Who controls a company?One company that may have a promising lead on a Covid-19 vaccine is Moderna Inc., a U.S. biotechnology firm that we talked about on Tuesday. A Covid-19 vaccine would be a very good thing, and the market has been following Moderna's work with great interest. Its stock is up about 240% this year. It was up 20% in one day, this Monday, after Moderna announced good results in a Phase 1 trial, and Moderna took advantage of investor enthusiasm to sell $1.3 billion of stock that day to fund production of the vaccine. This is all how it is supposed to work. A company does a good thing with a promise of large future profits, the stock goes up, the investors get rich, and the company raises more money to continue and expand the thing by selling stock to the enthusiastic investors. In Moderna's particular case, the stock fell a lot the next day as questions were raised about those Phase 1 results, so there is some drama and uncertainty here, but, like, the shape of it is correct. Another company that may have a promising lead on a Covid-19 vaccine is Sinovac Biotech Ltd., a Chinese biotechnology firm that made an "old school" vaccine and gave it to some monkeys, with good results; it has started human trials. I say "a Chinese biotechnology firm" but actually it's a bit complicated. Sinovac is headquartered in China, but it is incorporated in Antigua and Barbuda and its stock trades in the United States. Traded. Its stock traded in the U.S., on the Nasdaq Global Market, under the ticker SVA. But Nasdaq halted trading in Sinovac stock in February 2019 and never reopened it. The last trade was at $6.47 a share, giving it a market capitalization of about $460 million as of last February. Ordinarily when you hear that a company's stock has been halted for more than a year, you assume that the stock was a penny stock, the company was a fraud, and it was halted for general worthlessness. This can be annoying for people who owned (or shorted!) the stock, but it is usually a small-dollar sort of annoyingness: You can no longer trade shares of a company that was worth roughly nothing. That's not what's going on here! Since its stock stopped trading a year ago, Sinovac has apparently developed a promising Covid-19 vaccine, the sort of activity that tends to make stocks go up a lot. People might want to speculate on whether that vaccine will work, whether Sinovac will make billions of dollars selling it, that sort of thing. But they can't. The stock is halted. Or Sinovac might want to raise money, to keep developing the vaccine and maybe get ready to manufacture and distribute it. The easy way to do that is to sell stock to investors who really want to buy it because of the promising vaccine, like Moderna did. But Sinovac can't do that, because the stock is halted. Instead it announced today that it had raised $15 million from two investors in the form of a loan convertible into equity in a subsidiary, which seems like a much smaller and more expensive investment than Moderna got. Why is the stock halted? For an amazing corporate-governance battle, as it happens. We talked about it last February, when it came to a head and the stock was halted. And this week Damian Garde at Stat wrote about the history and current state of the fight: The acrimonious fight for control of Sinovac began in early 2018, when a group of frustrated investors mounted an insurrection in hopes of taking the company private. That February, at Sinovac's annual meeting, those investors nominated an alternative slate of board members and convinced the majority of voting shareholders to depose Sinovac's incumbent directors. But Sinovac declared the election illegitimate, announcing a month later that all of its current directors had been re-elected "by a majority of the votes validly cast." Then, according to Sinovac, minority shareholder Aihua Pan escalated the situation. On April 17, 2018, Pan and "dozens of unidentified individuals forcibly entered Sinovac Beijing's corporate offices and limited the physical movements of employees in Sinovac Beijing's general manager's office and finance department in an attempt to wrongfully take control of Sinovac Beijing's official seal, legal documents, accounting seal, financial documents, and financial information systems," the company said in a federal filing. The raid would turn out to be just the tip of the iceberg, according to Sinovac. Pan's group left behind two laptops containing meeting minutes and audio recordings of a conspiracy, the company said. Examining the evidence, Sinovac claims that Pan had joined forces with the hedge fund 1Globe Capital and other investors to secretly amass a 45% stake in the company and then stage a coup at the annual meeting, according to the company.
Usually when corporate managers claim that activist shareholders are part of a nefarious conspiracy, that is just the usual sort of governance bluster, but the U.S. Securities and Exchange Commission ended up more or less agreeing with Sinovac about this. Last week it settled an enforcement action against 1Globe for secretly conspiring with other shareholders to take control of the company. But Sinovac went further in its response by triggering its poison pill. Its corporate documents allow it to issue more shares to everyone who wasn't part of the conspiracy, to dilute the conspirators. (Specifically, the pill is triggered if any person or coordinated group gets more than 15% of the stock, so anyone who was part of the 1Globe group gets diluted.) Lots of companies have provisions like this, but they essentially never use them, because they are terrible. They are a deterrent: Knowing that you will trigger a poison pill, dilute yourself and generally blow everything up if you become an activist 15% shareholder is a good reason not to get above 15% or conspire with your fellow shareholders. When we discussed this last year I wrote that "because everyone knows that the pill exists, and is a disaster, no one ever triggers it." Or here's Garde: "A poison pill is a nuclear weapon," said Wei Jiang, a professor of finance at at Columbia Business School. "It's something you use as a deterrent. You don't actually explode it." But Sinovac did. On Feb. 18, 2019, the company pulled the trigger on its poison pill, approving the issue of 28 million new shares. Days later, before Sinovac could disperse those shares, Nasdaq halted trading of the stock, and the parties have spent the ensuing months fighting it out in courts around the world.
The legality of the pill in Antigua, and the exact mechanics of who is in a group and who gets the shares, are all up for debate, and everyone is suing everywhere. In the meantime the problem is that nobody knows how many shares there are. Garde: If Sinovac's poison pill is lawful, there will be about 99 million shares of the company; if it's not, that number is closer to 71 million. Until that's sorted out, there's no way for an exchange like Nasdaq to allow the shares to change hands, said Larry Harris, a professor of finance at the University of Southern California's Marshall School of Business. "Nasdaq looks at it and says, 'We have no idea who's going to win this. We cannot allow it to continue to trade under this circumstance,'" Harris said. "The key issue is how many shares are outstanding. If you think the company's worth, say, $2 billion, you're going to get a different value per share depending on how many shares there are."
So it can't trade, which is bad for lots of reasons: You can't invest in it, it can't raise money conveniently, the market is not providing efficient price signals, etc. Also though no one knows who owns it. If the activists win, they will control something like 45% of the company and might still be able to take it over as it works to develop a promising but uncertain vaccine. If Sinovac management wins, the activists will get diluted; they'll own a much smaller chunk of the company and have no real say over its future, and management will be firmly in control. What if their vaccine works? What if they are first to market and commercialize it and make billions of dollars? A year ago Sinovac vanished from the public markets as a small-cap speculative biotech company with a weird corporate governance fight, but during its time in the wilderness it might turn into a giant hot biotech company with a Covid vaccine. And a weird governance fight! If the fight over Sinovac was so bitter before, imagine what it will be like when there's real money involved. Floor tradingTraditionally the way stocks were traded is that a bunch of people all got in the same room and yelled at each other. In the 1600s, and even in the 1980s, this had big advantages over other forms of trading. For instance if you all yelled at each other in different rooms, you might not hear each other. If you wrote each other letters, trades could take weeks. Even if you telephoned each other, you'd have to talk to one person at a time and it might take too long to find someone to trade with. Standing in a room and shouting—or perhaps giving hand signals—was, for centuries, the most cutting-edge technology available for trading stocks. Eventually it wasn't, though. It was superseded by everyone submitting electronic orders to a central exchange with an algorithmic matching engine to match up buyers and sellers. This is much faster and more precise than standing in a room and shouting, which is why it has become the main way that stocks, options and commodities are traded globally. Still there are some throwbacks, including a few commodities exchanges and the New York Stock Exchange, which combine electronic trading with some amount of shouting in a room. NYSE in particular gets a lot of mileage out of its trading floor; having a bunch of people in funny jackets standing in a room and shouting adds a certain energy to the many financial television broadcasts that are filmed at NYSE. Also of course "proponents of trading floors say they provide a valuable service, by funneling trades into one place and allowing traders to exercise human judgment about how to execute them." On the other hand current public health guidance is pretty much that the worst thing you could possibly do is get a bunch of people in a room to yell at each other, so the trading floors are closed. But the New York Stock Exchange is planning to reopen its floor next week, though with masks and social distancing and hopefully quiet voices. In the meantime, NYSE is still trading stocks, electronically. As it usually does, and as other stock exchanges do, but without the sprinkling of human activity that NYSE always touts as a benefit of its exchange. This is an obvious natural experiment: When the trading floor closes for two months and only the computers can trade, is NYSE better or worse at trading stocks than it is in ordinary times? That is a complicated question—there are different measures of exchange quality, and of course closing the trading floor is not the only thing that has changed in the last two extremely volatile months—but here is an argument for "better": An academic study released Thursday found that NYSE's crucial 4 p.m. auctions, which determine end-of-day prices for thousands of stocks, ran more smoothly after the Big Board closed its floor to curtail the spread of the coronavirus. NYSE has questioned the study's conclusions. … When NYSE closed its floor, firms could no longer use "D orders," a popular way for traders to buy or sell large quantities of NYSE-listed stocks in the closing auctions. Under NYSE rules, such orders must be routed through a floor broker, and they can be entered throughout the day, until 10 seconds before 4 p.m. That gives traders greater flexibility than they have at Nasdaq, which imposes stricter limits on closing-auction trades after 3:55 p.m., but it can fuel price swings in NYSE stocks during the final minutes. In Thursday's study, researchers at New York University and the University of Illinois at Chicago found that closing the floor made the process more orderly. NYSE's "indicative" auction prices, which are meant to give investors a sense of closing prices for stocks, grew more accurate: The gap between 3:55 p.m. indicative prices and actual closing prices narrowed by about 1%, the study found. Traders also tended to join the auctions earlier, potentially damping big moves at the end of the day. Before the floor closed, only 46% of NYSE closing-auction volume was matched—or paired off between buyers and sellers—by 3:55 p.m. That jumped to 74% after the closure, the study found.
Here is the study, "Vestigial Tails: Floor Brokers at the Close in Modern Electronic Markets," by Edwin Hu and Dermot Murphy. "This flawed study ignores real-world investor outcomes," says NYSE, and I suppose there is a sense in which it is tautological. As far as I can tell the point of D orders is to give floor brokers an advantage over the electronic order book, which naturally makes the order book less informative; if you get rid of the floor brokers then the electronic order book will more accurately reflect supply and demand, but … I guess … that is … not what NYSE wants? They want the magic of human trading. The conclusion here is really that NYSE without floor brokers is a better and more efficient electronic exchange, but if you like floor brokers that is not quite what you want. You want whatever mysterious advantage floor brokers provide. Oil ETFsAn exchange-traded fund is a box that takes investor money and uses it to buy investments. For instance if you have a stock ETF, and investors put in a million dollars, it will buy about a million dollars' worth of stock. If the stock prices double, it will have $2 million of stock, and its investors' shares in the ETF will be worth about $2 million. If the stock prices go to zero—if it invested all the investors' money in companies that go bankrupt—it will have $0 of stock, and its investors' shares will be worth zero. This is a convenient, sensible box. There are stranger and more worrisome boxes. There are leveraged ETFs, ETFs that take a million dollars of investor money, borrow more, and buy $2 or $3 million worth of stuff. There are inverse ETFs, ETFs that take a million dollars of investor money and sell a million dollars' (or $2 or $3 million) worth of stuff, betting that its price will go down. These ETFs are not quite the same as the regular stock ETFs in the previous paragraph. If you have a triple-leveraged inverse volatility ETF, and investors put in a million dollars, the ETF will sell three million dollars' worth of volatility derivatives. If volatility falls by 10%, the ETF's investors will be up by 30%. If volatility goes up by 50%, the ETF will have to pay $1.5 million on those derivatives, but it will only have $1 million of investor money. The investors' shares of the ETF will go to zero, but it can't ask them for more money. The extra $500,000 will just be a … hole? Perhaps the ETF's sponsor—the investment company that sells the ETF—will come up with the money. Otherwise, the ETF's broker (the company that executed the ETF's derivatives on an options or futures exchange) or its counterparties (the companies that sold the derivatives to the ETF) will eat the loss. The point is that weird ETFs—leveraged ETFs, inverse ETFs—are not floored at zero. Like regular ETFs, they are boxes full of investor money, but they do trades that could potentially lose more than all of the money in the box, and if that happens someone has to come up with more money. That someone will not be the anonymous, limited-liability, sometimes-retail investors who put the money into the box, and who benefited from any gains if the box made money. It will be someone else. The person most at risk for having to come up with the money is the weird ETF's broker. Brokers to weird ETFs are very careful about this risk, monitor it closely, charge appropriately for it, have triggers to minimize it, etc. Still weird ETFs are controversial, and there are always proposals floating around to regulate them more or to not let them be called ETFs. They are not as clean and convenient and sensible as regular, boring, put-stocks-in-a-box ETFs. Until about a month ago oil ETFs were normal ETFs but now they are weird ETFs. The way an oil ETF works is that you put a million dollars of investor money in a box, and the box buys a million dollars of oil futures. If the futures double the box has $2 million, if the futures go to zero the box has $0, all straightforwardly like stock ETFs. Not quite; you can't just buy and hold futures forever, so there is some complexity and some roll costs and the box does, technically, hold derivatives. But in broad strokes you could sort of ignore that and think it was like a stock ETF, because the worst thing that could happen would be that its trades would become worthless and the box would lose all its money. But then on April 20, the price of the May West Texas Intermediate crude oil futures contract fell to negative $37.63 per barrel, meaning that an ETF that held that contract would have lost (much) more than all of its investors' money. No ETF actually did—that contract's last trading day was April 21, and the big ETFs had gotten out of it the previous week—but that's not the point; the point is that negative prices are possible now and so the box is no longer safe. And so if you are for instance a broker to that box you are getting nervous. We talked a couple of weeks ago about the Samsung S&P GSCI Crude Oil ER Futures ETF, a Hong-Kong-based oil ETF whose "broker refused to let it increase holdings of crude futures." But now the big oil ETF, USO, the United States Oil Fund LP, with $4.6 billion of assets, is in the same boat. In an SEC filing yesterday, reported by Izabella Kaminska at FT Alphaville, USO disclosed new "risk mitigation measures taken by USO's futures commission merchant ('FCM') RBC Capital Markets, LLC": RBC won't let USO invest in the front-month oil futures contract at all, and it won't let USO purchase any new oil futures contracts through RBC. "USO has been engaging in efforts to enter into additional FCM agreements" so it can keep trading oil futures, but it has't found any yet. In a way this makes total sense: RBC thought it was doing a safe boring trade with a safe boring box, but it turns out it was doing a trade that could conceivably cost it billions of dollars if oil prices go negative, so it said "no more, thanks, we're good." In another way it is kind of weird: There are lots of leveraged and inverse ETFs, they have counterparties and brokers, and everyone kind of figures out how to manage the risk. USO has just sort of fallen between the two categories; it's been kicked out of the normal ETF category but hasn't yet found a home as a weird ETF. The specific problem here is not just that oil ETFs are risky for their brokers, it's that everyone thought they were safe and now they are risky. As is so often the case in finance, it's not the risks that you knowingly take that are the problem; it's the risks you never even thought about that cause trouble. No coupon clubMeanwhile in risks you knowingly take, sort of, I don't know: It's one of the bond market's most dubious honors, a mark of shame that among even the very worst deals in history, few carry. Dubbed 'no-coupon-at-all,' it's reserved to describe securities that default before making a single payout. The distinction is so rare that it's generated a cult-like following among traders, who recall just a handful of transactions in recent decades that fit the bill. But now, they're on alert for another potential entry into the infamous club. Hertz Global Holdings Inc. last week issued a so-called going concern warning, telling creditors it may be forced to file for bankruptcy amid dim prospects for a rapid recovery in its travel-dependent car rental business. That would leave its $900 million of 6% notes sold back in November in default before paying investors a dime.
Six percent! I am not part of the cult that follows the no-coupon-at-all club, but if you are, tell me: Is that the lowest ever coupon for a no-coupon-at-all-bond? Usually when you issue a bond and then default immediately, there was, uh, some inkling that you might default; the investors who bought the bonds charged you a lot for the risk of not being paid. (Of course you never paid them what they charged you, that is the point here, but in expectation they demanded a high coupon.) Even MF Global Holdings Ltd., the broker-dealer that blew up on European government bonds three months after it issued investment-grade debt, was paying 6.25% on that debt. Hertz managed to sell junk bonds six months and a lifetime ago, when credit was so generous that even B3/B- rated bonds seemed safe enough to pay 6%, and now it might not pay a single coupon. Here's a giant golden statute of Elon MuskOkay: One of Tulsa's biggest landmarks, The Golden Driller, went through some big changes recently to show the local community's support for Tesla. The statue was painted to look like Elon Musk, and The Golden Driller's belt buckle went from saying "Tulsa" to "Tesla." The EV automaker's logo was drawn on the statue's chest as well.
There is a picture. Things happenJudge Tosses Hedge Fund Visium's Lawsuit Against Portfolio Manager's Widow. SoftBank's Masa-Misra Partnership Strained by Losses, Infighting. Harold Hamm, Fracking Pioneer, Faces a Career Reckoning. Millions of PPP Loan-Forgiveness Requests Are About to Rain on Banks. "We find that companies with more Gen Xers on their boards perform significantly better than their peers in terms of market valuation." The Secret Language of Cairo's Goldsmiths. "For example, over 500 businesses with '1' eligible employee reported a figure of '1,500' (which is the amount of JobKeeper payment they would expect to receive for each fortnight for that employee)." Salvage Firm Can Cut Into Titanic to Recover Telegraph, Judge Says. World's Best Restaurant Noma Reopens as a Cheeseburger Joint. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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