Phantom Shareholders and Junk Mail

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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Record holders. 

We've talked before about the goofball system of stock ownership in the U.S., in which most of the shares of every public company are held by Cede & Co., the nominee of the Depository Trust Company, which is just the company in charge of owning all the stock. (And then your broker has a claim on some of Cede's shares, and you have a claim on some of your broker's shares, and it all works out fine almost all of the time.) But actually DTC only owns almost all of the stock; for various reasons some other people end up being record holders of small amounts of stock, rather than holding it through DTC. Again, that is mostly fine. Sometimes it isn't, though. Here is Ronald Barusch on Baxter International, which is trying to amend its charter to de-classify its board:

A provision in the charter that’s over 20 years old requires the change to be approved by “at least two-thirds of the holders” of the Baxter shares. We corporate lawyers read things literally: Each record holder gets a single vote even though most shares are held in “street name” by a single record holder. There were 34,742 record holders at the end of last year, according a Baxter regulatory filing. And it’s hard to get votes from most small holders.

So DTC holds most of the shares but gets only one vote. But there is a fix: Third Point, the Baxter shareholder agitating for the change, "can 'create holders…to vote to adopt the amendment,' presumably by transferring a single share to each of a large number–probably tens of thousands–of corporations or trusts it would create and control," and isn't corporate law amazing? Imagine being the junior lawyer put in charge of creating tens of thousands of phantom companies each to vote a single share of Baxter stock. Like, oh sure, you can probably build some sort of script to automate the process of naming the corporations and generating and printing their incorporation documents. But then someone has to sign each one. (I think, but this is not legal advice.) "Baxter has agreed to pay for this endeavor," and imagine being the senior lawyer in charge of sending Baxter the bill for it. This is the most heartwarming story about the legal industry that I've read in years.

Fintech. 

A basic story in the rise of "financial technology" firms is that they start with the idea of simplifying and disintermediating the business that big banks do, and then slowly realize that the big banks do it the way they do for a reason. Usually that reason is regulation, but not always. Here is the charming story of how "LendingClub Corp., Prosper Marketplace Inc. and other financial technology, or 'fintech,' companies are spending hundreds of millions of dollars trying to pry customers away from traditional banks," mostly through direct-mail advertising. Like, actual mail. "Scott Sanborn, LendingClub’s marketing and operations chief, said in a recent interview that the mailers are more high-tech than they first appear," but they do appear to be printed on paper and sent through the Postal Service. And here is a story about how "some customers signing up for loans are instantly deluged with phone calls and spam from rival lenders hoping to piggyback on the borrower and sign them up for more credit." And: "Banks Demand More Government Scrutiny of Marketplace Lenders." And Izzy Kaminska is skeptical of "the capacity of fintech companies to achieve quality network effects at a lower cost base (i.e. without significant headcount) and within the limits of current regulations." It is possible that the banking industry is better than the tech industry thinks it is at assimilating upstart competitors into its culture.

Conflicts.

We talked a while back about a shareholder lawsuit over the acquisition of Zale by Signet, in which aggrieved shareholders claimed that Zale's bankers at Bank of America Merrill Lynch had a conflict of interest because they had previously pitched Signet on acquiring Zale. I was pretty skeptical: An M&A banker will pitch anyone on anything; just pitching a deal to a company doesn't create any loyalty to that company. The fee is what creates loyalty. But yesterday a Delaware court let that lawsuit go forward. Here is the opinion, which strangely dismisses the lawsuit against Zale's board of directors for breaching their fiduciary duty, but keeps alive the lawsuit against Merrill for aiding and abetting that breach. 

Elsewhere in merger lawsuits, Mike Lynch, the founder of Autonomy, which was acquired by Hewlett-Packard, and whom Hewlett-Packard is suing for $5.1 billion over alleged financial misrepresentations, decided to sue Hewlett-Packard for $150 million for "making false and negligent statements about him and other former Autonomy executives."

Unicorns.

A unicorn is of course a startup with a value of at least $1 billion, though "value" is a loose term for a company without publicly traded stock. One way to think of it is that a unicorn is a startup that has raised at least one dollar at a headline valuation of at least $1 billion, ignoring the fact that that last dollar might be in the form of convertible preferred stock with a liquidation preference implying a considerably lower downside valuation. So there's a whole flock of unicorns whose horns might be hollow, or pasted on, or stolen from a nearby narwhal.

But here is Dan Primack on "a smaller, more exclusive group of billion-dollar companies within the unicorn herd: The companies that have actually raised $1 billion or more in equity funding." Somewhat surprisingly, there are 21 of them that remain private, 13 in the U.S., including giants like Uber and Airbnb. It is increasingly strange that anyone ever goes public. Primack has decided to name these companies "honey badgers," because every valuation category in the startup space needs a cutesy name, and presumably because these companies don't care (about going public) (because they can raise vast amounts of money privately). I don't know, though; it's distinctly non-mythic. Questing Beasts? 

Speaking of terminology, Primack also has a story about "a new 'pre-seed' investment firm called Precursor Ventures." A "pre-seed" fund is a fund that gives companies the capital they get before they get seed capital, which you might have thought was the capital they used to start the business before raising outside money. But, no, the relentless process of Silicon Valley semantic drift means that seed funding now often comes from outside investors and after the company is already in business, creating a gap for pre-seed funding. Which also comes from outside investors. Eventually there will be a new category -- unicorn embryos -- of companies that have raised their seed rounds at a $1 billion valuation. 

Oh and here's the founder of an app to "rate and comment about the people you interact with in your daily lives," talking about the impact of her product:

I can appreciate, when people found out the world was actually round and not flat, and that we revolved around the sun instead of the sun revolving around us, there was tons of fear and uproar.

I mean basically the major signposts in the intellectual history of the modern world are the Copernican theory, Einstein's relativity, quantum mechanics, and "Yelp for people."

An alleged Ponzi.

Here is a Securities and Exchange Commission action against William J. Wells and his firm Promitor Capital Management LLC:

Wells allegedly raised more than $1.1 million from dozens of investors since 2009, but by late summer, the Promitor fund brokerage accounts held less than $35, with the rest dissipated by trading losses and Ponzi-like payments, or diverted into Wells’s personal bank account, the complaint alleges.

According to the complaint, when one investor was unable to get Wells to return a portion of his investment, he asked Wells by text, “You running Ponzi scheme?  Why the heck is this going down like this.”  Wells later responded by text saying, “My explanation is that I’m an idiot and was trying to get some big trades to. . . make you more money.”

I mean, that's a good explanation, as these things go. The complaint also mentions that at one point Wells's account was down to "an opening balance of $64.14," before getting $25,000 from an investor and allegedly taking $8,000 for himself, Ponzi'ing out $10,000, and losing the rest trading. I like the spirit here, and the follow-through; anyone can run a Ponzi, but running it down to its last $35 takes commitment.

Elsewhere, here's an SEC case "against the operator of a worldwide pyramid scheme that falsely promised investors would profit from a venture purportedly backed by the company’s massive amber holdings."

Banks are more profitable when rates are higher and steeper.

This is not exactly a surprise, I don't think, but here is a Bank for International Settlements working paper on "The influence of monetary policy on bank profitability":

Overall, we find a positive relationship between the level of short-term rates and the slope of the yield curve (the “interest rate structure”, for short), on the one hand, and bank profitability – return on assets – on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non-interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, ie that non-linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability

Elsewhere: "Bank Earnings May Leave Investors Feeling Spooked."

Oh hey private prisons.

The idea of building private prisons to "rent beds to the federal government, mainly to hold undocumented immigrants" and profit from mass incarceration of immigrants has some obvious moral and public-choice problems. But it also has some tax problems. Apparently a lot of counties were pitched by a consultant named James Parkey to do this and issue tax-exempt bonds to pay for it. But "since 1986, the federal use of projects built with tax-exempt bonds has been limited to 10 percent," so it doesn't really work:

As of July, eight detention center deals were being investigated over their tax-exempt financing, according to an IRS document. Several other counties in Texas and Arizona have settled with the government, paying as much as $1.9 million and refinancing their prisons with taxable debt, including at least three developed by Parkey and his network. In most cases the deals were “basically snake oil,” says Bob Libal, executive director of Grassroots Leadership, a nonprofit in Austin opposed to private prisons.

People are worried about bond market liquidity.

This week has been an absolute deluge of liquidity (sorry), with a Monday Night Football ad, an International Monetary Fund report, a New York Fed speech and an Andrew Ross Sorkin column. But unless I have missed a papal encyclical or a Justin Bieber tweet, I'm going to say today is looking like an anticlimax on the liquidity front. The best I can do for you is this Bloomberg News article about pre- and post-trade transparency for fixed-income block trades in Europe, which people are of course worried about for liquidity reasons.

Things happen.

Treasury Sends Debt Limit Letter to Congress, and remember the premium bonds. At Morgan Stanley, Clues on Succession. Some hedge funds are having a bad year. Glencore's Wild Ride Has Investors Asking: Can It Happen Again? U.S. v. Newman wasn't granted (or denied) certiorari yesterday. Judge Rules for J.P. Morgan in $8.6 Billion Lehman Lawsuit. "The outgoing dean of Stanford’s Graduate School of Business faces accusations of discrimination and criticisms of his management style." CME Ordered to Tell Judge Names of Alleged Spoofers in HTG Case. "We find that the couples’ average level of and the match quality in credit scores, measured at the time of relationship formation, are highly predictive of subsequent separations." Good grammar also helps. "Mets fans are the Crossfitters of baseball agony." Watch woman yell 'bear don’t eat my kayak' as bear eats kayak. Beard transplants. Sbarro Seeks New Life Outside the Mall. Taco Bell To Offer Discreet Purchasing Charged Under ‘TBfoodsLLC.’

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

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

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