Congress, Obama face dynamite in “fiscal cliff”: CEOs

BOSTON (Reuters) – Corporate America is raising the volume of its plea that the U.S. government avert a year-end “fiscal cliff” that could send the nation back into recession, but chief executives aren’t pushing the panic button just yet.

With a heated election season in the rear-view mirror, executives are calling on the White House and congressional leaders to head off a self-imposed deadline that could bring $ 600 billion in spending cuts and higher taxes early in 2013 if they are unable to reach a deal on cutting the federal budget deficit.

The Business Roundtable on Tuesday kicked off a print, radio and online ad campaign on which it plans to spend hundreds of thousands of dollars featuring the chiefs of Honeywell International Inc , Xerox Corp and United Parcel Service Inc calling on lawmakers to resolve the issue.

In an opinion piece published on Tuesday evening on the Wall Street Journal’s website, Goldman Sachs Chief Executive Officer Lloyd Blankfein urged the business community and the Obama administration to compromise and reconcile so as not to derail the fragile recovery.

One of the more dramatic warnings of the consequences of allowing the U.S. economy to go over the fiscal cliff came from Honeywell CEO David Cote.

“If the last debt ceiling discussion was playing with fire, this time they’re playing with nitroglycerin,” Cote said in an interview. “If they go off the cliff, I think it would spark a recession that’s a lot bigger than economists think. Some think it would just be a small fire. I think it could turn into a conflagration.”

The nonpartisan Congressional Budget Office (CBO) estimates that the U.S. economy would contract 0.5 percent in 2013 if the government fails to stop the budget cuts and tax increases – far below the 2 percent growth economists currently forecast.

A failure in Washington to solve the crisis by the year’s end could prompt major companies to curtail investment plans, said Duncan Niederauer, CEO of NYSE Euronext , operator of the New York Stock Exchange.

“We simply won’t be investing in the United States. We will be investing elsewhere where we have more certainty of the outcome,” Niederauer said in an interview.

About a dozen top U.S. CEOs, including General Electric Co’s Jeff Immelt, Aetna Inc’s Mark Bertolini, American Express Co’s Ken Chenault and Dow Chemical Co’s Andrew Liveris are scheduled to meet with President Barack Obama on Wednesday to discuss the issue.

The four are members of “Fix the Debt,” an ad-hoc lobbying organization that this week launched an advertising campaign that advocates long-term debt reduction.

UNCERTAINTY FACTOR

Bank of America Corp CEO Brian Moynihan said on Tuesday that worries about the cliff have companies holding off on spending.

“That uncertainty continues to hold back the recovery,” Moynihan said, speaking at an investor conference in New York.

Sandy Cutler, CEO of manufacturer Eaton Corp , shared his concern.

“Until we solve the fiscal issues (in the United States and Europe), you’re not going to get back to normal GDP growth,” Cutler told investors on Tuesday.

CEOs are not alone in this worry. The CBO report warned that failure to reach a deal could push the U.S. unemployment rate up to 9.1 percent, the highest since July 1991. It is currently 7.9 percent.

Obama and the Republican leadership of the House of Representatives have signaled a more conciliatory tone since last week’s election, when Obama soundly defeated Republican challenger Mitt Romney, whose party retained a majority in the House.

Wilbur Ross, an investor known for taking stakes in distressed companies, is bracing for higher tax rates in 2013.

“We, like many people, have been trying to utilize gains this year. It does seem that the probability is that rates will go up,” Ross said in an interview with Reuters Insider. “We don’t have a “for sale” sign on anything. But we are mindful that there is a benefit to concluding things this year rather than next.

NO SIGNS OF PANIC

Concerns about the cliff have not prompted customers to cancel orders, though they have added to an overall level of uneasiness that has companies wary of making large capital purchases or hiring significant numbers of new workers.

“We haven’t seen the panicking, like, ‘I’m not going to order something because of the fiscal cliff,’” said Steve Shawley, chief financial officer of heating and cooling systems maker Ingersoll Rand Plc . “Customers are being very judicious with their orders.”

Likewise, JPMorgan Chase & Co CEO Jamie Dimon last month told investors he did not expect the negotiations to hurt lending in the fourth quarter.

“The fiscal cliff isn’t going to change us,” Dimon said, referring to JPMorgan’s commercial bank, which loans money to businesses. The bank’s investment banking side could be more vulnerable if the debate makes investors jittery, he allowed.

WEAPONS, MEDICINES IN THE CROSS-HAIRS

The defense and healthcare sectors are the most vulnerable to the fiscal cliff, as they face the threat of sequestration — automatic, across-the-board cuts to their funding.

Makers of weapons systems note that they have long been preparing for declining sales as the United States winds down two long wars in Iraq and Afghanistan. The industry has already shed tens of thousands of jobs and closed facilities.

Lockheed Martin Corp’s new president and chief operating officer, Marillyn Hewson, told analysts on Monday her company had been preparing for tighter defense budgets for years, even before the sequestration deal.

“We aren’t going to see a major change,” said Hewson. “We’ve been very proactive as a leadership team in taking actions in recent years to address our cost structure, to look at how we can make our product more affordable.”

Automatic cuts to the federal budget could reduce federal health spending by $ 21.5 billion in 2013, potentially affecting everything from Medicare to the Food and Drug Administration, according to an analysis by PwC’s Health Research Institute.

Vincent Forlenza, the CEO of Becton Dickinson & Co , said the labs he supplies have held off on buying new instruments because of the threat of spending cuts.

“If we don’t get to a deal we will have another year of paralysis and putting off research,” Forlenza said. “The impact of uncertainty on the (National Institutes of Health) budget is causing our research customers to put off research.”

(The story corrects spelling of company name in penultimate paragraph to “Becton Dickinson” instead of “Beckton Dickinson”)

(Additional reporting by John McCrank, Nick Zieminski, Caroline Humer, Jed Horowitz, Sharon Begley and Daniel Wilchins in New York, Rick Rothacker in Charlotte, North Carolina, Nichola Groom in Los Angeles, Andrea Shalal-Esa in Washington, Debra Sherman in Chicago and Anna Driver in Houston; Editing by Patricia Kranz and Steve Orlofsky and Carol Bishopric)

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Sources: BP to pay record fine for Gulf Coast disaster

HOUSTON/WASHINGTON (Reuters) - BP Plc is expected to pay a record U.S. criminal penalty and plead guilty to criminal misconduct in the 2010 Deepwater Horizon disaster through a plea deal reached with the Department of Justice (DoJ) that may be announced as soon as Thursday, according to sources familiar with discussions.

Three sources, who spoke to Reuters on condition of anonymity, said BP would plead guilty in exchange for a waiver of future prosecution on the charges.

BP confirmed it was in "advanced discussions" with the DoJ and the Securities & Exchange Commission (SEC).

The talks were about "proposed resolutions of all U.S. federal government criminal and SEC claims against BP in connection with the Deepwater Horizon incident," it said in a statement on Thursday, but added that no final agreements had been reached.

The discussion do not cover federal civil claims, both BP and the sources said.

London-based oil giant BP has been locked in months-long negotiations with the U.S. government and Gulf Coast states to settle billions of dollars of potential civil and criminal liability claims resulting from the April 20, 2010, explosion aboard the Deepwater Horizon rig.

The sources did not disclose the amount of BP's payment, but one said it would be the largest criminal penalty in U.S. history. That record is now held by Pfizer Inc, which paid a $1.3 billion fine in 2009 for marketing fraud related to its Bextra pain medicine.

The DoJ declined to comment.

The deal could resolve a significant share of the liability that BP faces after the explosion killed 11 workers and fouled the shorelines of four Gulf Coast states in the worst offshore spill in U.S. history. BP, which saw its market value plummet and replaced its CEO in the aftermath of the spill, still faces economic and environmental damage claims sought by U.S. Gulf Coast states and other private plaintiffs.

The fine would far outstrip BP's last major settlement with the DoJ in 2007, when it payed about $373 million to resolve three separate probes into a deadly 2005 Texas refinery explosion, an Alaska oil pipeline leak and fraud for conspiring to corner the U.S. propane market.

The massive settlement, which comes a week after the U.S. presidential election, could ignite a debate in Congress about how funds would be shared with Gulf Coast states, depending on how the deal is structured. Congress passed a law last year that would earmark 80 percent of BP penalties paid under the Clean Water Act to the spill-hit states of Louisiana, Mississippi, Alabama, Florida and Texas.

POTENTIAL LIABILITY

In an August filing, the DoJ said "reckless management" of the Macondo well "constituted gross negligence and willful misconduct" which it intended to prove at a civil trial set to begin in New Orleans in February 2013. The U.S. government has not yet filed any criminal charges in the case.

Given that the deal will not resolve any civil charges brought by the Justice Department, it is also unclear how large a financial penalty BP might pay to resolve the charges, or other punishments that BP might face.

Negligence is a central issue to BP's potential liability. A gross negligence finding could nearly quadruple the civil damages owed by BP under the Clean Water Act to $21 billion in a straight-line calculation.

Still unresolved is potential liability faced by Swiss-based Transocean Ltd, owner of the Deepwater Horizon vessel, and Halliburton Co, which provided cementing work on the well that U.S. investigators say was flawed. Both companies were not immediately available for comment.

According to the Justice Department, errors made by BP and Transocean in deciphering a pressure test of the Macondo well are a clear indication of gross negligence.

"That such a simple, yet fundamental and safety-critical test could have been so stunningly, blindingly botched in so many ways, by so many people, demonstrates gross negligence," the government said in its August filing.

Transocean in September disclosed it is in discussions with the Justice Department to pay $1.5 billion to resolve civil and criminal claims.

The mile-deep Macondo well spewed 4.9 million barrels of oil into the Gulf of Mexico over a period of 87 days. The torrent fouled shorelines from Texas to Florida and eclipsed in severity the 1989 Exxon Valdez spill in Alaska.

BP has already announced an uncapped class-action settlement with private plaintiffs that the company estimates will cost $7.8 billion to resolve litigation brought by over 100,000 individuals and businesses claiming economic and medical damages from the spill.

(Additional reporting by Andrew Callus in London; Editing by Edward Tobin and David Stamp)

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Beating tax cheats key to Italy’s recovery plan

ROME (AP) — Good plumbers may be worth their weight in gold, but when one was spotted zipping around in a bright red Ferrari, Italian tax police were fast on his trail.

Stamping out entrenched tax evasion is crucial to Premier Mario Monti‘s quest to keep Italy from succumbing to the European debt crisis, and it is critical to fellow eurozone members in more dire straits, such as Greece and Spain — which are also notorious for making cheating the taxman a way of life.

Indeed, Greece’s international rescue creditors have been pressing Greece for two years to reform its ailing tax system, citing poor collection as a key factor keeping the country mired in crisis. In Spain, where tax fraud is rampant, as much as €90 billion ($ 150 billion) is lost each year to tax fraud — the equivalent of the country’s national debt, according to Spain’s main tax inspectors union.

To succeed in Italy, authorities will have to catch the legions of self-employed and small business owners who brazenly lie about their earnings, like the plumber in the eastern town of Pescara, who socked away undeclared income in 30 bank accounts, or a successful pastry shop owner in Calabria, who on his tax return claimed he was earning next to crumbs.

And those are the less sophisticated schemers.

Tax police officials say that wealthy Italians, their companies and foreigners who make their money in Italy are increasingly trying to avoid taxes by using such strategies as falsely declaring that their base of operations or residence is abroad.

Another daunting challenge is the so-called “submerged” economy, a term embracing Italians who declare only a fraction or nothing at all of their earnings — and dentists, lawyers, doctors and other big-earning professionals are frequently among the worst offenders.

Tax evasion of all types in Italy totals about euros 240 billion ($ 300 billion), or 15 percent of the country’s gross domestic product of €1.6 trillion ($ 2 trillion), tax police estimate. Winning the war on tax cheats could therefore more than wipe out the country’s budget deficit, which is expected to increase to euros 42 billion ($ 53 billion), or 2.6 percent of GDP this year. That would start knocking away at the nation’s colossal public debt of €2 trillion ($ 2.5 trillion), or 125 percent of GDP.

But “big international frauds are up,” lamented Lt. Col. Gianluca Campana, in charge of the income tax unit revenue protection office at the Guardia di Finanza, Italy’s financial police corps which reports to the Economy Ministry.

The entrenched practice by many cafes, eateries, hair dressers and similar small business of neglecting to give customers mandatory cash register receipts commonly grabs the attention in crackdowns on tax evasion in Italy.

But, cautioned Campana, “one false (big business) invoice can equal no cash register receipts for coffees for two months.”

Over all of 2011, the total of non-declared income discovered by tax police amounted to some €50 billion ($ 65 billion), of which some 20 percent was due to international tax evasion, he said. By comparison, in the first nine months of this year, tax police discovered some €40 billion in undeclared income, with 30 percent of that blamed on international tax evasion, Campana said.

With the economic crisis shrinking bottom lines, and Italy increasingly on the hunt for big-time evasion, especially by big businesses, “there is a tendency to move capital abroad, using maneuvers apparently legal but which really are not,” Campana said. A classic technique consists of declaring one’s formal residence abroad in tax havens like Monte Carlo. Also common are companies that clearly have their business base in Italy but claim it is abroad in countries with far lower tax brackets.

Campana is armed with three degrees, including a masters in tax law from Milan’s Bocconi University, the prestigious economics institute formerly headed by Monti. He brings skills to this specialized police corps that are as finely tuned as sharp-shooting.

“We are going after the big cases (of evasion) in order to rake in more money,” Campana said.

The Ferrari-driving plumber hid some €2 million ($ 2.6 million) of his income over several years by giving his customers invoices — for jobs ranging from fixing leaks to installing new bathrooms — for the actual cost of his work, but kept a second, false registry of much lower figures for tax purposes, said Pescara tax police Col. Mauro Odorisio.

Armed with a 2008 law, authorities confiscated assets belonging to the plumber equivalent to the approximately €1 million ($ 1.3 million) they contend he owed in taxes, Odorisio said.

With Ferraris in red or yellow, and snazzy Porsches parked inside, Guardia di Finanza garages practically resemble luxury car dealerships.

The cars get sold to help recoup unpaid taxes and interest.

Overall, tax revenues in Italy were up by 4.1 percent, says the Economy Ministry, when comparing figures from the first eight months of 2012 with the same period in 2011, but much of that was due to new taxes, and not necessarily a revolution in citizens’ consciences about tax obligations.

Monti’s recipe relies heavily on taxes that are nearly impossible to avoid, such as sales tax. He also revived a property tax that his populist predecessor, Premier Silvio Berlusconi, had abolished in a promise to voters.

The ministry’s report last month noted that the property tax figured prominently in the “tendency toward growth” in tax revenues. But sales tax revenue dropped slightly despite higher sales tax rates, indicating that consumers were feeling the pinch of the stagnant economy.

The heavier fiscal burden seems to have driven some honest citizens to rebel against the engrained culture of tax evasion.

The number of phone calls from the public to the tax police’s hotline to report stores, restaurants and other businesses that didn’t give customers sales receipts has almost doubled in the first nine months of this year, compared with the same period in 2011.

It’s apparently dawning on Italians that shirking taxes in the end only costs them, in terms of ever-higher levies and cutbacks in public services.

Citizens now increasingly understand that “the lack of revenue over time caused by tax evaders forced the government to stiffen the tax burden on categories where you can’t evade taxes,” Campana said, referring to workers whose taxes are deducted from paychecks. Another area where evasion is close to impossible is real estate ownership.

Odorisio noted the crackdown included extending the statute of limitations on tax evasion from six to eight years and establishing prison as a penalty for big-time evasion.

Other weapons include a measure promoted by the Monti government that limits cash payments to no more than €1,000. Paying by credit card or personal check is a relatively new habit for Italians, who are used to carrying wads of cash in their pockets, even for big-ticket items like home renovations or vacations.

Past governments in Italy sometimes resorted to tax amnesties to try to boost revenues. But critics, contending some Italians counted on such a possibility, described that strategy as only perpetuating the tax cheat culture.

Spain hasn’t had much success with its own tax amnesty introduced by the conservative government in March. That measure, expiring soon, allows undeclared assets or those hidden in tax havens to be repatriated by paying a 10 percent tax without criminal penalty. The amnesty is estimated to recuperate far less than the expected €2.5 billion ($ 3.25 billion).

Greece saw demands for tax system reform from international rescue creditors added on to conditions for future rescue loan payments, as Greek authorities acknowledged that a high-profile campaign to crack down on major tax cheats has produced disappointing results.

The cash-strapped government over the last 10 months recovered just €19 million ($ 25 million) of the €13 billion ($ 17 billion) of arrears on the list. A prominent Greek magazine publisher recently tapped anger over rich tax evaders by publishing a list of people allegedly holding Swiss bank accounts. He was acquitted this month of breaching privacy laws.

Meanwhile, Italian tax police are chasing after cheats who have shown some of the most chutzpah about not paying their fair share of taxes, like the Padua woman who advertised on the Internet that she had a couple of “cash-only” bed and breakfast rooms to let.

Tax police discovered the lodgings are part of an apartment in public housing she was given after falsely declaring she was indigent on her annual tax forms.

____

AP reporters Derek Gatopoulos in Athens and Ciaran Giles in Madrid contributed to this report.

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Software pioneer McAfee says framed for murder in Belize

BELIZE CITY (Reuters) – Computer security industry pioneer John McAfee says he has gone into hiding in Belize because he believes authorities there are trying to frame him for the murder of a neighbor, a crime he says he did not commit, according to Wired magazine.

Belize police are searching for McAfee as “a person of interest” in a murder investigation.

“You can say I’m paranoid about it, but they will kill me, there is no question. They’ve been trying to get me for months. They want to silence me,” Wired quoted McAfee as saying on its website. “I am not well liked by the prime minister. I am just a thorn in everybody’s side.”

The magazine reported that McAfee, 67, contacted one of its reporters by telephone after his neighbor Gregory Faull, was found dead on Sunday in a pool of blood. The 52-year-old American was apparently shot in the head in his home on the island of Ambergris Caye.

Police say McAfee had a history of conflict with Faull, whose post-mortem was expected to be conducted on Tuesday.

McAfee, who amassed a fortune by building the anti-virus company that bears his name, has homes and businesses in the Central American country where police say he has lived for at least two years.

It was not the first time McAfee, who has tattoos, a goatee beard and mustache, and a penchant for guns, has drawn police attention in Belize.

His premises were raided earlier this year after he was accused of holding firearms, though most were found to be licensed. The final outcome of the case is pending.

He was also suspected of running a lab to make the synthetic drug crystal meth.

“He was suspected (of making crystal meth) but he was not convicted nor was he charged. He was only suspected,” said Belize police spokesman Raphael Martinez.

McAfee also owns a security company in Belize as well as several properties, an ecological enterprise and a water taxi and ferry business.

Reuters could not reach McAfee, who police want to question.

“It would be quite nice for him to come in and answer some of the questions that could lead to the closure of this case,” Martinez said. “He is not wanted for murder, but he is wanted for questioning as a person of interest.”

One man in Belize who knows McAfee well told Reuters he believed the American’s troubles began when he turned down requests for donations to the ruling United Democratic Party (UDP) to help fund its successful re-election bid in March.

“He rejected them because he doesn’t believe in participating in politics,” said the man, who spoke on condition of anonymity, calling McAfee an “honorable person.”

McAfee said earlier this year he had refused to donate to the UDP, which could not immediately be reached for comment.

The Belize police department has reached out to counterparts in neighboring Mexico and Guatemala, asking them to detain McAfee if he leaves Belize overland.

McAfee was one of Silicon Valley’s first entrepreneurs to amass a fortune by building a business off the Internet.

The former Lockheed systems consultant started McAfee Associates in 1989, initially distributing anti-virus software as “shareware” on Internet bulletin boards.

He took the company public in 1992 and left two years later following accusations that he had hyped the arrival of a virus known as Michelangelo, which turned out to be a dud, to scare computer users into buying his company’s products.

McAfee currently has no relationship with the software company, which has since been sold to Intel Corp.

(Reporting by Jim Finkle in Boston, Jose Sanchez in Belize City, Simon Gardner and Dave Graham in Mexico City; Editing by Kieran Murray and Eric Walsh)

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Planned Parenthood seeks injunction over Oklahoma health program

OKLAHOMA CITY (Reuters) – Planned Parenthood asked a federal judge on Tuesday to stop Oklahoma from blocking it from participating in a federally funded nutrition program that helps poor women and children at three clinics in the Tulsa area.

The request, filed in federal court in Oklahoma City, appeared aimed at combating a move similar to those taken by conservative Republicans in more than a dozen states over the past two years to eliminate funding for health services provided by Planned Parenthood.

The non-profit women’s health organization has administered a federal program called Women, Infants & Children for 18 tears in Oklahoma’s Tulsa County, but the state health department said in September it would let other clinics provide the services, blocking Planned Parenthood from taking part.

That decision followed a failed attempt in the Republican-controlled Oklahoma legislature in May to prohibit WIC benefits from being administered by Planned Parenthood because it provides abortion referrals.

The state health department has denied its decision was tied to Planned Parenthood’s position on abortion, citing decreasing caseloads, high costs and billing questions with the Planned Parenthood clinics as reasons for its decision. State health officials were not immediately available for comment.

The Oklahoma Policy Institute, a nonprofit organization that examines public policy, has called the health department’s reasons inaccurate.

Planned Parenthood attorney Tamya Cox said the group was seeking the injunction to protect access to nutritional services for about 3,000 women and children that used the three clinics in September.

The group’s request said that other clinics in Tulsa County can’t absorb the caseload that the Planned Parenthood clinics handled and that there was a three-month waiting list to make an appointment at the other clinics.

“Politics should never interfere with a woman’s access to health services – or food for her children,” Cox said.

(Editing by Cynthia Johnston and Eric Walsh)

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'Warrior monk' at center of growing scandal

WASHINGTON (Reuters) - Marine Corps General John Allen, the soberly formal, spit-and-polish head of U.S. and international forces in Afghanistan, is not a military leader whose image immediately conjures up the word "flirtatious."

The four-star general, who succeeded General David Petraeus last year as head of the International Security Assistance Force, is known for his ability to work with tribal sheikhs, a skill that helped him turn the tide against al Qaeda in Anbar Province in Iraq five years ago and has served him well in Afghanistan.

So the news that Allen, a 36-year veteran of the Marine Corps, had been snared in the same investigation that prompted the resignation of Petraeus as CIA director last week was greeted with surprise at the Pentagon and elsewhere in Washington.

John Ullyot, who served under Allen at Camp Lejeune in North Carolina in 1993, said he was all about "setting the example" for those under him and it was "hard for anyone who ever served under Allen" to believe he had been pulled into the probe.

Allen, who is married and has two daughters, "was known as a kind of warrior monk," said Ullyot, who was a spokesman for former U.S. Senator John Warner, a Republican who chaired the Senate Armed Services Committee.

Allen's connection to the probe that snared Petraeus was revealed early on Tuesday when Defense Secretary Leon Panetta announced he was putting Allen's nomination as head of U.S. European Command on hold pending an investigation.

A senior U.S. defense official said Panetta had asked the Defense Department's inspector general to investigate what the Pentagon called "inappropriate communication" between Allen and Jill Kelley, a Tampa, Florida socialite who is involved in volunteer causes that support the military.

Kelley is the woman who told the FBI she had received anonymous harassing emails about Petraeus. The FBI investigation into the emails uncovered an extramarital affair between Petraeus and his biographer, Paula Broadwell, who was found to be the source of the emails to Kelley, officials have said.

The FBI investigation also uncovered 20,000 to 30,000 pages of emails between or copied to Allen and Kelley. While defense officials were unable to say exactly how many emails there were between the two, the volume in pages raised concerns, they said.

A senior defense official, speaking on condition of anonymity, said the emails were "flirtatious" in nature, but did not deal with security or military business. The official said he had not seen the emails and could not say whether they were merely friendly or sexually explicit.

The investigation came just two days before Allen, the first Marine to serve as Commandant of Midshipmen at the U.S. Naval Academy, was to testify at a confirmation hearing naming him to replace Admiral James Stavridis as head of the U.S. European Command and Supreme Allied Commander Europe.

RECOMMENDED BY PETRAEUS

Allen and Petraeus have long known one another and served together. Allen was Petraeus' deputy at U.S. Central Command, based in Tampa.

Petraeus personally recommended Allen for the ISAF command. During Allen's confirmation hearing for the job, Senator John McCain told Allen he could "think of no higher compliment to pay a military officer" than to have the kind of support Petraeus had given him.

Allen has served as the head of ISAF since July 2011, managing the drawdown of U.S. forces following a surge that helped push Taliban insurgents out of major cities across the country.

His time in Afghanistan also has been marked by a spate of incidents that have enraged Afghans. They include video images of troops urinating on Taliban corpses and the burning of Korans and religious texts taken from a prison library. There also has been a surge in attacks on international forces by their Afghan partners.

Allen has handled the incidents with sensitivity, even as tensions have increased, his supporters say.

"I think General Allen has done a good job under very difficult circumstances in Afghanistan," said Senator Susan Collins, a member of the Armed Services Committee.

McCain, the top Republican on the Armed Services Committee, said he was surprised by the probe of Allen's emails and urged people to withhold judgment until the inspector general had finished his investigation.

"I have great respect and appreciation for the work that General Allen has done," he said. "If we fail in Afghanistan, which we are, it's because of decisions that were made by the president, not by General Allen."

"General Allen has said that he is not guilty of any improper behavior," McCain added. "He deserves to have us withhold judgment until the investigation is completed."

Allen, a 1976 Naval Academy graduate, served from 2008 to 2011 as deputy commander of U.S. Central Command, which oversees U.S. military dealings with countries from Egypt to Kazakhstan, including Afghanistan and Pakistan.

He was a deputy commanding general of the 2nd Marine Expeditionary Force in Iraq from 2006 to 2008.

(Additional reporting by Susan Cornwell. Editing by Warren Strobel and Christopher Wilson)

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General investigated for emails to Petraeus friend

PERTH, Australia (AP) — In a new twist to the Gen. David Petraeus sex scandal, the Pentagon said Tuesday that the top American commander in Afghanistan, Gen. John Allen, is under investigation for alleged “inappropriate communications” with a woman who is said to have received threatening emails from Paula Broadwell, the woman with whom Petraeus had an extramarital affair.

Defense Secretary Leon Panetta said in a written statement issued to reporters aboard his aircraft, en route from Honolulu to Perth, Australia, that the FBI referred the matter to the Pentagon on Sunday.

Panetta said that he ordered a Pentagon investigation of Allen on Monday.

A senior defense official traveling with Panetta said Allen’s communications were with Jill Kelley, who has been described as an unpaid social liaison at MacDill Air Force Base, Fla., which is headquarters to the U.S. Central Command. She is not a U.S. government employee.

Kelley is said to have received threatening emails from Broadwell, who is Petraeus’ biographer and who had an extramarital affair with Petraeus that reportedly began after he became CIA director in September 2011.

Petraeus resigned as CIA director on Friday.

Allen, a four-star Marine general, succeeded Petraeus as the top American commander in Afghanistan in July 2011.

The senior official, who discussed the matter only on condition of anonymity because it is under investigation, said Panetta believed it was prudent to launch a Pentagon investigation, although the official would not explain the nature of Allen’s problematic communications.

The official said 20,000 to 30,000 pages of emails and other documents from Allen’s communications with Kelley between 2010 and 2012 are under review. He would not say whether they involved sexual matters or whether they are thought to include unauthorized disclosures of classified information. He said he did not know whether Petraeus is mentioned in the emails.

“Gen. Allen disputes that he has engaged in any wrongdoing in this matter,” the official said. He said Allen currently is in Washington.

Panetta said that while the matter is being investigated by the Defense Department Inspector General, Allen will remain in his post as commander of the International Security Assistance Force, based in Kabul. He praised Allen as having been instrumental in making progress in the war.

The FBI’s decision to refer the Allen matter to the Pentagon rather than keep it itself, combined with Panetta’s decision to allow Allen to continue as Afghanistan commander without a suspension, suggested strongly that officials viewed whatever happened as a possible infraction of military rules rather than a violation of federal criminal law.

Allen was Deputy Commander of Central Command, based in Tampa, prior to taking over in Afghanistan. He also is a veteran of the Iraq war.

In the meantime, Panetta said, Allen’s nomination to be the next commander of U.S. European Command and the commander of NATO forces in Europe has been put on hold “until the relevant facts are determined.” He had been expected to take that new post in early 2013, if confirmed by the Senate, as had been widely expected.

Panetta said President Barack Obama was consulted and agreed that Allen’s nomination should be put on hold. Allen was to testify at his confirmation hearing before the Senate Armed Services Committee on Thursday. Panetta said he asked committee leaders to delay that hearing.

NATO officials had no comment about the delay in Allen’s appointment.

“We have seen Secretary Panetta‘s statement,” NATO spokeswoman Carmen Romero said in Brussels. “It is a U.S. investigation.”

Panetta also said he wants the Senate Armed Services Committee to act promptly on Obama’s nomination of Gen. Joseph Dunford to succeed Allen as commander in Afghanistan. That nomination was made several weeks ago. Dunford’s hearing is also scheduled for Thursday.

___

Associated Press writer Slobodan Lekic in Kabul, Afghanistan, contributed to this report.

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Head of Microsoft’s Windows unit steps down

(Reuters) – Microsoft Corp said the head of its flagship Windows division and the driving force behind Windows 8, Steven Sinofsky, will be leaving the company with immediate effect, days after the software giant launched the Surface tablet.

Sinofsky, who presented at the launch of the Windows 8 operating system in New York City last month, will be succeeded by Julie Larson-Green, who will head the Windows hardware and software division, the company said in a statement.

Tami Reller will remain chief financial officer and chief marketing officer and will assume responsibility for the business of Windows.

Both executives will report directly to Microsoft CEO Steve Ballmer, Microsoft said.

At the launch event in October, Sinofsky and his team showed off a range of devices running Windows 8 from PC makers such as Lenovo Group Ltd and Acer Inc, but devoted most of their energy to the second half of the presentation and the Surface tablet, the first computer Microsoft has made itself.

(Reporting by Sakthi Prasad and Nicola Leske; Editing by Edmund Klamann)

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Syrian Red Crescent estimates 2.5 million uprooted in Syria

GENEVA (Reuters) – The Syrian Arab Red Crescent estimates that 2.5 million people are internally displaced within Syria by civil war, doubling the previous figure of 1.2 million used by aid agencies, the United Nations refugee agency said on Tuesday.

“The figure they are using is 2.5 million. If anything, they believe it could be more, this is a very conservative estimate,” Melissa Fleming, chief spokeswoman of the U.N. High Commissioner for Refugees (UNHCR), told a news briefing in Geneva.

“So people are moving, really on the run, hiding. They are difficult to count and access,” she said.

The United Nations said on Friday that up to 4 million people inside Syria will need humanitarian aid by early next year when the country is in the grip of winter, up from 2.5 million now whose needs are not fully met.

The UNHCR has temporarily withdrawn about half of its 12 staff from north-eastern Hassaka province due to fierce fighting and insecurity that has resulted in the loss of some aid supplies and driven more Syrian Kurds into Iraq, Fleming said.

More than 407,000 Syrian refugees have registered or await registration in the surrounding region – Lebanon, Turkey, Jordan and Iraq – and more are fleeing every day, she said.

(Reporting by Stephanie Nebehay; Editing by Janet Lawrence)

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Petraeus probe ensnares top U.S. commander in Afghanistan

PERTH, Australia (AP) — In a new twist to the Gen. David Petraeus sex scandal, the Pentagon said Tuesday that the top American commander in Afghanistan, Gen. John Allen, is under investigation for alleged "inappropriate communications" with a woman who is said to have received threatening emails from Paula Broadwell, the woman with whom Petraeus had an extramarital affair.

Defense Secretary Leon Panetta said in a written statement issued to reporters aboard his aircraft, en route from Honolulu to Perth, Australia, that the FBI referred the matter to the Pentagon on Sunday.

Panetta said that he ordered a Pentagon investigation of Allen on Monday.

A senior defense official traveling with Panetta said Allen's communications were with Jill Kelley, who has been described as an unpaid social liaison at MacDill Air Force Base, Fla., which is headquarters to the U.S. Central Command. She is not a U.S. government employee.

Kelley is said to have received threatening emails from Broadwell, who is Petraeus' biographer and who had an extramarital affair with Petraeus that reportedly began after he became CIA director in September 2011.

Petraeus resigned as CIA director on Friday.

Allen, a four-star Marine general, succeeded Petraeus as the top American commander in Afghanistan in July 2011.

The senior official, who discussed the matter only on condition of anonymity because it is under investigation, said Panetta believed it was prudent to launch a Pentagon investigation, although the official would not explain the nature of Allen's problematic communications.

The official said 20,000 to 30,000 pages of emails and other documents from Allen's communications with Kelley between 2010 and 2012 are under review. He would not say whether they involved sexual matters or whether they are thought to include unauthorized disclosures of classified information. He said he did not know whether Petraeus is mentioned in the emails.

"Gen. Allen disputes that he has engaged in any wrongdoing in this matter," the official said. If Allen was found to have had an affair with Kelley, he could face charges of adultery, which is a crime under the Uniform Code of Military Justice.

Panetta said that while the matter is being investigated by the Defense Department Inspector General, Allen will remain in his post as commander of the International Security Assistance Force, based in Kabul. He praised Allen as having been instrumental in making progress in the war.

But the Allen investigation adds a new complication to an Afghan war effort that is at a particularly difficult juncture. Allen had just provided Panetta with options for how many U.S. troops to keep in Afghanistan after the U.S.-led coalition's combat mission ends in 2014. And he was due to give Panetta a recommendation soon on the pace of U.S. troop withdrawals in 2013.

The war has been largely stalemated, with little prospect of serious peace negotiations with the Taliban and questions about the Afghan government's ability to handle its own security after 2014.

At a photo session with Australian Prime Minister Julia Gillard shortly after he arrived in Perth, Panetta was asked by a reporter whether Allen could remain an effective commander in Kabul while under investigation. Panetta did not respond.

The FBI's decision to refer the Allen matter to the Pentagon rather than keep it itself, combined with Panetta's decision to allow Allen to continue as Afghanistan commander without a suspension, suggested strongly that officials viewed whatever happened as a possible infraction of military rules rather than a violation of federal criminal law.

Allen was Deputy Commander of Central Command, based in Tampa, prior to taking over in Afghanistan. He also is a veteran of the Iraq war.

In the meantime, Panetta said, Allen's nomination to be the next commander of U.S. European Command and the commander of NATO forces in Europe has been put on hold "until the relevant facts are determined." He had been expected to take that new post in early 2013, if confirmed by the Senate, as had been widely expected.

The military official said Allen is in Washington, where he was to testify at his confirmation hearing before the Senate Armed Services Committee on Thursday. Panetta said he asked committee leaders to delay that hearing.

The senior defense official said Panetta has not talked to Allen about the investigation, nor has he discussed the matter with President Barack Obama, although he consulted with unspecified White House officials before making the decision to seek a postponement of Allen's confirmation hearing.

Panetta did talk about the Allen matter with Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, who happens to also be in Perth for a meeting of American and Australian diplomatic and defense officials. Those talks were starting Tuesday with an official dinner.

With a cloud over Allen's head, it was unclear Tuesday whether he would return to Kabul, even though Panetta said Allen would remain in command. The second-ranking American general in Afghanistan is Army Lt. Gen. James Terry.

NATO officials had no comment about the delay in Allen's appointment.

"We have seen Secretary Panetta's statement," NATO spokeswoman Carmen Romero said in Brussels. "It is a U.S. investigation."

Panetta also said he wants the Senate Armed Services Committee to act promptly on Obama's nomination of Gen. Joseph Dunford to succeed Allen as commander in Afghanistan. That nomination was made several weeks ago. Dunford's hearing is also scheduled for Thursday.

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Associated Press writer Slobodan Lekic in Kabul, Afghanistan, contributed to this report.

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