Also insider tainting, share counts, token exchanges, angels, and some more fake accounts at Wells Fargo.
Uber class action.
One reason that big technology companies seem to be staying private longer is that they are afraid of being sued if they go public. If you stay private, your shareholders are basically your employees and venture capital investors, and there are strong norms against VCs suing their portfolio companies.
If you go public, though, you lose the ability to control your shareholder base. Lots of random people will buy your stock, and lots of securities lawyers will keep an eye on it. And if it goes down, they will put together a complaint saying, in essence, « you did bad things and didn’t tell us about them, and that’s why the stock went down, and that is fraud. » (Every bad thing that a company does, I often point out, is securities fraud, and plaintiffs’ lawyers take that idea very seriously.) And then they will go out and shop that complaint around until they can find a shareholder willing to put his name on the complaint, and they’ll file it as a billion-dollar class action purporting to represent every shareholder.
Again, you do not see that sort of thing much in private companies, because (1) plaintiffs’ lawyers can’t watch your stock to see if it goes down, and (2) even if they could, and they wrote a complaint and shopped it around to your investors, none of your VCs is going to sign on to be lead plaintiff in a class action. There is also a more technical reason: If you are a public company, every public statement you make might induce someone to buy your stock on the stock exchange, so there are a lot more opportunities for you to mess up and mislead investors. If you are a private company, people are only buying their stock from you, in an offering, and the only real fraud question is whether the offering documents are accurate.
But Uber Technologies Inc. is not like other private tech companies, and here is a class action complaint against Uber brought by the Irving Firemen’s Relief & Retirement Fund. The basic claim is that Uber did some bad stuff and its stock went down. But the secondary, implicit claim is that Uber was more or less a public company. « Beginning in 2014 Uber and Kalanick commenced a mass media campaign designed to induce investors to invest billions of dollars in the Company, » says the complaint. That is: You can think about this case as a regular public-company stock-drop case, where the company’s public statements induced random investors to buy in the public markets without any relationship with the company, opportunity to do due diligence, or specific offering document.
That is not … quite … true? Here’s how the lead plaintiff’s share ownership is described in the lawsuit:
We talked about New Riders back when it launched; I described it in very rough terms as « sort of a one-stock mutual fund » that raised money from Morgan Stanley clients and used it to buy Uber shares. New Riders is an Uber shareholder, and if its managers are unhappy with Uber they could always, I suppose, sue. But the Irving Firemen’s fund does not actually seem to be an Uber shareholder, so it is an odd choice to represent a class of all Uber shareholders. At some point, big private tech companies usually become public companies and lose the opportunity to choose their investors, but I suspect Uber is not at that point yet.
My model of Uber is that it is a large public company with an unusual governance structure. It happens! There are large public companies with non-voting shares, or no fiduciary duties to shareholders, or weird control structures or whatever. Uber’s odd governance feature is that it happens to be a private company — unusual for a large public company, but, you know, we can work with it. It has many of the attributes, good and bad, of a big public company: limitless fundraising, merger currency, name recognition, (some) secondary-market liquidity, battles between management and activist shareholders, class-action stock-drop suits. It lacks some other traditional attributes: quarterly financial disclosures, real-time stock-price updates. But one lesson of the unicorn boom is that no attributes are essential, that there is not a clean divide between « normal public company » and « normal private company, » that many big tech firms exist in shades of gray.
Elsewhere here is Bernard S. Sharfman with » Another Reason Why Companies Avoid IPOs, » which is « the reduced ability of corporations to take advantage of private ordering once they become a public company. » And: » Dual-Class Shares Are Coming Under Fire—Again. »
Taxes.
Yesterday a reporter effectively asked Gary Cohn if the Trump administration’s tax plan will raise taxes on the middle class in order to pay for a massive tax cut for Donald Trump himself, and while the answer to that question definitely appears to be « yes, » Cohn cleverly deflected by telling reporters that he doesn’t know how much cars cost:
That is distracting! Cohn added that the tax plan is « purely aimed at middle-class families, » but, you know, you aim a gun. On the other hand, one controversial tax increase in the new proposal — the elimination of the deduction for state and local taxes — already seems to be in trouble, so it is perhaps silly to be too concerned at this stage with little technical details like whose taxes would go up or down under this plan.
Elsewhere, here is some speculation on « What Awaits Wall Street in Trump Tax Plan, » though perhaps the biggest question for banks — what will happen to corporate interest deductibility — has no answer yet:
And here are some claims that the Trump administration is committed to ending the « carried interest » loophole, though that was not in the tax plan, which would actually lower the tax rate on hedge-fund and private-equity earnings by taxing them at a new 25 percent rate for pass-through business income.
Insider tainting!
Here are a law review article and related blog post that are very much relevant to my interests, which are, roughly, « goofy hypothetical insider-trading tricks. » This one is called « Insider Tainting: Strategic Tipping of Material Non-Public Information, » it’s by Andrew Verstein of Wake Forest and the University of Chicago, and it’s arguably not entirely hypothetical:
Verstein cites the example of Mark Cuban: The chief executive officer of Mamma.com told Cuban about an upcoming dilutive equity issuance, Cuban didn’t like the news and sold his shares, and the Securities and Exchange Commission pursued Cuban for years for insider trading before he was ultimately vindicated at trial. No one disagreed that Cuban traded on inside information; the issue at trial was whether he had agreed not to trade. Cuban said he hadn’t (which would make his trading legal, since he had no duty of confidentiality when he received the information), the SEC said he had, and it took many years to sort out.
Cuban traded, and won, but Verstein’s quite plausible hypothesis is that many people in his situation wouldn’t have. Insider trading law is sometimes murky, and prosecutors, jurors and the SEC all tend to think that any trading on inside information, whether or not there is a violation of a duty of confidentiality, ought to be illegal. If you get inside information from a corporate CEO, you might not want to risk trading. And so if you are a corporate CEO, and you want to, say, do a big dilutive equity offering without impacting your stock price too much, you might call up some of your big shareholders and say « hey we’re doing a big dilutive equity offering, now you know, don’t trade, bye! » And it might work.
Obviously there are problems with this approach, for the CEO. For one thing, if the CEO tips the shareholder, and the shareholder trades anyway, then the CEO might risk being accused of insider trading. This seems unlikely, though, if the CEO got no personal gain, was doing the tipping/tainting on behalf of the company, and tells the shareholder not to trade. This is allegedly what happened in the Leon Cooperman insider trading case, where a corporate executive had multiple conversations with Cooperman about an undisclosed material event and then, in one of the later conversations, said something like « don’t trade, bye. » I found that silly — « corporate executives don’t usually say ‘oh hey by the way you’re locked up’ after talking, » I wrote — but perhaps it was part of a cunning plan. In any case Cooperman was charged with insider trading, and settled; the executive wasn’t.
Another problem is Regulation FD, which forbids companies from selectively disclosing information to some investors without locking them up. This is not a huge problem because Regulation FD is rarely enforced, but also, Regulation FD prohibits tipping investors who are likely to trade, and if you just do it to prevent them from trading, you might have a decent defense.
It is an odd little trick. You would not expect companies to use it all that often. But sometimes companies do announce things that annoy and dilute big shareholders, and want those shareholders’ support. Calling up those shareholders, tainting them with inside information, and then asking for their support can be a good and cynical strategy: Maybe they’ll support you (buy your stock offering, etc.), but even if they don’t — even if the phone call makes them more annoyed — they won’t be able to dump their stock, which is almost as good.
Counting shares.
D. R. Horton Inc. is acquiring Forestar Group Inc., and is letting Forestar shareholders choose to be paid in cash or stock. « Approximately 91.
