From the 4th of July Archives

Though the piece is two years old now, James Lilek's thorough fisking of Michael Moore's editorial in the L.A. Times about the meaning of the 4th of July remains one of my favorites.

Enjoy the long weekend!

Naked Short Selling is not as Sexy as it Sounds

In the stock market, short selling is the practice of borrowing, then selling shares of a stock that you do not own with the intention of profiting by buying them back at a lower price at a later point in time. Shorts sellers get a lot of unnecessary negative publicity in my mind. They're really just part of the stock market eco-system. Often times they're the first ones to sniff out corporate malfeasance, and they add liquidity to the market overall.
Naked short selling is an altogether different story. Naked shorting involves selling short shares that you did not borrow, which means that when it comes time to settle the trade, you have no shares to deliver to the buyer.
To illustrate: imagine you saw a house in a neighborhood that you thought was overvalued and was going to get cheaper in the future, so you sold it without the owner's permission, and at the close of escrow you did not deliver the house to the buyer because not only was it not your house, you never asked the owner if you could sell it in the first place! Aside from being dishonest, think of the problems it would cause to you, the buyer and the escrow company.

In an earlier post I talked about the class-action lawsuit brought against Vonage regarding the debacle surrounding their recent IPO. The class-action suit seeks to bring charges against the company and recover damages for all the investors that were "mislead" into investing in the company and subsequently lost money on the deal. On June 9th the NYSE decided to investigate whether or not naked short selling was at least partly to blame for the poor performance on it's first day of trading. The investigation is on going at this time.

Today the Wall Street Journal (subscription only) announced a pair of civil-antitrust lawsuits being brought against 11 of the largest prime-brokerage operations (they are responsible for making sure shares are "borrowable" and delivered upon settlement)-- including Morgan Stanley, Goldman Sachs and Bear Stearns--over the role they play in the practice of "naked short selling."

One of the lawsuits, by Electronic Trading Group LLC, which was filed in federal court in Manhattan, says the prime-brokerage services collusively condone "chronic failures to deliver by which clients are charged for
'borrowing' when in fact no borrowing actually takes place."
The lawsuits say the brokers charge fees of as much as 25% annually for hard-to-borrow stocks to which they mightn't be entitled. The prime-brokerage firms act reciprocally to avoid forcing delivery for each other's trades, the lawsuits maintain, adding that the firms instead operate a system of "phantom," book-entry transactions.

The lawsuits highlight the obscure mechanics of short selling, which are under scrutiny by regulators, including the New York Stock Exchange, in the decline of Vonage Holdings Corp., an Internet telephone-service provider whose stock price has tumbled 48% since its initial public offering May 24.

The SEC has been chronically understaffed which makes it difficult to carry out the tasks for which they've been charged. Regardless, I believe that short sellers who engage in naked shorting should be severely fined and their licenses revoked after repeated violations. The same thing applies to the prime-brokerage firms that tacitly allow it to happen. The only instance when it should be allowed is when a registered market maker is acting as the contra-party when facilitating a trade on behalf of a customer, and only then when there is a "reasonable" expectation the shares will be readily borrowable.

The class-action firm going after Vonage seems to be barking up the wrong tree.

Quantifying Political Correctness

In a previous post I talked about how Larry Summers was being forced from his post as President of Harvard University by the faculty of the Arts & Sciences department for some "controversial" comments he made regarding innate gender differences and their possible correlation to the lack of women in the upper eschelons of science.

Last year, as part of a sentence handed down for insider trading in his own company's stock in 2001, Larry Ellison of Oracle was required to donate $100 million to the charity of his choice. He chose to donate $115 million to the Harvard University Global Health Initiative. One year later, the money has been slow to come, and no deal had yet been signed outside of his pledge. Now we know why:

Sources familiar with the deal claim Ellison delayed the project because of controversy embroiling economist and then-Harvard President Lawrence Summers.
The sources, who asked to remain anonymous because they feared losing their
jobs, said only Summers had the international clout needed to roll out such an
ambitious project, which involved tracking how health care dollars are spent and
what impact they have in the developed and developing worlds.
Summers resigned in February, amid faculty uproar over comments suggesting that differences in "intrinsic aptitude" may explain why fewer women than men succeed in math and science.

Mr. Ellison said he plans to give the money that would have gone to Harvard to a charity that trains teachers and educates impoverished children in the developing world. He didn't identify the institution or elaborate further.

I wonder how the Arts & Sciences Department feels about this?

World Cup Pride

Futbol, football, soccer. Regardless of what one chooses to call it, it is widely regarded as the most popular sport the world over. It is not difficult to see why; all that is required to play is a ball, a field and some sort of goal marker. When those things are not available, any round object, a street and a little imagination will do. Even the poorest African village can supply these items.

Many nations take their football very seriously. Though hooliganism has become a catch-all word for sport-related violence and mischief, it has its roots in football. In many cases football games seem to act as a proxy for national pride. It was considered the final proximate cause of the Football War in 1969 between El Salvador and Honduras. The sport also exacerbated tensions at the beginning of the Yugoslav wars of the 1990s when a Red Star Belgrade at Dinamo Zagreb match devolved into rioting in March of 1990. I will add my own anecdote and say that when the USA beat Mexico in the 2002 World Cup my Mexican girlfriend and I broke up for almost 3 weeks. Fortunately we were able to reconcile and get married 2 years later.

This past weeks Lexington column in the Economist has an article titled, "The odd man out--America's coolness towards football is another example of American exceptionalism".

Amid this global fervour the United States will stand out like a temperance
preacher at a Bierfest. Football is not quite the non-sport that it once was.
The American team is not bad. There are a few pockets of football enthusiasts,
mostly in posh suburbs and Latino-crowded inner cities. Fans will be able to
follow the game without resorting to Spanish-language channels. But football
still remains a distant also-ran behind American sports such as baseball,
basketball, hockey and American football (in 2002 only 3.9m Americans watched
the World Cup final, compared with 95m who watched this year's Super Bowl). The country that dominates the world's popular culture is hopelessly marginal when it comes to the world's most popular sport.

We're hopelessly marginal at soccer, yet despite this we've fielded a "not bad" team that managed to qualify for the World Cup. It must be made up exclusively of kids from posh suburbs and Latinos from crowded inner cities since those are the only people who seem to care about the sport.

America's marginality is underlined by its failure to export its own sports. Baseball is popular in Japan and Central America, and basketball has recently become a craze in China; but that is a pretty poor record compared with the
British Empire's success in exporting one of the world's most idiosyncratic
games, cricket.

Who knew it was a foreign policy goal to export our sports around the world? Surely those entities with a vested interest in US-owned and dominated sports would like to see it, but I am pretty sure there's no Secretary of Sports at the cabinet level. And only if we had an empire as successful as the British Empire once was, the Sun would Never Set on the Baseball Stadium.

America is perhaps the only country that greets the World Cup with an orgy of football-bashing. In 1986 Jack Kemp took to the floor of Congress to contrast “European socialist” soccer with “democratic” and “capitalist” American
football. In 2003 a blogger even pointed out that a leading al-Qaeda terrorist
had been a European soccer player: “You don't see any former NFL players or
Major League baseball players joining al-Qaeda, do you?”

The author had to go back 20 years to dig up a quote by an ex-football player turned-marginally successful politician to prove how America greets the World Cup with an "orgy of football-bashing." Just in case you did not get the point, even a blogger on the internet thinks soccer is for terrorists!

Yankee hostility to football draws on deep wells of both patriotism and populism. The history of assimilation has been one of abandoning foreign sports(primarily football) in favour of American pastimes. The sons of football-playing parents knew that they had become good Americans when they could quote the batting average of left-handed Yankee players in losing seasons.
More recently, football has become embroiled in the culture wars. The most
prominent supporters of football, apart from new immigrants, are overclass
parents who want their little darlings to play a civilised foreign game rather
than the lumbering American performance that bears the same name.

Now that the author has proven that America is hostile to football, he explains that it's only natural due to the fact that patriotism and populism demand that new immigrants foreswear their old world sports in favor of becoming statistical machines.
I played soccer for 8 years in my youth. Although there were kids on my teams that could be described as coming from both "overclass" and "new immigrant" families (note the author's mutual-exclusiveness), both were far from the most prominent supporters. Amazingly, when I arrived at high school I began to play the "lumbering" American version as well. My life could have taken a number of paths beginning in high school. The fact that I am by traditional measures a well adjusted, dues-paying citizen I attribute to the discipline, commitment, tenacity, fairness and structure that American football taught me. Soccer was about fun, but football was about life.

Behind all this lies a bigger debate about America's cultural
idiosyncrasy. Americans like to think of themselves as global trendsetters and
standard-makers. But a raft of opinion polls since the Iraq war have
demonstrated that America is not so much a trendsetter as an outlier—more
individualistic, more religious, more nationalistic, more anti-government and
more gung-ho about the use of force than other countries.

When Americans are not completely self-absorbed in their populist, patriotic rhetoric, they're very busy worrying about setting global trends. As you'll recall, America was loved the world over--especially in Europe--before President YEE-HAW ruined our image by invading the kite flying, peace-loving nation of Iraq. All the people from virtually every nation on earth who are literally dying to get to our shores are outliers, too.

This evidence of American exceptionalism has provoked a fierce debate within the United States between “red” Americans, who are proud of their country's oddness, and “blue” Americans (mostly Democrats), who think that America should pay more attention to the rest of the world. It has also provoked an even fiercer backlash in other countries against America's “weird” values, such as its support for the death penalty and its predilection for unilateral action.

IF you are a "red" American you are proud of your oddness as defined by the fact that you may or may not believe that people who commit the most heinous of crimes may deserve to die. Heaven forbid you believe a nation has the right to act unilaterally. If you are a "blue" American you are superior (a Democrat!) because you pay attention to what(Europe)the(Europe)Rest(Europe)of the(Europe)World is saying because they obviously have your best interests at heart. Their track record proves it, too. I forgot, what's this have to do with football?

It is possible that American exceptionalism may wane in the next few years, particularly if the Democrats can recapture the presidency. Unilateral action is out of fashion, thanks to the Iraq mess. But when it comes to sport, American exceptionalism looks more enduring. It is hard to imagine America's indigenous sports being forced to cede much ground to soccer, short of a dramatic victory by the national team in July; and it is impossible to imagine the rest of the world abandoning their beloved footballs for pigskins or baseball bats.

The Democrats will surely flog this nation back into their rightful, supine place in the world if only enough people will open their eyes and see that Iraq is a total, broken, unsalvagable mess and will always remain so. Oh yeah, back to football. America, quit trying to cram pigskinned-wrapped baseball bats up the world's behind. They just won't go for it. Maybe if your "not bad" team can pull off a miracle upset, your nation will see the virtue that the rest of the world sees in football.

I am usually a big fan of the Economist, especially the Lexington column. I'm going to try to give them the benefit of the doubt and assume that the regular authors of the column are all on holiday--maybe even in Germany for the World Cup--because this piece could have been written by an intern for The Nation.

Clear Leftist Thinking is Not Always an Oxymoron

In politics, there is a big difference between loyal opposition and subversive obstruction. There seems to be much more of the latter than the former lately. Political lines have been so clearly defined that there are not many examples of people from either end of the political spectrum breaking free from their dogmatic, ossified thought patterns in order to open their minds to consider new thoughts that may contradict their core beliefs. That is why it is encouraging to know that documents such as the Euston Manifesto exist.

A. Preamble
We are democrats and progressives. We propose here a
fresh political alignment. Many of us belong to the Left, but the principles
that we set out are not exclusive. We reach out, rather, beyond the socialist
Left towards egalitarian liberals and others of unambiguous democratic
commitment. Indeed, the reconfiguration of progressive opinion that we aim for
involves drawing a line between the forces of the Left that remain true to its
authentic values, and currents that have lately shown themselves rather too
flexible about these values. It involves making common cause with genuine
democrats, whether socialist or not.
The present initiative has its roots in and has found a constituency through the Internet, especially the "blogosphere".
It is our perception, however, that this constituency is under-represented
elsewhere — in much of the media and the other forums of contemporary political
life. The broad statement of principles that follows is a declaration of
intent. It inaugurates a new Website, which will serve as a resource for the
current of opinion it hopes to represent and the several foundation blogs and
other sites that are behind this call for a progressive realignment.

Whenever I see "socialist", "progressive" and "liberal" used in the same paragraph I usually recoil, but it is a small price to pay for an example of loyal opposition in this case. Besides, not all forms of socialism are equal. For example, one should not confuse the socialism of Hugo Chavez's Venezuela with that of Michelle Bachelet's Chile, or even Lula de Silva's Brazil.

B. Statement of principles (Each of these is expanded upon
within the Manifesto)

1) For democracy
2) No apology for tyranny
3) Human rights for all
4) Equality
5) Development for freedom
6) Opposing Anti-Americanism
7) For a two-state solution (re: Israel/Palestine)
8) Against racism
9) United against terror
10) A new internationalism
11) A critical openness
12) Historical truth
13) Freedom of ideas
14) Open source
15) A precious heritage

No apology for terrorism, against Anti-Americanism, against terror, in favor of historical truth, in favor of democracy. One could be forgiven for thinking that much if it came from the Neocon playbook!

C. Elaborations (See website for details)

D. Conclusion
It is vitally important for the future of progressive
politics that people of liberal, egalitarian and internationalist outlook should
now speak clearly. We must define ourselves against those for whom the entire
progressive-democratic agenda has been subordinated to a blanket and simplistic
"anti-imperialism" and/or hostility to the current US administration. The values
and goals which properly make up that agenda — the values of democracy, human rights, the continuing battle against unjustified privilege and power,
solidarity with peoples fighting against tyranny and oppression — are what most
enduringly define the shape of any Left worth belonging to.

I find it hard to argue with this document when taken in its totality.

I wonder what the subervise obstructionists that claim to speak for the entire Left have to say about this?

Even more telling than the prominent Leftists who have signed the Euston Manifesto, are the prominent Leftists who have not.

Class Action Lawsuits

Homer Simpson once said of beer: "...the cause of and answer to all of life's problems." One could substitute "lawyers" for "beer" and the phrase would still ring true. Of course not all lawyers cause as many problems as they solve. Many are upstanding members of the community; professional, smart and ever-so-helpful when we need them. But there does exist in the litigation-ecosystem a certain breed of lawyers who often put their own interests ahead of both their clients and society in general; and they seem to congregate in the realms of personal injury and class-action.

Vonage is a Voice over Internet Protocol (VoIP) company that recently went public with much fanfare. The underwriters; Citigroup, Deutsche Bank and UBS put their collective heads together and determined that they should price 31.25mil shares at $17. Admittedly, pricing an IPO is tricky. One must factor in market sentiment, institutional, hedge fund and retail investor demand, the "hotness" of the sector at the time of the offering and a host of other components. Generally the syndicate of underwriters is responsible for allocating the entire deal to investors. This deal was unique in that Vonage gave its customers an opportunity to purchase IPO shares through the company rather than through the traditional method of indicating interest to one of the investment banks that is a member of the syndicate. In theory, it gives the loyal customer a chance to get in on the "ground floor" of a deal they'd otherwise have to buy in the open market at whatever price the IPO is trading--presumably higher than the issue price. In practice, Vonage traded as high as $17.25 for a brief moment on it's first day of trading, and has done nothing but head south since. Understandably, many of the Vonage customers who bought stock at the IPO price are upset that the stock is hovering around $12 these days.

Enter the class-action do-gooders. Motley Rice announced they were filing a lawsuit on behalf of the people who lost money on the IPO.

"We don't know yet exactly what happened in this IPO," Herb Teitelbaum, a partner in securities litigation practice group Bryan Cave, said Monday. "The fact that the stock dropped off 30 percent is not a violation."

He doesn't yet know what happened, but rest assured whatever it was, Vonage is going to pay for it. He'll see to that--and collect a handsome fee in the meantime.

If the underwriters would have done their job properly and there wasn't the amount of demand for the deal that they first thought, they could have taken a number of steps to ensure that the deal would not trade underwater right out of the gate. For example, they could have lowered the price of the IPO, scaled back the size of the deal, or postponed the deal until a later date when the market conditions were better. Their job (for which they are very well-compensated by the way) is to find the equilibrium point at which the company is happy with the proceeds raised from the IPO, and the institutions, hedge funds and small investors who bought the stock are happy with the price and the way it trades in the aftermarket.

Vonage did not set the price of the IPO, the underwriters set the price of the IPO. The market told the world that the price was too high. If anybody should be held responsible, it seems to me it should be the underwriters.

But wait a second, there's no guarantee that an IPO will trade higher right out of the gate. Markets can be brutal--it's proven time and time again everyday. Surely Vonage fulfilled their obligations per the SEC in fully disclosing to their customers the risks associated with the purchase of their IPO. A big dose of Caveat Emptor seems to be in order. Maybe they did somehow mislead their investors, who knows? I guess Motley Rice LLC will get to the bottom of it--for the good of the little guy of course.

Milberg Weiss Bershad & Schulman is another class-action law firm that specializes in securities fraud cases. Unfortunately for them, they are in the midst of some serious turmoil surrounding allegations that they paid illegal kickbacks to name plaintiffs and went through extraordinary lengths to cover it up.

All of this is not to say that there is no place in litigation for class-action lawsuits. They serve the public well in many cases. However, if somebody can point me to an area of litigation that is fraught with more fraud, exploitation and corporate blackmail--as has been exemplified in the billions of dollars wasted in asbestos and tobacco class-action litigation--please do.

Appeasement is a Dead End

It appears that Canada's high-minded opposition to the invasion of Iraq has not been enough to offset the damage caused by participating in NATO's efforts in Afghanistan--at least that seems to be the case in the eyes of their own homegrown Jihadis.

TORONTO - Police said Monday more arrests are likely in an alleged plot to bomb buildings in Canada, while intelligence officers sought ties between the 17 suspects and Islamic terror cells in the United States and five other nations.

A court said authorities had charged all 12 adults arrested over the weekend with participating in a terrorist group. Other charges included importing weapons and planning a bombing. The charges against five minors were not made public.

A Muslim prayer leader who knew the oldest suspect, 43-year-old Qayyum Abdul Jamal, told The Associated Press on Monday that Jamal's sermons at a storefront mosque were "filled with hate" against Canada.

Always, ALWAYS the shock!

Some people who know the suspects said they were astonished by the arrests.

But Faheem Bukhari, a director of the Mississauga Muslim Community Center, said Jamal, the oldest suspect, had taken to giving hateful sermons and preaching intolerance to young Muslims at a small storefront mosque in Mississauga, a city near Toronto where six of the suspects lived.

"These youth were very fun-loving guys, soccer-loving guys, and then all of sudden they were not associating with guys they used to," Bukhari told AP, referring to some of the younger suspects.

He said Jamal once told "the audience that the Canadian Forces were going to Afghanistan to rape women."

I do believe I saw a similiar storyline in the better-than-expected Showtime series Sleeper Cell once.