample of their workforce rather than looking at all of their
workers` pay.

(on camera): And second, a source says the firms won`t be required to
calculate a workers` pay the same way they calculate a CEOs` pay as it`s
presented in the annual report.

(voice-over): While this might require somewhat less work, companies
still maintain the ratio creates an expensive and time-consuming
administrative burden.

Critic Tim Bartl of the Center for Executive Compensation says
calculating the ratio takes time energy and resources that then deflect
focus away from far more productive uses such as generating growth that
produces jobs. As the proposed rule, it`s likely to be made available for
public comment between 30 to 90 days before the SEC commissioners have the
final vote, a vote that will give the working class a lot to say on
executive pay.

For NIGHTLY BUSINESS REPORT, I`m Mary Thompson.

(END VIDEOTAPE)

MATHISEN: And coming up, a prescription for fraud. We`ll show you
how the feds are fighting back on a problem that costs taxpayers and our
healthcare system billions of dollars a year.

But, first, how commodities, treasuries and currencies fared today.

(MUSIC)

GHARIB: Eli Lilly (NYSE:LLY) is being accused by a Chinese newspaper
of spending nearly $5 million in direct kickbacks to Chinese physicians in
exchange for prescribing it`s insulin product. The company says it`s now
investigating the charges, but hasn`t admitted or denied any wrongdoing.
Chinese authorities are currently investigating similar bribery charges
against drugmaker Sanofi and British pharmaceutical giant, GlaxoSmithKline.

MATHISEN: Health care fraud is one of America`s costliest issues. An
estimated $80 billion sinkhole every year. Part of that fraud takes place
in small pharmacies across the country. But now, law enforcement is
fighting back and Andrea Day got a front row seat to an undercover sting.

(BEGIN VIDEOTAPE)

ANDREA DAY, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): We
rode along with federal agents from Health and Human Services Office of
Inspector General, along with a team of other local agents while they took
down Alexander Aliev (ph), the pharmacy owner accused of bilking Medicaid
and ultimately taxpayers out of almost a million bucks.

We`re now just blocks away from DNA Pharmacy in Brooklyn, while
another team is following the drugstore owner, watching from a distance as
he leaves his house.

UNIDENTIFIED MALE: Following the guy now.

DAY: As the team waits for word the owner is close, special agent in
charge Tom O`Donnell walks us through the alleged scheme.

TOM O`DONNELL, SPECIAL AGENT: He billed Medicaid for prescriptions
that he did not dispense.

DAY: A dubious plan O`Donnell says that went on for more than a year.
Investors say Aliev enticed patients to bring their prescription slips to
his pharmacy, but instead of filling prescriptions and handing out drugs,
he allegedly handed out cash.

O`DONNELL: Twenty bucks, 30 bucks, 40 bucks per script.

DAY: From there, investigators said he billed Medicaid for drugs that
were either partially filled or never dispensed at all, including billing
for refills and he`d rake in the cash. O`Donnell says focusing on
prescription for HIV drugs, like Atripla.

O`DONNELL: They reimburse in the neighborhood of 1,400 to 1,500 bucks
for a 30-day supply. Very expensive.

Anytime you have that drugs that are of that high in terms for
reimbursement, there is going to be a black market for it.

DAY: A scheme, according to investigators, that is being played out
right now at small pharmacies all over the country.

So why would patients want to get involved?

Philip Shapra (ph) is the fraud unit director for the Human Resources
Administration. He says in some cases, patients don`t want to take their
medication and are just looking for pocket money.

UNIDENTIFIED MALE: A lot of times they will go back and report their
medications were stolen, get police reports and get a doctor to write them
another prescription and go out and attempt to refill it again.

DAY: The pharmacy scheme, a growing piece of healthcare fraud.

LAUREN MACK, BROOKLYN DISTRICT ATTORNEY`S OFFICE: It`s between $184
million to $630 million of fraud a day. That is huge. It is the second
largest white collar crime in the United States.

DAY: We keep watch as the pharmacy owner walks up to the gate and
opens up for business.

UNIDENTIFIED MALE: They are going.

DAY: Investigators make their move. Once inside, investigators show
Aliev this video — it`s an undercover agent posing as a patient. You can
see the owner hand a prescription to the agent. Then he walks her outside
and gives her $25, cash — investigators say as an incentive to come back
and bring others.

UNIDENTIFIED MALE: This type of medication, I will give you more and
more and more. Every time you bring me some patient, I give them
medication. I can take care of you and I can take care of them. From each
patient, I will give you your commission. Even from each refill, not only
one time you bring me, from each refill, I will take care of you.

DAY (on camera): He looked at the video, what did he say?

UNIDENTIFIED MALE: Straight up, he said that`s not me.

DAY (voice-over): Twelve noon, finally, investigators walked the
owner out in cuff. Then a search team moved in. And hours later,
investigators emerge with boxes of evidence. One alleged scheme busted but
many more to go.

For NIGHTLY BUSINESS REPORT, I`m Andrea Day.

(END VIDEOTAPE)

MATHISEN: The Brooklyn district attorney`s office is now bringing the
case to a grand jury. Aliev is facing 17 charges, including health care
fraud, grand larceny and falsifying business records. He denies the
charges and according to his attorney maintains his innocence and will
vigorously defend himself in court.

GHARIB: Amazing story.

Well, that`s NIGHTLY BUSINESS REPORT for us. I`m Susie Gharib, thanks
so much for joining us tonight.

MATHISEN: And I`ll see you all in a couple weeks. I got a couple
weeks of vacation.

GHARIB: You have a good time.

MATHISEN: I`m Tyler Mathisen, thanks for watching. We`ll see you
back here tomorrow.

END

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