I must be psychic, or at least recognize that regulators do what they do: shut down what they cannot understand or control. The Bitcoin risk is becoming real. First, The Reserve Bank of India issued a warning to people dealing in Bitcoin about the risks involved in dealing in Bitcoin. Were they just being helpful?
The warning did not explictly say that dealing in Bitcoin was illegal, but it offered this bit of foreshadowing:
“The Reserve Bank has also stated that it is presently examining the issues associated with the usage, holding and trading of VCs under the extant legal and regulatory framework of the country, including Foreign Exchange and Payment Systems laws and regulations.”
A couple of days later, Indian authorities raided a Bitcoin trading platform, buysellbit.com.in. The Enforcement Directorate conducted the raid since the central bank does not provide permission to indulge in such transactions [Ed.: We assume something was lost in translation here, but you get the idea.]
“’We are gathering the data of the transactions, name of the people who have transacted in the virtual currency from Gupta’s server that is hired in the US. At present, we believe that this is a violation of foreign exchange regulations of the country. If we are able to establish money laundering aspect then he can be arrested,’ said a top ED official.”
John Carney at CNBC posted an interesting article posing the question about whether insider trading should be a crime. In light of Michael Steinberg’s conviction for securities fraud due to his activities at SAC Capital, Carney asks who were the victims and what was the harm?
In Steinberg’s case, part of the facts involved trading on early access to Dell’s earnings. Why is this a big deal?
But it’s hard to see how Steinberg’s acquisition of Dell’s earnings a day early hurt the company in any way. His trading may or may not have moved the stock price a bit but the actual release of the earnings moved it more.
Does Dell have an intellectual property right in its earnings? We don’t really recognize all corporate secrets or corporate information as protected intellectual property, much less property whose unauthorized use gives rise to criminal sanctions. There are certain categories—trade secrets, trademarks, copyrights—that are protected. But earnings aren’t trade secrets. Dell released them the very next day.
It is important to remember that Steinberg’s trading did not involve face-to-face arm’s length transactions with the counterparties. They were nameless and faceless people who never met Steinberg, knew Steinberg was in the market to buy or sell Dell shares or placed their orders with any knowledge of Steinberg and what he may have known or not known, disclosed or not disclosed. As Carney points out, regardless of what Steinberg did, each one of them would have acted in the exact same way.
What about the people who bought the shares of Dell on the day Steinberg was selling? Again, they would have been in exactly the same position regardless of whether Steinberg traded or not. Arguably, they were able to buy at a slightly better price because Steinberg’s trades would have pushed the stock slightly in the direction the stock actually moved when the earnings became public.
You’ll sometimes hear it said that the people on the other side of Steinberg’s trades were harmed because they wouldn’t have bought the shares if they had the same information he had. But that’s precisely the wrong test. The question isn’t what would they have done if they also had inside information. It’s what would they have done if Steinberg hadn’t had his information? The answer is: exactly what they did anyway. Steinberg’s possession of inside information didn’t affect them one bit.
Carney comes to a similar conclusion that I have always believed. This type of insider trading is not about protecting people. It is about (1) punishing success and profit [Ed. This is more me than Carney], and (2) a gut reaction that this behavior is wrong and should be punished. It is about addressing moral qualms, not about stopping harm.
In this respect, Carney compares this type of insider trading to blue laws.
In other words, our ban on insider trading isn’t really about protecting investors or making markets function better. It’s about expressing a moral view, much like we do with Blue Laws that ban the sale of alcohol on Sundays.
There’s nothing necessarily wrong with encoding morality into securities laws.
Yes, there is. We see it everyday in garbage like the ridiculous executive compensation disclosure now imposed on companies. We see it in required environmental disclosure, cybersecurity disclosure and blood minerals disclosure that probably don’t apply to most companies.
We see it every time some activist jumps up to demand that the SEC impose disclosure requirements on all companies that comport with the activists’ agenda, regardless of whether it furthers the mission of the disclosure regime for SEC reporting companies: Do investors have the information they need to make an informed investment decision? End of story.
If those issues are material to the disclosing company, they will have to be discussed. If not, this is nothing more than an extra tax (by way of time and money spent to assess and produce this nonsense) on reporting companies to pay for the whims of some vocal activists, be they outside agitators or Congressmen (who were (and probably still are) able to trade on inside information illegally in a way that would send you or I to prison).
Bitcoin seems to moving away from its seedy reputation as a digital currency for the underworld.
Coinbase, a San Francisco based startup founded in June 2012. It provides a Bitcoin “wallet and platform where merchants and consumers can transact with the new digital currency bitcoin.” If you look at their ‘About‘ page, their kitchen looks spiffy.
Coinbase announced a $25 million funding round led by Andreessen Horowitz and including Union Square Ventures and Ribbit Capital, both existing investors. This brings their funding to $31 million, including the $6 million they announce on their website. Representatives of Andreessen Horowitz and Union Square will join Coinbase’s board.
Much of the trepidation around Bitcoin stems from the regulatory issues. Basically, many people (me included) expect the U.S. federal government to view Bitcoin with hostility, despite recent noises that they are okay with it. To that end, Coinbase says that they will be spending a lot of money for licenses with state regulators.
A Young Socialist-backed proposal to limit executive pay to twelve times the pay of junior employees was voted down by Swiss voters by a vote of 65 percent. The executive pay limits far exceed the disclosure-based limitations of Dodd-Frank and SEC regulations.
According to the Bloomberg article, at least five of Europe’s highest paid execs are in Switzerland.
The leader of the Young Socialist party vowed to continue the fight to:
Send Swiss companies fleeing to other jurisdictions
Severely water down the talent pool willing to work in Switzerland or for a Swiss business
Turn the pool of executives working for Swiss companies into easy prey for headhunters in competing companies in other countries
Make Switzerland toxic to anyone who wants to start a business and hire employees
There may be constraints on UBS leaving Switzerland, but you can bet its CEO (or those talented enough to be in line for executive positions) has plenty of means of escape from this sort of income restriction. However, do you think Glencore (giant international commodities trading firm) can’t structure its business away from these restrictions?
These are the types of consequences that result from navel gazing over “income equality” and generally looking to more successful people with envy and anger rather than looking to more successful people and trying to learn about how to become successful.
The Recorder recently ran an article discussing Fenwick & West’s corporate governance study. I believe F&W produces these annually, and they are excellent resources for anyone interested in the up-to-date information about corporate governance practices, particularly for Silicon Valley companies.
However, there was an interesting statement at the beginning of the article:
“When companies are seeking to establish appropriate corporate governance policies, they often look to model themselves after those titans of industry in the Standard & Poor’s 100.”
Well . . . sometimes.
More often, companies will look to the companies that:
they deem somewhat comparable to the themselves; and
they aspire to be.
Typically, that will include prominent companies in their industry, which may or may not include companies in the S&P 100, 500, Pick-A-Number. They also account for size and complexity and other factors.
For many companies, the governance practices of the S&P 100 will be far too complex and have far too many processes and procedures to have any value. There will often be fewer people in the decision-making process, fewer layers of bureaucracy and the fewer issue-specific policies for smaller companies.
That said, the F&W studies tend to be extremely valuable, and I plan to spend a good part of the weekend reading the new one. I hope your weekend is better than that.
In an appeal of an injunction, the Delaware Supreme Court took a look at whether a stock buyback would be a “business combination” requiring stockholder approval under Activision’s bylaws.
In 2008 Activision bought Vivendi’s video game subsidiary for Activision shares. Vivendi also made a separate cash investment in Activision. Activision’s bylaws were amended to require approval of unaffiliated stockholders with respect to any merger, business combination or similar transaction between Activision and Vivendi. In 2012, Vivendi wanted to sell its Activision stake but found no takers. Activision agreed to a buyback, under which Vivendi would create a non-operating sub, “Amber,” to hold the assets for sale and Activision would purchase Amber. Activision did not seek stockholder approval, which was the part of the reason for the litigation, which resulted in a preliminary injunction.
The court first looked to see if “business combination” was ambiguous. Nope.
“A provision is ambiguous only if it is “reasonably susceptible to more than one meaning,” and the fact that the parties offer two different interpretations does not create an ambiguity. Moreover, a provision “may be ambiguous when applied to one set of facts but not another. Finally, the provision must be read in context.”
The court decided that while the meaning could be ambiguous in some contexts, it was not ambiguous here because under their agreement, Vivendi will sell 429 million shares of Activision stock back to Activision. Because those shares will become treasury stock, control of Activision will shift from Vivendi to Activision’s public stockholders. Vivendi’s holdings will decrease from 61% to 12%, and Vivendi’s representation on Activision’s board will decrease from six appointees to none.
Since there was no “combination or intermingling of Vivendi’s and Activision’s businesses,” it is not a business combination. In fact it is the opposite of a business combination. These companies will be separating themselves. As a result, the stockholder approval requirement does not apply.
In addition, structuring the sale through Amber does not change the analysis. Neither the form of the transaction nor its size changes its fundamental nature. Amber is a shell created to serve as the transaction vehicle. The court stated that calling Amber a business “disregards its inert status” and “glorifies form over substance.”
The size of the deal does not change the analysis. The plaintiffs argued that it was a “value-moving” transaction. However, the bylaws do not require stockholder approval based on size of the deal.
In addition, the bylaws do not require stockholder approval for any deal between Activision and Vivendi, only specified transactions. While the Chancery Court may have been looking out for the non-interested shareholders’ interests, other provisions of the bylaws already provided for independent director approval for related party transactions.
I had a discussion the other day about how start-ups can increase their odds of success. Since I do a lot of work with start-ups, in legal and consulting roles, I offered three tidbits of advice:
1. Business Idea. Do not pick an idea simply because you think it is cool or you will get rich. For example, the start-up graveyard is littered with music industry apps created by people who believed it was their entry into a “cool” industry.
Find a problem that you think you may share with many people and build a solution. This is what good businesses do. They induce customers to pay them to make the customers’ lives easier in some way. Yes, this includes the Facebooks and Twitters of the world who are good at aggregating and identifying users to make advertisers’ jobs easier in targeting an audience.
2. Pick the Right Team. It is important that founders surround themselves with people they trust to be committed to the venture and, most importantly, to produce quality results. The start-up world is populated with many “flakes,” but the founders need to be able to trust that their associates will do what they commit to do. I have seen this over and over. People show up with visions of options and IPOs and foosball tables, but when it comes to actually working and producing results, enthusiasm and attendance fade.
3. Know When to Step Aside. Very often, the skills necessary to start a business are different from the skills needed to grow a business. For example, founders often underestimate the importance of a skilled and talented sales person. This is a skill set just as computer programming is a skill set, and they does not necessarily overlap. In addition, managing an ongoing enterprise is much different than managing the birth of an enterprise. A skilled manager can often be the difference between a hobby with some potential and a successful, growing business.
Enforcement officials often use DPAs to encourage targets to come forward with information about illegal activities and to cooperate with investigations. The agency agrees not to prosecute, and the target agrees to behave.
In this case, the deferree, a hedge fund administrator, spilled the beans about his boss regarding misuse of about $1.5 million and lying to investors about the fund’s performance. The DPA discusses overstatements of fund returns and discrepancies in the net asset value, or NAV, used for internal and external purposes.
The SEC froze the fund’s and the boss’ assets and is preparing to distribute about $6 million to injured investors.
On Thursday, November 7, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) halted trading in all OTC Equity Securities pursuant to FINRA Rule 6440(a)(3). FINRA determined to impose a temporary halt because of a lack of current quotation information. Therefore, FINRA has determined that halting quoting and trading in all OTC Equity Securities is appropriate to protect investors and ensure a fair and orderly marketplace. The trading and quotation halt began on Thursday, November 7, 2013, at 11:25:00 a.m. E.T. FINRA will notify the market when trading may resume.
In the book, there was a discussion of Wing Chau, who helped create and, in theory, manage some disastrous CDOs. He was not portrayed like the brilliant hedge fund managers who cashed in on the crash of real estate-backed securities. He was portrayed like a fool. For this, he sued Lewis for defamation.
I’m not sure if that case is ongoing or not, but the SEC has weighed in. Verdict: fraud charges against Chau for misleading investors in a CDO and for breach of fiduciary duties.
The SEC’s claims that Chau and his firm, Harding Advisory LLC, compromised their independent judgment as collateral manager to a CDO in favor of a hedge fund firm. The hedge fund, the awesomely named Magnetar Capital LLC, had invested in the equity of the CDO. Merrill Lynch structured and marketed the CDO. Harding was collateral manager for the CDO.
Specifically, the SEC claims that Harding agreed to let the hedge fund help select the subprime mortgage-backed assets underlying the CDO. This was not disclosed to investors.
The SEC claims that the influence of the hedge fund led Harding to select assets that its own credit analysts disfavored. In the tradition of criminal geniuses everywhere, in accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch:
“I never forget my true friends.”
The SEC claims that Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar’s strategy included “hedging” its equity positions in CDOs by betting against the debt issued by the CDOs. Because Magnetar stood to profit if the CDOs failed to perform, Magnetar’s interests were not necessarily aligned with investors in the CDO debt, which depended solely on the CDO performing well.