The SEC is contemplating policy regarding Multiple Voting Shares (MVS) as a result of this month’s $mega billion IPO of SNAP (Snapchat social media service) in which shareholders purchased non-voting common shares. In fact, at 200 million shares, Snap raised $3.4 billion and was valued at almost $24 billion as of its pricing. The two promoters have retained voting control, as well as personal fortunes in the billions, by way of Multiple Voting Shares (MVS).
I have been asked to comment.
http://mobile.reuters.com/article/idUSL2N1GE2AG
Actually, Hollywood has the answer. They made their statement and the public responded with overwhelming box office receipts. The movie was one of 2015’s very best, winner of the Best Adapted Screenplay, which had been based on a Michael Lewis book of the corruption on Wall Street that led to the 2007-2008 financial system collapse. It was called The Big Short. If you did see it; then I’m preaching to the converted.
https://en.wikipedia.org/wiki/The_Big_Short_(film)
In case you haven’t and yet you are an investor in capital markets, then I’ll lay out the problem facing the SEC – that government almost toothless watchdog agency whose task it is to serve and protect the people’s money (i.e., the 99%) from unscrupulous actions of financially sophisticated people who have either made the lofty 1% Club or desperately seek to join it.
Bottom line: it’s the SEC’s responsibility to prevent The Big Lie turning into The Big Short. I cannot say it more simply.
To paraphrase Bernie Madoff and the tens of thousands of scoundrels who thrive in their life’s work to scam the public: “Trust me. I give you my word.”
The financial system in the world’s most financially powerful country is suppose to be a subset of its Constitution – you know, the one with checks and balances like the tripartite Judiciary, Congress and Administration that is currently under attack by an Administration hell bent on belittling the integrity and importance of the other two legs of the American system.
For years, the SEC has been by far the most important agency of government with oversight of financial services and capital markets, but it has also been – to be kind — ineffectual. Yes, the SEC is always under intense political pressure. Humongous Bank & Broker has pretty much had their way and a bought-and-paid-for Congress has kowtowed to their lobbyists. Now it’s a crowded trade with Trump piling on as well, so maybe the public will fight back and the SEC will listen to them.
When the $50 billion Madoff scam came to light, I wrote “HB&B knew!” HB&B denied knowing. After years of costly investigations, the truth is out: HB&B knew. How could they not when it’s their business to know?
Why would I write what I did, back then? Well, for starters, I have not been driving a tractor in the fields of Iowa for a living. My life’s work has taken me to building world-class financial services businesses – one in the penthouse of the Toronto Stock Exchange tower, which I designed and built from raw concrete, introduced the best technology the world’s financial services industry had ever seen, and hired and trained the professionals whose job it was to compete in a field dominated by HB&B – the public’s banker. I did that once in Toronto and a second time in Vancouver. So, I’ve been there and done that. I know about things like back offices and regulators and HB&B and Multiple Voting Shares.
The Big Lie #1 is that companies like Snap Inc. want to remain private companies that are financed by public capital but want to do it on their terms. As I hear them, they appear to be saying “Trust me.” But I know that if and when these entrepreneurs go into a commercial bank, and they say “Trust me,” then you can trust me when I say they are immediately shown the banking agreement they are going to sign or else they are shown the door. Transparency is demanded and transparency is received. Later, if and when the private company fails to meet the terms of the banking agreement, the loans are called. No questions asked.
The success of some entrepreneurs today seems to make these brand spanking new billionaires think of themselves as above the rules of our society and, perhaps, banking. The SEC will soon tell us if they are. Will the SEC be directed by people like Jamie Dimon (JP Morgan), Lloyd Blankfein (Goldman Sachs) and Donald Trump (presently of the White House) on how to operate their public service agency or will it be the US Congress and the public? I guess we’ll soon be finding out the answer to that important question, and SNAP/MVS will be a highlight in the telling.
Being Canadian, I’ve had to live with MVS and the shenanigans that those companies bring to the market. I used to hate them. If I saw a dot A and dot B or a hyphen in the ticker symbol, I quickly moved on to something else. Things change. Presently, I believe there are two sides of the issue that deserve to be considered.
At the heart of the matter is that securities law is unlike statutory or common law. It’s more like gray area law in that unlike systems put in place by Congress and overseen by the Judiciary, securities law needs checks and balances by the promoters who are overseen by the quasi-judicial SEC on behalf of the people.
I assure you that if two entrepreneurs walk into the SEC with their lawyers, each team making the identical proposal, one team might walk out with all smiles and the other team simply furious. Why? Let’s say the one promoter has a history of abuse of the people’s money. People complained. Other people (SEC) listened and ruled. Even if there had been no court room prosecution, SEC files, some of which are made public, contain all matters pertaining to the investigation and hearing. Their files are deeper and broader than police files. Next time through the SEC door, the dark promoter is dead meat.
The SEC and the public need to work together on this MVS matter. The bottom line is that the promoters cannot be given a free “unquestioned honesty” pass. If they are, there will soon be a series of Madoff stories in the media.
Big Lie #2 is “Trust our auditor.” Sorry, but after Arthur Anderson (Enron scandal) and PwC (Academy Awards this month, and maybe the MF Global scandal), I think the public is not going to give them that break. Skepticism abounds, and for good reason.
Just like the promoters that visit the SEC – some of them good and some bad – the audit companies are a collection of audit partners – some of them good and some bad. I can say that too because I too was an auditor, spending five years earning CA and CMA designations in the Toronto headquarters of KPMG and PwC (actually Coopers at the time).
https://www.wsj.com/articles/SB1023409436545200
https://www.wsj.com/articles/jon-corzine-says-mf-global-relied-on-auditor-in-pwc-case-1489091186
In taking the side that companies should be able to issue non-voting common stock and also remain essentially private, I would advise the SEC to allow it on one condition, which is that they remove the Big Lie opportunity that promoters – even the good ones — would die to be able to hide behind. I say if the company wants the public to finance their private company – the ones that expect to offer little to nil transparency – the SEC must demand transparency and good corporate governance in the form of an independent chair who must approve a majority of board members and write an independent report on behalf of these non-executive directors that follows the Management Discussion & Analysis component of a quarter yearly filing. Otherwise, just like commercial bankers whose demands for transparency are not met, the SEC ought to show these promoters the door.
In fact, I like the submission of corporate filings that do not require the pre-approval of regulatory committees. In Canada, the Canadian Securities Exchange offers just that situation. The CSE (but not the Toronto Exchange) will even assist listed companies – the small ones with limited capital and access to the big name corporate law firms – in making those filings to the regulators on the basis that the company executives are subject to severe prosecution for fraud. As I see it, it’s not the regulators job to prevent fraud any more than it’s not the company auditor’s responsibility. As I wrote here a week or so ago, I like the US Over-The-Counter system wherein the listing organization posts a symbol for Buyer Beware in certain cases where they believe the public should invest with extra caution.
I don’t know how the SEC is going to move forward in policy in the Multiple Voting Share matter, but I do know (i) their budget is always under pressure, which means they have fewer staff than is required to take on too much responsibility, and (ii) they need to show leadership in this important matter. The SEC can do this with a simple check and balance, i.e., demanding Congress support of a policy requiring an independent Board of Directors whose job it would be to ensure the “Trust me” issue does not become a “Madoff” or “Enron” issue.
The ruling Republicans ought to like that because it would lead to less regulatory oversight and budgetary savings, i.e., smaller but more effective regulatory involvement but with more pressure on the promoters to stand behind their version of the truth and the investors to buy in or sell out. That is the form of capitalism I want.
Enjoy the rest of your weekend,
/Bill
