Business Law Prof Blog

Righteous Investors

Today's Wall Street Journal has a wonderful article by Diya Gullapalli on "socially responsible" stocks ("Pax May Bless Some "Sin" Stocks").  Socially responsible stocks are under performing the market and the responsible of Pax World Funds is to redefine what is socially responsible.  Starbucks now sells a coffee liqueur (in a joint venture with Jim Beam) so Pax had to drop Starbucks, for example.  Under the new rules, Pax can invest in Starbucks (the liquor sales are di minus).  The story is a classic.  Investment funds tout so form of responsible investing -- no "sin" stocks or no "polluters" stocks, do well for a while (bragging all the while) and then, over time, watch the sin or polluters stock outperform the fund and the fund under perform a relevant market index.  Investors should assume such returns and enjoy their feelings of moral superiority (like folks who go to jail for civil disobedience; the analogy is not perfect here many are rewarded with University tenure).  They cannot have it both ways, moral superiority and returns (no jail for civil disobedience).  The only focused, responsible funds that seem to do better than the market over time are the corporate governance focused funds, the ones that only invest in well governed companies. Imagine that.

Pegasus Wireless Property Dividend

Pegasus Wireless company has issued a "property dividend" of stock warrants (options to by stock from the company).  There is a catch:  The company will pay only those shareholders whose names are listed individually on the the stock roles or as beneficial owners on the roles of a trustee who is on the stock roles.  The later shareholders are the equitable owners of stock held in legal title by someone else (held in "street name"), usually a brokerage house or a clearing corporation.  So far so good; here is the catch. If a brokerage house shows up to claim the warrants so as to pass them on to the beneficial owners, the company will not pay unless the number of dividends claimed matches the brokerage house accounts (or client accounts) on file with the Depository Trust Clearing Corporation, which holds about 85 percent of the stock.  The discrepancy is caused by brokerage house loans of the stock to others, usually short sellers.  On a loan, beneficial title passes, but the right to collect dividends stays with the lessee;  as the result of a short sale the brokerage house attempts to collect dividends on stock that is no longer listed under its name with the clearing house.  Normally such requests are honored by the company. Not so with Pegasus.  If the number of dividends requested by a brokerage house is larger than the brokerage house account at the DTCC, the company will not pay.  To collect the Pegasus dividends, the brokerage house has to go get the stock back so as to even its accounts.  The company is attempting to get a firm count on its outstanding shares, neutral of short sales, and to stop the trading of what it calls "fake stock", stock that was never issued that is trading as issued stock.  Short sales on Pegasus stock can still happen, but the purchaser from a short seller collects the dividend and the short sell must remit a substitute value of the property dividen to the lessee when it re-delivers the stock, adding to the risk of the short sale.  Nevada and the SEC are trying to figure out whether the dividend is legal.  Ingenious.  Looks perfectly legal to me.   

Excelon Acquisition of Public Service Enterprise Group

The attempted acquisition of Public Service Enterprise Group Inc. by Excelon Corp. is a classic illustration of how difficult utility acquisitions are in the United States.  The Chicago utility announced a friendly deal with the New Jersey company over two years ago.  The Justice Department approved the acquisition.  The Federal Energy Regulatory Commission approved the acquisition. Several state regulatory bodies have approved the acquisition.  But the New Jersey Board of Public Utilities is balking.  PSEG owns New Jersey's largest electric utility.  To satisfy the concerns of the NJBPU that the new company would raise utility fees for New Jersey residents,  PSEG offered $600 million in rate relief, a freeze on rates, other consumer incentives, and the sale of some power plants.  The NJBPU refused, demanding $220 million additional refunds and the sale of two additional New Jersey power plants to competitors.  Shares of stock of both companies fell on the Exelon announcement that the "likelihood" of the deal closing has substantially decreased. 

China Gets Tough on Foreign Investment

China has adopted a serious of measures to discourage foreign direct investment in China.  China's securities regulated has a new takeover code, for example, that stops acquisitions that "harm national security or the public interest."  The Chinese Ministry of Commerce has also declared that it will stop foreign acquisitions that "affect economic security" or involve "key" domestic industries.   Ironically, China's chief economic planning agency is considering further restrictions, patterned after Congressional proposals to expand the power of CFIUS (Committee for Foreign Investment in the United States)  to block foreign investment in the United States.

Jenkins on Stock Options

Holman W.Jenkins Jr., in today Wall Street Journal ("Stock Option Fiends Revealed"). is once again excusing those who back dated stock options.  The expensing rule on stock options in 1995, requiring "in the money" options to be expensed and "at the money options" not to be expensed, was irrational and back dating options to make "in the money" options look like "at the money" options was a "victimless crime."  He is incorrect, of course, because one of the effects of the fraud was to claim favorable tax treatment for the phony "at the money" options. 

Barnes and Noble Receives Subpoena Regarding Options Practices

In a SEC Filing received today, Barnes and Noble (NYSE: BKS) reported that it received a subpoena from the U.S. Attorney for the Southern District of New York regarding its stock option practices.  In its filing, BKS indicated that it intends to fully cooperate. [SEC Filing]

This is just another of the many companies which are being investigated for potential illegal options practices.

See related stories:

Apologizing for Back Dating? - August 16, 2006

Backdating Options - July 19, 2006

Back Dating Options - June 22, 2006

[Jason R. Job]

Insider Trading

Page one of the Sunday New York Times carries a story containing data on what most in the investment community already know, insider trading occurs frequently before large merger announcements in the United States. (Gretchen Morgenson, Whispers of Mergers Set Off Bouts of Suspicious Trading")  In 41 percent of the big mergers over the last 12 months the securities of the target "exhibited abnormal and suspicious trading in the days and weeks before those deals became public..."  The story does, however, struggle to define why insider trading is illegal, and Ms. Morgenson's list of "victims" is problematic. Her argument that stock sellers are injured, because they could have held their stock until after the announcement and recieved more value, makes no sense unless one assumes that only the higher price, created by insider trading, induced the sale, that the sellers would not have sold at the lower pre-announcement market price had there been not insider trading before the announcement.  This is a stretch for many sellers, who had decided to sell pre-announcement and get the market price, whatever it was.  Those that sold only on the rise, refusing to wait, accepted the risk that they would give up any more increases in the price.  Victims?  The real reason for the illegality of insider trading (the disadvantaged buyer who wanted to buy and could not at market prices pre-announcement) remains elusive to even educated reporters.