Facebook: Grow up and Smell the Carnage

A little knowledge is axiomatically asserted to be a dangerous thing; let me be dangerous.  Here is an excerpt from a blurb received today via the National Association of Corporate Directors (a great organization; disclosure: I am on the New England chapter board):

“A bipartisan group of lawmakers called on regulators to overhaul the way initial public offerings are conducted,” reports the Wall Street Journal(June 21, Eaglesham, Demos), “concerned that last month’s flubbed stock sale by Facebook Inc. shows the current system unfairly punishes small investors.” In a letter to SEC Chairman Mary Schapiro, Rep. Darrell Issa (R-Calif.) urged the agency to revamp rules for pricing and disclosure in IPOs. Separately, Sen. Jack Reed (D-R.I.) — the Democratic chairman of a subcommittee of the Senate Banking Committee — publicly stated that regulatory changes are needed to boost investor confidence sapped by the social networking giant’s botched debut. According to the Journal, “the prodding from lawmakers puts pressure on the SEC to rev up its scrutiny of the Facebook deal. Officials are examining technical glitches on the Nasdaq Stock Market that caused chaos during the stock’s first day of trading that left some investors unsure of how many Facebook shares they owned — and at what price.” In addition, the agency is reportedly investigating whether the underwriters broke any rules by allowing warnings from research analysts about Facebook’s business prospects to be passed along to handpicked clients, but not the general public.”

SO–let me see if I understand.  The primary complaint is that trading glitches prevented avaricious short-term investors from effectively flipping the stock for a quick profit.

They were prevented from doing so with respect to a stock so grossly hyped that every person who was awake and read a newspaper, a magazine or a blog knew that it was volatile at best and possibly very overpriced.

The conclusion being reached is that one class of investors, the small public investor (who likely could not get his hands on the stock at $38 anyway) was prevented either from buying the stock or flipping the stock for a quick profit.

Rep. Issa, the putative champion of the little guy, thinks we need laws to prevent this.

What one needs here is either a repeal of the laws of human nature or, alternately, an anti-capitalist mandatory substantive review of public deals to both attempt to mark them to market and to make sure that retail investors are denied access (rather than encouraged).  But that would be anti-American.

As I write this, Facebook is under $32; it came at 38 and its high was 45.  Who should be investing in this stock?  Who shoud be allowed by law to invest in this stock?  Is this stuff that the Congress should care about?  Pass MORE regulation, driven by people who at the same time decry over-regulation of our capital markets?

Maybe it is time to grow up.  Capital markets are extremely risky and depend on some people being smarter and quicker than other people.  Retail investors by and large will not be among the smarter and quicker.  They lose and under our system they must play so — grow up and live with it.

SEC Acts on Compensation Committee Regulation

Today the SEC announced final rules concerning compensation committees of public company boards of directors.  This action is a mere two years after being mandated by the Dodd Frank Act and demonstrates the struggles of the SEC in keeping up with its regulatory agenda.  That having been said, the content of the final rules is not startling.

Basically, securities exchanges now must establish listing rules that traded companies must comply with, requiring a wholly independent comp committee with the power to hire and totally control compensation consultants; companies must agree in advance to foot the bill.

Proxy disclosure amendments require indication of conflicts of interest between the consultant and the company and management, and how the conflict is being addressed; proxy disclosure already elicits details about the use of consultants, payment of fees, etc.

Many but not all public companies use consultants; while it is clear that using consultants is not sufficient alone to discharge fiduciary duty, the data provided by consultants and the discussion of variables is strong evidence of diligence and care.  Some large companies do not use consultants as a matter of practice, but the burden of going against a de facto best practice is heavy.

Those who decry creeping regulation through the securities laws as a drag on entrepreneurship and job creation, and who react negatively to the web of regulation contained in Dodd Frank, will have more evidence to point to.  But the new rules are not a significant added burden to the already existing practices of most companies.  The real game is the loss of the older practice of the board fixing compensation in its own judgment and not having to explain it to anyone.  And today, even with a comp committee and consultants, poor performance in stock price will foster resistance to the board from shareholders and problems with ISS.

The real problem of course is driven by human nature.  In fixing compensation of C level executives, what board member is content to say that his or her executive is just average in skills, or even below average (someone HAS TO BE below, mathematically)?  Does the disclosure say “Your board decided we have and want to keep an average CEO and pay him the market average, we think the board discharges its duty to you in this regard by providing mediocre pay to a mediocre president”?  Not hardly likely.  Boards want to think, and do think, they have gotten someone above average, at least.  Everyone ends up being perceived as above average.  The pay scale increases to make a new, higher average.

These are not human dynamics that can be cured by disclosures and by preventing conflicts of interest.  Unless the unthinkable is thought of (regulation by government or quasi-governmental institutions of actual executive pay), it will continue.  Again, a failure of regulation to rein in human nature.

It remains good to be king.  And to be a C level executive.

News: Criminal Law System Totally Useless?

Criminal law addresses several issues with assumed results.  It addresses the need for fairness and closure by punishing disfavored behavior.  It addresses the need for moral retribution in the same fashion.   It is supported by lawyers and lawmakers as having prophylactic effect, preventing crimes from happening because people are fearful of punishment; this utilitarian argument is most favored by legal folks who are thinking about law, as opposed to abstract fairness, moral values or satiating a lust for revenge.

Unfortunately it seems that laws may not prevent people from doing evil after all.  I do not know where that leaves us because intuitively it just feels wrong to say, hey criminal laws do not have impact so let people do what they want, we can save lots of money on the court system and on cops and jails.

I thus eagerly await June 5, when Harper-Collins publishes “The (Honest) Truth About Dishonesty: How we Lie to Everyone–Especially Ourselves.”

One can quarrel with the book’s pop-culture title and its grammar, but the author is a credentialed behavioral economist (they write the very best books, don’t they  –all those statistics that just disprove  everything we ever thought) who says that probability of getting caught has “no effect” on the occurrence of dishonest behavior. If that be true, then criminal laws therefore will exist only for much-maligned reasons: enforcement of subjective or moral values, or revenge.

We have long recognized that certain crimes of passion are not prevented by criminal law: the domestic dispute, the Jihadist, the withholding of tax dollars that go to support the military, .  No one seriously contends that these folks are impacted by the thought of jail time.

Bernie Madoff clones are particularly hard to think about in these terms.

But it seems there is a lot of experimental support for the proposition that dishonesty is controlled by things like “honor pledges,” placing signatures at certain positions on documents, moral reminders, and simple supervision.  And interestingly, there is indication that increased amounts to be stolen may, for the vast majority of people other than hard core crooks, actually decrease dishonesty; apparently you can rationalize stealing a dollar while considering yourself a fundamentally good person, but somewhere up the line most people don’t feel comfortable taking a really large sum.

Now, whether the experimental techniques used by the researchers (asking college students questions that afford them the chance to cheat, lie and steal if they so choose) have analogy to harsher and more raw factual situations, and whether the lack of criminal laws will turn loose the very small percentage of truly evil people in the world against whom we need protection, is likely to prove a philosophical question (at least until some economist begins to think about it).  But the idea (which by the way I have extrapolated, it seemingly is not the thesis of the book itself) that much of our criminal system is a waste of time is pretty startling, and worthy of a closer look when the no-doubt overpriced hard cover edition hits the streets.

I pause to express confusion about one aspect of this implied result.  There are indeed physically dangerous people in jail.  Pathological killers, sex offender recidivists, etc.  Perhaps since by definition the criminalization of their offenses is just the rubric for locking them up, we need another category of confinement,  which will capture these folks for us; and perhaps that new nomenclature will foster new thinking about treatment of these people, if they cannot be dismissed as “criminals.”  I am discomforted mightily by spending a lot of societal capital, in time and money, to address this aspect of the issue, but perhaps doing so is the measure of an increasingly humane approach to incarceration.

It sure does get complicated and I am sure I am leaving a trail of half-thoughts and logical lapses in my wake here.

Perhaps I can ask the publisher to comp me under the guise of my posting a blog about the book.  Now that I know that getting caught isn’t going to hold me back, there is nothing standing between me and a free Kindle download.  Don’t you just love economic analysis?

Facing a Dying Nation?

I am reminded of the lyrics from Hair as I read the New York Times account (May 17) captioned “Whites Account for Under Half of Births in U.S.”  There is a tinge of fear in the reporting; fear that our social compact cannot ultimately stand the strain fifty years down the road.

Are we in fact:

“Facing a dying nation
Of moving paper fantasy
Listening for the new told lies
With supreme visions …”?

The question is particularly focused from the Boston standpoint; a segregated city without a real societal plan to bridge the gap.  That 92% of U.S. population growth in the past decade came from Hispanics, blacks, Asians and persons of mixed ethnicity seems not believable from where I stand —  which of course is a measure of the issue.

The article worries whether the white de facto majority (today and in the near future) will be willing to actually pay the tab for educating a mass of children who do not look like that majority.  The article offers the self-satisfied assurance that the U.S. is better off than many European-based societies because at least we have a surge of young people to drive the economy and support the aging white population;  one expert is quoted:  “If the U.S. depended on white births alone, we’d be dead.  Without the contributions for all these other groups, we would become too top-heavy with old people.”

What is NOT said by the article or the quoted experts is the inverse of the worry that aging rich whites will not pay to educate the alien young.  What is NOT said is that the alien young will not pay to support the old age of the alien old.  Seems to me both stand-offs are plausible if we do not bridge our inbred prejudices, and fast.

In a world where Breivik blows away 77 people in Oslo and Zimmerman blows away one kid in Florida, in a world where on this morning’s drive time news we hear that a bunch of cops drill a 15 year old with a spray of bullets after the kid knifes the cop, in a world where just about every country or area seethes with the detritus of what must be a fundamental human condition —  the instinctive initial recoiling from “the other” — in a country which in the words of the Times “has wrestled mightily with issues of race, from the days of slavery, through a civil war, bitter civil rights battles and, most recently, highly charged debates over efforts to restrict immigration,”  it strikes me that we need to do a lot of work  and deal with a lot of backwards slips if the U.S. is going to pull this one out of the fire.

The American Challenge for this century may not be forestalling economic decline; it may be just surviving as a political entity that provides a predictable and adequate life style to a reasonable number of the people who happened to find themselves within its borders.


At the May meeting of the New England Chapter of the National Association for Corporate Directors, the subject was that time-honored question: “what keeps the directors up at night?”  As it turns out, an awful lot.

A spirited panel included Ken Burnes (lead director at State Street), Ralph Verni (board chair of Eaton Vance Mutual Funds) and Kim Williams (professional director who among other posts serves on the Weyerhaeuser board).

The program started with a leading survey which contained a predictable list of “the top five”: executive compensation, board role in corporate strategy, CEO succession, board role in strategic management, and director recruitment.

The things that worried the NACD panel were, however, far broader.

  • Do risk committees (or their equivalent) adequately identify risk?
  • Is a company protected from cyber-attack in an age which is seen as encouraging a growth in corporate espionage?
  • Is the high rate of pay in private companies disincentivizing proper staffing of public companies, where public comp is under intense scrutiny?
  • In manufacturing companies, is capital made sufficiently available to drive both internal needs (for safe operating conditions) and external needs (emissions control, tsunamis, weather catastrophes)?
  • Do directors sufficiently understand the company’s business and competitive climate to provide requisite guidance?

Much of the discussion circled back towards risk assessment.  It was noted that management always thinks that everything is under control, and it is the task of the board to dig deeply.  Directors were urged to “ask the stupid question” when they do not understand.  Other ways to make sure that boards are adequate to their risk assessment task include providing wide diversity of backgrounds on the board so as to spark discussion and understanding, and embracing current trends in board recruitment which look for specific skill sets to complete board’s skill requirements.

From a lawyering standpoint, I note that there was no discussion whatsoever of certain areas in which we lawyers know that much litigation against directors arises: nondisclosure of allegedly material information contemporaneously with a substantial drop in stock price; accusations of self-interest or lack of care in connection with acquisition transactions; lack of appropriate oversight of corporate affairs in a variety of areas including but not limited to the Foreign Corrupt Practices Act; the entire range of what lawyers call the Caremark duties of general supervision of corporate operations.

The Supreme Court: Healthcare, Immigrants and Killer Teens

On a recent visit to Boston, Attorney Steve Shapiro (General Counsel to the American Civil Liberties Union) outlined matters before the Supreme Court today, or likely to arise in the coming 2012-2013 session.

I.    Obama – Care

The gorilla in the room is litigation concerning the healthcare law (designated derisively by some as “Obama Care” but we in Massachusetts really know it more by its original name: “Romney Care”).  In an unprecedented move, the Court extended its usual one hour argument time by a factor of six in order to hear arguments on specific issues posed by the Court itself:

  • Is the case ripe to be decided today since most of the provisions, including the requirement to obtain health insurance (the so-called “individual mandate”), don’t take effect until 2014?
  • Since the IRS can collect the penalty for violating the individual mandate only by offsetting tax refunds, and since there is an established rule of law that you can challenge a federal tax provision only after the tax is paid, will it ever be possible to challenge the law from the “tax” standpoint?
  • Can a citizen be forced to buy a commercial product such as insurance?
  • If the Supreme Court strikes the individual mandate, what other parts of the law if any are so inter-related that they must also be stricken?

Why is the Civil Liberties Union interested in the healthcare law, bearing in mind it is not overtly a civil liberties statute and the ACLU has taken no position as to whether the healthcare law is wise legislation?  The reason has to do with Commerce Clause of the Constitution; the ability of the Federal government to pass the healthcare law is dependent upon whether such legislation fits within the constitutional grant of authority to the Federal government to regulate interstate commerce, and a broad reading of the Commerce Clause of the Constitution is necessary in order to support a variety of civil rights legislation which is similarly premised.

Shapiro noted that there is political pressure on the Supreme Court to decide this issue now, regardless of the technicalities as to whether it is “ripe.”  As to the question of whether the case is appropriate for decision where the “tax” has yet to be collected, Shapiro points out that the Administration has firmly taken the position (requisite in the current economic climate) that the IRS-collected penalty is simplynot a tax.  Indeed, its collectability is only as an offset from otherwise government-owed refunds which may never arise.

Whether a citizen can be forced to buy insurance is fascinating.  It seems clear that State governments could in fact impose such a requirement, because it is an exercise of the general police powers.  But the Federal government only has those powers which are expressly afforded to it by enumeration in the Constitution.  All other powers are retained by the people and the States.  Thus for example, the similar Massachusetts Healthcare Law cannot be attacked on the ground of lack of government authority.

In a way it is therefore a shame for the Administration that it has claimed that the penalty is not a tax, since the Federal government clearly is entitled to levy tax pursuant to the Constitution.

Challengers to the law say that the Commerce Clause cannot support the legislation.  It may be true that if an individual chooses to buy health insurance he then participates in the interstate commerce business of the healthcare system.  But, say opponents, the statute is focused on individuals who do not buy health insurance and, consequently, uninsured individuals subject to this law are by definition notinvolved in interstate commerce relative to healthcare, as they do not participate.  The government counters by saying that in fact all Americans participate at some point in time, this is a matter not of “if” but simply “when.”  If someone who is not insured requires healthcare, and he does not have insurance, by law he cannot be denied medical care and ultimately that care is paid for by all Americans as part of the interstate commerce of healthcare.

Shapiro noted that two popular provisions of the healthcare law clearly are within the constitutional powers of the Federal government: that insurers cannot deny coverage for pre-existing conditions, and that insurers cannot increase charges for insurance based upon one individual’s health history.  Since the Constitution grants to the Federal government all other power necessary to effect otherwise constitutional actions, the individual mandate perhaps can be backed into a convenient parking space of constitutionality through this argument, without reference to the Commerce Clause.

Query: let us say it is true that the Federal government can require an individual to buy health insurance because the Federal government supports a national healthcare system which in turn is part of interstate commerce.  Does that also mean the government can require all citizens to buy a General Motors car because we bailed out GM?  Shapiro suggests that the issues are analytically the same but the political ramifications vastly different.

How will the case come out?  As in the past, Justice Kennedy is thought to be the key.  But the general thinking is that if the healthcare law is to be stricken, the vote will be five to four.  If, however, there are in fact five votes to retain all aspects of the law (that is, if Kennedy votes in favor of the law), then the vote is liable to be six to three.  Why is that?  Because at that point the Chief Justice is expected to vote to uphold the statute, because then the Chief Justice will be entitled to write the legal opinion, and he would want to write the legal opinion in the narrowest possible terms.

II.  Immigration

The second leading and as yet undecided case before the Supreme Court is the Arizona “show me your papers” law which requires the police, upon any otherwise permissible detaining of a person (including for example running a red light), if that officer also has a “reasonable suspicion to believe” that a person is in the country illegally, to ask the detainee to prove his legality (green card or some such).  If you cannot, you are to be taken into custody and a call placed to Immigration.

The key question here is the basis for “reason to suspect” that someone is in the U.S. illegally.  Shapiro’s position is that this is an open door in Arizona to racial profiling to accomplish Arizona’s overtly articulated goal: attrition through forced immigration of minorities out of the State.

The fight over the Arizona Immigration Law is the exact reverse of the fight over the healthcare law: the cases are mirror images.  Why is that?  It is again a question of who has authority to take action.  Under the healthcare law the question is whether the Federal government has authority to act under its constitutionally specified powers (the Commerce Clause).  In the Arizona “show me your papers” case, the question is whether the State has the authority to take any action with respect to immigration which is clearly a primary Federal function.

Opponents of the law say that immigration is a Federal matter and the States are preempted from acting upon it.  And here the issue is compounded by history.  Historically, immigration indeed was a Federal prerogative both in terms of articulating the law and enforcing it.  In the last Bush Administration, the President’s legal office stated that the Federal government could share enforcement of Federal policy with the States, and that the States therefore could have concurrent authority.  The Obama Administration, although urged to reverse this position, declined to do so.  Consequently the Obama Administration now cannot maintain that the States have no power whatsoever to enforce in the area of immigration.  Now the Obama Administration is therefore required to take the following position: States cannot enforce Federal immigration laws inconsistently.  The response of the State is obvious and based on the facts:  “we do in fact consistently enforce.”

Shapiro suspects the Supreme Court may indeed uphold the “show me your papers” portion of the Arizona Immigration Law (other provisions clearly will fall), but will still leave open the issue of discriminatory application.  And in that regard, there ultimately may be a victory for the opponents of the law; business and agricultural interests in Arizona (and similar States that have adopted similar laws) have realized that clamping down on immigrants is bad for business, and the political will to enforce the law in a discriminatory manner may well have dissipated.

III.    Murderous Children

More consistent with the kinds of cases with which the ACLU generally deals are two pending cases involving whether imposing a criminal sanction of life in prison without parole, in cases of murder, can be applied to a minor.  The contrary argument is that it is cruel and unusual punishment violative of the Constitution’s Eighth Amendment.  The Supreme Court previously has held that a sentence of life without chance of parole constitutes cruel and unusual punishment for a minor in all non-homicide cases.

At this point two cases are pending under an Alabama law against two fourteen year olds (at the time of the crime), one of whom pulled the trigger in a murder and the other of whom was found guilty of murder under the time honored “felony murder rule” (any participant in a criminal act which is a felony, where that criminal act results in someone’s murder, is himself guilty of that murder).

Shapiro expects that the Alabama law will be determined to be unconstitutional because the Alabama lawrequires a life sentence without parole in such a case.  He expects that the Court will say that the judge must be left with some discretion with respect to sentencing.  Query whether the Court will go further?  Query whether the Court will establish an absolute minimum age with respect to which a life without parole sentence will always constitute cruel and unusual punishment.  Conveniently in the argument before the Supreme Court in the two Alabama cases, lawyers for the minors claimed that the appropriate absolute minimum age is fifteen while the State of Alabama claimed it was thirteen, artificial line drawing with respect to two defendants who happened to be fourteen years old.

IV.    Congressional Medal of Honor

Other interesting cases this term include:

United States v. Alverez (a pending case asking whether the statute which criminalizes lying about receiving a military honor such as the Congressional Medal of Honor violates the First Amendment right of free speech); and

Two decided Fourth Amendment search and seizure cases (United States v. Jones asked whether the police with no warrant can put a GPS tracking device on your automobile, answered in the negative by this Court in a rare nine to nothing decision; as compared to Florence v. Board of Freeholders, which asked whether a New Jersey jail can routinely strip search each person held in the jail, no matter how minor the offense and how short the incarceration, an exercise of police power upheld by a five to four vote).  Shapiro suggested that the difference between the decisions in the Jones and Florence cases is one of Court “empathy;” the Justices could imagine, and be shocked by, the government putting a GPS device on their own cars parked in the Supreme Court parking lot (they actually asked the government attorney during argument if the government felt it had the power to do so, and received an affirmative response!) while, it was suggested, the Justices simply could not imagine themselves in a position of being stripped and searched because they ran a red light).

V.  Coming Attractions

What is liable to come up in the next term?  (The Supreme Court operates on what is an academic year, the cases start getting heard in the Fall and all must be decided by the following June 30th.)

There is likely to be another case on whether affirmative action is supportable in university admission settings, re-examining the acceptance of such a criterion in the University of Michigan case several years ago.

There may be a challenge to Section 5 of the 1965 Voting Rights Act, which requires States with a history of voting discrimination to obtain affirmative Department of Justice pre-approval of any change in their voting rules (Obama’s DOJ has struck down two such laws, while allowing a change in Wisconsin voting laws without DOJ review because Wisconsin had no history of voting discrimination).

It is likely that California Proposition 8 (defining legal marriage as only between a man and a woman) will come before the Court (the statute had been stuck down by three judge panel of the Ninth Circuit [California] Court of Appeals).

ACLU hopes to bring up the case of Clapper v. Amnesty International, where ACLU raises the Fourth Amendment protection against unlawful search and seizure in a wire-tapping for national security purposes without judicial oversight.  This case presents an anomalous twist: generally you can only challenge United States Federal surveillance powers if you have standing because you have been under surveillance, but under the national securities regime you may well not know that you are under surveillance, and if you ask you will not be told because it is of course a secret national security matter.  This surveillance right was struck down by a three-judge panel of the Second Circuit [New York] Court of Appeals), but the en banc Second Circuit (a conclave of all the judges who sit on the Circuit) was divided six to six.

Finally, it was asked whether any more litigation was liable to reach the Supreme Court out of the Gitmo detentions.  While there is of course no definitive answer, Shapiro noted that at present all detainee cases go to the Federal District Court for the District of Columbia, which has granted the government broad license to detain a wide variety of suspects, and has determined that although a given detention may in fact be unlawful there is no ready remedy because the detained individuals cannot be set free in the United States and the courts cannot compel deportation.

Knock Your Sox Off

Early in this season, I blogged briefly about the pitiful state of the Boston Red Sox who are, if you are not local to Boston, the nearest thing we have to royalty since most of the Kennedys have moved onward.  My dire predictions of doom were promptly followed by the Sox winning five games in a row, which shows how the blogging gods punish anyone who offers a clear position on anything– immediate discredit by example.

But alas, the Sox have lost again, often and terribly, with horrible pitching and a bunch of guys who are lionized around here for hitting .250.   Indeed we have a few fill-ins, people promoted from the minors, who over the short haul show some promise, but you cannot easily replace the guy who almost won the MVP voting with a rookie and expect to win ball-games.

Today a friend called to my attention a post by Pete Abraham of the Boston Globe staff.  (Blog posts must be brought to my attention; I write but do not read, a set of habits that bodes ill for my journalistic future, but that is another issue.)  Abraham notes that since last September 1, which comprises the equivalent of more than a third of a whole season, our pitching staff has an ERA of about 6.  During this time, the team has won only 19 of its last 56 games.

If you look today, you see that we are in last place in our division.

What to do?  My thought was, wait for the return of our injured players (we have $78M of talent on the DL, including two outfielders, our third baseman and our closer).  But no team can win by giving up 1.50 WHIP (that is, one and a half walks and hits for each inning).  So we need pitching (pretty clever of me, eh?).

We await the return of Dice-K from Tommy John surgery.  Will that help?  Who knows? Dice-K had a couple of good years and a couple of bad ones; he is stubborn, and also (not that it matters, but…) no fun to watch.  But we cannot expect he will bring iron to the rotation.

Abraham says we ought to trade for good pitching which means trading good position players.  He notes that in 2004, that season of blessed memory, we traded Nomar and shook the team into the World Series.  Let us say that is a good idea; who do you trade?  Assume no one is untouchable.

You have a choice; trade young guys and become the NY Mets of a couple of years ago.  We have a couple of young guys doing great right now.  Sweeney is hitting .360 in 25 games; he actually is not so young, been up in the Show a few years and last year got into over 100 games and hit a mere .265, but he sure looks good today.  Middlebrooks is hitting .409, but that is only over 5 games and while he has had a pretty good minor league career he has had only a handful of AAA games.  Others deep down in the system?  Maybe, but not sure there is gold there; I do not follow our depth charts.  Our much touted shortstop phenom who some in the press wanted to keep with the Big Club and start at short in favor of Aviles in hitting around .200 at Pawtucket and does not seem like much trading bait at this juncture.

Trade older guys on the major league roster?  Maybe not a bad idea. Shakes things up. But who?  Big Papi?  Big nerve to trade him.  Youk?  Popular idea in the press but, in the stands?  And right now he is not in the best position to be traded, some have suggested we put a fork in him (although that is likely an over-aggressive criticism).   Ellsbury?  No doubt high value but frankly he is the most exciting player we have.  Pedroia?  Wow.  Gonzalez?  Hard to say what to do.  Compared to these choices, Nomar was easy.

I think the Sox should forget this year and draw up a “rebuilding plan” that excludes old guys and trades for young pitching talent.  I don’t see them pulling it out of the fire this year.  Not sure, either, that the current management has it in them to rebuilt with the average loge seat costing almost a hundred bucks, guts-wise or skill-wise.

Now why have I taken so pessimistic a view?  I will tell you: it is part of my scheme to have the Sox finish first this year.  As soon as I write that X will happen, we get Y happening.  Having predicted doom, we will no doubt win fifty in a row.  I have tickets for this Saturday and again this coming Monday.  I hope to see my first Fenway-attended win by the Sox since early last August.  I will report.  Well, I will report if we win….

And meanwhile, the Newton South Little League AA Brewers are doing great this season.  This really young catcher is pounding the ball, sets up well with a big target, is learning to get the ball to second base.  Clear the roster for him if you will.  Matthew Honig is his name, and he looks a hell of lot better than the current Sox line-up, and can be had for a few sets of Legos on a long-term contract basis.

US Life Science: Left to our own Devices?

The other day at UMass Boston, MassMEDIC (the trade organization of Massachusetts medical device companies) held its 16th Annual Conference.  It was well attended, and my prior blog post reported Covidien CEO Jose Almeida’s comments for the advancement of the United States medical device industry.

Another speaker, Yair Holtzman, is a director at WTP Advisers of White Plains, New York, where he focuses on business advisory services to the life science industry.  A CPA and MBA, Yair ambitiously traced the current and future states of R&D in device development.  Let me take a stab at summarizing the high points.

In the past, the United States has been dominant in the medical device market through a combination of its head start with a large number people working within the field, deep expertise, entrepreneurial investment, a robust middle class that drove medical device advances, and a group of patients who could afford to be price-insensitive when it came to buying medical services.  A large number of hospitals, and the leadership of the FDA in device safety, didn’t hurt.

International R&D, as many have noted, is greatly increasing.  Reimbursement has become an issue in the United States, creating concern for ROI that can be derived from R&D efforts.  Added pressure was placed on U.S. ROI for many other reasons, as outlined by Covidien’s Almeida (see the May 1st post).  China and India have growing middle classes and growing expertise; they may well develop medical device products and not even bother to have them cleared in the United States.  Approval of devices in Europe takes half the time of FDA review; Brazil, India and China are becoming very entrepreneurial and are attracting substantial investment.  Germany and Israel have substantial medical device expertise.

For these reasons the United States, historically a leader in the production and consumption of medical device advances, may find itself left behind the rest of the world.

Joining the cacophony in criticizing the Affordable Care Act, which in 2013 will assess a 2.3% excise on the gross income of medical device companies regardless of whether or not a profit has been made, Holtzman anticipated that the effect would be “devastating” and urged that the excise be repealed.  Also in order is a reinstatement of the R&D tax credit, which expired at the end of 2011.

What else must be done in the future?  First, greater speed and predictability must become part of the FDA approval process.  Second, a continuation in the trend to reduce R&D costs through joint ventures and through “farming out” R&D functions must continue.  Third, the industry must recognize certain trends in healthcare: mobile health, personalized medicine, economic efficiency demanded by patients and their reimbursers, and the need for disruptive technologies which will create a paradigm shift in costs and outcomes.  Analytics to demonstrate both health and financial outcomes must become part of device development.

Holtzman observed a trend in the United States to develop incremental products, as opposed to developing disruptive technologies through R&D expenditure, with the “disruptive” perhaps more likely to be generated offshore.  This development is not beneficial to U.S. industry, to say the least.

Holtzman also noted that many VCs are establishing offshore presences, including in Israel and Singapore.  Hopefully some of his recommended changes (at the FDA and in tax policy) will again make domestic United States venture investment in medical device companies attractive, but Holtzman added that his firm has success in identifying grants, state credits and local incentives, as well as joint venturing approaches, in order to drive down R&D costs, speed development and thereby improve ROI.

Interestingly, Holtzman’s remarks also reflected an anomaly which was apparent upon analysis of several recent life science conferences (not just medical devices).  On the one hand, the FDA is praised as setting the standard for review of medical technology which is emulated around the world, and which is one basis for historical American primacy in these markets; on the other hand, the FDA now also is criticized as one of the primary causes of the United States slipping behind the rest of the world.

How Covidien Sees the Med Device World

In conjunction with Mass MEDIC’s 16th Annual Conference, Jose Almeida, who is chairman and president and CEO of Covidien, today put forward a roadmap for what has to be done to retain the United States’ primacy in the medical device field.  Apparently Almeida spends a lot of time thinking about this; he views the role of a CEO as planning what is going to happen ten years down the road (leaving the operation of “today” to others).

His brief shopping list for things that the United States must do:

Expand the coverage of healthcare, but not pay for it by instituting the 2.3% excise tax on gross revenues which will be collected from device companies starting in 2013 under the Affordable Care Act.  Tax burdens reduce R&D expenditures, and it is not logical to tax companies that just happen to operate in the medical field in order to pay for universal healthcare.  One of the effects of this tax burden is to drive companies such as Covidien to undertake hiring not only in the United States but also in China, India and Singapore.

Improve the speed with which the FDA approves products, which now often go to Europe first because of the efficiency of the approval process there.  Slow approval also impacts the economics of VC investments, because it disincentivizes such investments and drives capital offshore.

Address Marketing:  growth overseas of the middle class will drive the need for medical devices, and also require medical device companies to look in detail at their marketing strategies (noting in passing that Covidien is in the process of adding 1,000 sales representatives for its products just in Asia).

Simplify products for sale to lower tier hospitals overseas (interestingly, to achieve this within Covidien, these tasks had to be given to a different team, as the regular R&D team was much more interested in state of the art complexities).

While Almeida reiterated much of what you hear from all large life science companies (and many small companies also) both in the biotech and medical device fields, he makes a powerful case for the necessity of dealing with the Federal government at a granular level in order to maintain United States supremacy in these fields.  With the Affordable Care Act giving rise to (per Almeida) seventeen new federal agencies and their attendant bureaucracies, with the life sciences driving an increase in the number of people at the FDA and the need to increase their pay scale so that turnover at that agency is reduced, and with the negative effects of the upcoming device excise tax, there is a cogent case for substantial realignment of thinking at the Federal level.

And in one area the argument seems absolutely irrefutable: if we are expanding healthcare coverage for the benefit of all, why is the cost to be paid for by an excise only upon an industry that happens to operate within the healthcare system (not to mention that such excise will reduce R&D expenditures and increase the cost of medical devices, two results that are inconsistent with health care policy)?

Red Sox Victorious

The Boston Red Sox scored a major victory last night when their 8pm game against the Yankees was drowned out by torrents of wind-driven rain.  Any game the Sox don’t play these days is counted as a victory.  The team lacks two outfielders, a credible short-stop, predictable starters and any hope at all from the bull-pen.

But failure on the field is not unknown to Red Sox Nation; recent World Series wins set off insane celebration just because everyone knew the Sox were woeful as a general proposition.  Why, now, has the slow start caused such angst among the faithful?  The folks with whom I share season seats have been emailing about this, and there is no shortage of theories.

First, when you expect a lot and don’t get it, you are angry.  For the first time, Sox fans have expectations.

Second, we pay the highest or second highest tariff in the Big Leagues.  At this price point, one can go to a Patriots game and see true brain trauma, so why waste the bucks on so tame a sport as baseball.

Third, there is the carpetbagger syndrome.  We are owned by non-Boston people, and they are not very sympathetic folks at that.  (Principal owner John Henry ties his yacht up at the Boston Harbor Hotel in the summer, and there is something about the winding staircase sweeping up the front of the salon that is, shall we say, lacking in New England frugality.)  Henry’s Boston-based mouthpiece sounds smarmy so the overall feeling is one of, well, invasion.

Just the other day, management invited all true fans to come to the ballpark (America’s most beloved ballpark, they call it; must be true, as it sells out even though half the seats are obstructed view and you take your private parts in your hands if you try to sit on a toilet after the first beer dumping – whoops, I mean the second inning).  Come on over free and have the run of the park.  Morning to night.  People flocked.  Of course, there was no ball game that day.  The idea of a free ballgame would cause management cardiac arrest.  You poor folk can walk the by-ways of Fenway to see how it might feel if you could afford a ticket; noblesse oblige I think the French call it.

Which brings us, fourth, to soccer.  Any true member of Sox Nation knows that soccer is that effete European low-scoring, high-boring, foreign thing that the rest of the world erroneously chooses to call a spectator sport to the detriment of the beautiful symmetry of baseball.  SO —  HOW MUCH did that non-Boston owner (the guy pronounces his Rs in his words, fagodzakes, what the hell is THAT all about) pay to buy a soccer team?  In Europe?  Do you have any idea how many starting pitchers we could have bought with that kind of money spent here in the US of A?  We couldda had Verlander in the bull-pen, facryinoutloud‼

There is still time for the Sox to turn it around.  This year I hear the Major Leagues have added another wild card team to post-season play (MLB is beginning to look like my kid’s Little League: every team gets a trophy, every player an award, there are no losers in the new Valhalla).  But, and this is the shocker, no one cares.  We are watching the Bruins, the Celts, the NFL draft, Nadal playing tennis, Tiger imploding for the umpteenth time (this is really too much punishment for just wandering off the reservation a few times, why take it out on his putts?)….

I hope this is not the end of Red Sox Nation; that powerful marketing combine that posts the number of days of consecutive sell-outs with the breathless fervor of reporting a real score in a real ballgame.  I hope to see the continuing traffic of visitors to Boston who just want to see Fenway Park and don’t care whether the Sox win that particularly game.  I hope Senator Scott Brown, who once urged a Sox move to Foxboro and now advertises the singular grace of a rehabbed Fenway, continues to get seated in one of the eight seats that has both no poles and a visual orientation onto the playing diamond.

So I have a few tickets for games that I cannot use.  Interested?  No scalping, I can give them to you for face value because, well, you’re a true member of the Nation.   … What, no takers?  Hey, these are SOX tickets, ya hear?  SOX SOX SOX, get em while you can, this won’t last forever.

Wait til May, you’ll see.  Then there is always next year….