Money Stuff

Merger Battles and Disgorgement

Also retail shareholder votes, indexes, blockchain tomatoes and alternate Matt Levines.


What is going on with AT&T Inc.'s proposed acquisition of Time Warner Inc.? The most straightforward answer seems to be that the Department of Justice's antitrust division, which has a new director as of September, has decided that the merger might be anticompetitive and is seeking significant divestitures before it approves the deal. "The Justice Department brought up the idea of divesting either DirecTV, the satellite provider, or Turner Broadcasting, which includes CNN, TNT and TBS," reports Bloomberg News. The New York Times and the Wall Street Journal report similar demands, which make sense: The concern in a vertical media merger would be that one company would combine control of too much distribution capacity and too much content, and the way to remedy that would be to require the combined company to divest either a bunch of content or a bunch of distribution. 

But there is an alternative story, reported in the Financial Times: that the Justice Department just wants AT&T/Time Warner to sell off CNN, because it doesn't like CNN, because Donald Trump doesn't like CNN, because CNN says mean things about him:

“It’s all about CNN,” said one person with direct knowledge of the talks with the DoJ, adding that the regulator made it clear to AT&T that if it sold CNN the deal would go through.

There seems to be no corroboration for this claim that "it's all about CNN." In fact, the Times and Bloomberg mention (disputed) reports that AT&T proposed selling CNN as a way to get the deal done, but the Justice Department said no. ("The officials also insisted that selling the cable news channel would not be enough to address antitrust concerns," reports the Times. But AT&T's chief executive officer says that "throughout this process, I have never offered to sell CNN and have no intention of doing so.")

But of course Donald Trump has called for the merger to be blocked specifically because he dislikes CNN, so one can wonder. ("This is the kind of situation where it would be nice, as a citizen, to have broad confidence in the integrity of the president of the United States and his White House team," notes Matt Yglesias, who does not.) 

I tend to assume that the widely reported story -- that the Justice Department wants broad divestitures for antitrust reasons, not media-suppression ones -- is probably true. The alternative story would mean that not only does Donald Trump want to use the power of the Justice Department to punish his political critics -- which is unquestionably true -- but also that the Justice Department is on board with that. And not just "the Justice Department," but career attorneys in the antitrust division, who presumably didn't sign up for that job years ago so that they could one day punish Donald Trump's media critics. (Also: Selling CNN would not necessarily punish it?)

So I doubt that the Justice Department is really driven by anti-CNN animus. On the other hand, I can perfectly well understand how someone on the AT&T/Time Warner side, who wants to get the deal done, might call up a reporter and anonymously say things like "it's all about CNN." You use the tools that are presented to you, and if the Justice Department is trying to block your merger and you think you can create public and political pressure against its position, why wouldn't you? Derek Thompson raises the "disconcerting possibility" that "AT&T recognized it could co-opt the news media’s disgust toward the president to distribute a pro-merger narrative that would drown out the Justice Department’s reasonable objections to its acquisition." David Dayen writes that the Justice Department's demand is "far more thought-out than 'Trump hates CNN,' though that's how it's being played by an inch-deep media," and worries "that association will lead DoJ to buckle."

And for that matter, it's not just a public relations strategy. My Bloomberg Gadfly colleague Tara Lachapelle argues that both Turner and DirecTV "appear to be crucial to AT&T's strategy to diversify its revenue with video services and advertising for the content viewed on them," and so it shouldn't agree to divest either of them and "should take its chances in court." If the deal goes to court, it will turn mostly on usual antitrust considerations like harms and benefits to consumers. But it probably won't hurt AT&T if it can make some noise about the DOJ's opposition to the deal being politically motivated media suppression. And Trump's own statements might be just the noise A&T needs.

Is the SEC illegal?

Sometimes people do bad securities stuff and they get in trouble with the Securities and Exchange Commission. The SEC can do things to punish the people who do the bad stuff: It can't put them in prison, but it can ban them from the securities industry, or it can fine them money. It can also demand "disgorgement," which means, roughly speaking, that they have to pay back the money they made (or the money their victims lost) by doing the bad stuff. I mean, they have to pay it back to the SEC. The SEC doesn't have to give it back to the victims. 

A weird thing about disgorgement is that the SEC sort of made it up. There was never a law saying that the SEC could get disgorgement, but it seems sort of obvious that it should be able to, and so it managed to talk courts into it. "In the absence of statutory authorization for monetary remedies, the Commission urged courts to order disgorgement as an exercise of their 'inherent equity power to grant relief ancillary to an injunction,'" the Supreme Court said last year, describing the history of SEC disgorgement. (The SEC was only authorized to seek fines in 1990; now it often pursues both fines and disgorgement. In 2002, Congress specifically authorized the SEC to seek "any equitable relief that may be appropriate or necessary for the benefit of investors," which perhaps covers disgorgement, at least when the money goes back to victims.)

This all went along well enough for decades and then the SEC got a little greedy. In 2009, it sued a guy named Charles Kokesh for doing bad securities stuff from 1995 to 2009. SEC actions have a 5-year statute of limitations, so most of that bad stuff was too old for the SEC to fine Kokesh for it. But the SEC argued that there's no statute of limitations for disgorgement: Statutes of limitations apply to penalties, and disgorgement is not a penalty; it is just the fair requirement that fraudsters give up their ill-gotten gains. The Supreme Court (unanimously) disagreed, finding that disgorgement is a penalty and that the SEC couldn't pursue it for Kokesh's very old behavior.

That was a minor loss, but it opened up a can of worms. "Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context," says a footnote to the Kokesh opinion. Well ... wait ... can the SEC get disgorgement? If you read the Supreme Court's opinion in a particular way, you'll notice that it finds that the SEC regularly pursues penalties against securities fraudsters that are not specifically authorized by statute. That is weird! Usually the government can't punish you in ways that are not spelled out in a written law. It is not unheard-of -- the government can pursue equitable remedies in civil cases, and we often talk around here about how insider trading is a crime that is not explicitly set out in any statute -- but it is weird.

Anyway some lawyers read the Kokesh opinion in that particular way and brought this class-action lawsuit against the SEC a couple of weeks ago. Delightfully the class of victims/plaintiffs in the lawsuit is securities fraudsters: Specifically, it's "all persons or entities from whom the SEC has collected, during the period from October 26, 2011 to the present, purported 'disgorgement,'" with some fairly minor-seeming exceptions. The alleged damages are "approximately but not less than $14.9 billion over the last six years." Casual internet browsing suggests that potential class members might include Raj Rajaratnam (for insider trading), SAC Capital Advisors (ditto), Och-Ziff Capital Management Group (for paying bribes in Africa), Standard & Poor's Ratings Services (for mis-rating commercial mortgage-backed securities), and a whole bunch of big banks for crisis-era mortgage misbehavior. (Goldman Sachs Group Inc.'s Abacus settlement, as well as Angelo Mozilo and Bernie Madoff, just miss the time cutoff.) I hope they all show up to court to demand their $14.9 billion back, and to get some catharsis. Finally, the people who broke the law get to sue the SEC.

Retail shareholders.

I am not running for Chairman of the Securities and Exchange Commission -- it's not really a job you can run for -- but if I were my platform would be the opposite of this:

It is not clear whether in our rulemaking processes the views and fundamental interests of long-term retail investors are being advocated fully and clearly, either by individual investors or groups that represent them. Since I arrived at the agency, I have made concerted efforts to reach Main Street investors across the country, and this has resulted in productive conversations with individuals, as well as those who advocate for them. Many others at the SEC, including Rick Fleming, our Investor Advocate, and the Office of Investor Education and Advocacy, concentrate on retail investors generally and have specific outreach efforts focused on investors who are teachers, students, serve in the military, or live in retirement communities.


In situations where the voting power is held by or passed through to Main Street investors, it is noteworthy that non-participation rates in the proxy process are high. In the 2017 proxy season, retail shareholders beneficially-owned 30% of the shares in U.S. public companies; however, only 29% of those shares voted. This may be a signal that our proxy process is too cumbersome for retail investors and needs updating.

That's from a speech that SEC Chairman Jay Clayton gave yesterday about "Governance and Transparency at the Commission and in Our Markets," much of which is good and sensible, but I am simply missing the part of my brain that would cause me to care about retail votingWhy would you vote the stocks you own? Time is finite, it takes a lot of effort to become knowledgeable about the various proxy proposals you'd have to vote on, most proxy proposals are unlikely to influence your wealth in any material way, and even on the important ones, your vote is vanishingly unlikely to matter.

And the financial system -- unlike the political system, I might add -- actually has a really good way to address these issues. Instead of buying individual stocks and spending all your time voting them, you can pool your money with thousands of other retail investors and hire professionals to buy stocks for you and decide how to vote. (This is called a "mutual fund," or "exchange-traded fund" these days.) Those professionals, being professionals, can devote their full time to thinking about your stocks, while you go off and be a teacher or student or soldier or retiree.

If you are a stock-market regulator, which model should you encourage? Making it slightly less cumbersome for individual investors to own individual stocks and vote them for proxy proposals -- with the goal of increasing participation -- will make those investors' lives worse. They'll just spend more time reading proxy proposals and voting pointlessly, with no positive effects on their wealth and with negative effects on the time they spend gardening or reading poetry or running marathons or whatever else they would have been doing. Discouraging retail participation might drive them to mutual funds, where specialists will take the time to research on their behalf. Of course there are problems there too: The mutual funds charge fees, and Clayton reasonably asks, "are voting decisions maximizing the funds’ value for those shareholders?" But the persistent bias of the SEC seems to be against professionalization; the agency seems to want to encourage amateurs with day jobs to try to compete with professional investors as active stock pickers. I just don't think that this is in those amateurs' best interests.


Here's kind of a weird story about how Stoxx Ltd. is building "its first index created from artificial intelligence." "For Stoxx, one goal is to create indexes that find new trade ideas and investment themes -- such as aging populations, for example -- that conventional indexes haven’t explored."

What ... is ... an index? I feel like in the olden days you would just shrug and say "it's a list of stocks," like the Dow Jones Industrial Average or whatever. But then with the rise of index investing, and with the technology to make better and more comprehensive indexes, indexes started to make grander claims for themselves. "Indexing" is now synonymous with "passive investing"; active managers' performance is compared with "the index," and an index is now often thought of as being coterminous with "the market" (or the market for small-cap stocks, etc.). An index is a way to buy all the stocks without choosing among them, a tool for passive investing.

But now indexing has succeeded so well that we have wrapped back around, and an index is just a list of stocks again. "Our artificial intelligence has picked a really good index" is just another way to say "our AI has picked some really good stocks," except that now people want to buy indexes, not stocks, so your AI picks some stocks and calls them an index.

Blockchain blockchain blockchain.

"Someone Figured Out How to Put Tomatoes on a Blockchain." Not literally -- you can't eat a blockchain -- but physical tomatoes can now have a parallel ghostly presence on a blockchain:

While an easy-to-use database is key to managing a complex supply chain, skeptics say it doesn’t necessarily need blockchain. The technology also requires adaptation. While bitcoin exists only on a blockchain, tomatoes exist in the real world. At most, what Ripe can provide is a detailed record of their qualities and condition at each step of the growing and distribution process. 

Elsewhere: "Coinbase Escalates Showdown on U.S. Tax Probe as Bitcoin Surges." And: "Bitcoin Dodges Split That Threatened Its Surging Price."

People are worried that people aren't worried enough.

"What explains this striking and unexpected outbreak of," writes Michael Santoli, and can you guess what word completes the sentence? Ha, you're reading this section, so sure you can. "Calm." "What explains this striking and unexpected outbreak of calm?" Whatever it means for your portfolio, or for financial stability, our current low-volatility regime has really been great for lovely paradoxical writing. "Volatility crashes," "striking and unexpected outbreak of calm," everything is weird and wonderful.


We talked the other day about James Gubb, the world's first representational artist in the medium of stock prices (he drew a middle finger on the stock chart of Oakbay Resources and Energy), and also perhaps the world's first stock-price artist to get in trouble with regulators (South Africa's Financial Services Board fined him 100,000 rands for his graffito). I have been informed that there's now an effort to crowdfund his fine. "Show State Capture The Finger" is the title, and while I cannot vouch for it, it does seem to be getting coverage in South African media. The whole fine comes to less than the cost of one Sarah Meyohas stock-price painting, so this might be a cheap way to get into financial-art patronage. 

Matt Levines.

Every year I read the Goldman Sachs Group Inc. managing director or partner list (they alternate years now) and get a wistful sense of what might have been if I had stayed at Goldman. (Disclosure: I used to work at Goldman.) Over time the nostalgia has dimmed, though, and I am no longer bothered when I don't see my name on the -- hey wait a minute I'm on the list this year! A Matt Levine made managing director at Goldman Sachs yesterday. Congratulations to him, unless he is me, in which case, congratulations to me, for making MD at Goldman in absentia. (Nope: "We can confirm the Matt Levine who made MD this year does not appear to be you, at least based on his directory photo and his apparent expertise in information security," said a Goldman spokesperson by email.)

Actually when I first saw the list I assumed that it was a Matt Levine who I had worked with at Goldman. He was a lawyer who covered my desk, which led to confusing moments where he'd call and an assistant would yell over to someone "it's Matt Levine for you" and I was sitting right there. I found this situation intolerable, so I led a campaign to have him renamed Max, so the assistants would say "it's Max Levine." This campaign was mostly successful, to the point that when he'd call me he'd sometimes say "hi Matt, it's Max." But in fact, the Matt Levine who just made MD is an entirely different -- third -- Matt Levine. The moral of the story is that Goldman Sachs's key strength lies in its ability to recruit a lot of Matt Levines. (Bloomberg's too, of course; I regularly get emails meant for the other Matt Levine here.) Also congratulations to the other 508 new Goldman MDs, who I am sure are fine. 

Things happen.

Russia Says Venezuela Accepts $3 Billion Restructuring Terms. Holders of Venezuelan Bond Default Insurance Ask to Be Paid. Did Venezuela make a vague restructuring announcement so it could buy back its debt cheap on the secondary market? U.S. Subpoenas Icahn Over Biofuel Action While Trump Adviser. Merrill Lynch Revamps Broker Pay to Reward Referrals, Stronger Growth. Behind the Fall of a New York State Pension Fund Executive. How Some Small Banks Are Firing the Fed. European leaders seem determined to remake the “global savings glut” on a massive scale. Equifax CEO to Congress: Not Sure We Are Encrypting Data. Duke University's "Inside Hedge Funds" class bars student newspaper reporters. "Assist teen with identifying list of clothing and personal items to pack for travel." My Bloomberg View colleague Vladimir Putin. Facebook tests fighting revenge porn by asking users to file nude photos first.

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