The Saturday - 11/14/2020 Edition
Volume 1, Issue 8
Good morning,
After years of cherishing the extra hour of sleep on daylight savings, I’ve officially changed sides: it gets dark way too early now. In 2018, 60% of voters in California actually voted in favor of repealing the time change, but unfortunately, it appears that the bill died in committee. At least, it’s morning again!
It’s Saturday November 14, 2020.
Say It Ain’t So
Last week, when discussing Chinese regulators’ eleventh-hour scuttling of Ant’s IPO, we asked the following questions:
Did Xi Jinping want to put [Jack] Ma in his place? Did China suddenly realize that “tech” companies should be regulated the same as legacy companies?
On Thursday, the WSJ provided the answer:
Chinese President Xi Jinping personally made the decision to halt the initial public offering of Ant Group, which would have been the world’s biggest, after controlling shareholder Jack Ma infuriated government leaders, according to Chinese officials with knowledge of the matter.
Turns out that publicly stating “success doesn’t have to come from [Xi Jinping]” was a bad PR move. Shocker!
Classic Mixup
No companies capture the zeitgeist of 2020 like Hertz and Kodak; the Cheech and Chong of present-day corporate America.
In fairness to the former, it’s not really Hertz’ fault that hundreds of thousands of investors took its bankruptcy filing as a screaming “Buy” signal. Their ham-fisted attempt to issue worthless equity mid-Chapter 11 wasn’t exactly a bright spot for the car rental company, but you miss 100% of the shots you don’t take, right?
Kodak, on the other hand, has put on an impressive display of missteps. In July, the Rochester, NY-based company accidentally leaked non-public information to local news networks, revealing that it was moving into the pharmaceutical industry and had secured a $765M loan from the US government to produce ingredients for a potential COVID vaccine.
Trading volume increased 700% overnight and sent the stock price up 25%. The next day, when the deal was formally announced, shares briefly reached $60. They had been trading around $2 days before.
Naturally, journalists started prying into these events and discovered that, on the day of the leak, the CEO was granted options that almost immediately resulted in a $50M windfall.
When the news formally broke the following day and the stock reached an unlikely five-year high, a board member also made a record $116M tax deductible stock donation to his own charity. Nothing suspicious here.
Believe it or not, on Tuesday, the story got better. During the company’s earnings call, the CFO announced that Kodak had incurred over $5M in “compensation expenses” this summer due to an “unauthorized issuance” of company stock. Put more bluntly, when the share price skyrocketed, former executives were somehow able to exercise 300,000 stock options… that they had previously forfeited.
Apparently, no one at the camera-cum-cryptocurrency-cum-pharmaceutical company noticed that the former employees no longer owned the options before processing the transactions!
Kodak shares closed at $6.71 on Friday, the agreement with the US government is on life support, and the SEC is investigating the leak.
Corporate Inoculation
While we’re on the subject of vaccines and executive sales, on Monday, Pfizer announced that its experimental coronavirus vaccine was more than 90% effective, sending its stock price soaring. The same day… well, here’s a slightly dramatic headline from the Daily Mail:
Pfizer CEO sold 60 PERCENT of his stock for $5.6M the DAY of the vaccine announcement, but firm claims it was all part of a pre-announced trading plan agreed in AUGUST
Coming off the heels of executives at another drugmaker (Moderna) selling $30M in stock on positive news - which, by the way, didn’t pan out and resulted in the stock tumbling shortly thereafter - the Pfizer CEO’s actions have inevitably led to some scrutiny. Moderna and Pfizer both offered the same explanation: it was all planned!
The plan referred to here is a powerful corporate medicine: the 10b5-1 vaccine, an SEC-developed therapeutic granting precious antibodies to corporate insiders engaging in the purchase and sale of their own company’s securities.
Transacting in company stock can be a minefield for insiders. Execs have unparalleled access to material non-public information (MNPI), owe a slew of duties to their company, and are expected to align their interests with those of shareholders, so even where insider transactions are done for completely valid reasons - diversification, children’s college education, a house in the Hamptons - they inevitably lead to questions from shareholders and, at times, regulators.
Mere possession of MNPI when selling company stock can expose insiders to insider trading charges. Moreover, materiality itself is inherently subjective and, while some information might be blatantly material at the time a trade is placed, it can often be more of a hindsight thing.
10b5-1 plans allow insiders or companies to set out formulas, in advance, determining when, at what price, and on what other conditions the insider - or, ideally, a third-party administrator acting on that insider’s behalf - will execute certain purchases or sales of company stock.
While these plans can be improperly manipulated - the SEC notably obtained a $90M settlement on such grounds against the former CEO of Countrywide Financial - their delaying trades and reducing discretion does minimize the appearance of impropriety and provides insiders with an affirmative defense against claims that trades were executed on the basis of MNPI.
This is my long-winded way of saying that Pfizer’s explanation is legitimate and their CEO likely did not act improperly. At least, not insofar as the SEC is concerned.
Beat ‘Em To It
In October, the House Judiciary Subcommittee on Antitrust published a lengthy report that labelled Amazon, Apple, Facebook, and Google as “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.” A few weeks later, the DOJ filed suit against Google, but the others were spared. For now. In America.
On Thursday, the EU formally accused Amazon of violating its competition policy. As summarized by FT, the European Commission took aim at the company’s practice of using non-public data it gathers from third-party sellers using its website to develop its own rival products and “avoid the normal risks of retail competition.” Remember Allbirds? That.
What I really want to know here is how the DOJ took the news? I’ve watched enough cop shows to know that law enforcement agencies are hyper competitive. What about regulators?
Have a great weekend!