The Supreme Court of the United States decided a much-watched patent-law appeal on Monday, as part of its wrap-up of this term.
The Bilski case, as regular readers of this blog will remember, involves an effort to patent an "energy risk-management method" -- in essence, an application of the familiar idea of commodity hedging.
That would seem to fail under the non-obviousness test. But obviousness is the dog that hasn't barked here. The Bilski case has been litigated almost entirely with reference to what is or isn't a "process."
The Court of Appeals upheld the Patent Office. Both said that the law does not authorize the patenting of an abstract idea, and that the "process" Bilski has devised is a dressed-up abstraction. More specifically, the Court of Appeals said that a process becomes patentable only if it is tied to a "particular machine," or if it transforms a particular article into "a different state or thing." This is known as a matter of shorthand as the machine-or-transformation test.
The Supreme Court has now agreed with every other authority who has looked at the matter in rejecting the notion that Bilski should have a patent on commodity price hedging. But it also rejected the machine-or-transformation test as an answer to the question "why not?". Nor has it substituted any alternative test of its own as to what is a "process" in the relevant sense.
The brief the government -- via solicitor general Elena Kagan -- submitted to the Supreme Court on this matter, asked the court to uphold machine-or-transformation.
The software industry was concerned about this. Software is designed to run on a very general sort of machine, but to read machine to include any digital computer might allow for the patenting of very abstract ideas anyway, precisely what the phrasing is supposed to avoid. The Court of Appeals had refused to address that point: "We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine."
Kagan's brief on appeal to SCOTUS acknowledged that the software industry was unhappy about the test she was embracing. But she took the view that reference to a digital computer is not enough to create patentability, so most software would probably not be patentable. The consolation prize for the software industry is copyright law, and "the other legal doctrines that protect non-technological commercial activities," trademark law, common law notions of contract and tort, etc.
Again: although SCOTUS ruled against Bilski, it did not do so for the reasons the circuit court, or solicitor general suggested. Referring to amici briefs it had received from the Business Software Alliance, the Biotechnology Industry Organization, and the Boston Patent Law Association, Judge Kennedy writing for the court agreed that the machine-or-transformation test would create unacceptable uncertainties in the software industry.
More generally, in the course of applying such a test, "courts may pose questions of such intricacy and refinement that they risk obscuring the larger object of securing patents for valuable inventions without transgressing the public domain." Let's keep our eye on the ball, then! But Kennedy produces no alternative test, except that the courts below should reason by analogy to its various precedents such as Flook, Benson, Diehr, etc.
A group of four concurring Justices (Stevens, Ginsburg, Breyer, and Sotomayor) put forward their own views. They too agreed that Bilski tried to patent an unpatentable abstraction. They also agreed that machine-or-transformation is nopt a good rule for the meaning of "process." But they did want to give the lower courts more guidance than Kennedy had.
In an opinion written, as a cap to his judicial career, by Justice Stevens, these four argued for a bright-line rule against "business method" patents: "[A] claim that merely describes a method of doing business does not qualify as a 'process' under §101." This rule would overturn a good deal of what has been regarded as established law, going back to State Street.
The State Street case, a 1998 Circuit Court decision that SCOTUS did not review, and which has been very influential since, involved a patent for software used in administering a "hub and spoke financial services configuration." The spokes were investment funds that served as "feeders" of assets into one broader, master fund.
Although the decision in State Street can be read narrowly as upholding the patent on software, it has usually be read as if it upheld a patent on the hub-and-spoke system itself ... a business method. Stevens wants to put an end to that reading of State Street, at least, and to patents issued on that basis.
"If business methods could be patented," he writes, "then many business decisions, no matter how small, could be potential patent violations. Businesses would either live in constant fear of litigation or would need to undertake the costs of searching through patents that describe methods of doing business, attempting to decide whether their innovation is one that remains in the public domain."
The only thing wrong with that passage is the hypothetical construction. Business decisions can be patented, since they have been for several years and Stevens was unable toget the five votes to stop it. Furthermore, for this very reason, business in ther US do live in constant fear of litigation.
Wednesday, June 30, 2010
Tuesday, June 29, 2010
Rorech/Negrin victory, Part II
Let's pick up where we left off yesterday.
Judge John Koeltl has entered judgment in favor of the defendants, Rorech and Negrin, in an insider-trading enforcement action brought a little over a year ago. He ruled in the SEC's favor on the jurisdictional issue, but after that point in the opinion things are all downhill for the agency.
The Judge found, as a matter of fact, that Deutsche Bank has policies in place designed to keep its "public side" employees from obtaining information from its "private side" employees unless they need it and are aware of the importance of confidentiality. Further, the compliance office is to be notified when a "wall-crossing" does occur. Members of the sales force, including Rorech, are on the "private" side of this wall.
Mark Fedorcik, DB's global head of leveraged debt-capital markets (who, I should say at once, was not accused of anything in this matter) plays a critical role in the judge's reasoning, because it was Fedorcik's job, as the judge describes it, to straddle the wall, to "control the flow of information from the private side of the bank to their sales and trading colleagues ... and to potential investors." On the government's theory of the case, Fedorcik shared critical non-public information with his colleague, Rorech, in confidence. Roreck then went and blabbed out of school, to Negrin, who traded on this information.
At the trial in April, Fedorcik testified that he had not initiated any of these "wall-crossing procedures" in the period of July and early August 2006. That is when the bank was marketing VNU's bond offering, which in turn supposedly generated the "insider trading" in CDSs at the heart of the case.
Why didn't Fedorcik initiate any such procedures? A defense counsel asked him whether it was because he didn't believe that he was "in possession of confidential information that was being shared with any salesman?" Fedorcik replied: "That's correct."
Yet on the government's theory Fedorcik was the source of the information. The judge accepts Fedorcik's own account that anything he discussed with Roreck about VNU was already public information, which is fatal to the SEC's case.
As the judge writes, "Information that Deutsche Bank's investment bankers were advising the sponsors on the deliverability issues in general, ands that the sponsors were likely to address the investor demand for deliverable bonds was widely discussed in the marketplace in July 2006."
The takeaway, for investment managers, is that documented walls, procedures related to wall-crossings, anmd so forth are very good. The more thoroughly you can document such matters, the more credibility you buy from a finder-of-fact later if the question arises whether nonpublic information made it across the wall and then out to a trader.
Judge John Koeltl has entered judgment in favor of the defendants, Rorech and Negrin, in an insider-trading enforcement action brought a little over a year ago. He ruled in the SEC's favor on the jurisdictional issue, but after that point in the opinion things are all downhill for the agency.
The Judge found, as a matter of fact, that Deutsche Bank has policies in place designed to keep its "public side" employees from obtaining information from its "private side" employees unless they need it and are aware of the importance of confidentiality. Further, the compliance office is to be notified when a "wall-crossing" does occur. Members of the sales force, including Rorech, are on the "private" side of this wall.
Mark Fedorcik, DB's global head of leveraged debt-capital markets (who, I should say at once, was not accused of anything in this matter) plays a critical role in the judge's reasoning, because it was Fedorcik's job, as the judge describes it, to straddle the wall, to "control the flow of information from the private side of the bank to their sales and trading colleagues ... and to potential investors." On the government's theory of the case, Fedorcik shared critical non-public information with his colleague, Rorech, in confidence. Roreck then went and blabbed out of school, to Negrin, who traded on this information.
At the trial in April, Fedorcik testified that he had not initiated any of these "wall-crossing procedures" in the period of July and early August 2006. That is when the bank was marketing VNU's bond offering, which in turn supposedly generated the "insider trading" in CDSs at the heart of the case.
Why didn't Fedorcik initiate any such procedures? A defense counsel asked him whether it was because he didn't believe that he was "in possession of confidential information that was being shared with any salesman?" Fedorcik replied: "That's correct."
Yet on the government's theory Fedorcik was the source of the information. The judge accepts Fedorcik's own account that anything he discussed with Roreck about VNU was already public information, which is fatal to the SEC's case.
As the judge writes, "Information that Deutsche Bank's investment bankers were advising the sponsors on the deliverability issues in general, ands that the sponsors were likely to address the investor demand for deliverable bonds was widely discussed in the marketplace in July 2006."
The takeaway, for investment managers, is that documented walls, procedures related to wall-crossings, anmd so forth are very good. The more thoroughly you can document such matters, the more credibility you buy from a finder-of-fact later if the question arises whether nonpublic information made it across the wall and then out to a trader.
Monday, June 28, 2010
Rorech/Negrin victory, Part I
The Securities and Exchange Commission's case against Jon-Paul Rorech of Deutsche Bank and Renato Negrin of the Millennium hedge fund -- a case that the Manhattan federal court derailed Friday -- attracted a good deal of attention when it was first filed, in May 2009.
Here is the Reuters coverage from that time, for example.
The man-bites-dog reason for the interest is that this was the first insider trading case involving what had only then become a headline-worthy sort of instrument in the mainstream media, credit default swaps (CDS). In this case, the CDSs' were bets for or against the solvency of a Dutch media company, VNU, which was a client of Deutsche Bank.
The case was a test of a new theory of jurisdiction for the SEC based upon the Commodity Futures Modernization Act of 2000, which extended the SEC's enforcement authority to "securities-based swap agreement[s]."
Here's an analysis that Law360 did in August.
Those of you who have a PACER subscription can read Judge Koeltl's decision dismissing the case Friday. Be assured, there is no charge for viewing opinions. But be warned, this one is 122 pages long.
The Wall Street Journal this morning has headlned it on p. C1 (the prime real estate for real finance wonks -- let the 'casual reader' look to A1!): "SEC Loss Shows Difficulty of Insider Cases," with the byline to Kara Scannell.
Frankly, I think that headline itself exhibits exactly the wrong emphasis. (Scannell of course can't be blamed for the headline.) We shouldn't worry about the costs imposed upon the poor SEC as it brings tricky enforcement actions pushing the boundaries of its jurisdiction. They'll be all right, the world is full of porn whereby they can console themselves. We should be concerned, rather, by the individuals whose lives are disrupted by the very act of bringing such a case. Courtroom vindication a year later doesn't give you that year of your life back.
The court conducted a non-jury trial of the case from April 7 to April 28 of this year. It has now issued its findings of fact and of law.
The only good news from the pro-enforcement point of view (never my own) is that the court agreed with the SEC about what Congress had meant to do with that CFMA language I quoted above. Koeltl writes, "[The] CDSs at issue in this case are security-based swap agreements for the purposes of section 206B of the Gramm-Leach-Bliley Act and are subject to 10(b)'s antifraud provisions...."
The bad news for enforcers? He didn't buy anything else they tried to sell him.
I hope to come back to this tomorrow.
Here is the Reuters coverage from that time, for example.
The man-bites-dog reason for the interest is that this was the first insider trading case involving what had only then become a headline-worthy sort of instrument in the mainstream media, credit default swaps (CDS). In this case, the CDSs' were bets for or against the solvency of a Dutch media company, VNU, which was a client of Deutsche Bank.
The case was a test of a new theory of jurisdiction for the SEC based upon the Commodity Futures Modernization Act of 2000, which extended the SEC's enforcement authority to "securities-based swap agreement[s]."
Here's an analysis that Law360 did in August.
Those of you who have a PACER subscription can read Judge Koeltl's decision dismissing the case Friday. Be assured, there is no charge for viewing opinions. But be warned, this one is 122 pages long.
The Wall Street Journal this morning has headlned it on p. C1 (the prime real estate for real finance wonks -- let the 'casual reader' look to A1!): "SEC Loss Shows Difficulty of Insider Cases," with the byline to Kara Scannell.
Frankly, I think that headline itself exhibits exactly the wrong emphasis. (Scannell of course can't be blamed for the headline.) We shouldn't worry about the costs imposed upon the poor SEC as it brings tricky enforcement actions pushing the boundaries of its jurisdiction. They'll be all right, the world is full of porn whereby they can console themselves. We should be concerned, rather, by the individuals whose lives are disrupted by the very act of bringing such a case. Courtroom vindication a year later doesn't give you that year of your life back.
The court conducted a non-jury trial of the case from April 7 to April 28 of this year. It has now issued its findings of fact and of law.
The only good news from the pro-enforcement point of view (never my own) is that the court agreed with the SEC about what Congress had meant to do with that CFMA language I quoted above. Koeltl writes, "[The] CDSs at issue in this case are security-based swap agreements for the purposes of section 206B of the Gramm-Leach-Bliley Act and are subject to 10(b)'s antifraud provisions...."
The bad news for enforcers? He didn't buy anything else they tried to sell him.
I hope to come back to this tomorrow.
Sunday, June 27, 2010
Skilling's Partial Victory
In October 2006, a federal court judge sentenced Jeffrey Skilling, former CEO of Enron, to 24 years and four months in prison. He began serving that sentence later that year, while pursuing his appeal.
The appeal led to a decision by the U.S. Supreme Court Thursday, June 24, in which the Court rejected Skilling's contention that pretrial publicity and community prejudice in the area of Houston, Texas, made it impossible for Skilling to get a fair trial there.
The court did, though, prune the "honest services" statute -- the Byzanrine growth of which has long been encouraged by ambitious prosecutors -- and then determined that if that statute is interpreted as the Court now holds it must be, Skilling did not on the facts on the record commit the crime.
The defense had argued that the court should go further and simply declare the honest-services statute, section 1346, [which criminalizes "a scheme or artifice to deprive another of the intangible right of honest services"] vague for voidness. But the court said that it will not declare a statute void if it can save it by a reasonable construction, which is what it proceeded to do.
As it applies to old-fashioned bribery the "honest services" language seems easy enough to understand. If I accept payment from my employer (i.e. a corporation and its shareholders) to do my job in a careful and lawful way, then accept a payment from a third party to do the job in a careless or illegal way, then follow through on my promises to that third party, one can see how I have cheated my employer.
But the government didn't charge Skilling with taking a bribe from some competitor or speculator who might benefit from Enron's fall. Indeed, the government at one point stiulated that there are no facts supporting such a contention. It accused him of artificially inflating the company's stock price by misrepresentations about its financial condition, and it contended that this was less than the "honest services" his employters were entitled to expect. Since the statute (as the court has now reinterpreted it) doesn't covered that, the convictions that depend on that statute cannot stand.
Skilling's defense team will be entitled to argue on remand that this taints the whole of the case against him, and the government will be entitled to try to sever the counts that it obviously taints from those that (the prosecution will of course argue) it does not affect at all. This litigation will be around for some time yet. With luck, we'll get another Enron trial.
The appeal led to a decision by the U.S. Supreme Court Thursday, June 24, in which the Court rejected Skilling's contention that pretrial publicity and community prejudice in the area of Houston, Texas, made it impossible for Skilling to get a fair trial there.
The court did, though, prune the "honest services" statute -- the Byzanrine growth of which has long been encouraged by ambitious prosecutors -- and then determined that if that statute is interpreted as the Court now holds it must be, Skilling did not on the facts on the record commit the crime.
The defense had argued that the court should go further and simply declare the honest-services statute, section 1346, [which criminalizes "a scheme or artifice to deprive another of the intangible right of honest services"] vague for voidness. But the court said that it will not declare a statute void if it can save it by a reasonable construction, which is what it proceeded to do.
As it applies to old-fashioned bribery the "honest services" language seems easy enough to understand. If I accept payment from my employer (i.e. a corporation and its shareholders) to do my job in a careful and lawful way, then accept a payment from a third party to do the job in a careless or illegal way, then follow through on my promises to that third party, one can see how I have cheated my employer.
But the government didn't charge Skilling with taking a bribe from some competitor or speculator who might benefit from Enron's fall. Indeed, the government at one point stiulated that there are no facts supporting such a contention. It accused him of artificially inflating the company's stock price by misrepresentations about its financial condition, and it contended that this was less than the "honest services" his employters were entitled to expect. Since the statute (as the court has now reinterpreted it) doesn't covered that, the convictions that depend on that statute cannot stand.
Skilling's defense team will be entitled to argue on remand that this taints the whole of the case against him, and the government will be entitled to try to sever the counts that it obviously taints from those that (the prosecution will of course argue) it does not affect at all. This litigation will be around for some time yet. With luck, we'll get another Enron trial.
Wednesday, June 23, 2010
Reverse Mergers
Roddy Boyd has a fascinating entry on his blog about reverse mergers in the Chinese context.
A reverse merger is a transaction in which the role of acquirer and target are the reverse, in substance, of what they are in form. In the two trans-Pacific cases that especially interest Boyd, a dormant shell of a U.S. company (which, was, nonetheless, exchange listed) formally acquired a Chinese concern. The Chinese company then in essence became the "new" operation, and inherited that public listing.
As Boyd observes, this gives the Chinese concern "a quick route to the deep and liquid U.S. capital markets without the scrutiny and expense of a traditional initial public offering process."
I suspect Boyd is being too cynical about such transactions, though, Personally, I thnk that a clever way of short-circuiting regulations is a good thing, and I'm on the side of the hot-wirers. Of course, it is good to work within the law of both of the countries involved but ... that's the point, isn't it? The reverse merger is a way of working within the law without letting it massage you into a lump.
Meanwhile, Carl Icahn ....
Icahn has recently issued a letter strongly denouncing the management of Lions Gate Entertainment. Icahn's designs on Lions Gate are not news to anyone, least of all readers of this site. Still, the tone is sharper now.
In a letter to "members of the board" dated June 11, Icahn professes himself "truly mystified by some of your actions -- and your inaction -- in the face of the abject failure of the current management team to deliver value to shareholders...."
He also cautions the board against engaging in any "inappropriate defensive acquisition or other transaction in an attempt either to thwart our [tender] offer or to dilute our position following the expiration of the offer. We will not sit idly by if you attempt to employ inappropriate defensive tactics."
A reverse merger is a transaction in which the role of acquirer and target are the reverse, in substance, of what they are in form. In the two trans-Pacific cases that especially interest Boyd, a dormant shell of a U.S. company (which, was, nonetheless, exchange listed) formally acquired a Chinese concern. The Chinese company then in essence became the "new" operation, and inherited that public listing.
As Boyd observes, this gives the Chinese concern "a quick route to the deep and liquid U.S. capital markets without the scrutiny and expense of a traditional initial public offering process."
I suspect Boyd is being too cynical about such transactions, though, Personally, I thnk that a clever way of short-circuiting regulations is a good thing, and I'm on the side of the hot-wirers. Of course, it is good to work within the law of both of the countries involved but ... that's the point, isn't it? The reverse merger is a way of working within the law without letting it massage you into a lump.
Meanwhile, Carl Icahn ....
Icahn has recently issued a letter strongly denouncing the management of Lions Gate Entertainment. Icahn's designs on Lions Gate are not news to anyone, least of all readers of this site. Still, the tone is sharper now.
In a letter to "members of the board" dated June 11, Icahn professes himself "truly mystified by some of your actions -- and your inaction -- in the face of the abject failure of the current management team to deliver value to shareholders...."
He also cautions the board against engaging in any "inappropriate defensive acquisition or other transaction in an attempt either to thwart our [tender] offer or to dilute our position following the expiration of the offer. We will not sit idly by if you attempt to employ inappropriate defensive tactics."
Tuesday, June 22, 2010
Three brief items
1. Deal Struck at Landry's
Landry's Restaurants Inc., a seafood chain operation, says that Pershing Square Capital Management has agreed to drop its resistance to the buyout of tghe company by its chief executive, Tilman Fertitta.
In order to obtain this agreement, as you mnight expect, Feritta had to sweeten his offer for the 45 percent of the shares of Landry's (LNY.N) that he doesn't already own, up from $24 a share to $24.50 a share. The bidding was at $14.75 a share back in November.
Pershing Square and related entitied own together a little less that 10 perecent of the outstanding shares.
2. Incumbents win at First Franklin
Two incumbent board members at First Franklin Corp., of Cincinnati, Ohio, the holding company for Franklin Savings and Loan Co., have held on to their seats despite a challenge from Lenox Wealth Management Inc.
Also, a nonbinding referendum on the declassification of the board failed to muster the necessary majority.
This fight illustrated one common feature of proxy fights that I believe I have so far left largely undiscussed on this blog: the disputes over what constitutes the relevant peer group. One commonly hears dissidents challenge a management on the theory that it has failed to keep pace with the performance of similarly placed corporations, the peer group. One often hears management deny that assertion -- by defining itself against another peer group.
In this case, Glass Lewis used a small list of other banks as a peer group and came to the conclusion that First Franklin is even with the pack. RiskMetrics used a larger group and said First Franklin is lagging behind.
3. Chesapeake Energy: Say on Pay
A vote at the June 11 annual meeting of the shareholders oif Chesapeake Energy ended with 55.6 percebt approval of a resolution that would provide for regular shareholder advisory votes on executive pay.
Chesapeake, an oil company that, despite a name that smacks of the Atlantic Ovcean, is actually based in Oklahoma City, Oklahoma.
The board of directors' argument against say-on-pay had been the rather lame contention that the company and its shareholders should wait and see what Congress will come up with this year. Or, to quote:
Because the Board is unable to predict whether federal legislation will be enacted or the form it might take, the Board believes that it would be premature for the Company to implement an advisory shareholder vote on executive compensation prior to knowing the ultimate disclosure requirements of the Stability Act or any other federal legislation pertaining to say-on-pay.
I'm not surprised that an argument like THAT failed to carry the day!
Landry's Restaurants Inc., a seafood chain operation, says that Pershing Square Capital Management has agreed to drop its resistance to the buyout of tghe company by its chief executive, Tilman Fertitta.
In order to obtain this agreement, as you mnight expect, Feritta had to sweeten his offer for the 45 percent of the shares of Landry's (LNY.N) that he doesn't already own, up from $24 a share to $24.50 a share. The bidding was at $14.75 a share back in November.
Pershing Square and related entitied own together a little less that 10 perecent of the outstanding shares.
2. Incumbents win at First Franklin
Two incumbent board members at First Franklin Corp., of Cincinnati, Ohio, the holding company for Franklin Savings and Loan Co., have held on to their seats despite a challenge from Lenox Wealth Management Inc.
Also, a nonbinding referendum on the declassification of the board failed to muster the necessary majority.
This fight illustrated one common feature of proxy fights that I believe I have so far left largely undiscussed on this blog: the disputes over what constitutes the relevant peer group. One commonly hears dissidents challenge a management on the theory that it has failed to keep pace with the performance of similarly placed corporations, the peer group. One often hears management deny that assertion -- by defining itself against another peer group.
In this case, Glass Lewis used a small list of other banks as a peer group and came to the conclusion that First Franklin is even with the pack. RiskMetrics used a larger group and said First Franklin is lagging behind.
3. Chesapeake Energy: Say on Pay
A vote at the June 11 annual meeting of the shareholders oif Chesapeake Energy ended with 55.6 percebt approval of a resolution that would provide for regular shareholder advisory votes on executive pay.
Chesapeake, an oil company that, despite a name that smacks of the Atlantic Ovcean, is actually based in Oklahoma City, Oklahoma.
The board of directors' argument against say-on-pay had been the rather lame contention that the company and its shareholders should wait and see what Congress will come up with this year. Or, to quote:
Because the Board is unable to predict whether federal legislation will be enacted or the form it might take, the Board believes that it would be premature for the Company to implement an advisory shareholder vote on executive compensation prior to knowing the ultimate disclosure requirements of the Stability Act or any other federal legislation pertaining to say-on-pay.
I'm not surprised that an argument like THAT failed to carry the day!
Monday, June 21, 2010
Some History
I've been reading a bit about the background of the Securities and Exchange Commission's rules regarding proxy fights.
There were several high-stakes high-publicity proxy fights in the early and mid 1950s, involving for example Montgomery Ward and the New York Central.
The Montgomery Ward case led for example to an early court test of the right of corporations to stagger their boards of directors. It also led to an ancillary fight over whether funds paid by a stockholder to an agent for the purpose of waging a proxy battle are an "ordinary and necessary business expense."
Such battles inspired a book by David Karr (1918-1979) which proved popular, Fight for control (1956), and that in turn helped focus the attention of the SEC.
Then, as now, the SEC tends to go where the public attention is.
What was the effect of the rules introduced at that time? They made life more difficult for the challenger, and thus easier for the management. Mark J. Roe, Delaware’s Competition, 117 HARV. L. REV. 588 (2004) wrote, "In the 1950s, the SEC federalized proxy contests to make them harder for insurgents to win, moving even before states acted definitively.”
There were several high-stakes high-publicity proxy fights in the early and mid 1950s, involving for example Montgomery Ward and the New York Central.
The Montgomery Ward case led for example to an early court test of the right of corporations to stagger their boards of directors. It also led to an ancillary fight over whether funds paid by a stockholder to an agent for the purpose of waging a proxy battle are an "ordinary and necessary business expense."
Such battles inspired a book by David Karr (1918-1979) which proved popular, Fight for control (1956), and that in turn helped focus the attention of the SEC.
Then, as now, the SEC tends to go where the public attention is.
What was the effect of the rules introduced at that time? They made life more difficult for the challenger, and thus easier for the management. Mark J. Roe, Delaware’s Competition, 117 HARV. L. REV. 588 (2004) wrote, "In the 1950s, the SEC federalized proxy contests to make them harder for insurgents to win, moving even before states acted definitively.”
Sunday, June 20, 2010
House-Senate Conference Committee
The conference committee is working on a compromise bill of financial regulatory reform, consolidating the two very different bills that have passed the two chambers of our Congress recently.
The weekend edition of the Wall Street Journal portrrays the deliberations as tiring and tiresome. "After just four days, House Democrats and Republicans appear exhausted. Some have abandoned their jackets. When their Senate colleagues filter in, they sit across the table and stare at their House counterparts like children visiting the zoo."
One of the many issues that it is their duty to discuss is whether brokers are to have a fiduciary obligation toward their customers -- and, oif so, toward which customers. The House negotiators want to order the Securities and Exchange Commission to impose the standard, in the limited set of cases in which brokers offer “personalized investment advice about securities to a retail customer.” They would give the SEC the choiuce whether to extend that obligation to other customers.
Bloomberg's account portrays this as a make-or-break issue from the POV of the House negotiators, quoting Rep. Barney Frank (D-Mass.) “I cannot foresee us giving in on fiduciary responsibility for individual investors.”
Bloomberg also said, in a story on June 16, that Dodd was about to propose a counter-offer some day soon, to the latest House conferees' language on this point. I'm not aware that he has done so yet.
Rich Blake is predicting, with tongue in cheek (I think), that: "Financial reform will pass on Friday July 2, the last news day prior to the long Fourth of July weekend, with Obama, flanked by Senator Chris Dodd and a Republican, possibly Richard Shelby of Alabama, announcing 'America’s independence from Wall Street.'"
The weekend edition of the Wall Street Journal portrrays the deliberations as tiring and tiresome. "After just four days, House Democrats and Republicans appear exhausted. Some have abandoned their jackets. When their Senate colleagues filter in, they sit across the table and stare at their House counterparts like children visiting the zoo."
One of the many issues that it is their duty to discuss is whether brokers are to have a fiduciary obligation toward their customers -- and, oif so, toward which customers. The House negotiators want to order the Securities and Exchange Commission to impose the standard, in the limited set of cases in which brokers offer “personalized investment advice about securities to a retail customer.” They would give the SEC the choiuce whether to extend that obligation to other customers.
Bloomberg's account portrays this as a make-or-break issue from the POV of the House negotiators, quoting Rep. Barney Frank (D-Mass.) “I cannot foresee us giving in on fiduciary responsibility for individual investors.”
Bloomberg also said, in a story on June 16, that Dodd was about to propose a counter-offer some day soon, to the latest House conferees' language on this point. I'm not aware that he has done so yet.
Rich Blake is predicting, with tongue in cheek (I think), that: "Financial reform will pass on Friday July 2, the last news day prior to the long Fourth of July weekend, with Obama, flanked by Senator Chris Dodd and a Republican, possibly Richard Shelby of Alabama, announcing 'America’s independence from Wall Street.'"
Wednesday, June 16, 2010
Today is Bloom's Day
In recognition of the day, let us talk about a work of fiction. But not Joyce's immortal re-write of Homer. That would be rather outside our remit. Let us talk, rather, about Jerome Kerviel's imaginary friend.
You remember Kerviel, surely. Back in January 2008, when subprime contagion was already a worry but before all the craziness for which 2008 will be remembered, Kerviel lost 4.9 billion euros belonging to his employer, Société Générale, placing allegedly unauthorized bets on European stock index futures. His superiors there apparently discovered his losses -- overcoming his best efforts to hide them -- on Saturday, January 19. On the following three trading days (Mon. through Wednesday), the bank closed out Kerviel's positions.
Now Kerviel is on trial, breach of trust, computer abuse, and forgery, and his defense is that his trading was not unauthorized after all, that he was no Leeson-style "rogue." Here's a discussion of the issue phrased in the language of the quants.
But now we get to the almost Joycean twist. Kerviel now says he invented an imaginary friend called "Matt," supposedly a rugby loving hedge fund guy. Kerviel would answer questions from a broker, Moussa Bakir, about his trading strategy by saying that the questioned trades were in response to pressure from client "Matt."
Which Matt did he have in mind when he made up that name, one wonders? Damon? Lauer? "Mon ami, Matt, du Spectacle d'Aujourd'hui ...." Anyway, this admission would seem to sink the defense that "my bosses knew it all along."
The Reuters' take is here.
What is left of the defense, I imagine, is the idea that they should have known, and implicitly authorized Kerviel's shenanigans by looking the other way, perhaps pretending to believe transparent lies in the process. Doesn't sound like much of a defense, but it may well continue to delight and instruct, the two great goals of art.
Tuesday, June 15, 2010
Icahn, Genzyme Reach Agreement
Icahn and Genzyme had been waging a proxy contest in connection with the annual meeting scheduled for tomorrow, June 16.
Now, though, they have kissed and made up. Genzyme has agreed to increase the size of its board from 10 to 13. One of Icahn's nominees, Steven Burakoff, will fill one of the three new seats. Another one of the three new board members, Eric Ende, was a participant in the Icahn proxy solicitation. The third new appointee, Dennis Fenton, appears not to have an Icahn connection.
Fenton was the executive vice president in charge of operations at Amgen until his retirement from there in 2008.
But back to Burakoff. He is a cancer specialist, teaching oncology at the Mount Sinai School of Medicine, and leading the Tisch Cancer Institute at the Mount Sinai Medical Center.
Dr. Ende, a participant in the Icahn funds’ proxy solicitation, is a former biotechnology analyst with Merrill Lynch & Co. Inc.
Icahn made the usual gracious noises when agreement was reached: “I am always pleased when a proxy fight can be avoided. I believe Drs. Burakoff and Ende will add significant medical and financial expertise to the Genzyme board. I am also very heartened that the Genzyme board recently brought on Ralph Whitworth, a longtime activist, as a director, and announced that Dennis Fenton will shortly be added to the board as well.”
Now, though, they have kissed and made up. Genzyme has agreed to increase the size of its board from 10 to 13. One of Icahn's nominees, Steven Burakoff, will fill one of the three new seats. Another one of the three new board members, Eric Ende, was a participant in the Icahn proxy solicitation. The third new appointee, Dennis Fenton, appears not to have an Icahn connection.
Fenton was the executive vice president in charge of operations at Amgen until his retirement from there in 2008.
But back to Burakoff. He is a cancer specialist, teaching oncology at the Mount Sinai School of Medicine, and leading the Tisch Cancer Institute at the Mount Sinai Medical Center.
Dr. Ende, a participant in the Icahn funds’ proxy solicitation, is a former biotechnology analyst with Merrill Lynch & Co. Inc.
Icahn made the usual gracious noises when agreement was reached: “I am always pleased when a proxy fight can be avoided. I believe Drs. Burakoff and Ende will add significant medical and financial expertise to the Genzyme board. I am also very heartened that the Genzyme board recently brought on Ralph Whitworth, a longtime activist, as a director, and announced that Dennis Fenton will shortly be added to the board as well.”
Monday, June 14, 2010
Cross-border spitting match
Alimentation Couche-Tard Inc., a company popularly known simply as Couche-Tard (from the French for "goes to bed late") is a Canadian convenience-store chain, with a headquarters in Laval, Quebec, and a listing on the Toronto Stock Exchange.
Couche-Tard seeks to acquire Casey's General Stores, an Iowa-based company in the same business. Casey's board refers to this as a “self-serving and transparent attempt by Couche-Tard to take significant value that rightly belongs to Casey’s shareholders.”
Or, as paraphrased by Andrew Willis of the Torontoi Globe & Mail: "Get lost.".
On Friday, Casey's announced that it has filed a lawsuit alleging a market manipulation scheme. From their release: "Couche-Tard had accumulated a stake of 1,975,362 Casey’s shares, which represented approximately 3.9% of the issued shares of Casey’s. Shortly after Couche-Tard made public its offer of $36.00 per share on April 9, it sold almost all of its shares at a price of $38.43 per share. The 1,975,000 shares sold by Couche-Tard on April 9 represented 17% of the total trading volume in Casey's stock during market hours on that day."
Couche-Tard replies: The lawsuit "is entirely without merit and we will vigorously defend against these baseless claims. We are disappointed that the Casey’s Board of Directors has chosen to proceed down this path, which we believe is designed to distract Casey's shareholders from focusing on the real issue – our all cash, premium bid for Casey’s."
My own biases are with Couche-Tard, as the recourse to the courts in such matters is generically an effort to protect an incumbent company from the verdict of the markets. But I am, as always, happy to hear my readers' views.
Sunday, June 13, 2010
Inflation at Bay
Back in November, I was confidently predicting that oil would be worth $115 a barrel by July 1. This wasn't because I expected a roaring recovery and the great demand for oil that would create. It was, rather, because I expected that the "quantitative easing" of two successive administrations used as stimulus and as a way of resolving a credit crunch, would have its usual effect on wages and prices. The world price of crude oil is set in US dollars, and historically the price is a good proxy for inflation.
We are drawing near that date, and it seems obvious that I was wrong. The price has of course fluctuated since November, but the highest point it reached was roughly $87, in early April. It is presently at $74.
Now, it is my firm belief that there is no difference anywhere that does not make a difference somewhere else. So: what difference somewhere else does this make? An increased quantity of dollars should other things being equal reduce their value relative to goods and services (and other currencies). That in turn should have rendered my prediction spot on.
I think I went wrong chiefly by failing to anticipate the European crisis, especially with the southern tier countries, and the consequent debasement of the euro. This has strengthened the dollar. Not just by definition, if the dollar is measured in euros, but by virtue of a flight to safety.
Even the Iranian central bank, presumably staffed by people who believe the US is the Great Satan, is swapping euros for dollars these days.
Inflation has been kept at bay, but the situation remains extremely worrisome.
We are drawing near that date, and it seems obvious that I was wrong. The price has of course fluctuated since November, but the highest point it reached was roughly $87, in early April. It is presently at $74.
Now, it is my firm belief that there is no difference anywhere that does not make a difference somewhere else. So: what difference somewhere else does this make? An increased quantity of dollars should other things being equal reduce their value relative to goods and services (and other currencies). That in turn should have rendered my prediction spot on.
I think I went wrong chiefly by failing to anticipate the European crisis, especially with the southern tier countries, and the consequent debasement of the euro. This has strengthened the dollar. Not just by definition, if the dollar is measured in euros, but by virtue of a flight to safety.
Even the Iranian central bank, presumably staffed by people who believe the US is the Great Satan, is swapping euros for dollars these days.
Inflation has been kept at bay, but the situation remains extremely worrisome.
Wednesday, June 9, 2010
The mine-safety poster child (MEE)
What is the latest news on Massey Energy, the troubled mining company? Three points:
1. At the annual meeting on May 18th, the three incumbent directors up for re-election won. They remain on the board.
In a display of hubris, though, the company immediately announced its directors had been "overwhelmingly" elected. The numbers don't bear that out.
2. What has been happening with the price of Massey stock lately? It is almost enough to say that it can be and has been bracketed with recent performance by BP and Toyota.
3. On the other hand, there is always the possibility that it has fallen too far. Short interest is high, which means that should an upward tick begin, a rush to cover could give the upward move momentum.
Nothing I say here is to be interpreted in any way as investment advice.
1. At the annual meeting on May 18th, the three incumbent directors up for re-election won. They remain on the board.
In a display of hubris, though, the company immediately announced its directors had been "overwhelmingly" elected. The numbers don't bear that out.
2. What has been happening with the price of Massey stock lately? It is almost enough to say that it can be and has been bracketed with recent performance by BP and Toyota.
3. On the other hand, there is always the possibility that it has fallen too far. Short interest is high, which means that should an upward tick begin, a rush to cover could give the upward move momentum.
Nothing I say here is to be interpreted in any way as investment advice.
Tuesday, June 8, 2010
The Last Days of Lehman Brothers
CNBC will air "The Last Days of Lehman Brothers" this coming Friday.
Indeed, they'll be running it all evening, in accord with the cable imperative that anything worth broadcasting at all is worth broadcasting a thousand times.
The movie was first aired on BBC last September, a year after the dramatic events portrayed. Here's a YouTube clip, portraying Hank Paulson in a philosophical mood.
I love the viewers' comments beneath that clip, too. What a combined reflection of the Zeitgeist they are.
Cast? Glad you asked.
Corey Johnson plays Dick Fuld, chairman and CEO of Lehman.
James Cromwell plays Hank Paulson, whom you saw in the YouTube clip, talking about the fall of Rome, or the European empires, and now of "us."
Michael Landes plays a fictional character, Zach, an aid to Fuld who also delivers the voiceover narration.
It isn't an A-list cast, but a respectable one. Landes is best known for having played Jimmy Olson in "Lois and Clark" in the early 1990s.
Anyway: Happy viewing.
Indeed, they'll be running it all evening, in accord with the cable imperative that anything worth broadcasting at all is worth broadcasting a thousand times.
The movie was first aired on BBC last September, a year after the dramatic events portrayed. Here's a YouTube clip, portraying Hank Paulson in a philosophical mood.
I love the viewers' comments beneath that clip, too. What a combined reflection of the Zeitgeist they are.
Cast? Glad you asked.
Corey Johnson plays Dick Fuld, chairman and CEO of Lehman.
James Cromwell plays Hank Paulson, whom you saw in the YouTube clip, talking about the fall of Rome, or the European empires, and now of "us."
Michael Landes plays a fictional character, Zach, an aid to Fuld who also delivers the voiceover narration.
It isn't an A-list cast, but a respectable one. Landes is best known for having played Jimmy Olson in "Lois and Clark" in the early 1990s.
Anyway: Happy viewing.
Monday, June 7, 2010
Penwest Pharmaceuticals Makes Its Case
Penwest, of Paterson, NY, has a shareholders' meeting coming up: on June 22.
Penwest is best known for a proprietary drug-delivery technology.
The dissident slate has made the following case: The company's most valuable asset is the revenue stream on Opana ER that it receives from Endo, a licensee. The value of that single revenue stream has exceeded the net cap of the company for most of the last year. This indicates, to the dissidents, that company is acting as a drag on value. The dissidents would significantly reduce "headcount and other overhead expenses, which we believe continue to be maintained at levels that are in excess of what is required. Following the Annual Meeting, if our Nominees are elected, we intend to conduct a rapid, detailed review of the Company’s current employee base with the view towards eliminating all positions that are not funded by ongoing drug delivery collaborations or not necessary for the Company’s new operating plan."
How has the company responded? Its materials note that in an earlier proxy fight, Tang and Edelman (the former of Tang Cap, the latter of Perceptive Life Sciences) had a far more drastic proposal: they demanded a winddown of the company. So the incumbents think it a moral victory that Tang-Edelman no longer make that demand. Still, it is wrongheaded (they add) to demand headcount reduction.
"Don't reward this disruption of the progress we are making."
Penwest is best known for a proprietary drug-delivery technology.
The dissident slate has made the following case: The company's most valuable asset is the revenue stream on Opana ER that it receives from Endo, a licensee. The value of that single revenue stream has exceeded the net cap of the company for most of the last year. This indicates, to the dissidents, that company is acting as a drag on value. The dissidents would significantly reduce "headcount and other overhead expenses, which we believe continue to be maintained at levels that are in excess of what is required. Following the Annual Meeting, if our Nominees are elected, we intend to conduct a rapid, detailed review of the Company’s current employee base with the view towards eliminating all positions that are not funded by ongoing drug delivery collaborations or not necessary for the Company’s new operating plan."
How has the company responded? Its materials note that in an earlier proxy fight, Tang and Edelman (the former of Tang Cap, the latter of Perceptive Life Sciences) had a far more drastic proposal: they demanded a winddown of the company. So the incumbents think it a moral victory that Tang-Edelman no longer make that demand. Still, it is wrongheaded (they add) to demand headcount reduction.
"Don't reward this disruption of the progress we are making."
Sunday, June 6, 2010
Arcadia Opposing Symex/Accelrys Merger
Richard S. Rofe, the managing director of Arcadia Capital Advisors, is unhappy about a proposal to merge Symex Technologies Inc. with Accelrys Inc.
These are both research-and-development companies, both headquartered in California and chartered in Delaware. Accelrys certainly has the more intriguing way of describing its work. It is the "producer of various modeling and simulation software for both life and materials science research, like cerius, catalyst, insightll, quanta."
A little googling of those names shows me that Cerius software is used by the Laboratory for Molecular Simulation at Texas A&M. (I will refrain from telling my favorite Aggie joke now.) Apparently, Cerius is "legacy" software," and so is "no longer supported by Accelrys."
Anyway, Arcadia is unhappy because it owns a stake in Symyx and believes Symyx could get a much better deal elsewhere than it is getting from Accelrys. Symex' board acknowledges the receipt of cash offers, which it has called "inadequate, from a financial point of view, considering the price offered in comparison to the terms of the proposed Merger with Accelrys and long-term value which the Merger could provide to Symyx stockholders, and Symyx valuation as a stand-alone company."
In a release, Rofe said: "As a long-term Symyx shareholder, we would be more comfortable with the certainty of cash now rather than be dependent upon the execution risk, integration risk, market risk, and other uncertainties in the current economic environment related to any expected long-term value of the Symyx-Accelrys combination."
These are both research-and-development companies, both headquartered in California and chartered in Delaware. Accelrys certainly has the more intriguing way of describing its work. It is the "producer of various modeling and simulation software for both life and materials science research, like cerius, catalyst, insightll, quanta."
A little googling of those names shows me that Cerius software is used by the Laboratory for Molecular Simulation at Texas A&M. (I will refrain from telling my favorite Aggie joke now.) Apparently, Cerius is "legacy" software," and so is "no longer supported by Accelrys."
Anyway, Arcadia is unhappy because it owns a stake in Symyx and believes Symyx could get a much better deal elsewhere than it is getting from Accelrys. Symex' board acknowledges the receipt of cash offers, which it has called "inadequate, from a financial point of view, considering the price offered in comparison to the terms of the proposed Merger with Accelrys and long-term value which the Merger could provide to Symyx stockholders, and Symyx valuation as a stand-alone company."
In a release, Rofe said: "As a long-term Symyx shareholder, we would be more comfortable with the certainty of cash now rather than be dependent upon the execution risk, integration risk, market risk, and other uncertainties in the current economic environment related to any expected long-term value of the Symyx-Accelrys combination."
Wednesday, June 2, 2010
Genzyme and the FDA
The Food and Drug Administration (FDA) has entered into a consent decree with Genzyme Corp. (GENZ), a Cambridge, Mass. based biopharm concern that has been one of the unwelcome objects of the attentions of activist investor Carl Icahn.
Icahn now owns just under 5% of the equity of the company, after having doubled his holdings in the first quarter. This is what I said about Genzyme in January.
In recent days, Genzyme has trumpeted two words from the FDA. First, that it has approval to market Lumizyme (its trademark product, chemically known as alglucosidase alfa) for patients with late-onset Pompe disease. Here's more on Pompe disease.
Second, that it has entered into a consent decree with the FDA, ending a dispute over the company's Allston manufacturing plant. The company said that this gives it "further clarity and certainty in our ongoing improvements to our manufacturing and quality systems at our Allston Landing facility."
Icahn, though, portrays the consent decree as bad news for stockholders, not good. It will bring with it tighter FDA scrutiny. The FDA, he writes in a recent "Dear Fellow Shareholder" letter, "has seemingly lost faith in the company's ability to make important drugs for patients. Why should shareholders not look to recharge the board with strong managerial talent and fresh ideas that can ask the right questions and demand performance?"
The meeting has been set for June 16.
Icahn now owns just under 5% of the equity of the company, after having doubled his holdings in the first quarter. This is what I said about Genzyme in January.
In recent days, Genzyme has trumpeted two words from the FDA. First, that it has approval to market Lumizyme (its trademark product, chemically known as alglucosidase alfa) for patients with late-onset Pompe disease. Here's more on Pompe disease.
Second, that it has entered into a consent decree with the FDA, ending a dispute over the company's Allston manufacturing plant. The company said that this gives it "further clarity and certainty in our ongoing improvements to our manufacturing and quality systems at our Allston Landing facility."
Icahn, though, portrays the consent decree as bad news for stockholders, not good. It will bring with it tighter FDA scrutiny. The FDA, he writes in a recent "Dear Fellow Shareholder" letter, "has seemingly lost faith in the company's ability to make important drugs for patients. Why should shareholders not look to recharge the board with strong managerial talent and fresh ideas that can ask the right questions and demand performance?"
The meeting has been set for June 16.
Tuesday, June 1, 2010
Postscript to the Berliner case
Yesterday, I was working on what may by the grace of God eventually become my next book.
Some of yesterday's work involved the Paul Berliner case. This was a real-life instance of a short-and-distort scam, i.e. one in which a manipulator drives the price of a stock down by lying about corporate events, for his own quick profit. My point, in discussing Berliner, was simply that short-and-distor does happen, though much less often than is alleged.
My ancillary point was that when it does happen, it unravels rather quickly given normal market forces.
In a lawsuit and a settlement announced on Thursday, April 24, 2008, the SEC claimed that Mr Berliner lied to other traders and institutions through internet instant mesages on November 29, six weeks after the announcement of a definitive agreement betwen The Blackstone Group and ADS that the former would acquire the latter for a price of $81.75 a share.
It is of course routine that during the period after such a deal is made, but before it is closed, the target company's stock trades in a narrow range at a discount to the contract price. The discount reflects the level of skepticism in the market about whether the deal will proceed as planned -- there may be stockholder cold feet or unanticipated regulatory barriers.
In late November, accordingly, ADS's stock price was stuck in a narrow range near $77 a share, or at a stead 6% discount to the contract price. It was in this context that Berliner started sending his messages, claiming that ADS's board was in an emergency meeting "on a revised proposal from Blackstone to acquire the company at $70/share ... due to weakness in World Financial Network -- part of ADS' Credit Services Unit...."
The message seemed plausible, and within a matter of minutes ADS' price fell below the supposedly new contract price of $70. In fact, though, there was no board meeting underway.
Eventually, Berliner was fired, forced to disgiorge his gain of about $26,000, and pay a $130,000 penalty.
Small potatoes? Yes, but still ... one can make no excuses for Berliner.
What intrigues me are two facts. First, the efficient capital markets hypothesis looks pretty good in day-to-day terms, if nbot minute-by-minute. The market saw through the b.s., and rebounded with alacrity.
Even before ADS had had a chance to put out a statement of denial, the price had recovered most of its loss.
Another thing that fascinates me? The deal actually did fall through.
Some of yesterday's work involved the Paul Berliner case. This was a real-life instance of a short-and-distort scam, i.e. one in which a manipulator drives the price of a stock down by lying about corporate events, for his own quick profit. My point, in discussing Berliner, was simply that short-and-distor does happen, though much less often than is alleged.
My ancillary point was that when it does happen, it unravels rather quickly given normal market forces.
In a lawsuit and a settlement announced on Thursday, April 24, 2008, the SEC claimed that Mr Berliner lied to other traders and institutions through internet instant mesages on November 29, six weeks after the announcement of a definitive agreement betwen The Blackstone Group and ADS that the former would acquire the latter for a price of $81.75 a share.
It is of course routine that during the period after such a deal is made, but before it is closed, the target company's stock trades in a narrow range at a discount to the contract price. The discount reflects the level of skepticism in the market about whether the deal will proceed as planned -- there may be stockholder cold feet or unanticipated regulatory barriers.
In late November, accordingly, ADS's stock price was stuck in a narrow range near $77 a share, or at a stead 6% discount to the contract price. It was in this context that Berliner started sending his messages, claiming that ADS's board was in an emergency meeting "on a revised proposal from Blackstone to acquire the company at $70/share ... due to weakness in World Financial Network -- part of ADS' Credit Services Unit...."
The message seemed plausible, and within a matter of minutes ADS' price fell below the supposedly new contract price of $70. In fact, though, there was no board meeting underway.
Eventually, Berliner was fired, forced to disgiorge his gain of about $26,000, and pay a $130,000 penalty.
Small potatoes? Yes, but still ... one can make no excuses for Berliner.
What intrigues me are two facts. First, the efficient capital markets hypothesis looks pretty good in day-to-day terms, if nbot minute-by-minute. The market saw through the b.s., and rebounded with alacrity.
Even before ADS had had a chance to put out a statement of denial, the price had recovered most of its loss.
Another thing that fascinates me? The deal actually did fall through.
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