The SEC’s Twitter Feud with Elon Musk Escalates in Federal Court

Elon Musk fired back at the Securities and Exchange Commission (SEC) in federal court last week, accusing the agency of making a retaliatory “unconstitutional power grab” to silence his free speech. The SEC seeks to hold the Tesla CEO in contempt of court over tweets sent on February 19 that allegedly violated a 2018 settlement agreement. Musk’s lawyers submitted a brief claiming the SEC’s strict interpretation of the settlement is an “unprecedented overreach” and an attempt to “trample on Musk’s First Amendment rights.”

In 2018, Musk posted a misleading tweet that he had secured funding to take Tesla private at $420 a share. The company’s stock soared, but the claim wasn’t true. The SEC hit Musk with $40 million in fines and a settlement agreement that forced him to step down as chairman. The settlement also restricted his communications to investors. Now, Musk must get preapproval from in-house counsel before sending any tweet about Tesla. The SEC claims the “twitter-sitter” did not approve a February 19 post in which Musk boasted that Tesla would produce 500,000 vehicles in 2019.

Musk’s aggressive response to the SEC is poorly timed. Because commercial speech is more regulated than private speech, the federal judge is unlikely to heed Musk’s First Amendment claims. Many predict the SEC and judge will try to avoid punishing Musk in a way that harms shareholders, meaning a permanent ban from Tesla is unlikely. But regardless of the outcome of the case, more negative publicity is the last thing Tesla needs.

Tesla stock is down 14% this year, and the company faces pressure from competitors, growing debts, and whistleblower complaints. Tesla has been so embroiled in controversy that it included scrutiny from critics as a risk factor in its recent 10-K filing. Musk’s needless provocation of the SEC might spur investors to push for further constraints on Musk’s role in the company.

On the other hand, some investors are confident that Tesla has matured enough to have a strong path forward with or without its CEO. As Ross Gerber said of Musk: “He’ll never be a liability for Tesla. He’s more a liability for himself.”

The SEC’s Twitter Feud with Elon Musk Escalates in Federal Court

Lyft Prepares to Hit the Road(show)

Ride-hailing company Lyft announced yesterday that it began its roadshow in preparation for its IPO later this year. While the company has not yet announced what day it will publicly list, companies typically begin trading two weeks following their roadshow, meaning Lyft’s IPO is just around the corner. Lyft is set to debut on NASDAQ under the ticker LYFT. The company updated its S-1 to offer 30.77 million Class A shares priced at between $62 and $68 dollars. This pricing would value Lyft somewhere between $21 and $23 billion, a big increase from its $15.1 billion valuation last June. Lyft’s rival, Uber, is expected to conduct its IPO with a valuation between $100 and $120 billion. The two companies seemed to be raising each other to be the first ride-hailing company to IPO. Lyft’s co-founder John Zimmer released a video explaining the five key reasons why “Lyft wins,” a not-so-subtle hint to explain why Lyft “wins” against Uber. Zimmer went on state to Lyft has a narrow focus, likely alluding to Uber’s expansion into food delivery services and the trucking industry.

Lyft’s IPO is the first of many anticipated initial public offerings this year. Though IPOs have been off to a slow start in 2019, Lyft and its rival Uber will soon be joined by tech giants Airbnb, Slack, and Pinterest. Levi Strauss & Co. is also set to IPO this Thursday at around $14-$16 a share, which is relatively cheap compared to the expected pricing of anticipated IPOs.

Investment bankers and capital market lawyers are not the only people in San Francisco who have been busily preparing for San Francisco’s burst of IPOs. The wave of IPOs is going to bring in a new class of millionaires to the city, which is already facing a housing crisis. There are estimates as high as 6,000 new millionaires emerging from this year’s IPOs, which will put a ton of pressure on the small San Francisco housing market. Real estate agents are preparing for cash buyers eager to stop paying rent and willing to overpay for single family homes; some estimate that single family homes may go as high as an average of $5 million.

Lyft Prepares to Hit the Road(show)

Jury Finds Apple Infringed Three Qualcomm Patents

Last Friday, a jury in U.S. District Court for the Southern District of California awarded Qualcomm $31.6 million patent royalties based on the finding that Apple infringed three Qualcomm patents.  This lawsuit marked Qualcomm’s first legal victory of US jury trial over its prolonged global dispute with Apple.

Comparing to the figure of about $265 billion in sales in fiscal 2018, $31.6 million is really a drop in the bucket for Apple. However, the “per-phone royalty rate” being recognized by the jury boosts Qualcomm’s confidence in contending that its licensing practices are fair.

After the jury verdict, Qualcomm’s statement tried to amplify the effect of the verdict by saying that “[they] are gratified that courts all over the world are rejecting Apple’s strategy of refusing to pay for the use of [their] IP.” In contrast, Apple attempted to divert the public attention to the antitrust investigations Qualcomm faces. Apple said, “Qualcomm’s ongoing campaign of patent infringement claims is nothing more than an attempt to distract from the larger issues they face with investigations into their business practices in U.S. federal court, and around the world.”

Apple has already been at a disadvantaged situation in Germany and China in this patent war against Qualcomm. In early December last year, an intermediate court in China issued injunctions against four Chinese subsidiaries of Apple on infringement of two Qualcomm patents. Under the China’s injunctions, Apple was ordered to cease the unlicensed imports and sales of several iPhone models in China. In Germany, a district court also ruled in favor of Qualcomm in an infringement claim, blocking the sales of some iPhone models.

The concluded jury trial last Friday is far from the end of the patent battle between the two companies. Next month, a much more important case concerning whether Qualcomm abused its “monopoly position” to impose “onerous” terms for patents is scheduled to start on April 15 in the Southern District Court of California.  The result of the case may affect the landscape of chip market globally.

Jury Finds Apple Infringed Three Qualcomm Patents

Despite Government Support, Potential German Finance Giants’ Merger Faces Major Obstacles

This past weekend, Deutsche Bank and Commerzbank announced that they had begun talks for a possible merger of Germany’s two largest financial institutions. Marked by several years of disappointing revenue, the two firms hope a consolidation effort might give them the edge they need to compete with the likes of Goldman Sachs, JP Morgan Chase, Morgan Stanley, and other major, foreign financial players.  Backing the merger, the German government has lent its voice in favor of consolidation, stressing the need to create a competitive, domestic financial entity that would shield the German economy from reliance on foreign firms – critically important in the event of another financial crisis when German businesses may have difficultly acquiring foreign credit. Moreover, the German government’s extant equity position in Commerzbank following a 2008 bailout means that the government could hold as much as 5% of the consolidated company (which will probably be Deutsche Bank, as it is the larger firm), further aligning its interests.

However, the proposed merger is not without its opponents. A consolidation would likely result in the loss of tens of thousands of jobs, leading unions representing workers in the banking industry to come out strongly against it. In addition, some investors and analysts doubt the wisdom of merging the two German giants, citing the difficulties associated with combining highly competitive firms, each already suffering from a long list of ailments that led them to this point; consolidation might actually make worse the problems the two banks now face. Deutsche Bank has been in the news lately regarding investigations into the financing of major Trump Organization projects, drama that could taint the firm’s image at a time when investor confidence needs to be at an all-time high.  Still, if a merger is successful, the resulting firm would have access to a considerably larger talent, resource, and capital pool – maybe enough to get it to the critical market share it needs for the long-standing German finance industry to survive.

Despite Government Support, Potential German Finance Giants’ Merger Faces Major Obstacles

Amazon: Two Years Tax-Free

Amazon raked in $11.2 billion in profit last year, about double its 2017 profits of $5.6 billion. However, instead of paying a 21% income tax rate on its U.S. earnings, Amazon reported a $129 million federal tax rebate for 2018. This represents the second year in a row that Amazon paid zero federal income taxes despite its staggering profits.

In 2017, Amazon benefitted from a huge, one-time tax write-off from the December enactment of the 2017 Tax Act. Because of the permanent reduction in the corporate tax rate from 35% to 21%, it remeasured federal net deferred tax liabilities for a tax benefit of $789 million. Deferred tax liabilities are recorded when figures for accounting purposes differ from figures for tax purposes, such as when depreciation on equipment for accounting purposes is less than depreciation using accelerated depreciation for tax purposes. This difference eventually reverses out, which is why it is recognized as a liability. When the tax rate decreases, that eventual payment on the deferred tax will be lower than originally anticipated, which manifests as a reduction in income tax expense in the period of enactment.

Amazon attributed its low-income taxes in 2017 to this one-time favorable effect of the 2017 Tax Act as well as tax benefits from its stock compensation. Yet, in 2018, Amazon again paid zero income taxes. In note 9 of its financial statements, it vaguely represents $419 million of “tax credits” and $1.1 billion of benefits from stock compensation.

Paying stock compensation occurs quite often as a means of reducing tax liability. Indeed, according to Netflix’s 2018 financials, it paid an effective 1% tax rate with stock compensation being its largest write-off. Stock compensation serves as an attractive means of compensation because, minus a slight timing difference, it allows companies to benefit from the tax deduction of a normal compensation expense while also not limiting cash flow.

The other $419 million of Amazon’s tax credits is likely due to accelerated depreciation of its equipment and property. The 2017 Tax Act enhanced the option to claim bonus depreciation from 50% to 100% for qualified property acquired and placed in service in 2018, and Amazon purchased $13.4 billion worth of property and equipment in 2018. Not surprisingly, this increase in property and equipment corresponded with an increase in its deferred tax liabilities from depreciation and amortization by about $1 billion in 2018.

While Uncle Sam clearly missed its share of Amazon’s 2018 profits, 2018 does not necessarily mark the end of the story. The 100% bonus depreciation creates a deferred tax liability that eventually reverses out. While Amazon and other companies take full advantage of the Act and invest today, Uncle Sam may eventually gain back the losses of tax revenue through a larger economy, fueled by today’s capital investments. Of course, this assumes companies will return their profits from overseas.

Amazon- Two Years Tax-Free

The End of Hellish Tarmac Delays? Or Increased Airline Ticket Prices?

The majority of Americans don’t know that they possess a variety of rights while they sit on an airplane, let alone a more robust bundle of rights that they possess at essentially every step of the air travel process. In fact, 92% of Americans have no clue what their rights are or entail. From the time that you begin shopping for airline tickets online to when you hit the tarmac at your destination, your “Airline Passengers’ Bill of Rights” kicks in and provides various protections as you enter sky-space.

Following well-publicized tarmac delays, some of which reached well over six hours, regulators answered the distressed public by implementing federal rules that allot a maximum of three hours on the tarmac for flights landing in the U.S. Violations are punished by monetary fines. During the delay, passengers are entitled to various necessities such as food, water, functioning toilets, and medical attention, if needed. All of this seems like it’s pointing favorably towards consumers, but some industry experts have voiced their skepticism with these regulations.

The very nature of the regulation is a massive carrots-and-sticks situation. The fines that the federal rules impose are not to be taken lightly – they are currently set at up to $27,500 per stranded passenger. On a standard commercial Boeing 777 flight, with a capacity of 300, the penalty for a single flight can be enormous.

Robert Isom, US Airways COO, has stated that the airline’s defense simply is “cancelling flights.” And this seems like a rational solution on the part of the airlines; as sophisticated players, they will inevitably establish a robust system to calculate their benefits and losses with the potential fines if they figure that simply cancelling a flight will cost them less than potentially violating the new tarmac rules. Vikrant Vaze, assistant professor at Dartmouth’s Thayer School of Engineering, found that “for every minute of tarmac time being saved there is, on average, a three-minute increase in the total passenger delay.” He, like others, have begun to discern the potential implications of airlines choosing to cancel flights instead of facing massive fines if they feel like a delay might occur.

On the other hand, these penalties seem to be a common method employed by the legislative and judicial branches in a variety of scenarios to encourage or discourage certain behaviors. At least in some respects, it is pushing more accountable behavior by airline companies. Delta has expended “millions to invest in new technologies” to reduce tarmac wait-time variability, investing money towards equipping their tarmac spaces with tools like deicing pads to better combat against issues posed by the weather, which is frequently responsible for these delays.

How these airliners will collectively react to an intervention by the legal system is yet to be seen. It could potentially end up protecting consumers from one of the most upsetting parts of air travel and simply make airliners responsible for the issues that they should have resolved years ago. Or, consumers may have accidentally asked for even more delayed travel time while also having the interim costs of improvement passed along to them.

The End of Hellish Tarmac Delays? Or Increased Airline Ticket Prices?

Advancing Convenience Using Technology or Sustaining Implicit Bias

In recent years, Amazon has developed and widely marketed its facial recognition technology. This new invention has made it quicker and more convenient for organizations that use the technology to identify individuals. Many police departments and federal agencies across the country have already begun to use the service. Although this new technology has the ability to make day-to-day practices more convenient, researchers have found that the technology is limited to individuals of certain appearances. More specifically, results from this research have shown that the technology does not have the ability to facially recognize those of the female gender and those with a darker complexion.

During further testing of the facial recognition product, results showed that the product had the ability to properly identify the gender of lighter skinned men with 100% accuracy while also misclassifying women as men 29% of the time and darker-skinned women for men 31% of the time. Although the program is still in its pilot stage, many concerns have been raised given its current errors. The first of which is safety. Amazon’s facial recognition service has been sold to numerous law enforcement agencies around the country. If the current errors persist, there is a high possibility that the product will misidentify suspects primarily those that identify as African American. Given the current relationship between communities of color and law enforcement agencies, these flaws will potentially lead to further instances of misconduct.

Additionally, the research not only raised concerns around bias, but they also raise questions regarding the marketability of Amazon’s product. If a given product will only serve a certain subset of the population, many consumers and agencies will not have the desire to purchase the product. If Amazon decides to market its facial recognition further to be included with everyday consumer products, its lack of inclusivity could present roadblocks. This creates a larger issue as you begin to consider the ever-increasing buying power of both women and people of color. Ultimately, this defect has become a hindrance on Amazon’s ability to popularize the face recognition product.

In addition to concerns regarding the economic viability of the product, there must be further research done to analyze the algorithms used in artificial intelligence products to reduce potential biases against underrepresented groups. Although bias exists within our everyday society, developers must continue to create ways in which to prevent this bias from affecting technological advancements as society continues to become more innovative.

Advancing Convenience Using Technology or Sustaining Implicit Bias

Boeing, You’re Grounded

In October 2018, a Boeing 737 Max 8, operated by Lion Air, crashed soon after takeoff and killed 189 people. In March 2019, another Boeing 737 Max 8, operated by Ethiopian Airlines, crashed soon after takeoff and killed all 157 people on board. In response to the two crashes, safety regulators in 42 different countries banned all flights of the 737 Max 8. Initially in the U.S., the FAA stood firm behind Boeing, a U.S. company, asserting no systemic performance issues that would require grounding all 737 Max 8 planes. However, on March 13, 2019, President Trump went against the FAA’s stance and announced the grounding of all Boeing 737 Max in the U.S.

Investigators fear that both the Boeing 737 Max 8 planes crashed due to a malfunction in Boeing’s Maneuvering Characteristics Augmentation System (MCAS). The MCAS system was added when Boeing updated the 737 Max 8 with more fuel efficient engines to compete with the Airbus A320. However, these engines were also larger and could cause the plane’s nose to pitch dangerously upward. Therefore, Boeing added MCAS, an automated system that would push the plane’s nose down when necessary.

As the investigation continues, Boeing’s relationship with the FAA will be under scrutiny as well. When MCAS was added to the 737 Max’s flight control system, Boeing and the FAA determined that pilots did not need additional training. Boeing’s main reason for not training the pilots was to minimize costs. However, this oversight may have left pilots without a full understanding of how to address the MCAS malfunction, which likely contributed to the crashes.

The proximity of the Lion Air and Ethiopian Airlines crashes have put Boeing on the defensive. Airlines plan to seek compensation from Boeing because of the 737 Max groundings. The surviving families likely will file lawsuits against Boeing as well. Further, the 737 Max is Boeing’s best-selling jet ever and the crashes have put 4600 unfulfilled plane orders or $550 billion in future revenue at risk. The disasters will also cause significant damage to Boeing’s brand and reputation. Hopefully in the future, other industry leaders will learn from Boeing’s mistakes and err on the side of caution when balancing safety and costs.

Boeing, You’re Grounded

Higher Minimum Wage May Have Unintended Consequences

A few weeks ago, Senator Bernie Sanders announced his candidacy for President of the United States. Joining a crowded field of Democratic hopefuls, Sanders called on his supporters to “complete the revolution” that he began in 2016. And, just as he did in 2016, Sanders is making wealth inequality a central issue of his campaign. When Sanders called for a $15 national minimum wage in 2016, the idea was derided as ‘radical’ and ‘extremist.’ Since then, both New York and California have passed legislation, raising their minimum wages to $15 per hour (the CA bill calls for an incremental increase, gradually raising the wage to the target level). Additionally, numerous cities across the U.S. have imposed a $15 minimum. Notably, Sanders’ most recent attempt to pass a Senate bill raising the nationwide minimum wage to $15 was co-sponsored by Senator Cory Booker, Senator Kamala Harris, Senator Elizabeth Warren, Senator Kirsten Gillibrand, and Senator Amy Jean Klobuchar—all Democratic candidates for President. Indeed, the entire Democratic roster of candidates now seems to support the wage hike. While it was once a revolutionary idea, it has become the rallying cry of the Democratic Party.

Certainly, the idea has its merits. Raising the minimum wage can create incentives to work. Theoretically, ‘voluntarily unemployed’ workers may be encouraged by the prospect of earning $15 an hour as opposed to $7.25—essentially, the more a job pays, the more likely people are to do it. Further, some evidence suggests a correlation between wages and marginal productivity. That is, when you pay workers more, they actually become more productive. Perhaps most compelling is the moral argument. As Senator Sanders has said countless times, “if you work full-time, you should not live in poverty.”

However, there are strong counterarguments counseling against the wage increase. A minimum wage is, in effect, a price floor. In a perfectly competitive market, setting a price floor above the natural equilibrium will invariably lead to excess supply. Stated in non-economic terms, a minimum wage will increase unemployment. If companies have to pay each worker more money, they will naturally hire fewer workers. At the same time, as mentioned above, the higher wages will incentivize more people to join the labor force. Due to the concurrent expansion of the labor force and reduction in hiring, we would see a massive glut in the supply of labor—simply put, a surplus of jobless workers.

In reality, the analysis is more nuanced. It is affected by the elasticity of labor-supply and a host of other factors. In fact, in some rare market scenarios (such as a monopsony), a minimum wage can actually increase employment rates. Still, as a general rule, a minimum wage translates to higher unemployment. Crucially, young people would be hit hardest by this increase in unemployment. Firms hire workers based on their marginal revenue product (MRP). With less experience and knowledge, younger workers tend to have a lower MRP. As such, they are the first to hit the chopping board when firms are looking to trim fat.

Hence, the debate rages on: Is a $15 minimum wage the path to greater and more widespread prosperity? A bigger pie and more equitable slices? Or, alternatively, is it a path to severe unemployment, particularly for young inexperienced workers? Amazon provides a perfect case study which may help us answer this question.

In 2017, Amazon acquired Whole Foods Market, Inc. Under mounting pressure from activists and politicians (including Sanders himself), Amazon raised the minimum wage of Whole Foods workers to $15 per hour. The move was applauded by Sanders, who commended Amazon for paying its workers a living wage. However, since the wage hike, Whole Foods employees have seen their hours drastically reduced. One worker experienced a 33% reduction in his hours—the cut was so drastic, he actually earns less money now, despite being paid a higher hourly rate. Part-time employees, who overwhelmingly consist of young people, saw the biggest cut with their hours dropping from 30 per week to roughly 20 per week. Meanwhile, full-time employees suffered a less dramatic cut, with hours falling from 37.5 per week to approximately 35 per week. One worker lamented, “Just about every person on our team has complained about their hours being cut…Some have had to look for other jobs as they can’t make ends meet.”

This comports with the above-described economic model. By setting a price floor above the natural equilibrium, Amazon created a surplus of labor—more employees were eager to work, but the company was correspondingly forced to pay fewer workers, since each worker now costs more. And, as per the economic theory, younger part-time workers were disproportionately impacted; their hours-reduction was almost 4 times greater than that of full-time workers. If the Amazon case study is representative, then a $15 national minimum may not be the best way to help low-skill workers. In an economy where many minimum-wage jobs are already disappearing due to automation, a wage hike would only further diminish the availability of these vanishing low-skill positions. Instead, subsidizing education, constructing affordable housing units, and expanding an earned income tax credit may be more viable options.

Higher Minimum Wage May Have Unintended Consequences

The Crony Capitalist of Omaha

Berkshire Hathaway, run by legendary investors Warren Buffett and Charles Munger, published its annual letter to shareholders on February 23, 2019. Some commentators speculate that Mr. Buffett subtly criticized President Trump in that letter. The passage reads, “It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’”

Those words may appear to reference President Trump. But, it would be a mistake to let one’s distaste for our President cloud one’s judgment. Make no mistake: Mr. Buffett was referring to himself.

Berkshire Hathaway is a successful American company. Its long record of outperforming the markets is unrivaled. Warren Buffett is undoubtedly the reason for this success. Even so, Mr. Buffett recognizes that he could not have done it alone. During the financial crisis of ’07-08, Mr. Buffett lobbied the government to provide a cash infusion to the financial institutions in which he held a significant stake. Berkshire Hathaway invested $26 billion in the largest banks that were about to implode, $7 billion of which was Mr. Buffett’s personal stake.

Perhaps Mr. Buffett was simply discharging his duties as CEO. Maybe he was simply acting rationally within a system designed to promote this type of behavior. He might have benefitted his shareholders by employing his political capital. Maybe he even helped save the economy by pushing the government to do more.

But the Oracle of Omaha he is not.

A successful investor, by Mr. Buffett’s own definition, is someone who invests in productive ventures for their long-term value. But, someone who uses his enormous influence to lobby the government for a handout of epic proportions, albeit indirectly? We have a word for that in this country: a crony capitalist.

The Crony Capitalist of Omaha