Delaware's Attraction and Cynk's Manipulation

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Delaware.

Here's a Wall Street Journal article arguing that some companies are fed up with Delaware corporate litigation and are looking to change the rules or incorporate in more management-friendly states. I must say there are a lot of merger lawsuits in Delaware -- one guy in the article says they "amount to no more than a private tax on companies" -- though part of that is that there are just a lot of mergers in Delaware, because there are a lot of companies there. If everyone moved elsewhere, there'd be a lot of corporate litigation elsewhere, and while the rules might be more management-friendly, their operation would be more unpredictable. People kind of know how the law works in Delaware.

There is a much-discussed notion of a "race to the bottom" in corporate law, in which managers want their companies to be incorporated in states whose laws let the managers do whatever they want, and so states attract companies by getting rid of shareholder protections. I suppose this story is evidence in favor of that theory. The argument against the theory is that managers who want to attract investment choose shareholder-friendly states so that they can sell more stock at higher prices. (The article notes that "bankers shepherding initial public offerings to market often push for Delaware, saying big investors still prefer to buy shares in companies based in Delaware, where they understand the rules of play.") I always wonder about that argument. Like, investors cheerfully snap up shares of dual-class tech companies with basically no shareholder rights; they're really going to object to a Hawaii incorporation? The problem is that there are a lot of things that investors want, but that they're not willing to pay for. So they tend not to get them.

They caught the Cynk guy.

I mean, they caught a Cynk guy. Allegedly. Here's the Securities and Exchange Commission action against Phillip Thomas Kueber, who allegedly incorporated Cynk (as "Introbuzz"), took it public and signed up fake shareholders to make it look like a real public company. But the trail goes cold in June 2013, when Kueber allegedly sent a broker some false beneficial ownership declarations about some Cynk shares. Cynk's time in the limelight, when it captivated the social-networking and stock-manipulation worlds and was briefly worth $6 billion, was still over a year away. What did Kueber do in the meantime? How did he manipulate the stock? The complaint doesn't say. Kueber talked to Bloomberg last year and said he didn't know who was running Cynk: "'No idea what’s going on,' he says. 'I’ll let you guys figure it out from there.'" I'm not entirely confident that the SEC did.

America's criminal justice system is barbaric.

Here is a story about how convicted insider traders Rajat Gupta and Raj Rajaratnam are in the same prison together, which starts jauntily as sort of an awkward buddy comedy and then veers into tragedy and terror. Apparently Gupta was sent to solitary confinement for six weeks for having an extra pillow, and his sister who traveled from India to visit him was not allowed to see him. Meanwhile here is a glowing story about the U.S. Attorney's office that put him there, and I hope they're proud.

Me Friday.

I wrote about the government's appeal in the U.S. v. Newman insider trading case. We also briefly discussed debt and sin in the theology of Bill Gross. Attentive readers may have noticed that Gross's Biblical commentary doesn't discuss the Old Testament requirement of periodic debt forgiveness. Here is an article in Novum Testamentum arguing that the debt forgiveness injunction in the Lord's Prayer is not only intended to encourage debt forgiveness, but also that it was specifically directed at "the Pharisaic innovation of the prosbul, a legal device which allowed lenders to escape the debt release laws of the Torah."

Things happen.

The Athens stock exchange didn't have a great first day back. Maybe high-frequency trading caused the Chinese stock market crash? The head of trading at AQR is on leave because of the ITG dark pool investigation. Wall Street buys a lot of spy software. Dan Loeb announced a stake in Suzuki. Bill Miller is back. Existentialism for Millennials. Dogs are great.

Money Stuff will be a bit shorter and more intermittent this week, because I am traveling. If you'd like to get Money Stuff in handy e-mail form, right in your inbox, please subscribe at this link. Thanks! 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net