BizBuzz by Paul Marotta

GDP Nonsense

2011-06-27T15:43:00.000-07:00

The Buzz has a degree in economics but was stunned to find the GDP includes government spending. In the private sector when an employee is paid $100 and produces a $0.07 pencil, we say that the addition to GDP is $0.07. But when a government worker is paid $100, we say that GDP has grown by $100. That makes no sense; especially as a measure of production. Of course, how do we measure government production? We don’t. It doesn't produce; not even in the same way that other service jobs produce. Everyone from waiters to accountants charge for what they do; the market responds by paying them what they are worth and we call what they are paid by the market, not by their employer, production. Every model should work in the outliers or it is flawed. If Government spending belongs in GDP, let’s just borrow another $14 trillion and spend that this year; we’ll be rolling in 100% GDP growth right up until we file bankruptcy.

-- Paul Marotta

Lending

2011-06-22T15:54:00.000-07:00

We love that scene in It’s a Wonderful Life where Jimmy Stewart explains, during a run on his Savings & Loan, that one person’s money was loaned out to another person, and isn’t sitting in the vault. We have believed for awhile that lending should be based on more knowledge than mathematically calculated credit scores. After all Freddie and Fannie both used their expert algorithms to only buy “safe” loans and how did that work out? You would think that others might reexamine this too in light of where our mathematical models led us recently. Well, someone has. Tufts University economist Amar Bhidé argues in a recent book that especially small business lending should be based on a deep understanding of the borrower’s situation, not on rules and algorithms. He argues that an academic argument that all risk can be quantified was embraced and all non-quantifiable stuff was called marginal and unimportant. So whether you had known the borrower for 15 years or whether he had just showed up in town didn't matter. We once met a sharpie who claimed a credit score of 900 (the actual highest is 850) as if that was all we needed to know about him. Maybe getting to know the borrower isn’t such a bad idea and Bhidé is on to something.

-- Paul Marotta

Airlines and Oil

2011-06-21T15:44:00.000-07:00

With oil prices around $100 a barrel it’s not a good time to be a mass consumer of fuel. A recent chart we saw illustrated that 20% of airline revenue is spent on fuel; another 20% for labor costs, and airlines only enjoy about 6.5% in profit. A FOTB (Friend of the Buzz) told us that someone (the Oracle of Omaha?) had analyzed airlines and found that collectively there had been no return on capital from that industry since its inception. The chart also included showed 15% in federal taxes and fees (is there anything these guys won’t take a piece of?), and about 10% for costs of planes (Is that all?; that’s kind of scary; upgrade your planes guys). The remaining 28.5% was for a slew of miscellaneous things. One thing is for sure, as fuel prices rise, so will tickets. We’re sure most airlines engage in all kinds of fuel arbitraging but eventually there will be nowhere to hide as prices go up over a long term. A chart we saw has United winning the fuel cost control war with average price per gallon of $1.75 in 2009, reduced from $3.54 in 2008. Well, even those days are over with the recent oil price hikes in 2011. But as what goes up, then comes down, airlines should benefit. Oil prices are declining right now in the wake of settling of Middle East unrest and airlines are benefitting. American’s loss is expected to be lower than previously estimated and others might actually make a profit. Whoa!

-- Paul Marotta

Crew Sues

2011-06-20T13:33:00.000-07:00

On March 1, 2011 41 million shares, or about 64%, of J. Crew voted in favor of a $3 billion LBO by two private equity firms, TPG Capital and Leonard Green & Partners. 13 million shares were voted against, and the sales process was called flawed by some. Only a couple of dozen people attended the special shareholder’s meeting and it was over in four minutes. And a group of shareholders sued claiming breach of fiduciary duty in not analyzing the bid properly. Well, now, J. Crew has sued those same shareholders, including the New Orleans Employees Retirement System, claiming that they breached a settlement agreement. Following the original shareholders case, J. Crew had agreed to extend a shop period to see if there was a better offer available (as well as paying the shareholder’s and their lawyers $10 million and reducing a break up fee if the deal didn't close). No better bids arose. Most targets in acquisitions don’t sue their own shareholders so this is a bit of a novelty. Now, J. Crew is asking the court to enforce a memorandum of understanding claiming that the shareholder’s lawyers are trying to change the deal at the last minute despite their earlier agreement. It looks to us like the lawyers figured out belatedly that their payday wasn’t big enough. Boo!

-- Paul Marotta

SECex

2011-06-17T14:19:00.000-07:00

Some facts have been released concerning the SEC internet pornography club. It turns out that 31 SEC employees were found to be surfing internet porn in 2010. They were paid between $100,000 and $225,000 a year, but they have not been fired and their names have not been released despite a FOIA request. One senior lawyer admitted to watching up to eight hours a day of porn in his office, while a Division of Corporate Finance employee surfed smut for 5 hours a day. And these are the guys that missed Bernie Madoff and the Fannie Mae debacle. Our advice is whatever else you do, don’t look to this gang of crooked shooters for any help. Caveat Emptor might be a more useful tool than spending more money on this bunch.

-- Paul Marotta

Justice

2011-06-13T15:33:00.000-07:00

We were glad to see UBL dead but we questioned a TV news crawl that said that he had been “brought to justice.” When discussing with a FOTB (Friend of the Buzz), he pointed out that justice is the absence of injustice and once an injustice has occurred there is no justice, only things like vengeance. To whose justice had UBL been brought? Well, they say that the victors write the history books. But why not question those history book writers to keep them honest? We’re as glad as anyone to see UBL dead, but he was apparently shot in the head; not brought to some mythical justice. He certainly worked hard to deserve being shot in the head and he certainly did deserved to be shot in the head. But honest reporting would report that he had been shot in the head because we were mad at him for running the group that flew planes into buildings killing thousands of innocent people. It just sounds more straightforward. Why do we have to dress it up so that we can feel good about “bringing him to justice,” when what we did was kill him.

-- Paul Marotta

Gold Bug Judge

2011-06-02T13:28:00.000-07:00

We read with interest an article about a judge that filed a lawsuit in 2008 for a pay raise. You might look askance at what at first looks like another public servant pension grab, but she had an interesting theory. Judge Judith Kaye, former Chief Justice of the New York Court of Appeals [the highest New York court, trial courts being called “supreme courts” (don’t ask)] filed a lawsuit claiming that her pay package had been illegally debased. She pointed out that the dollars in which she was paid used to command 1/35 of an ounce of gold, and now they only command 1/1,300 of an ounce of gold. Since Mad Old King George had made judges dependent on him for their tenure and salary, our Constitution provided in Article 3 that judges were appointed for life and that they were to “receive for their Services a Compensation which shall not be diminished during their Continuance in Office.” If only we were all so protected. So Judge Kaye argued that her salary had been “diminished” through systemic inflation. She was really fighting for 1,300 NY judges and argued that raises had been promised and that promise broken several times over a decade of increasingly meager pay. We’re not sure about arguments advanced by most “gold bugs” but we also think a government controlled fiat currency monopoly can’t be good for us. How did things work out for Judge Kaye? She retired in 2009 and joined a big law firm.

-- Paul Marotta

MIT

2011-05-27T09:33:00.000-07:00

MIT is 150. The Buzz’s oldest brother is an MIT grad where he played soccer. The Buzz thought that by osmosis this might qualify for admission to the patent bar but no such luck. The Commonwealth of Massachusetts approved a charter in 1861 for the “Massachusetts Institute of Technology and Boston Society of Natural History.” The name was subsequently shortened. MIT grads founded over 26,000 companies including everything from publisher of Guitar Hero and Bose to Intel and HP, and those companies collectively would constitute the 17^th largest economy in the world. Grads include everyone from Click and Clack of NPR’s CarTalk to Buzz [no, no relation] Aldrin to Benjamin Netanyahu to I.M. Pei. Its first woman instructor was Ellen Henrietta Swallow Richards, the first American woman to earn a degree in chemistry, who also studied at MIT in 1870. A founder of the American Association of University Women, Richards died almost exactly 100 year ago. There is no truth to the rumor that MIT has no Division I football team because other schools protested that MIT’s student’s ability to work calculations on the fly concerning ballistics would be unfair to other schools. We say, when visiting, watch out for smart attacks!

-- Paul Marotta

Hold ‘Em

2011-05-18T11:20:00.000-07:00

Since its inception, the Internet has been shaking things up due to its global reach. We predict that it will continue to do so in stronger and stronger ways. Beware repressive governments; your people see freedom across the border. The latest example is the unfortunate indictment of the founders of three leading gambling websites. These are legal businesses located in other countries, but which take bets from US citizens. The US has seized their domain names and bank accounts, charged them with wire fraud, and sued them in a civil action for $3,000,000,000, all for conducting a legal business in the country in which they are located. The US is in a minority of countries that have made online gambling illegal. As the Buzz’s father used to say, “The Government prosecutes the Mafia because it hates competition.” The regressive tax on people bad at math called the lottery is OK but not online gambling. The US has even gone so far as to arrest gambling site execs as they visit the US. We guess multiculturalism is bad only when it involves things you decided to make illegal.

-- Paul Marotta

The Face Book

2011-05-10T10:56:00.000-07:00

We were glad to see the Winklevoss’ lose, finally, in their second battle against Facebook, after settling once for tens of millions of dollars and then changing their minds about how much they got. Raw ideas are cheap while good execution is critical, and rare. An unpatented idea is worth very little. But Facebook faces another suit from an alleged investor who bought half “The Face Book” for $1,000. He might be late to the party since he waited seven years to bring suit. He claims that he forgot about the deal, but with Facebook and its value broadcast across the globe you’d think he would have paid more attention, earlier, had the deal been real. Facebook claims it is a fraud, but Paul Ceglia, the Plaintiff, is back with new and improved lawyers who claim they’ve vetted his claims and who, we are sure, are on a contingency. You can read the amended complaint here. This time Ceglia has produced emails between Zuckerberg and himself. At one point Zuckerberg complains that a provision giving Ceglia an additional 1% ownership for each day delay in launching the site is unfair because Ceglia could have an ownership stake of over 80%. This battle may last a while due to the amount at issue.
-- Paul Marotta

Signs Of The Times

2011-05-02T16:41:00.000-07:00

If we knew what was going to happen, we’d likely be trading whatever it was we knew about. So we wear our ignorance of the future proudly. But we were interested recently in two events that might point in the same direction, and not a good one for business. First, the Pimco Total Return fund cut its holdings of US government debt to zero. The largest bond fund in the world at $237 billion has no US government debt in its portfolio any more. In a March investment outlook letter Pimco said that it thought the Fed was buying 70% of government debt since QE2 was sprung, which it likened last year to a Ponzi scheme. The Fed is now buying treasuries at $100 billion a month. Pimco said rates may have to go much higher in order to attract buyers. Second, Carl Icahn is returning investor money and said he is unwilling to manage money through another downturn. He is apparently joining Chris Shumway who is returning $8 billion of investor cash and Oaktree Capital which is returning $3 billion of $10 billion it raised. In a letter to investors Icahn said that he did not wish to be responsible to limited partners through another possible market crisis. “While it may sound ‘corny’ to some, the losses that were incurred by investors in our funds in 2008 bothered me a great deal more, in many respects, than my own losses.” We say bully!
-- Paul Marotta

Whoops!

2011-04-08T08:49:00.000-07:00

Everyone has sent emails to the wrong person, and if you are sending your email to the people you intend to sue beware. But more surprisingly you need to beware if you read the email sent by your future nemesis. In Terraphase Engineering, Inc. v. Arcadis, the court actually disqualified the layers who read a wrongly sent email message. The former employer of a group of departing employees believed the employees had stolen trade secrets and the departing employees thought the employer was interfering with their customers. The former employees sue first. But in preparation for that suit, their lawyer sent an email to an old email address at the defendant. The defendant’s in-house and outside counsel read the email and an attachment discussing their strategy. When the employees complained, the court took their side disqualifying the employer’s lawyers who read the email message, citing a lawyer’s ethical obligation to not read privileged documents. We think there is some moral hazard created here, and the opinion went too far protecting a sloppy lawyer. The message: If you want to disqualify opposing counsel, send them a bunch of secret emails and hope they read one. We say, “Boo.” -- Paul Marotta

“People’s IPO’s”

2011-03-21T09:53:00.000-07:00

Former Soviet satellite Kazakhstan is planning some People’s IPO’s, as state owned firms are sold off and the wealth shared. In part to fight claims of a corrupt ruling elite (pardon our cynicism, but which country doesn't have one of those?), and in part to benefit its citizens, certain state owned companies are to be floated. For example, the production subsidiary of the state owned oil company will float 5% of the company on the Kazakh stock exchange. It is already listed on the London exchange. Said Kazakhstan president Nursultan Nazarbayev, “This is an event of paramount importance to the state...the whole world is earning money on stock markets and citizens of Kazakhstan should also learn how.” The actual wealth comes from hard work, smart decisions, good business, and a good investment climate, but a stock exchange certainly has a part to play in wealth creation. Although we find it ironic that we have yet another politician trumpeting the sale of the people’s asset to the people who already supposedly own it. Maybe another way to do this could have been for the state to divest itself he oil company in favor of the Kazakh citizens who then could have sold or kept their shares as they saw fit and elect professional management rather than politicians to make these business decisions. We won’t hold our breath.
-- Paul Marotta

Profits

2010-05-10T10:50:00.000-07:00

Those not ignorant about things economic know that profits are what are left over after business is conducted. We hear a lot about “obscene” profits and that “now is not the time for profits.” And we wonder why we are in an economic stew? Profits are the return on capital like wages are the return on labor. Without profits we would have no risk capital, no equity, and no funds to start businesses. Higher profits encourage more savings and investment. Without profits the only capital available would be bank loans, and those would be looking for collateral. If now is not the time for profits, then it must be the time for stagnation, huge start up costs, lower employment, lower wages, lower economic activity, and third world status. Without profits there are no 401K’s, no IRA’s, no college funds, and no retirement accounts. And what are profits? They are either used to hire more people (good), buy more goods (good), or distribute dividends to investors (good). And profits come from those who voluntarily engage in business. Think GM’s profits are grossly obscene, don’t buy their cars; think Blacked Eye Pea’s concert profits are grossly obscene, don’t go to their concerts; think Walt Disney’s profits are grossly obscene, don’t see their movies or visit their theme parks. Think an insurance company’s profits are grossly obscene, don’t buy their insurance or, better yet, buy some of their stock and get some profits for yourself. Until massively huge, grossly obscene, gargantuan profits are encouraged from every source possible, we’re economically doomed as financial illiterates.
-- Paul Marotta

Law School—Evidence

2010-04-26T13:39:00.000-07:00

An old legal adage is that if your case is weak on the law, argue the facts, and if it is weak on the facts, argue the law. In every legal dispute, those are the primary components, law, and facts. The law changes quite slowly and usually only through legislation or a change in court decided law. Applying the same law to different facts usually yields different results. So it makes sense that in any dispute getting to know your fact is quite important. Hence if you are mad about something or think you’ve been wronged, or find yourself yelling, “I’ll see you in court,” to some miscreant former business associate, do two things: (i) Collect all documents that have anything remotely to do with that dispute, and (ii) start writing long emails to your lawyers telling them what happened. You will have to produce the former in response to discovery from the other side, and the later will be attorney-client privileged communications that give your counsel the foundation to start applying the law correctly. The Buzz has told many a client that lawyers are like computers; garbage in, garbage out. Great lawyers, like great computers, have an encyclopedic knowledge of the facts in their case. Are you working with a mainframe, or a refurbished Commodore 64?
-- Paul Marotta

Start-Up Supporting Venture Capital

2010-04-20T09:47:00.000-07:00

We have observed several cycles and it seems like venture funds that do well, raise too much money in subsequent funds to invest in start-ups for long, and have to look to larger private equity deals. Those that don’t do well, go do something else. The end result; there is not much real continuity in start-up focused funds. And we need start-up focused funds. Recent statistics showed that the entire 2000-2010 decade has been relatively bad for venture capital, and that is bad for, as a friend of mine put it, the “entrepreneurial eco-system.” The National Venture Capital Association recently provided data showing that, for most of the last decade, a dollar invested in a venture funds resulted in that same dollar being returned to the fund investor. In other words the return was essentially flat; you got your principal back and nothing else. An article commented both that (i) the answer seemed to be smaller investments in smaller companies, and (ii) maybe venture capital is not needed since some tech start-ups need far less money to start than their uncles did in the 80’s. We have always argued that the real goal of all those supporting growth companies should always be a well run company. But we understand that venture capital is a money management business, not a start-up supporting business. However, we believe that you accomplish the former by supporting the later. It’s always true that to fold the portfolio company means lower returns than to fund a way to continue and build it.

-- Paul Marotta

Forgery

2009-11-30T14:44:00.000-08:00

What is it with all the people making stuff up? Is it just easier to create phony documents and signatures than it was twenty years ago? Maybe Dan Rather was the first victim of a wave of people creating phony stuff. If the legion of services offering to protect against identify theft could help out with forgeries, they’d really have a market. Exhibit A is a DLA Piper/Duane Morris Singapore lawyer who forged a pay stub so it looked like he was making $65,000 a month rather than $25,000, as he negotiated with a new employer. He’s facing Singapore jail time for forgery. Exhibit B is a former judge working in Southern California as a supposed mortgage rehabilitation lawyer. He forged a judge’s signature on an order to prevent a client from getting kicked out of a house. Exhibit C is a New York lawyer who forged a judge’s signature on an order so he could keep $35,000. It is the third time he has been charged with forgery. And there is more. What is it with people ginning up phony documents? The Buzz could show its age and claim that it’s a decline in public character. But we suspect it has more to do with great looking forgeries being easy to create now due to great technology. Is it technology’s fault? Of course not. Hmmm, all these guys are lawyers. Maybe that has something to do with it….

-- Paul Marotta

Fed Reverse Repos Fighting Inflation

2009-11-20T09:56:00.000-08:00

The Fed is starting to fight inflation. One way it does that is to use repos as a way of draining liquidity off the market and halting the dollars slide. In a Fed repo, the Fed lends money to a selling bank holding Fed securities, against purchase of the securities, and the bank pays it back with interest a day later, receiving the securities back. In a reverse repo the Fed sells a security to a bank and agrees to buy it back later with interest. Reverse repos drain liquidity off the market. The buyer of a reverse repo, a bank, can use the security to enhance its balance sheet for a short term. When the security is repurchased that liquidity is gone. Many see the merit of taking liquidity out of the market. Inflation is too much cash; we already have that. But there are things to be done to keep that excess cash from turning into rising prices, a bad product of inflation. With the Fed unlikely to increase interest rates anytime soon because we are still seen by most as in an intractable recession, the Fed is left with things like reverse repos to try to curb the affects of inflation. However, markets have been scared by reverse repos, seeing any decrease in liquidity as ultimately bad for the economy. We are certainly in uncharted waters. Economists should get some new benchmarks and several theories about inflation will be tested and either confirmed or rejected by the time this economy is sorted out.
-- Paul Marotta

Sunken Galleon

2009-11-12T08:34:00.000-08:00

Another fabled New York hedge fund investor has hit the skids, this time charged with insider trading. Billionaire founder of The Galleon Group, Raj Rajaratnam was arrested recently and charged with inside trading in such stocks as Hilton, Clearwire, Polycom, and Google. Rajaratnam was tipped off that a contact had been wearing a wire and was carrying a ticket to Switzerland for a few days later when arrested. Supposedly he made more than $20 million in profit from 2006 to 2009. His fund, Galleon, was rumored to be a pressure cooker, with long hours and highly detailed research reports. Born in Sri Lanka, Rajaratnam became a technology analyst at Needham, eventually becoming president. Several others were also arrested and their firms, including Galleon, quickly expressed shock, promised cooperation, and distanced themselves from their errant employees. There are a lot of possibilities here and we would be the last to make excuses for crooks, but we are always confounded when people worth billions risk it all for a little bit more. We had that reaction when Michael Milken supposedly inside traded for an extra hundred thou, when Drexel was paying him half a billion a year, and this seems similar. Either people are really really really greedy or the government overstates the intent of the accused and its case. We suspect maybe a bit of both.
-- Paul Marotta

F-Cubed

2009-11-03T14:03:00.000-08:00

A rare securities class action is underway in New York, involving foreign investors who traded foreign securities on foreign markets [F3]. Plaintiffs claim that they bought shares in Vivendi, as its CEO Jean-Marie Messier was on an acquisition path, but was hiding a liquidity crises the revelation of which ultimately caused the shares to drop. The case has been around since 2002. Messier had been transforming the French water company into a media conglomerate. The class was certified, including investors from France, England, and the Netherlands. Over 30 F cubed cases were filed in the last year, against such targets as Lernout & Hauspie (Belgium), Ahold (The Netherlands), and Daimler AG (Germany). Why are we creating a litigation forum for the world? Good question. Are we trying to export legal services? Maybe. Plaintiffs still have to show a nexus between the alleged fraud and the U.S. Sometimes plaintiffs try to show accounting conduct involving a US subsidiary. Last year in a case involving National Australia Bank Ltd. the Second Circuit Appeals Court confirmed a District Court dismissal but declined to disallow all such cases saying that, “[w]e are an American court, not the world’s court, and we should not expend our resources resolving cases that do not affect Americans or involve fraud emanating from America.” Sounds good to us. The Supremes are watching.
-- Paul Marotta

Leave Craig Alone

2009-10-28T10:48:00.000-07:00

No one knows what to make of Craig. The founder of one of the most ubiquitous web sites in the world; Craig does not want to sell to Google or eBay for billions of dollars; does not want to tweak his web site to make it pretty; does not want to maximize revenue; does not want to add myriad social networks; is not interested in driving web 2.0 or 3.0 (or wherever we are now) applications; does not want to tinker with different revenue models; and does to want to do much of anything but add cities and answer his email. He has 30 or so employees to eBay’s 16,000, and Amazon’s 20,000. Yet they drive 20 billion page views a month in what is largely a free site. Yet Craig’s revenue is guestimated at anywhere in the tens to hundreds of millions. Let’s see what is that on a revenue per employee basis. Whoa. We say leave Craig alone. We are so shocked by anyone who is not after every dollar he can squeeze out of a situation we don’t understand it. We have to question and criticize. We have no idea what motivates Craig, but we believe that Craig is, and should be, free to do whatever he wants with the business he started. Just as we are free to speculate about what he is doing, use his site, start a competitor or ignore him. One thing is for certain, Craig is unique and, as with any entrepreneur, everyone who enjoys using his site would be poorer but for what he has done. We say, “Go Craig...wherever you’re going.”
-- Paul Marotta

Corporations v. Government

2009-10-07T09:06:00.000-07:00

The Buzz tries not to get too political, we enjoy the diversity of thought that comes with everything from communists to anarchists, but we hear more and more complaints about “corporations” and we don’t understand it. Now, we admit, we kind of like business, and kind of distrust government. And, of course, corporations come in all sizes. When people complain about “corporations” we think they mean really big ones that they don’t like. Not their friend’s 501(c)(3) or their uncle’s wholly owned consulting corporation. And, hello, “corporation” is in our name, so what’s not to love? But, what can a corporation do to you? Crummy employer? Quit. Product breaks? Don’t buy it. Making “obscene profits”? Buy their stock and share in those profits. Board is evil? Sell their stock or vote them out. So what’s the problem? After all, our standard of living was produced by the hard work of businesses, not government. Government never really produces one job unless it takes money from you to pay for that job. One could argue that some musicians or athletes make “really obscene profits” but as long as I am free to not buy their music, attend their games, or go to their concerts, what do I care what they make? Everyone but government is in the “contract“ business, they can’t make you do anything you don’t want to do; government is in the “coercion” business. Put on your bike helmet, buckle your seat belt, file this, stop here, or it’ll take your money away. We’ll take corporations any day.
-- Paul Marotta

Smoke This

2009-09-16T13:42:00.000-07:00

San Francisco banned sales of cigarettes in drug stores. We guess this is proof that cigarettes should not be regulated by the FDA since they are apparently not drugs. Phillip Morris argued that the law violated its right to advertise its product. In an unpublished opinion the 9th circuit upheld a district court ruling that there is no censorial motive since the cigarettes can still be advertised, just not sold in drug stores. One argument made by proponents of the law was that drug stores are havens of health and tobacco is in opposition to health. That must mean that drug store candy will be targeted next. Of course, we bet the real proponents of the law were cigarette specialty stores and convenience stores. Eliminate the competition by whatever means possible, right? Another argument was that it is inconsistent to sell products to quit smoking next to cigarettes. We guess that means that Safeway will stop selling diet products soon. In any case, it’s all for your own good…...
-- Paul Marotta

Not So Inside After All

2009-08-27T12:03:00.000-07:00

Mark Cuban is an entrepreneur who sold Broadcast.com to Yahoo for over $5 billion, and is the owner of the Dallas Mavericks. An SEC complaint against him for insider trading was recently dismissed. A company Cuban had invested in, Mamma.com, called him and told him if he would sign an NDA they had some secret stuff to tell him. He signed and they told him they were engaging in a so-called PIPES transaction (private investment in public entity; made more popular with the lessening of resale holding restrictions). Supposedly, Cuban hates PIPES transactions (they can result in so-called “death spirals”) and said, “Well, now I'm screwed. I can’t sell,” but then sold his 6% stake, avoiding $750,000 in losses. The SEC’s complaint relied on the misappropriation theory of insider trading, that due to some special relationship, typically a fiduciary one, a non-corporate-insider could not trade on confidential information. But it wasn’t clear Cuban could not trade; it was only clear that he would not disclose the information. Therefore the SEC’s complaint was dismissed. We’ve always included in NDA’s used for Reg. FD and insider purposes an acknowledgement that the recipient would not trade on the information received.
-- Paul Marotta

Is it a Rye-p-Off?

2009-07-28T15:18:00.000-07:00

Catcher in the Rye author J.D. Salinger was not amused by the tribute piece by “J.D. California” entitled “60 Years Later: Coming Through the Rye.” Salinger attacked and quickly won. The case begs questions about so-called “fan fiction;” works by fans using characters from popular works. Until now, the Buzz doesn't know of any so-called fan fiction that anyone attempted to publish. Typically such fan fiction is shared for non-economic reasons, out of love for the original, and usefully promoting and advertising the original. Author “California” said that, “just like [in] the first novel, [Caulfield] leaves, but this time he’s not at a prep school, he’s at a retirement home in upstate New York....It’s pretty much like the first book in that he roams round the city, inside himself and his past.” Salinger argued that the sequel was not a parody and did not comment upon or criticize the original,” and was therefore illegal copyright infringement. Of course, there are fair use infringement exceptions for use in critiques and discussion that does not involve true commercial use. And “copying” for copyright infringement does not have to involve broad paragraphs of exactly duplicated text; it can be present where the copying is more subtle and involves copying of characters. Write away, but don’t try to sell your update of Luke Skywalker’s latest exploits.
-- Paul Marotta

Supremes to Examine Business Methods Patents

2009-07-22T15:05:00.000-07:00

Recently the U.S. Supreme Court agreed to examine business methods patents. Business methods patents protect ways of doing business, typically in a string of actions that can be said to have been invented by a business. Priceline’s name-your-own-price process is one example of a business method exclusively claimed under a patent. The U.S. Court of Appeals for the Federal Circuit, the principal national arbiter of patent cases narrowed business method patents in Bilski v. Doll. In 1997 plaintiff Bernard Bilski sought a patent for a method of predicting and hedging risk in commodities trading. The Federal Circuit rejected the claim because the inventor did not show that the method was tied to some mechanistic process. This was different from earlier precedents that had led to more patents for such intangible business methods. In the months since Bilski, more business methods patent have been rejected by the PTO. Retired Judge David Souter was seen to question broad patent protection while nominee Sonia Sotomayor worked protecting intellectual property while in private practice, leading some to believe that her confirmation would be a plus for business method patent applicants.
-- Paul Marotta

Be Careful With Legal Self Help

2009-06-16T13:43:00.000-07:00

Self-help sounds like a good idea, and may be in many pursuits, but in legal matters it can be a terrible idea. And in a bad economy it is a common practice as payment cycles get longer and companies are focused on cash flow. We have seen a rise in self help efforts, almost all of them fraught with unnecessary risk. Many of these risks are related to doing things that you think will put pressure on your debtor, but which really can expose you to liability. For example, a former employee of a company told the company that unless they paid him the amount demanded, he would post their source code on the Internet: The former employee ended up being arrested for extortion. Another former employee went into his former employer’s website and messed with customer data: He was arrested for federal computer crimes. You might try to scuttle a sale that you were working on while still employed: And get sued for “interference with prospective business advantage.” The right kind of self help? Help yourself to a lawsuit against your debtor if you have to. Once litigation had been filed, an immunity arises to things like slander, extortion, and interference with prospective business advantage, while prosecuting your lawsuit.
-- Paul Marotta

Scofflaw?

2009-06-02T16:41:00.000-07:00

We have been following a fight between UBS and the IRS. The IRS wants the names of UBS accountholders who are not paying their US taxes and UBS is asserting Swiss law making it criminally illegal to give up those names. The Internal Revenue Service sued UBS to try and force the bank to turn over information about 52,000 account holders the agency says have $14.8 billion in assets and are using Swiss bank secrecy to illegally evade paying US taxes. We guess that this current era of non-hegemony ends at the pocket book. UBS asked that a Miami federal judge deny the IRS petition. The Swiss government weighed in that the IRS case might threaten an intended Swiss-US tax treaty being negotiated: “There can be no question that the Swiss interest in enforcement of its financial privacy laws is strong and legitimate...In contrast to some other countries’ financial privacy laws, the laws of Switzerland impose criminal, as opposed to merely civil, liability on those responsible for violations.” UBS quoted from the US Supreme Court case M/S Bremen v. Zapata Off-Shore Corp. 407 U.S. 1, 9 (1072) that, “[w]e cannot trade and commerce in world markets...exclusively on our terms, governed by our laws, and resolved in our courts.” Sounds good to us IRS.
-- Paul Marotta

One Man’s Poison...

2009-05-29T11:13:00.000-07:00

Poison Pills have been structured and adopted for 25 years now to shun uninvited bidders. They typically use mass dilution as a deterrent when acquisitions cross a threshold such as ten or twenty percent of a company’s issued and outstanding stock without board approval. For example, when the uninvited bidder buys in excess of ten percent of the target’s stock, then investors who owned before the bidder, can buy more shares at a deep discount. This dilutes the bidder and makes the transaction more expensive. Potential bidders were usually extremely careful not to trigger such a poison pill. A newer flavor of poison pill lowered the threshold to 4.99% and was structured to protect a company’s NOL’s, the idea being that the NOL’s will be lost in a change of control. In December, 2008, Versata Enterprises triggered an NOL poison pill of Selectica. Selectica’s NOL was $150 million. Versata acquired 5.1% and Selectica’s board lowered the pill threshold from 15% to 4.99%, but grandfathered Versata and others. Then Versata increased its ownership to 6.7% triggering the pill. The case went to trial with a central fight over the validity of the structure and application of the pill. Watch this space….
-- Paul Marotta

Look and Feel

2009-05-19T16:48:00.000-07:00

As a young lawyer the Buzz worked on the first copyright “look and feel” case to go to trial. At the time the sort-of novel concept was that a copyright existed in the look and feel of software (read: interface) as well as in the source code. Well of course it did, the graphical interface was a copyrightable work of authorship as well as the text of the source code. So we felt déjà vu while reading about Apple’s displeasure with Palm’s new Pre and the intuitive way that users can slide their fingers around, controlling the interface. Apple had actually followed our earlier case, in part because their user interface looked something like that developed at Xerox Parc [boy, if that doesn't date us nothing will]; and also because HP had a user interface that kind of looked like Apple’s, even including a garbage can. Whoaa. About Palm’s new interface, Apple COO Tim Cook reportedly said, “We will not stand for having our IP ripped off, and we’ll use whatever weapons we have at our disposal. I don’t know that I can be clearer than that.” So we say watch this space for updates on Apple v. Palm, coming soon to a theater near you. There are defenses available for interface features that are functional and not aesthetic, but aesthetic is in the eye of the jury and is easily claimed. Fire up those defenses Palm.

-- Paul Marotta

Creating an IP Portfolio

2009-05-12T08:52:00.000-07:00

The Buzz’s father once had an idea he wanted to patent: Little cups on airplane wheels that would start the wheels spinning before landing so that the tires wouldn’t squeal when they hit the pavement. When he looked into it, there were already a dozen variations of his idea patented. That ended his inventing career. Our state and federal intellectual property laws, including patents, trademarks, mask works, trade secrets, copyrights, and the like, give you a monopoly of one sort or another. That’s pretty cool. You get to charge monopoly profits from anyone who wants it. Famous author? Try charging $300 for your next book. [Well maybe there are some market forces at work in limiting your profits, like competition from other books.] But still you should pursue a portfolio of protection for the intellectual property that defines your business. Even if you will never start exacting huge patent infringement settlements from the Fortune 500, or shut down potential competitors in their infancy, a portfolio is useful for cross licensing when disputes do arise and to make a buyer feel good about acquiring you. And some, like trademarks and copyrights, are relatively cheap, although there are a few landmines for the DIY IP protector.
-- Paul Marotta

Avast ye Hardies Yo-Ho

2009-05-06T09:38:00.000-07:00

Another kind of pirate than the Somalis made the news recently when the four men behind The Pirate Bay were convicted in April of violating Sweden’s copyright law. The Pirate Bay is (was?) a file sharing site similar to Napster. The four were convicted of helping millions of users download music, movies and computer games without paying. The Stockholm district court sentenced Gottfrid Svartholm Warg, Peter Sunde, Fredrik Neij and Carl Lundstrom (who financed TPB) each to one year in prison, and imposed a fine of 30 million kronor (about $3.767 million) to a bunch of media conglomerates such as Sony, EMI, Columbia Pictures, and Warner Brothers. TPB became digital content’s public enemy number one after Kazaa and Grokster were forced down. TPB suggested somewhat humorous responses to cease and desist letters, informing the writer that Sweden was not a state in the United States. TPB’s technology allowed parts of a large file to be transferred from several different users. Defense lawyers argued that TPB didn’t host any copyright-protected material. They lost anyhow.
-- Paul Marotta

OctoMark

2009-04-27T15:07:00.000-07:00

Mother of eight Nadya Suleman, claiming “also known as” status as the “Octomom”, has filed for two trademarks on “Octomom” to be used with diapers, dresses, pants, shirts, and textiles on an “intent to use basis” meaning that she is not yet using the intended trademark; and in connection with an intended TV variety show. The Buzz refuses to imagine how you turn reproductive excess into a variety show. So called “Intent to use” trademarks are supposed to avoid the old problem of manufacturing a commercial sale of something trademarked good just in order to file a registration application. It used to be that you had to actually use the mark in commerce before you could file a registration application. Now you get 6 months and a possible 5 additional 6 month extensions in order to actually start using a mark. We’ll see if “Octomom” diapers start showing up in the next 6 months. The strongest way to register a trademark is to use all capital letters in your application. This is to show that there is absolutely no stylized design or capitalization scheme associated with your mark. In other words, every single way of capitalizing or stylizing the mark is a potential infringement. Check this space for thoughts on building an IP portfolio next time.

-- Paul Marotta

www.Goldmansachs666.com

2009-04-21T09:15:00.000-07:00

We loved reading a good conspiracy theory in our misspent youth, but never really believed any of them. But the way that all politicians of all stripes joined in lockstep in the fall of 2008 to send trillions of dollars of our money to AIG, Goldman, etc. and the expedience and prestidigitation with which Lehman (whose legal bill has passed $80 million already) was allowed to fail raised a few interesting questions for us. Now, with Goldman’s profit announcement, apparently built mostly on (i) non-recurring AIG unwinding, and (ii) relaxation of the same mark-to-market accounting rules that were so important after Enron’s collapse, but have now fallen out of favor, we wonder if the conspiracy buffs might be right. Surely the wrong people lost money in the fall of 2008 or the politicians would not have genuflected quite so low. Goldman has now tried to slam a critiquing website called www.goldmansachs666.com that is posting negative Goldman information. The site recently filed suit against Goldman in a preemptive strike seeking declaratory relief that it is not infringing the Goldman Sachs mark used in connection with financial services. Law firm Chadbourne & Parke, representing Goldman, had sent a nasty-gram demanding that the site close down. We guess Chadbourne was confused and tried to hire the site to manage its 401K.

-- Paul Marotta

Corporate Governmentance?

2009-04-09T14:51:00.000-07:00

We have watched with interest (and some horror) the uncharted waters into which our economy is swimming (sinking?). We now have one of the recently largest companies in the world bowing at the alter of government (OK, it bowed a long time ago, but now is being sacrificed). We speak of General Motors. After Enron, intense focus on corporate governance was the watchword; Sarbanes-Oxley the bible. Let’s make sure that the system of running our corporations was free of undue influence, based on the independence of the caretakers, and that all persons with any influence be properly vetted and approved. Shareholders are being given new powers of proposition and Boards are supposed to respond to them, not the managers. Well, we guess all that changes when the government is involved. We watched with open mouths as the POTUS fired the GM CEO. Wasn’t that the Board’s job? Did the Board abdicate its responsibilities? Was that a fiduciary breach? Doesn’t the Board select the CEO? Don’t the shareholders control things? BTW, the latest SEC filing as of this writing is an order granting confidential treatment concerning the government loan agreement, so we may never know whatever is really going on. The Buzz says playing in that sandbox is no good for your company or the country.
-- Paul Marotta

Charles Ponzi and his ilk

2009-03-31T13:58:00.000-07:00

Charles Ponzi claimed to be buying discounted postal reply coupons in other countries and redeeming them here at face value, performing a kind of arbitrage. He promised his investors 50% in 45 days or 100% in 90 days. Postal reply coupons were supposed to allow the recipient of a letter the money to mail back a reply. A Boston reporter suggested that there was no way Ponzi could legitimately be making that kind of money. Ponzi sued him for defamation and won. Bernie Madoff and Arthur Nadel are only the latest in a long line of swindlers. We suspect that some of these people start out legitimately are just too embarrassed to admit they lost 40% (of whatever) of their investors money so they lie, claim great returns, and start a process that is never going to end well for them. Now, states are looking at special legislation to “tackle Ponzi schemes,” as if fraud is not illegal enough now, or that by legislating they will prevent people from stealing. Generally involving new teams of cops and prosecutors, these proposals from Connecticut to Florida include letting states pursue securities fraud and money laundering (typically federal crimes, but ones most states can prosecute anyhow). In any case, the Buzz says watch out you don’t outlaw social security (or, maybe that’s OK too).
--Paul Marotta

Public Company Disclosure

2009-03-25T09:54:00.000-07:00

We were intrigued recently by a Wired article suggesting that there is a simpler way to format public company disclosure so that there is radical transparency, making reports easier to understand and easier to interpret. Of course, regulators believe that the current system does exactly that. But making financial reporting simpler is the exact opposite direction we have been heading. The idea is to have public companies file using universal tags that make the data easier to explore. We like the idea but don’t think it will be that simple. The current system already uses the equivalent of universal tags—“accounting terms of art.” The problem is that to overhaul financial reporting we need first to overhaul accounting. In a sense that is happening with the intended abandonment of GAAP and adoption of more international standards. But some lament the standards will allow more subjective interpretation, thus making financial statements more susceptible to fraud. And what 100 or so tags would you include. Revenue is good, but is that cash or accrual accounting? And earnings per share is great, but do you count pledged shares, options, warrants, convertible debt, etc. We like the idea because current reporting is inscrutable to almost everyone, including lawyers, accountants, and investment bankers, but as with everything, the devil is in the details.
-- Paul Marotta

Fannie Whoa!

2009-03-17T09:32:00.000-07:00

We recently had the distinct displeasure of reading the Annual Report on Form 10-K for Fannie Mae for 2008. The words sounded like any other annual report, but it read more like a horror story. Somehow they managed to bury $60 billion after losing just two and half billion a year ago and making three and a half billion in 2006. Retained earnings went from 33 billion to a loss of 26 billion. Stockholders’ equity went from 44 billion to negative 15 billion. Short term debt increased by $100 billion. There were a million shares of senior preferred stock outstanding at the end of 2008 at $1,000 per share, but none at the end of 2007. Guess who owns that? Right; you do. Of course there is a long discussion of its conservatorship since September 6, 2008. The conservator is the Federal Housing Finance Agency. Of course the conservator is delegating to Fannie Mae’s Board of directors and management the actual day to day management, so not much has changed. One ray of hope—Deloitte & Touche has lowered their auditing fees from $47 million to $39 million.
-- Paul Marotta

Attack Your Best Customers?

2009-03-09T11:45:00.000-07:00

As the recession deepens and panic sets in, the conventional wisdom seems to be to generate cash flow by force of will. Municipalities including San Francisco and San Mateo have been trying to hike every fee not nailed down, in an effort to close budget shortfalls. That’s a plan; now that everyone is hurting and out of work, hike their taxes. That’s the way to get our economy back on track. Maybe if taxes are high enough the few left with jobs will get fired and tax revenue will drop to zero. Similarly, one business after another has been trying to do anything to avoid shipping money out the door. A specialty retailer that the Buzz’s best friend frequents would not give her a refund on valentines day cards “because it is a seasonal item.” And this was three days before Valentines day. To make matters worse, this great customer traveled 30 minutes to shop at this store to help them stay in business rather than buying her stuff off Amazon.com at 30% less, and was buying another $50 worth of stuff when denied the refund. No good deed goes unpunished indeed. Why bother trying to help stores that couldn’t care less about you? The moral here? Don’t panic! Take extra good care of your customers! You should know that their retirement portfolios are down 40%; they might have been fired that day; the State of California might be shipping them an IOU instead of a tax refund; and they might not be able to afford college for their kids any more. In short, take a deep breath, relax, and still take care of those who value and use your products and services. Some day you might need them…...
-- Paul Marotta

“At Will” means never having to say “I’m Reviewing You.”

2009-02-24T16:48:00.000-08:00

We almost laughed out loud while reading some recent draft executive employment documents for a friend. Many lawyers are too smart by half. The Buzz tells clients that real at-will employment means that you can fire your absolute best employee any time you want to when they are at the top of their game, and have done everything perfectly, and you love them. With true at-will you do not need any “reason.” But lawyers constantly screw that up by adding “reasons” why the employee can be fired. Courts then ask why you would list reasons when you claim you do not need them. They deduce that, obviously, there is more here than meets the eye and conclude that you did not mean it when you wrote at-will since you also discuss “reasons” to terminate. These particularly drafts, obviously prepared by big firm sort-of-lawyers, even include the old 90 day review-of-employment saw. Why would you review their employment after 90 days when they are employed at-will and every day is just like any other day of employment? The only answer: Because something changes after the review and now they are no longer employed at-will. And worst of all, the agreements say this while continuing to protest that employment is still at-will. Can you say, “schizophrenic......”

-- Paul Marotta

Legal News You Can Use

2008-09-07T12:43:00.001-07:00

The Buzz thinks the new California cell phone law is silly. You can still eat, play drums, shave, read the newspaper, and put on makeup but you cannot hold your hand next to your ear. Oh, you can still talk on the phone too, you just need to do it on a hands free device. Mind this, you do not actually need any hands on the steering wheel, you just need to be distracted talking on the phone while the phone is not next to your head. As we said, silly! In fact, we think it was merely a revenue grab; an excuse to take $20 ($50 for a second and further offence) from anyone using their phone. Sure the State is short on money, although showing the fiscal restraint of drunken sailors. No...I'm sorry...that’s unfair to drunken sailors. Well, we’re here to help. California Vehicle Code Section 23123(c) provides that, “This section does not apply to a person using a wireless telephone for emergency purposes, including, but not limited to, an emergency call to a law enforcement agency, health care provider, fire department, or other emergency services agency or entity.” SO, if you are using your telephone for any emergency, challenge the ticket. The Buzz says go for it!

-- Paul Marotta

Bon Jour

2008-09-07T12:42:00.000-07:00

The Buzz will never forget reading a book about Cambodia, where the friendly greeting “bon jour” was frequently accompanied by a handful of dollars used to bribe whomever was receiving the greeting. Similarly, on June 30, 2008, Iraq sued 50 companies ranging from Chevron, BNP Paribas, and GlaxoSmithKline to Boston Scientific, and AWB, Australia’s largest wheat producer, for taking kickbacks in connection with that textbook example of fraud known as the United Nations Oil-for-Food Program. Surprisingly that fine example of responsible leadership Saddam Hussein received kickbacks. The only really surprising thing here is how gullible we can be when assuming the best about people. Paul Volker headed a commission that found that 2,200 companies in 66 countries paid at least $1.8 billion in kickbacks to Iraqi “officials.” since the Oil-for-Food Program ran some $70 billion, we imagine he only saw the tip of the old iceberg. The recent lawsuit alleges violations of the Foreign Corrupt Practices Act, among other things. One thing that may prove troublesome for the Iraqi plaintiff is that the plaintiff frequently must show “clean hands” before throwing stones. Iraq was represented internationally by a bunch of crooks for so long that it may not be able to do this. We’ll see. Bon Jour!

-- Paul Marotta

Chick Fight

2008-09-07T12:41:00.000-07:00

Barbie just won $100 million against Bratz. Former Mattel (Barbie) designer Carter Bryant, developed the Bratz concept for MGA Entertainment, Inc. Most of the damages were related to an employment contract between Mattel and Bryant. MGA was found liable for interference with contract and aiding and abetting Bryant’s breach of fiduciary obligations. Ten percent of the damages were assessed against MGA for copyright infringement. No punitive damages were awarded even though they could have been if intentional interference with contract was found, like in the infamous $11 billion Penzoil v. Texaco case. MGA claimed vindication and said that the amount Mattel was awarded was dwarfed by their demand. Bratz girlz Yasmin, Cloe, Jade and Sasha had taken food out of Barbie’s mouth. They might be right since MGA and its CEO Isaac Larian have built a billion dollar Bratz empire. Barbie sales slid as Bratz gained popularity, adding Bratz Boyz, Bratz Petz and Bratz Babyz. Bryant, maybe seeing the train wreck to come, settled with Mattel on the eve of trial. We’ve know for a long time that “girls toys” consisted of Barbie, while “boys toys” was everything else, so maybe it was time for some competition. Still, with an ounce of prevention……...

- Paul Marotta

Classified Ad Death-Match

2008-05-20T15:04:00.000-07:00

Now that eBay and Craigslist are well on their way to putting most newspapers out of business, they have turned on each other. In 2004 eBay bought about 28 percent of Craigslist. Craigslist is still private. eBay apparently started operating it’s own classified service called Kijiji after making the Craigslist investment though the Buzz never heard of it or used it. Now eBay claims that the Craigslist Board did something in January that unfairly diluted its ownership in Craigslist by 10 percent. eBay sued Craigslist last month claiming breach of fiduciary duty. And in an unusual move (probably motivated by one or more confidentiality obligations, and since Craigslist is privately held), eBay filed the lawsuit under seal (now recently unsealed). Craigslist says that eBay never even tried to talk about what they viewed as wrong; they just rushed to court. The unsealed complaint suggests otherwise. Craigslist CEO Jim Buckmaster denies the allegations of the lawsuit and sees sinister motives, citing a possible “hostile takeover.” Of course that only works when you are publicly traded and do not control a majority of the stock. Since Craigslist is private we can’t evaluate the possibility of a takeover but all eBay would have to do is contact other shareholders and offer to buy their shares, not file suit. It looks like maybe the complaint is aimed at re-claiming eBay’s rights of first refusal, which Craigslist argues were lost when the competitive Kijiji site was created. It also looks like Craigslist engaged in questionable dealing to deny eBay it’s Board seat. In any event, the Buzz says get out the popcorn.

- Paul Marotta

Basel II-Much

2008-04-28T12:56:00.001-07:00

The Basel Committee on Banking Supervision was supposed to suggest guidelines that would make international banks safer, more depositor trustworthy, etcetera, etcetera, etcetera. The fundamental objective of the Committee’s work was to revise the 1988 Accord (Basel I) and develop a framework that would further strengthen the soundness and stability of the international banking system while maintaining sufficient consistency that ‘capital adequacy regulation’ (read “state protection”) will not be a significant source of competitive inequality among international banks. In other words disallow one country from letting their banks accept more risk. In crafting Basel II, the Committee said that it believed that the revised framework (which adopted three ‘pillars’: minimum capital requirements, supervisory review, and market discipline) will promote the adoption of stronger risk management practices by the banking industry. The bankers themselves felt that Basel II would benefit those banks with better risk management metrics. Now, after years of work, there is some thought that Basel II prescribes exactly the wrong thing for a recession. Basel II requires higher and higher safety margins as portfolios are found to be more and more risky. The result is that banks are tightening credit at exactly the time when credit itself is seen as being too tight. As our government hands back 67 cents in the form of a stimulant (of course, after taking a dollar of your tax money) and begging you to spend it quickly, the banks are telling you that your loan will not be renewed. Maybe all that the government hand outs will go toward paying down debt. Not necessarily a bad thing for economy but certainly not what the wonks in the Wash. intended. We say that the law of unintended consequences trumps all, which is why a little humility from those who think they control anything, would be a good thing.
--Paul Marotta

See you and Raise you

2008-04-01T14:38:00.001-07:00

A Harvard Law Professor is protesting a Massachusetts proposal to criminalize online poker, even when no money is being bet. Prof Charles Neeson, founder of the “Global Poker Strategic Thinking Society” at Harvard said, “I don’t think filling our expensive jail cells with poker players is what Massachusetts voters had in mind when they elected Deval Patrick.” Neeson founded the Society to tout poker’s educational benefits. We think the Gov would benefit from a bit of poker himself.

--Paul Marotta

No Chads Here Al

2008-04-01T14:33:00.000-07:00

Whatever you think of him or his ideas, you have to admit that Al Gore has been entertaining since giving up the public sector. Now the VP turned VC is taking his TV cable company public. But he’s shown an undemocratic distrust of tyranny of the majority and taken shares with 10 times as many votes for himself. His company Current Media, LLC, will convert into a corporation, issue super-voting Series B Common to Gore and sell mundane Series A Common to investors. The IPO is being underwritten by JP Morgan. The Company owes Gore $2 million and pays him over $1 million a year, but his stock ownership is not finalized yet. We think maybe the Florida hanging-chad had something to do with Gore’s insistence on super-voting stock.
--Paul Marotta

Open Primary OK

2008-04-01T14:32:00.000-07:00

The Supremes final score was 7 to 2 in a case involving Washington State’s open or blanket primary system. The two controlling political parties challenged a Washington state initiative that allowed those with the top two primary vote totals to enter the general election in November. The law would allow two persons from the same party to end up in the November election and also allowed anybody to run in any primary designating themselves as any political affiliation they wanted. No primary has yet been held under the new law because injunctions were granted early on. The law was challenged on grounds that it violated a political party’s members’ freedom of association. The District court granted the parties’ motion for summary judgment and the Ninth Circuit affirmed (in part,. we suspect, to move the case along to whence it belonged). But the Supremes reversed. Justice Thomas, noting the disfavor of facial versus actual challenges, and writing for the majority, said, “[i]f the ballot is designed in such a manner that no reasonable voter would believe that the candidates listed there are nominees or members of, or otherwise associated with, the parties that candidate claimed to ‘prefer,’ the ... primary system would likely pass constitutional muster.” Scalia and Kennedy dissented, opining that Washington’s system allowed the preempting of the political parties’ trademarks, so-to-speak, at the most crucial stage of the election. We say, “Go for it.” Anything that shakes up those who are entrenched in government and gives people a broader choice is only a bad thing, if they don’t choose you. Why should the dems and pubs assume they each get a candidate in the general election, when others might get more votes?

--Paul Marotta

Customers Rule!

2008-03-02T22:12:00.000-08:00

We read with interest a recent Business Week item about Vigilante Consumers. Some conventional wisdom holds that certain small customers are not worth any customer service. That school of thought focuses on a few large customers and let’s the vagaries of the companies product sort out the rest. In this possibly misguided application of the 80-20 rule, if the product or service works then great, if not, let the customer go elsewhere. Who cares? But an interesting combination of blogs, specialty websites and youtube is changing all that. One site http://www.comcastmustdie.com/ is actually turning into a useful Comcast customer service vehicle. Posters are encouraged to keep their posts civil and to include their account numbers. Comcast apparently trolls the site regularly and fixes the problems raised by the posters. We can see this evolving into both (i) customers using the site as a method of first instance in reaching Comcast and (ii) Comcast shutting down whatever customer service department is failing them so badly and possibly hiring the blog as its customer service contact point. Another story has a man posting a youtube video of him sledge hammering his Apple mac notebook since Apple won’t fix it. Other websites are offering executive contact information so that you can send executive suite carpet bombs that might get someone’s attention. We say, “Party on Wayne.” We were told a long time ago that if you do something right, maybe the person would tell their spouse but if you do something wrong or treat someone badly, they will tell the next 100 people they meet. Consumers deserve more and we’re glad to see them using guerilla tactics to get it. We are strong market believers and defenders. Part of what we love about the market is that you are not forced to do business with anyone with whom you do not want to do business. Markets work best when efficient and the more information the market has the more efficient it will be. We trust the market participants and leave it up to them to determine which criteria are most important. If companies are going to provide shoddy customer service experiences, we say let them go under and companies that care about their customers fill the breach. So which companies did Business Week rate best? A sampling includes L.L. Bean, Starbucks, Trader Joe’s, Chick-Fil-A, Ritz-Carlton, and Jetblue.

-- Paul Marotta

What Recession?

2008-02-18T21:21:00.000-08:00

The National Bureau of Economic Research is meticulous about accuracy in calling a recession. Consequently their anointment has no real predictive benefits because by the time they decide it was a recession it’s usually over. Harry S. Truman once famously quipped that a recession is when your neighbor loses his job, a depression if when you lose yours. The pundits are now claiming a recession is likely. A supposed horror in an election year, the politicians are falling over themselves to write checks to everyone to keep us spending. That’s a great plan; take the money away from productive uses in the first place and then mail back 40% of it to us after you’re done making Washington’s payroll. And some are linking the coming recession to the housing slump. Supposedly, when prices were high we all mortgaged our houses so we could buy a flat screen TV and a beemer. Now that house prices are not rising, we have nothing to spend. But the Buzz has always thought the Valley recession–resistant if not downright recession-proof. One of the miracles that is Silicon Valley is the incredible number of very intelligent people who have been recruited here. Sure many get out when their IPO hits, but there are a lot of very smart people still here. Yes, we mean you gentle reader. And we know that the smart people who make up our community are always working on the next thing. On top of this, venture capital does not fund what is now; it is generally looking for what is next. Just because housing prices have stalled or, God forbid, declined, does not mean that there aren’t a million new ideas being hatched every day. Of course we’re lawyers so none are coming from us, but we know that you have the next great idea. So, what are you waiting for? When the depression hits and YOU lose YOUR job, get cracking, give us a call, and start that business you’ve always wanted to start.

-- Paul Marotta

Who’s the Man?

2008-02-12T11:28:00.000-08:00

Our federal government is collecting millions of dollars for social security numbers that do not match any known record and supposedly keeping this money in a suspense account. We figure that account is right next to the social security trust fund account. Right. In any case the SSA sends out thousands of letters every week, commonly referred to as “No-Match Letters,” telling employers that that social security number they were given by their prospective employee does not match any known record. Many times, clerical errors, misspellings, slipped digits and the like are to blame. Eventually many are fixed. Employers were admonished in the past that no-match letters did not mean anything as far as the employee’s immigration status. But sometimes the social security number provided by that bright eyed new employee is one they made up or got from a friend. Now these no-match letters have become an enforcement tool in the battle against businesses employing the 12 million or so people the feds couldn't be bothered to find after their visas expired. Homeland Security now uses no-match letters as proof of a business’ knowing employment of illegal aliens. The state has always used businesses as their enforcement arm; what do you think payroll tax withholding is. So we guess the strategy our government is now using is that they can starve out the 12 million people they let slip in. Good plan; let’s ensure they are unemployable so that they can become wards of the state.

-- Paul Marotta

Executive Compensation

2008-01-29T14:56:00.000-08:00

The Buzz has watched with interest the increasing number of CEO’s who have made a bunch on their stock and have forgone their salary. Googlers Eric Schmidt, Sergey Brin, and Larry Page last year lowered their salaries to $1 (from the already-not-very-high $250,0000 for Schmidt and $150,000 for Brin and Page). Similarly Whole Foods Markets CEO John Mackey late in 2006 sent a letter to his employees stating that he was lowering his own salary to $1 for 2007. In a well written letter Mackey said that, “The tremendous success of Whole Foods Market has provided me with far more money than I ever dreamed I’d have and far more than is necessary for either my financial security or personal happiness.” Apparently in an effort to do even more good, Mackey also had the Board deposit $100,000 into a Whole Foods Global Team Member Emergency Fund, to be used by and made available to Whole Foods Markets employees with emergencies, and donated future options to two company foundations. Many people use their compensation as benchmarks for anticipated personal happiness, skill at a given endeavor, or societal value. Compensation has components of all of these things, but cash compensation truly measures none of them. Even stock compensation measures more of a collective effort, rather than an individual one. Though we are avid free-marketers, we generally applaud CEO’s whose desire for personal wealth has an end point (because most others’ greed has no bounds at all). But we find slightly disingenuous the protestations of Bill Gates, George Soros, and Warren Buffet. Their recent cries for “humanity” in business fall on deaf ears to the extent that they ignored that humanity while growing their own personal wealth. We find more honest the CEO who sets the stopping point well below the $1 billion mark. Just as compelling is the CEO who does not immediately layoff employees for a few more cents a share profit, or scheme endlessly to put a competitor out of business. Sure fiduciary obligations are important, but leaving a trail of scorched earth in your path may not be absolutely necessary to ensure that you are handling stockholders' assets well.

- Paul Marotta

Entrapment?

2008-01-14T18:50:00.000-08:00

The US Immigration and Customs Enforcement Agency (aptly named “ICE” by Washington’s acronym-addicts) is prosecuting an HR employee at Swift & Co., a beef processor, for “harboring an illegal alien.” Apparently ICE raided a slaughterhouse, wired a scared illegal and recorded his conversations with the HR Administrator. The same human compassion that gets politicians elected, got the HR Administrator prosecuted. And not only prosecuted, but prosecuted by the same federal government that cannot keep a border any tighter than Swiss cheese. Apparently the fact that people are regularly sneaking into our country by the millions is the fault of those trying to run businesses here; not the government’s. ICE made 863 criminal arrests in 2007, up from 176 arrests in 2006. The federal government believes that the 12 million people they already let into this country are supposed to either starve or be fed in public schools. Or maybe they can all turn to crime since they can’t get jobs anymore. That’s a good idea! The government believes that only it can help those it carelessly let in. And the workers who are caught make perfect snitches; they would much rather turn in everyone above them than face the consequences of their illegal status. We think this smells like entrapment: Let’s place hundreds of workers willing to do the job in front of you and then see how good you are at guessing which of our federally-issued social security cards are real and which are fake. Sounds like a good political solution to us; those stumbling over each other to be elected President can blame the “evil profit motive” for all of immigrations ills. It couldn't possibly be more endless bureaucratic ineptitude; could it?

Paul Marotta

Music to No One’s Ears

2007-12-15T14:27:00.000-08:00

The Recording Industry Association of America won its first case. In a blaze of self-righteousness it won $222,000 from a single mother from Brainerd, Minnesota, doing its part to keep our streets safe for gansta rap. The RIAA has filed 26,000 lawsuits over the last four years, but this was the first case to go to trial. The defendant had to pay $9,250 for each of 24 songs. Just ask any college student and for sure they have horror stories of someone down the hall in their dorm getting nailed for $4,000. The RIAA is on its third law firm in as many years, now handling cases through Denver firm Holme, Roberts & Owen. All we can say is HRO must not have been busy enough. The RIAA should have been out front in the evolution of digital music, but instead the best it can do is to weild the blunt instrument of law like a battle ax, crushing in the skull of all those really interested in music. Of course, they argue they are protecting “the artist.” Well, how about offering to let the artist keep more of what they earn for you? No Grateful Dead fans us, but we marveled at their willingness to let fans videotape and record their concerts. Thus was born viral marketing years before anyone coined the term. All the Buzz can say is that we are witness to the last gasps of the recording industry. The music industry is dead; long live music!
--Paul Marotta

The Law of Unintended Consequences for Hershey

2007-11-28T14:27:00.000-08:00

According to Wikipedia the law of unintended consequences, “dates to the Scottish Enlightenment and consequentialism, or judging by results. In the twentieth century, sociologist Robert K. Merton once again popularized the concept, sometimes referred to as the Law of Unforeseen Consequences. Merton (1936) spoke of the “unanticipated consequences” of “purposive social action,” emphasizing that his term “purposive action… [is exclusively] concerned with ‘conduct’ as distinct from ‘behavior’. In any case, the law was mightily fulfilled by Pennsylvania Attorney General D. Michael Fisher. The controlling interest in Hershey is owned by a charitable trust; likely set up by old Milton himself, and possibly benefiting the school he established. (By the way, Hershey’s story is a very interesting one for any student of growing businesses). It turns out that the trust was looking into selling its controlling interest and diversifying. That’s where AG Fisher comes in. Fisher was afraid that, following a sale, Hershey, PA would fold, ‘kisses’ street lights, amusement park, and all, and that jobs would be moved out of the state. He pressured the trust not to sell and it backed down. Now, law professors Jonathan Klick (Harvard), and Robert Sitkoff (Florida State), argue in a law review article in the Columbia Law Review that AG Fisher’s actions left Hershey in a “suboptimal ownership structure” and have destroyed $2.7 billion in shareholder value. Fisher, now a federal appeals court judge, defends his actions as “beneficial at the time.” Sounds to the Buzz like this judge doesn’t know his law... “of unintended consequences” at least. Also sounds to us like a good example of the arrogance of those who think they know best, but actually know very little.

--Paul Marotta

Proxy Compensation Discussion Redux

2007-11-27T15:15:00.000-08:00

The SEC has examined the new Compensation Discussion and Analysis section of the Proxy Statements for 350 public companies. The CD&A was new this year and, to its credit, the SEC is trying to figure out if the objectives were met and what might be changed to make it better. No rule changes are expected for 2008, but some might be offered in later years. The SEC thought that two principal themes emerged. First, the SEC thought that the Compensation Discussion and Analysis generally needed to be focused on how and why a company chose specific executive compensation decisions and policies. The SEC said that the focus should be on helping the reader understand the basis and the context for granting different types and amounts of executive compensation. Second, the SEC thought that the manner of presentation matters. In particular the SEC thought that using plain English and organizing tabular and graphical information in a way that helps the reader understand a company’s disclosure, were best. They added that techniques such as providing an executive summary, or creating tables or charts tailored to a company’s particular executive compensation program, can make the disclosure more useful and meaningful. None of its comments meant that the SEC thought more text was needed; rather it opined that a shorter, crisper, and clearer discussion would often be better. We’re sure that, as with anything, both good and bad practices will arise and both will likely become ubiquitous. The SEC will try to correct the bad practices. The Buzz believes that intelligent focus by boards on incenting for the right targets and avoiding perverse incentives is time well spent, and will certainly make any compensation plan more useful, not to mention writing a CD&A easier.

See http://sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm

--Paul Marotta