Chief Executive at Deutsche Börse Group Ousted Amidst Insider Trading Scandal

Amidst growing shareholder pressure, Carsten Kengeter has agreed to step down as the head of Deutsche Börse, one of the world’s largest stock exchanges. German authorities are investing Kengeter for insider trading after he purchased €4.5m worth of Deutsche Börse shares at the end of 2015 (the equivalent of 5.3 million USD). Kengeter purchased the shares just months before the company announced a potential merger with the London Stock Exchange Group (LSEG)—and weeks before formal work on the deal began. Public share value rose for both companies following the announcement and prosecutors now believe actual merger talks might have begun as early as that summer.

The all-stock merger between Deutsche Börse and LSEG would have created the largest operator of stock markets in Europe and likely the most profitable company in its industry. However, the deal faced problems from the beginning with Brexit. Ultimately, European regulators shut it down over monopoly concerns. Both Deutsche Börse and LSEG are now competing for post-Brexit market share as well as searching for new CEOs—Xavier Rolet announced that he will be stepping down as chief executive of LSEG at the end of next year.

Kengeter, once set to lead the exchange behemoth, now faces criminal charges in an investigation that keeps escalating problems for Deutsche Börse. The company was willing to shell out approximately $12.5 million in fines to end the German investigation (€10.5m in corporate fines and €500,000 for Kengeter). However, the Frankfurt court declined the agreement and ruled that the investigation will continue.

Despite Deutsche Börse’s supervisory board largely sticking by Kengeter’s side throughout the investigation, some of the company’s largest shareholders are now calling for its chairman, Joachim Faber, to step down as well. One of the 15 largest shareholders told the Financial Times last week: “Mr. Kengeter and Mr. Faber have been a tandem and should jointly draw the consequences.” While Mr. Faber says that he is willing to run for another term as chairman in May 2018, his continued support of Kengeter has not settled well with many top investors nor other members of the board. As a result, Faber recently hinted that he may consider an earlier departure, should it become necessary.

Kengeter will continue to head Deutsche Börse on an interim basis until December 31st, leaving on a tenure of just three short years. While the board has publicly expressed regret at Kengeter’s early departure, other top investors are breathing a sigh of release. This scandal has created an additional burden on Deutsche Börse which hasn’t preforming well since the LSEG merger failed last year. The company has announced that it isn’t likely to meet its full-year earnings targets and analysts predict their 2018 goals may be “overly optimistic” as well.

Chief Executive at Deutsche Börse Group Ousted Amidst Insider Trading Scandal (PDF)

Celebrity Endorsements Leave ICOs Counting Much More than Coins

The Securities and Exchange Commission (SEC) recently issued a public statement cautioning celebrities like Paris Hilton, DJ Khaled, and Floyd Mayweather from endorsing “initial coin offerings,” commonly referred to as ICOs.

These celebrities were primarily using their various social media platforms to advertise for ICOs. A recent example is Mayweather’s attention-grabbing Instagram post from July, where he is photographed next to a briefcase filled with $100 bills. In the post, Mayweather indicated he would make an exuberant amount of money “on the Stox.com ICO.” Similarly, Hilton tweeted that she was “looking forward to participating in the new @LydianCoinLtdTowken.” However, the tweet has since been deleted.

But why has the SEC taken such an interest in celebrities advertising for ICOs when their social media accounts are often littered with other promotional messages for the latest detox tea or waist trainer? The answer is simple and yet complex. ICOs may technically be selling securities. If this is the case, according to the anti-touting rule, celebrities would then need to make it known if and when they are being paid to promote these ICOs. With nearly $3.3 billion invested in some 200 ICOs within the last year, it is clear why the SEC has taken such an interest in these Twitter and Instagram posts.

However, the SEC’s authority to regulate ICOs is certainly up for debate. Unlike an Initial Public Offering (IPO), ICOs allow companies to get money without obtaining debt or giving its investors equity. Instead, those who invest are given a digital currency called a “token.” It is still not entirely clear which of these tokens qualify as securities that would be subject to the SEC’s many regulations.

Whether or not a token qualifies as a security turns on what it actually represents. We now enter the world of cryptocurrencies. Most tokens are recorded into a “blockchain” known as Ethereum. Ethereum is similar to a ledger, and it also accounts for a type of currency known as “ether.”  Ethereum also maintains “smart contract” programs. Individuals can invest ether into an ICO’s smart contract. As a result, tokens that may be traded are produced, and the ICO issuer of the tokens can choose to keep the ether or use it to finance its company.

The SEC holds that irrespective of the technology behind tokens, they are considered securities when companies use them to raise money. Alternatively, ICO advocates argue that tokens have a utility function beyond financing and should not be subject to SEC regulations.

Although the SEC has not enforced any violations against specific individuals, the Hiltons and Mayweathers of the world should probably add in a protective #ad hashtag when they get paid, to avoid liability for securities regulations that are often harsh.

Celebrity Endorsements Leave ICOs Counting Much More than Coins (PDF)

Lyft to Go Public in 2018

On October 19, 2017, Lyft announced that it has managed to secure a $1 billion investment from CapitalG, a growth investment arm of Google’s parent company, Alphabet. This latest round of funding is expected to help the San Francisco based company prepare for its IPO in 2018.

Before the investment was made, Reuters reported that Lyft was already close to hiring an IPO advisory firm to concretize its step of becoming publicly listed. The New York Times reported that the company has also had discussions with investment banks about becoming a public company, but hasn’t decided which bank will lead the IPO.

As the second largest ride service company in the United States, Lyft’s IPO could benefit a broad and diverse group of investors. Before CapitalG’s investment came into play, Lyft had already raised more than $2.6 billion since its founding. Such investments came from numerous venture and corporate investors, including General Motors, Alibaba, and a Saudi Prince, Alwaleed Bin Talal.

Earlier this year, Uber had already expressed its intention on going public as well. Dara Khosrowshahi, Uber’s new CEO, set a tentative timeline for Uber’s IPO. The IPO is projected to take 18 to 36 months from when Khosrowshahi stated the new timeline last August. In the meantime, the CEO aims to focus more on recovering Uber’s image from a range of scandals, as well as its $3 billion loss last year.

Since Lyft does not have to deal with those sorts of issues, it may find it simpler to list sooner than its larger competitor, Uber. Nonetheless, whichever company has its IPO first will set a benchmark for the valuation of a ride-hailing company and test the belief of many auto industry insiders that individual auto ownership will wane as people will sell their cars and rely on ride share services.

Lyft to Go Public in 2018 (PDF)

Waymo-Uber Sizzles Before Boiling

Alphabet, the parent company of Google and self-driving pioneer Waymo, has faced another setback in its lawsuit against Uber. Judge William Alsup, the Clinton-appointed judge of the Northern District of California, ordered Waymo to strike one of its trade secret claims, leaving it with only eight claims against Uber. Alsup has whittled Waymo’s claims down from 120 trade secret claims at the start of the lawsuit. Waymo is claiming $2.6 billion in damages and seeks permanent injunctive relief in the area of self-driving cars.

The lawsuit, which began in April of this year, involves the design for a custom LiDAR system. Anthony Levandowski, a former Google engineer who worked on LiDAR while at Google, had started a self-driving truck company called Otto, which popped eyeballs when it was acquired by Uber for $680 million with only prototypes and a mere seven months after its founding. Levandowski, who is started a church dedicated to a yet-to-be-built AI deity, was put in charge of Uber’s self driving car initiative, though Judge Alsup has banned Levandowski from working on any LiDAR systems for the duration of the trial. The lawsuit began when a Waymo employee was inadvertently copied on an email from a LiDAR supplier to Uber with designs that were eerily similar to the custom systems Levandowski designed while at Waymo.

While observers have been gripping their seats for the duration of the trial, this is a surprising setback for Waymo. Aside from an early victory in defeating a temporary injunction limiting R&D of autonomous vehicles, Uber has been hit with several roadblocks in the trial. It has been forced to produce its due diligence report of Otto, which suggested that Uber knew Levandowski had stolen trade secrets from Waymo (though, to their credit, told him to delete it); been accused of shredding files; and penalized for its aggressive discovery tactics. Nonetheless, Judge Alsup has suggested that Waymo likely has a stronger case against Levandowski, not Uber, though only the jury trial in December will tell.

Tech has been buffeted by several consequential lawsuits between giants in recent years. Apple and Samsung have been at arms over several design patents, sparking the so-called “smartphone patent wars,” with the $400 million lawsuit even reaching the Supreme Court. Apple is also currently locked in a significant lawsuit with Qualcomm, which claims Apple stole some of its chip designs. In 2012, Oracle and Google were locked in a lawsuit over Java APIs that was also seen as highly consequential for the industry. Oracle v. Google was also adjudicated by Judge Alsup, who became a tech industry folk hero by learning how to code in Java to understand the lawsuit.

Waymo-Uber Sizzles Before Boiling (PDF)

Broadcom’s Proposed Purchase of Qualcomm for $105 Billion

Revealed on Monday, Broadcom Ltd. has made an unsolicited bid to buy Qualcomm Inc. for approximately $105 billion. Broadcom’s bid for Qualcomm offers $70 per share in cash and stock: “$60 a share in cash and $10 a share in Broadcom stock.” The takeover would include Broadcom’s assumption of $25 billion of Qualcomm’s net debt, culminating in a total value of the takeover at $130 billion. The bid presents a 28 percent premium on the closing price of Qualcomm’s common stock on November 2, 2017.

This proposed deal is being classified as the “biggest takeover in the history of the technology industry.” Aside from this deal, both companies are in the process of attempting to acquire other technology companies. Broadcom, a semiconductor maker, is in the process of acquiring Brocade Communications Systems Inc. Qualcomm, the mobile phone chip maker, is in the process of acquiring NXP Semiconductors. Broadcom maintains that it will proceed with acquiring Qualcomm despite the result of the pending NXP Semiconductors transaction. A successful combination of Qualcomm and Broadcom would result in a technology giant that would be responsible for products incorporated into “nearly every smartphone in the world.”

It is anticipated that Qualcomm will reject the bid, as it views the price as undervaluing the company and taking advantage of Qualcomm’s difficult fiscal year and current legal disputes. Qualcomm has experienced an 18% decline in its stock price over the last year and has been embroiled in a legal dispute with Apple regarding patent royalties. Qualcomm will likely advise shareholders to reject the offer and to keep Qualcomm’s current management in place.

In the case that Qualcomm rejects the current offer, Broadcom may engage in a proxy battle to complete a hostile takeover and gain control of Qualcomm. Broadcom has until December 8, 2017 to engage in the proxy battle and move forward with a hostile takeover of Qualcomm.

Broadcom’s Proposed Purchase of Qualcomm for $105 Billion (PDF)

Emmanuel Macron makes bid for Silicon Valley on the Seine

Frances’s 49 year old president, Emmanuel Macron, is betting high on the development of startups and new tech businesses in France and it’s starting to work! As a result, France´s tech sector is becoming more and more attractive to entrepreneurs that were once discouraged by the countries rigid labor laws and high taxes.

What Macron’s government is trying to do is improve the chances of startup companies in becoming worldwide leaders.  “I want this country to become a country of unicorns (private companies valued at more than 1bn)” said Macron at the Viva Tech conference in Paris in June.

By reforming France’s strict labor law framework while injecting state backed venture capital funding, Macron plans to create an atmosphere were France’s great talent in engineering can be directed to create leading billion dollar tech companies. The countries great engineering talent is specially noted in areas such as software, healthcare, deep tech and artificial intelligence.

Even though France still faces great challenges in pushing through the labor market and fiscal reforms as well as creating more next stage investment opportunities, the governments actions are already having positive results.  During this year, French venture funds managed to raise more cash (€2 billion and counting) compared to other leading tech countries in Europe like Germany and Britain.

Where private capital was lacking, government funds have been feeling the void to help jump-start the countries tech sector.  Today, the largest investor in the country is BPI France, a government owned investment bank that has spent more than €4 billion over the last four years in both direct startup investments and funding for local venture funds.

Furthermore, to expand their knowhow in the wider tech world and to incentivize funders to come to France, the state bank also invested in U.S and pan-European venture capital firms. The new “French Tech Visa” that implements a visa program for foreign tech talent is another example that proves how France wants to expand and open their tech environment to the world.

Regardless of the government’s positive intentions to boost France’s tech sector, a valid concern for entrepreneurs in France is that the government’s central role in the industry might upscale into market interference.  Let’s not forget that in 2013, the French government blocked Yahoo’s intention to buy DailyMotion, a French video streaming startup who was then sold to the French media giant Vivendi, for a lower price.

Furthermore, the industries incredibly fast paced growth tends to suggest that state-backed programs and funding are not enough to create successful global tech companies but rather these efforts should be combined with efforts and involvement from the private sector.  Regardless, we can say that Macrons efforts have caught the eye of the industry and we look forward to seeing what France’s tech sector can accomplish during his government.  We might see Paris turn into the next French Silicon Valley.

“All the entrepreneurs who are here today, I want to give you back your freedom but I also want to make you realize that it is an immense responsibility. The world that we currently live in, the world that I want to lead with you, the world in which France is a leading nation, it is a world that cannot share the same values as the world of yesterday.”  Emmanuel Macron VivaTech 2017.

Emmanuel Macron makes bid for Silicon Valley on the Seine (PDF)

CVS and Aetna: First Signs of Amazon’s Effect on the Pharmaceutical Industry

Last Thursday’s report that Amazon has obtained wholesale pharmacy licenses in 12 states has caused a ripple in the healthcare field. Public records indicate that Amazon’s ambitions may include distribution of medical devices. First alleged in May, Amazon’s entry into the pharmaceutical industry would be its second attempt into retail pharmacy. Amazon previously owned 40% of the unsuccessful online pharmacy company, Drugstore.com.

CVS Health is vulnerable to Amazon’s move on both the retail pharmacy and pharmacy benefit manager areas. Unconfirmed reports have surfaced that CVS has submitted a bid to buy Aetna, the third largest U.S. health insurer. A joint CVS-Aetna is expected to leverage patient data to manage healthcare costs, whether in drug price negotiations or customized health plans that encourage use of lower-cost clinics. As a defensive measure, a joint CVS-Aetna would help CVS recover its stock price, which has dropped amid speculation of Amazon’s entry into the healthcare field. Meanwhile, Aetna’s revenue has been affected by Obamacare policies and the company expects to lose $200 million this year. An industry-wide health insurance tax of 3% is expected to affect profits for 2018.

Analysts have noted that Amazon’s move into pharmaceuticals is expected to most affect retail pharmacy chains like Walgreens Boots Alliance, CVS Health Corp., and Wal-mart Stores Inc. However, Amazon has not previously entered into a regulated market and without readily available assets to purchase, building out pharmacy capabilities may prove to be a challenge for Amazon.

Previous reports have indicated that Amazon was hiring an internal pharmacy benefit manager to serve its 128,000 employees. These managers often negotiate with drug makers to obtain discounts and also help patients save by converting them from name brand versions to generic versions. Amazon’s technology and experience in purchasing and inventory management may give them an advantage and eventually serve as a platform when the program is expanded and added to the plethora of other goods and services offered by Amazon.

Express Scripts Holding, the largest standalone pharmacy benefit manager, sees potential in partnering with Amazon. The company indicated that it saw no threat to its business that sold pharmaceutical drugs to cash-paying customers. Most people are guided in their pharmaceutical drug purchases by their insurance plan coverage and such strategic partnerships may be vital for Amazon to enter this market. Regardless of how this plays out, Amazon’s entry is likely to shake up the pharmaceutical drug distribution business.

CVS and Aetna First Signs of Amazon’s Effect on the Pharmaceutical Industry (PDF)

Privacy, Antitrust, or Utilities? Finding the Best Way to Regulate Big Tech

In the face of the increasing economic, cultural, and political influence of big tech companies, there is a growing sentiment that the ‘Frightful Five’ (Amazon, Apple, Facebook, Google, and Microsoft) need stronger government regulation.

When you consider Facebook’s recent revelation that Russian entities purchased ads to influence American political opinion and myriad examples of the use of social media to radicalize individuals, it is becoming increasingly clear that big tech firms have created the means to do immense harm, all the while still raking in immense profits. British Prime Minister Theresa May and the EU feel that “enough is enough” when it comes to the freedom of big tech companies, but does Washington feel the same?

One New York Times author, Farhad Manjoo, writes that it is unlikely that the growing cultural influence and marketplace dominance of big tech companies will be effectively combated by Washington lawmakers. These companies’ increasing political clout and a lack of consensus among representatives of Big Tech’s potential harms are two main reasons many argue Washington will be unable to curtail the power of Big Tech.

Even if the legislature mobilizes against tech companies, the methods further complicate the issue. Lina M. Khan, a fellow at Open Markets Institute (a liberal think-tank that opposes concentrated corporate power), argues that our antitrust laws are out of date. Because antitrust legislation is focused on punishing corporations for unfair prices, tech companies (who typically offer their services at little or no cost) are overlooked by regulation. Khan suggests that modernization of our antitrust laws could be an effective solution.

On the other hand, EU lawmakers are demonstrating a willingness to crack down on big tech companies, using both current and future legislation. After fining Google $2.7 billion in June for violating European antitrust laws, regulators have also chosen to implement new privacy laws to combat tech companies’ misuse of consumer data. Beginning in 2018, EU data protection authorities will be permitted to slap fines of up to 4 percent of a company’s worldwide revenue for violations of new privacy rules approved by the European Parliament.

A unique solution is to regulate tech firms like utilities. This method would treat the Frightful Five like monopolies that provide essential services. In this scenario, users would not only be given more control of their information by retaining the choice of whether to sell their personal data to advertisers, but would also profit by providing advertisers with access to their information.

Though big tech companies have generally experienced tremendous freedom from government oversight thus far, legislatures around the world, recognizing the cultural, economic, and political implications of allowing tech companies free reign, are trending towards imposing control on how big tech companies influence our society. Whether through antitrust legislation, privacy laws, or more creative alternatives, tech companies should prepare to brace themselves for stricter regulation.

Privacy, Antitrust, or Utilities Finding the Best Way to Regulate Big Tech (PDF)

Recap: “BCLBE Leadership Lunch Talk: So You Want to be a General Counsel?

On October 30, 2017, the Berkeley Center for Law, Business and the Economy (BCLBE) welcomed Erika Rottenberg, a Boalt alumni who is on the board of both Twilio, a leading cloud based communications platform, and Wix.com, a leading cloud based development platform, for a talk and Q&A with the law students regarding the practice of law as a general counsel, what a general counsel does, and the differences between being a general counsel and an in-house lawyer.

Besides being on the board of two companies, Mrs. Rottenberg is also a mentor to women, executives, young professionals and students, and advises companies that are scaling globally, particularly in matters evolving global privacy, data security and corporate arenas. Beforehand, she was a very successful general counsel at LinkedIn, and also served as a Consultant of SumTotal Systems and as Vice President of Strategic Development and General Counsel at Creative Labs Inc. During the beginning of her career, she was an attorney at Cooley Godward, practicing corporate and employment lay.

When asked about how she became a general counsel, she mentioned how it is almost the traditional path for law students to leave law school and go to work in law firms. She got a job in Cooley Godward straight after law school, but after a few years decided to change her career and go to work in-house in LinkedIn. Concerning this change, she mentioned how even though she did not have the knowledge in technology matters, she did not want to be just a lawyer at a firm, but rather be part of the business. For Mrs. Rottenberg, if you are a great in-house lawyer, you do not simply give legal advice, but rather become a business partner.

When talking about the difference of environment that is to work in a law firm and a big company, Mr. Rottenberg mentioned how in a law firm, the entire company revolves around the lawyers. On the other hand, on a company such LinkedIn, lawyers are on the expense side, and newcomers need to be aware of the necessity to be humble and accept that engineers and entrepreneurs will be much more on the center of the company’s attention.

Mr. Rottenberg also advised on how it is crucial for lawyers building their careers to always say yes to a project, and to take advantage of any opportunity to rotate around several areas of law. Furthermore, she talked extensively on how important it is for law students and young professionals to know how to make requests and how to be insistent in the appropriate manner in order to achieve their goals. Additionally, she mentioned how young lawyers should not be afraid to apply for opportunities even if they don’t meet the minimum requirements for the position, because what the hiring part is actually looking for is someone who will be productive and helpful.

Recap BCLBE Leadership Lunch Talk So You Want to be a General Counsel (PDF)

Facebook, Twitter, and Google Testify about Russia Meddling

This week, Facebook, Twitter, and Google testified before the House and Senate Committees about Russia’s interference with the 2016 election.  These hearings revealed that an estimated 126 million Americans were exposed to content disseminated on Facebook generated by a Russian government-linked Troll Farm.  During the hearing, lawmakers asked pressing questions about why it is so easy to spread misinformation on their platforms and how these companies plan to protect their platforms against use hostile to U.S. values.

These social media companies and Congress seem to agree that online political ads require greater oversight, though there is disagreement regarding whether internet companies can adequately self-regulate these ads.

For years, the government has given online companies much freedom for innovation and growth, with little government interference.  But the recent Russian investigations have opened the door to increasing congressional discussions about regulating online advertising.

Republicans and Democrats complain that it has taken Facebook a year to reveal how many Americans were exposed to Russia-linked content, and that Facebook, Twitter, and Google do not grasp the threat that foreign election interference poses to U.S. democracy. Accordingly, House and Senate bills are calling for greater regulation of online political ads. Three senators have introduced a new piece of legislation called the Honest Ads Act, which would require online social media companies to disclose who is buying political ads on their platforms.

Social media companies have an interest in keeping the government out of their business, and are therefore resistant to invasive regulation. Facebook and Twitter have taken pre-emptive steps to prove their ability to self-regulate.  Facebook revealed its plan to invest more in safety and security and to require political advertisers to disclose more information about their campaign and targeted audience.

While social media platforms are critical of government regulation, lawmakers also do not want to hamper innovation.  Accordingly, the proposed bills are very light, only targeting political ads.

Facebook, Twitter, and Google Testify about Russia Meddling (PDF)