Megaupload

Megaupload was established in 2005 in Hong Kong to allow cloud based file sharing.  But the domain was seized in January by the US Government allegedly for copyright infringement.  When that happened, users lost access to their files and $330 million in assets were frozen.  The owners, including New Zealand resident Kim Dotcom, were indicted.  Megaupload had enjoyed 50,000,000 visitors per day, 180,000,000 registered users, was the 13th most visited Internet site, and hosted 12 billion unique files taking up 25 petabytes (25 million gigabytes).  Dotcom’s house was intentionally raided on his birthday by New Zealand authorities at the instigation of the US.  It turned out that the company was never properly served with the property seizure notice nor the underlying federal case.  The Department of Justice has apparently been writing to lawyers taking on the defense, and warning them off the case, threatening to call their clients as witnesses.  Santa Clara University Law School Professor Eric Goldman described the Megaupload case as, “a depressing display of abuse of government authority.”   He claimed that seizing Megaupload’s site had created the “deeply unconstitutional effect” of denying users their data.  The Electronic Frontier Foundation has taken on cases on behalf of users denied their data.  We say, “Go for it!” 

-- Paul Marotta

BATs Failed IPO

A funny thing happened on the way to the initial public offering of BATS Global Markets, Inc.; a computerized stock exchange; it failed.  A bug in their own trading system disrupted trading within seconds of its debut and raised concern the exchange didn’t work.  By mid-day on IPO day BATS has fixed the bug, but by then had lost the confidence of its IPO buyers, mostly hedge funds and buy-side analysts.  The fiasco raised doubts about BATS technology, business model, and valuation, and no one wanted to pay $16 a share anymore.  So it withdrew its IPO and trades for more than a million BATS shares were voided.  BATS CEO said, “The fact that our own stock was out there to be traded for the first time, and we showed systems problems, eroded customer confidence.  Of course investors are going to say, ‘Hey, wait a second.’”  And the IPO already wasn’t going great guns.  The first trade was at 10:45 and was down $0.75 to $15.25.  When that hit, some people wanted to liquidate their entire position in BATS.  BATS wanted to reopen trading but some brokers said it would have been a bloodbath.  And pre-IPO shareholders, including the underwriters, had awarded themselves a $100 million dividend contingent on the IPO.  Had they kept trading, a lawsuit was almost certain.

-- Paul Marotta

Government Infringer

The Federal Circuit Court (the circuit responsible for most intellectual property disputes) recently held that the federal government can be held to patent infringement when one of its contractors infringes offshore.  In Zoltek Corporation v. US and Lockheed Martin, the owner of a patent concerning carbon fiber sheeting sued the U.S. because Lockheed Martin infringed in building F-22s.  The court found that the U.S. government can face patent infringement claims for products made outside the U.S. using infringing patented processes and then imported into the U.S. for use by a government contractor.  Also at issue was a statute providing immunity to the government contractor and whether or not Zoltek could sue Lockheed (they can’t).  Zoltek’s original complaint was filed in 1996.  The wheels of justice are apparently almost frozen.  

-- Paul Marotta

IPO's and Opt-Outs

We saw an interesting article recently concerning the place in our world for IPO’s.  The article argued that whereas IPO’s used to raise money for small companies, now they don’t really serve that function very well.  The flip side is that growing companies that don’t want to be public are stuck once they reach 500 shareholders and decent sized assets, in filing periodic reports whether they want to encourage a market for their stock, or need capital, or not.  Google didn’t need the money and Facebook doesn’t either.  And, of course, our increasing web of regulations (a lá Sarbanes Oxley) all based in an effort to regulate away dishonesty (good luck with that; how’d it work out in Bernie Madoff’s case) makes doing business harder and harder for the honest folk.  We think that our markets are not well served in any way:  Expense, burden; capital formation; reporting, ease of use, transparency, etc.  They simply don’t work. 

We’ve advocated before for a securities opt-out.  You don’t want SEC protection, opt out of their protection, good luck, and caveat emptor.  Maybe we need some wholly unregulated markets for trading securities.  The family Buzz has wanted for a long time a TSA-free airline.  Everyone get on the flight with your Louisville sluggers and during flight we’ll see whether the good guys or the bad guys are better batters [credit where credit is due:  That was the idea of a director of a public company we represent].  If the nanny state was created for our own good, can’t we decide we don’t want the protections offered?  In any case, we’ll likely see incremental changes in the SEC’s watchful eye but we doubt we’ll see any real reform.  Maybe we’ll just keep exporting public offerings to Britain, Canada, and Hong Kong.

-- Paul Marotta

Internet Tax "Fairness"

A bipartisan group wants to tax the Internet.  Thomas Paine said in Rights of Man (1791) that, “Invention is continually exercised, to furnish new pretenses for revenues and taxation.  It watches prosperity as its prey and permits none to escape without tribute.”  Now, after bankrupting just about every public institution in this Country the politicians want to tax every Internet transaction regardless of whether or not you live in a state without sales taxes.  Sen. Lamar Alexander (R-TN) and Sen. Dick Durbin (D-IL) have teamed up to promote a serious levy on all Internet sales.  The “Marketplace Fairness Act” S. 1832 was originally proposed last November by Sen. Michael Enzi (R-WY), and is now in the Committee on Finance.  The Popvox vote is 22% for, 78% against.  We’re particularly tired of calls for theft dressed up as “fairness.”  What is fair is for you to decide what to do with the fruit of your labor.  Anything else is evil, either as theft, or as tribute, or as greed, or as envy.  This 1984 new-speak of calling public sector greed, “fairness,” now brings us to an attempt to destroy the last vestige of state competition; sales taxes and the Internet.  The several states were supposed to be experiments in democracy, where drug users could legalize in one state and tax protestors could congregate in another foregoing collective services.  Instead, when one state says “no sales tax” in an effort to interest business and growth, another now wants to impose their sales tax on the residents of the untaxed state.  Soon there will be no quarter for tax weary citizens.  It isn’t fairness; it’s coercion, pure and simple.  We say, “Hands off.”

-- Paul Marotta

IPO's

The performance of some recent tech IPO’s is illustrated in the table below.  Zynga is in better shape than we thought; LinkedIn a little less so.  Poor Pandora (which we love) apparently increased users substantially but hasn’t yet found an effective way to monetize and is being hammered today. 

Issuer	IPO Date	Price At IPO	Mid-Day Price March 7, 2012	% Change
LinkedIn	2011-05-19	83.00	85.49	+  3.00%
Pandora	2011-06-15	20.00	10.98	- 45.10%
Groupon	2011-11-24	28.00	17.72	- 36.71%
Zynga	2011-12-16	11.00	13.71	+ 24.64%

 
-- Paul Marotta

What did you learn at Law School?

Apparently two former students at Texas Southern University Thurgood Marshall School of Law have sued over bad grades.  They claim they were kicked out of law school because their Contracts II professor gave them unfairly low grades.  The students each got a D.  Law Professors make mistakes like anyone.  The Buzz remembers a litigation class in which we drafted an “essential services of government” bill (which was quite short).  The Prof had told us the bill would be 70% of our grade and a final 30%.  But he then flipped the two weights later, claiming later that he had made clear the final would be 70% and the bill 30%.  The Buzz had gotten “A’s” on both and didn’t care but, it mattered to several fellow students, and we came to their rescue.  The two litigants mentioned above say they were both devastated by their grade, and claim the grades were designed to “curve them out of law school.”  They both had gpa’s below 2.0 and could not continue.  Of course, with gpa’s hovering around 2.0 we have some sympathy for the law school; you have to draw the line somewhere.  But what do you call the person who graduates last in their medical school class?...  Doctor.  All that said, we are not defenders of the “legal industry guild,” the bar, and would open up the practice of law.  After all, we’ve run into enough really poor lawyers to make an argument that the bar offers little protection to consumers of legal services.  

-- Paul Marotta

PUMP IT

We received a truly bizarre piece of stock manipulation in the mail the other day.  It was a 20 page slick magazine sized publication called “The China Club” but was really nothing more than an expensive attempt to pump the stock of China Global Media (“CGLO”).  We are not investment professionals but the last thing in the world we would do after receiving this is actually buy some stock that we’d never heard of before.  It actually says on the cover that, “I’ve uncovered a little known stock…with potential to bring you 822% gains in 9 to 12 months.”  We’re not interested because we are looking for exactly 823% gains in 9 to 12 months and this falls short 1%.  The publication talks about everything from US debt to China, to Chinese auto purchases, and claims that sales will double as, “CGLO grows at a frantic pace to keep up with blistering demand,” and that, “CGLO is poised to make huge windfall profits,” among other bon mots.  A disclaimer at the back claims that the publisher is not receiving any compensation other than future subscription revenue and that an affiliate is getting $15,000, but says that the publication cost over $800 thousand.  This is obviously an attempt to manipulate the stock price of a tiny company trading at a buck a share, albeit a more expensive scheme than is typical.  The SEC will want to check this one out.

-- Paul Marotta

Delaware Bylaws Challenge

Delaware Bylaws may generally be amended by the Board if the Certificate of Incorporation says so.  But now shareholders have brought nine lawsuits against companies incorporated in Delaware seeking to invalidate Bylaws provisions that say that litigation has to be brought in Delaware.  The rush toward Bylaws provisions requiring exclusive venue for shareholder litigation finds its roots in a 2010 idea from Stanford Law School professor Joseph Grundfest that corporations create such restrictions to make M&A litigation across several venues more difficult.  There are many costs, risks and problems associated with such multi-jurisdictional litigation, and many plaintiffs seek to create these sorts of problems to encourage settlement.  Some of the companies sued for their Bylaws are Navistar International Corp., Chevron Corp., and Franklin Resources, Inc.  And dicta in a footnote in In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010) gave such provisions some weight.  The new litigants argue that such provisions should only be adopted following a shareholder vote, like an amendment to a company’s Certificate of Incorporation.  They also argue that the challenged provisions require shareholders, but not companies, to sue in Delaware.   We think these new provisions will withstand this scrutiny, in part, because this multi-jurisdictional litigation is a problem in need of a solution and no better solution seems available at this time.