This kind of says it all, doesn't it?  While our economy is stuck in neutral, and stripping first gear, and with hundreds of billions of dollars in deficits as far as we can see, we are trying hard to spend $2 million we don't have to improve labor conditions in another country.  Does this mean that some Congress-critter's progeny has some scheme cooked up to work on labor matters in Georgia and they need public bid cover?
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DOL announces $2 million grant solicitation to improve labor conditions in the Republic of Georgia

07/29/2013 02:00 PM EDT

The U.S. Department of Labor’s Bureau of International Labor Affairs today announced the award of up to $2 million to one or more organizations to achieve improved compliance with labor laws in the Democratic Republic of Georgia.

You’re Too Good!

So the Iowa Supremes said it’s OK to fire someone for being too attractive.  Fort Dodge Dentist James Knight fired Melissa Nelson because he thought he might try to have an affair with her and he did it for his wife.  Really?  And, of course, Nelson had done nothing but work hard for him for 10 years.  The court said it was OK since motivated not by gender but by feelings.  Really?  This reminds us of the New London, Connecticut, police case which made the bòn mót “military intelligence” even more oxymoronic.  There, the New London, Connecticut, police department was OK in rejecting an applicant who scored too high on an IQ test.  You read that right; the New London police department wants only cops who are not that smart.  The would-be-cop sued, lost at the district court level, appealed, and lost his appeal.  The court found that, since the same standards were used for everyone, it was not discriminatory to not interview the smarter candidates.  Well,… we guess,… same standards except that whole intelligence thing.  The candidate there, Robert Jordan, a 49-year-old college graduate, took the exam in 1996 and scored 33 points, the equivalent of an IQ of 125.  New London police interviewed only candidates who scored 20 to 27, because they thought smart cops might get bored.  Yes, let’s keep all police as confused as possible as they try to “solve crimes.”  What does this really mean?  That it’s OK to discriminate against the upper half of the bell curve.  Smart, beautiful, people can take care of themselves?  It might.  Apparently even though you have as little control over your intelligence or looks as you do your skin color, it’s OK to discriminate on the basis of the former two.  Of course if you can’t discriminate according to intelligence, maybe the really dumb applicants would have to be hired as well.  Is it admirable that the Iowa Dentist knows he’s a low down unfaithful dog?  Is the real reason New London did not want the smart applicant was because the Chief didn't want to feel like the dumbest person in the room.  We guess in this weird world we inhabit if you want that job, forget the eyeliner and make a few mistakes on your test.

--  Paul Marotta

More Cooperation

Radio talk show host and recovering politician Mike Huckabee calls for less confrontation, more conversation.  We agree, and wonder what Gment would be like with more cooperation.  What if we all were not treated like terrorists by TSA?  What if Gment actually was there to help, and not to accuse and harass?  Maybe if, instead of being spied on, the Gment actually told us what it was doing we could feel like part of it rather than its target.  To a specific:  The Gment thinks that SAC Capital made money insider trading so it has indicted it.  Yet, Gment also said that it does not want to hurt SAC’s investors so it will not seek to interfere with SAC’s operations.  This would ring more useful if it had happened as soon as the Gment thought there was something wrong, not after it had already attacked SAC.  The Gment wants to keep SAC in business even after calling it a “veritable magnet for cheaters.”  Why keep it in business if that is true?  Don’t its investors NOT deserve such ill gotten gains?  Was such cheating just profiting the wrong people?  With the Gment picking winners and losers, and where the Gment knows no bounds in using its (our) resources for political ends, did we just have the wrong people politically in control?  There are certainly allegations that SAC’s head was no FOO (friend of Obama).  If it was illegal shut it down; if it wasn’t leave it alone.  And where did the insider knowledge come from?  Where are those indictments?  When the Gment indicted Arthur Andersen. LLP in 2001 (related to auditing work on Enron), the conviction was overturned on appeal, years after it collapsed and thousands of employees lost their jobs.  So we applaud some restraint; but the restraint is too little too late here.  What we need is less confrontation and more cooperation.  How about working with firms to ensure compliance with whatever the rules du jour are rather than destroying the people that built it while arguably trying to leave the firm intact?  The later smacks of rank jealousy more than anything.  You built it but I want to control it even though I could never have done what you did.  Why is it always “us versus them”?  Trust the Buzz, you’re not as good as you think and they’re probably not as bad as you think.  Why not actually work to reform it rather than playing games of “gotcha”?

--  Paul Marotta

Benefit Corporations

Delaware is enacting new Subchapter XV in its corporate laws to allow so-called Public Benefit Corporations.  California did this in 2012.  Not to be confused with nonprofit public benefit corporations, they are for-profit but allow business to be conducted for reasons other than maximizing profits.  Delaware is the 19^th state to allow these and the legislation is expected to become effective as early as August 1.  Benefit Corporations supposedly allow for-profit corporations to focus on things other than profit without fear of shareholder litigation.  It seems to us that they always have been socially responsible, but to those not paying attention or already indoctrinated in the corporations-are-evil school, maybe this makes them feel better.  They haven’t gotten a ton of traction yet but they could.  Any responsible business person is going to consider all of the social, environmental, employment, and other ramifications of their business’ impact on its community and I would argue those kinds of concerns are allowable in typical for profit corporations anyhow.  These Public Benefit Corporations are kind of the flavor of the month.  How many companies stopped doing business with South Africa due to its policies of apartheid?  How many were successfully sued for passing up those filthy South African rands?  The government nannies would always have you believe that unfettered business will always take the low road, but there is no evidence of that.  Henry Ford raised salaries not because of a mandate or regulation; he did it because his assembly line innovations made it possible.  Most successful businesses really care about their employees.  No one who cares about their employees are going to make less desirable their employees’ communities.  Anyone who says differently is ignorant.  Sure, there are bad apples but the market weeds them our far faster and far more efficiently than some rule. 

-- Paul Marotta 

Reg D Changes…Finally

One mandate of the JOBS Act was that Regulation D, the safe harbor for private placements, be changed so that issuers could generally solicit (advertise) to accredited investors.  That change was supposed to be implemented by September, 2012 but the SEC took their time and the change was just approved.  The modifications to Rule 506 for sales to accredited investors now require a Form D filing before any general solicitation is made, and requires more information to be disclosed, including some special legends (old 506 required no specific disclosure when selling only to accredited investors).  The new informational requirements include things such as:  Identification of the issuer’s website, expanded information on the issuer, the securities offered, the types of investors in the offering, the use of proceeds from the offering, information on the types of general solicitation used, and the methods used to verify the accredited investor status of investors.  Advertising materials would have to be filed as well.  One important change to the definition of accredited investor, which had been kicked around a long time, but was included in Dodd-Frank was that primary residences are now excluded from an accredited investor’s net worth.  So the number of accredited investors in California fell by 90%.  The need to verify accredited status just got much harder too, with methods ranging from looking at your investor’s tax return, to receiving confirmation from their broker or accountant.  Supposedly Rule 506 has not otherwise been affected and issuers can continue to use it as they would otherwise.  We’re not sure that will work out so well.  In any case, as always, we have more social tinkering and what is mandated by one hand is made illegal by the other.  The new rules will be subject to a 60 day comment period and then will become effective.  Only time will tell if this makes capital formation easier without increasing fraud activity.

-- Paul David Marotta

Flow Through Taxation

Limited liability companies, partnerships, and subchapter S corporations have so-called “flow through taxation.”  That means that the entity files a tax return but the taxes are owed by the shareholders.  Typically the taxes are assessed based on a percentage of ownership.  Flow through losses may be beneficial if you have other income which you can shelter with the losses.  Flow through profits are good if you get a distribution.  There is no requirement for flow through entities to make distributions so you could end up with taxable income, tax liability, and no money to pay the taxes.  Some flow through entities provide limited liability (LLCs, LPs, Sub S Corps) and some do not (general partnerships).  They are great for businesses being run for cash flow with many non-employee shareholders, since dividends are not doubly taxed.  If all owners are employees erstwhile profits can be distributed as paychecks and bonuses which are chargeable at the corporate level.  But if many owners are not employees dividends are the only way to distribute profit.  Typically the entity keeps a capital account for each owner.  Investments and undistributed profits increase an owner’s capital account, while distributions and distributed losses decrease an owner’s capital account.  But be careful of a negative capital account because having that written off can result in discharge of indebtedness income.  Some flow through entities are allowed entity owners and some are not.  LLCs are sometimes used for strategic alliances because each alliance partner receives a cash flow stream to use as it pleases.  If a new business is set up for cash flow, a flow through entity makes sense; if it is set up for capital appreciation maybe a non-S corporation makes more sense.  Flow through entities can convert into non flow through entities, but it is harder to convert the other direction.  If you are considering a new entity, talk to your accountant about whether a flow through entity makes sense for you.

 -- Paul Marotta

Supremes:  Your DNA is Not Your Own

After being arrested on first and second degree assault charges, the cops took a cheek swab of Alonzo King to check his DNA.  They found a match with an unsolved rape case, charged him, and he was convicted.  King claimed the cheek swab was an unreasonable search and seizure which violated his Constitutional Fourth Amendment rights.  The Supremes, led by Kennedy, disagreed finding that a cheek swab was not unreasonable and comparing it to a blood test.  But when that cheek swab results in your DNA being permanently indexed for everyone to access, we think more caution is called for.  This is not a case of checking blood alcohol level; this is a case of being tagged with a DNA match a decade later.  We don’t have any sympathy for rapists.  Gas ‘em if you want.  But these concepts are only really tested at the margins and the more heinous the crime the more careful we need to be that the rules aren’t bent to get a conviction.  Otherwise there will be no rules left.  Ninth Circuit Judge Alex Kozinski has made clear to us all that we control what is deemed “reasonable” and “unreasonable” by what we allow and don’t allow.  We can all help each other by decrying all such searches as unreasonable.  If enough of us do that, they will be seen as unreasonable by our courts.  The more we allow the more we invite.  The majority spoke quite a bit about the database being used for other purposes but seemed to imply that this could be done even if the person is never convicted of anything.  In other words, suspected until proven innocent.  That is not our system.  Scalia wrote for the minority, joined by Ginsburg, Sotomayor (the racist), and Kagan, saying, “The Fourth Amendment forbids searching a person for evidence of a crime when there is no basis for believing the person is guilty of the crime or is in possession of incriminating evidence.”  In other words, the search was unreasonable unless there was a basis for believing King to be the rapist, even if he was arrested for something unrelated, as here.  Scalia continued, “That prohibition is categorical and without exception,” and later said, “The Court’s assertion that DNA is being taken, not to solve crimes, but to identify those in the State’s custody, taxes the credulity of the credulous.”  We agree.  They got this one wrong and our liberty suffers further.

  --  Paul Marotta

Social Media Securities Disclosure

 

The SEC’s Division of Enforcement launched an investigation of Netflix after its CEO Reed Hastings posted on his personal Facebook page that Netflix’s monthly online viewing had passed one billion hours for the first time.  Netflix didn’t report this information to investors through a press release or 8-K.  Neither Hastings nor Netflix had previously used Hastings’ Facebook page to announce Netflix metrics, and no one told investors they might do so.  Netflix’s stock price rose over 10% during the next day.  Regulation FD did away with private analysts calls, and requires companies to make publicly available as soon as possible any information disclosed privately.  Disclosure can be by press release or 8-K filing.  Public companies frequently make 8-K filings following annual meetings since execs sometimes spill beans not already public.  In the investigative report the SEC said that use of social media to disclose company information was OK as long as it has alerted the public that it might do so through a specific outlet.  Websites already serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it.  The SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix.  We were happy to see common sense prevail.

   

-- Paul Marotta 

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