Monday, November 25, 2013

Duty of Candor


I was speaking with a group of investors this week regarding the patents held by one of the world’s most recognizable mobile telephony companies.  As this company has navigated its way, with varying degrees of success, through a tangled maze of consumer expectations, technical improvements and feature modifications they have hastily trodden on the intellectual property rights of others.  They, together with their industry cohorts have filed thousands of patents on everything from the shape of a phone to the resolution of images on diminutive screens – few of which represent actual fundamental innovation but rather hollow impediments to use in an effort to modulate the severity of infringement assertions made by competitors or would-be trolls.

In this particular case, nearly 75% of the patents owned by this firm not only fail to represent bona fide innovation but, in many instances, are clearly direct adaptations (plagiarisms or the more politically correct term I coined years ago “conceptual annexations”) of the developments made by others.  That is not to say, by any stretch of the imagination, that the company does not have some amazingly valuable innovations.  Among their assets include some patents on mobile device payment systems, geo-location, and power management that may be of greater value to others than the entire market capitalization of the firm. 

For years, this firm has been audited by one of the world’s top 4 accounting firms.  When they were taken public, their Initial Public Offering (IPO) was underwritten in the U.S. by investment banking firms that no longer exist having collapsed during the financial crisis of 2008.  Neither their auditors nor their bankers ever asked the question of whether the firm actually had valuable intellectual property assets.  Rather, they asked the question: “Does this company have patents?”

On the eve of this past week’s miscarriage of justice in California (the erroneous jury damages award to Apple assessed against Samsung), the United States Patent and Trademark Office (USPTO) found U.S. Patent No. 7,844,915 (‘915) invalid.  What this means is that when Apple filed for patent protection for the idea of zooming an image on a mobile phone by pinching fingers on the surface of the screen, they actually hadn’t “invented” anything.  In fact, Andrew Platzer and Scott Herz in partnership with the law firm of Blakely, Sokoloff, Taylor & Zafman LLP, had breached the Constitutional intent of the U.S. patent system by cutely describing the movement of fingers to expand or contract an image as “scrolling” “gestures”.  Setting aside the absurdity of presuming that one could “invent” in 2007 what had been in Hollywood movies for two decades already, Andrew, Scott and Apple’s legal eagles misled the USPTO and confused Patent Examiner Xiomara Bautista into awarding a patent on a feature that was neither novel nor non-obvious (two of the three standards which must be met for a patent to be issued).  Quite correctly, the USPTO found this grant to be in error and unfortunately did so in such close proximity to Judge Koh’s schedule for a decision that Samsung wound up having to pay for use of an “asset” that did not actually exist.  Apple knew it.  Samsung knew it.  Even the judge knew it.  But expediency and injustice were more powerful than upholding the law and Samsung has to pay.

Now what’s relevant in these two stories is the fact that the telecommunications company referenced at the top of this post has over 12,000 patents which would, if challenged, likely be found invalid just like the thousands of faux patents held by Apple.  They know it.  Their competitors know it.  But tragically, neither the media nor agents of accountability (auditors, ‘expert’ advisors, the SEC) are willing to inform the public about this giant fraud being conducted under the aegis of “innovation”. 

Under what is referred to as Rule 56, there is a “Duty of Candor” which requires all persons involved in applying for a patent to disclose all of the information they know which could adversely affect the grant of a patent for the invention they seek to protect.  This rule is similar to the accounting principle of what’s known as the “Duty of Care”.  Both of these Duties suggest that the potential for harm arises when a person knowingly fails to fully inform himself or herself with knowable information which could contradict assumptions being made carelessly.  The line between careless ignorance and negligence is one that is frequently gray due to the hurdle of effort (and cost). 

In the U.S. we have laws that are supposed to protect the public consumer from abuses like Apple’s enforcement of a wrongfully procured patent.  When parties knowingly prosecute legal cases against one another with dubious or invalid patents, they both thwart these laws and harm the public.  This will be the case with the telecommunications company’s patents referenced above.  By failing to separate the “wheat from the chaff”, investors and the market will presume that tens of thousands of patents exist in legal enforceability and have value.  This is not the case.  And when those patents are licensed or sold, they will be a real cost involving real money flowing between real parties.  Billions of dollars later, the public will wind up paying inflated prices for a fraudulent conveyance that was knowable (and known) today and the harm will be done.

It is time for the investing public to discontinue their benign neglect of the Duty of Candor and start paying attention to the abuses of law that are going unchecked.  It’s time that companies and the service providers they engage are held to standards that don’t seek camouflage in the ignorance of the public to the systems of proprietary market controls.  True innovation will not be put in jeopardy and consumers will stand a chance to actually see innovative solutions to substantive and meaningful challenges.

 For more, check this out.


Monday, November 18, 2013

November 17 and the Last 1479 Years


Happy 99th Birthday, Federal Reserve Bank.  And Happy 1,479th Birthday Codex Justinianus (Civil Law).  In her Congressional testimony this week, Fed Chairwoman-in-waiting Janet Yellen said, “I don’t think that the Fed even can be or should be a prisoner of the markets.”  In this comment she probably truly stated an imaginary desire for an alternative bank in an alternative universe.  However, in this comment, both she and her Congressional inquisitors failed to recall the founding history and practical reality of the very institution she’s being nominated to head.   

Benjamin Strong, the first Governor of the Federal Reserve Bank of New York who opened the august institution 99 years ago on this day stated that the bank was not only created, “to serve the banker, the farmer, the manufacturer, the merchant or the Treasury of the United States… but to serve them all.”  When Strong opened the bank on this day, he had seven bank officers, 85 clerks and $99,611,670 in deposits from member institutions.   In his early tenure, his mission, together with his warnings and admonitions are as eerie as the dense fog that shrouds this morning in Charlottesville, Virginia.  It’s as though he was looking across the future that lay before him and anticipating the moment we’re now embracing.  He wrote:

“And a seventh and last difficulty, although this may not indeed be all of them, is the one which I regard as more serious than any of the others – the exercise of the powers conferred by the Reserve Act upon the Reserve Banks by this rule of personal discretion, I fear, would develop inevitably in time a bureaucratic attitude of mind on the part of the managers of the Reserve banks which would be unfortunate indeed for the welfare of the whole banking System.  Power excites appetite for more power.   Bankers in time would rebel and the public would rebel.”

“Its future depends upon its own good behavior and upon its success in winning and holding the confidence of the public.”

Strong was running a well-funded start-up.  Ms. Yellen is inheriting a bloated balance sheet, obese, unwieldy, diabetic, and Alzheimer’s-afflicted institution.  Strong, by education or intuition, was acutely aware of the Justinian Codex which preceded his leadership which, in its second title, subsection 11, states that, “the laws of nature… are established by divine providence… but the municipal laws… are subject to frequent change, either by the tacit consent of the people, or by the subsequent enactment of another statute.”  Congress and Ms. Yellen would be well-served to read Title 14 of the Codex in which the Romans were good enough to recognize that civil society depends on real contracts and obligations to insure that those who take on obligations understand the nature of their obligations and are bound to restitution in the event that those obligations are unfulfilled. 

Ms. Yellen’s aspiration for the Fed to be emancipated is going to take more than a Lincoln proclamation.  If the markets have told us one thing over the past 5 years it is simple:  the Fed’s lofty goals of employment and inflation management have been weighed in the balance and found wanting.  Employment has not improved and the record number of employment-eligible people who are without adequate compensation is growing at an alarming pace.  And inflation control is an illusion supported by a mutual-assured destruction currency cold war that is allowing manipulation to override the markets that would be evidenced if Free Trade was Free.  While the U.S. has barely returned to 2008 levels in critical areas like Gross Fixed Capital Formation (still well below 2007 levels), the GDP effect of this fixed capital utilization is nowhere near where we were in the mid 2000s.  So, despite pumping trillions of dollars into balance sheet expansion, the desired effect has not manifest.

Moving the goal posts doesn’t win the game if the players know the rules and are paying attention.  Like the Affordable Care Act and the Administration’s response thereto, failed policy is not ethically managed by stating that the rules no longer apply.  The Roman Civil Code clearly recognized that The People will either have “confidence” or they will “rebel”.  If an emperor figured that out fifteen centuries ago, is it reasonable for us to ask for at least equivalent accountability?

It’s time for each of us to realize that our persistent neglect to holding public officials accountable for lack of oversight and integrity is not their failure but our own.  The impulse to criticize is nearly universal.  The integrity to accountably operate evidencing a better path is the road less traveled.  And on this day, in the yellow wood, I, delighted not to travel both, am not standing long and looking down both.  The one well-worn, fair and heavily trodden is one that has led to massive asymmetries of wealth and inhumanity.  The one whose leaves are untouched and overgrown for want of wear is a different path, one less traveled by, and traversing that path has, for me, made all the difference.


Sunday, November 10, 2013

Starting From Scratch


I’ve spent a considerable amount of time this week reviewing the creative writing of Australia National University’s Fellow of State, Society & Government in Melanesia Program Mr. Anthony Regan.  Having “specialized in constitutional development” in Papua New Guinea, Sri Lanka, East Timor and Uganda, Mr. Regan has recently submitted a proposed “transitional mining act” to the Parliament of the Autonomous Region of Bougainville. 

And, for those of you who are not familiar with Bougainville, a little history lesson is in order.  Under a dubious entitlement mandate from the United Nations following the Second World War, the Australian government decided that it needed to take possession of the massive metal reserves in the island at the end of the Solomon chain and, in 1967, confiscated Bougainville for their exploitation while ‘facilitating’ independence for the state of Papua New Guinea.  Over the well-documented opposition of many local communities, the Australian Administration and their appointees in the Papuan Administration, the 1967 Bougainville Copper Agreement Act became a supra-Constitutional Agreement between a territorial administration and Bougainville Copper Limited.  As if to prove that they knew that they were violating international legal standards, clause 4 of the amended Act states that “no other law of Papua New Guinea, affects this Act or the Agreement.”  In clause 5 of the amended Act, the Prime Minister (remember, the State had not yet been established) is granted the power to exclusively administer the Act without any consent, approval, or any other law.  In other words, the Australians, in what amounts to unlawful territorial seizure, enacted a law above ANY sovereign law directly expropriating land for their exclusive economic exploitation.  Oh, and for their $5 million trouble of exploring the mineral reserves, the Company (BCL) had to pay the extraordinary sum of 1.25% of ‘applicable revenue’ from the mine! 

In an elaborate scheme reminiscent of the first theft of Bougainville’s assets, Mr. Regan has complied with the wishes of his paymasters and drafted a new mining bill that preserves nearly all the abuses embodied in the 1967 Act.  To add insult to injury, his proposed bill reinforces the corruption quotient by burying in Clause 26 the nullification of the over 200 provisions with the simple empowerment of the Autonomous Bougainville Government to act unilaterally and without consideration of any law as it wishes.  Using his “constitutional” expertise, he’s taken to the U.S. government’s definition of Constitutional Law – if it is expedient, do it and tread on the Constitution to get what you want (thanks GW and BO!). 

Now Mr. Regan and BCL (along with Rio Tinto – the 54% owner of BCL) want to take advantage of the pro-autonomy movement in Bougainville and pull off another heist of gargantuan proportion.  But they forget that the world is more interconnected.  And while they and the BCL shareholders desperately want to take another malevolent trip around their merry-go-round of abuse, they are ignoring the simple fact that their “advice” and extra-governmental manipulation are now available for the world to see.  

Whether the Panguna Mine opens or not is an issue that should be decided by the citizens of Bougainville – including those who participated in the armed uprising in 1989.  But more fundamentally, we should examine what it would take to run an ethical, transparent operation – one that doesn’t require Australian academics to serve as advisory mercenaries to launder unethical behavior in the name of progress.  If the citizens of Bougainville determine that they would like to see their land utilized for mineral extraction, that’s a call that they should make fully informed of all the facts.  They should be informed of the state-of-the-art in development, mining, environmental management, power generation, and market participation at all capital levels.  If Rio Tinto and BCL want to be candidates as future operators, they should step up to the damage that they’ve already done and evidence their candidacy for action not by manipulating the law but by being responsible citizens accountable for past harm. 

This week, Australia has a chance to amend a blight on its post-War legacy in the Pacific.  It can intervene in this miscarriage of due process.  Together with the citizens of Bougainville, Australia can start from scratch and see if it can win in the full light of day rather than in the veiled obscurity of manipulation and corruption.  We’ll see.


Sunday, November 3, 2013

I Believe I Can Fly


Despite his age and plenty of free time for thoughtful inquiry, former Fed Chairman Alan Greenspan still doesn’t get it.  Like Daedalus, the famed designer of the Labyrinth in Crete into which the Minotaur was imprisoned, Greenspan and his off-spring have failed to recall that the maze includes Ariadne’s thread which, if followed, can unravel the mystery that isn’t.  During his interview with Charlie Rose, Greenspan evidenced the same myopia that blinded him for over 18 years – cataracts that are alive and well in the eyes of Janet Yellen.  Spoiler alert:  It’s not the housing, stupid.

He was a man learned for those times, of ripe old age, and in his early youth hazarded a deed of remarkable boldness.  He had by some means, I scarcely know what, fastened wings to his hands and feet so that, mistaking fable for truth, he might fly like Daedalus, and collecting the breeze on the summit of a tower he flew for more than the distance of a furlong.  But agitated by the violence of the wind and the swirling of air, as well as by awareness of his rashness, he fell, broke his legs and was lame ever after.  He himself used to say that the cause of his failure was his forgetting to put a tail on the back part.   – Eilmer of Malmesbury recounted by Geoffrey of Monmouth

Eilmer, the flying monk of Malmesbury was not sponsored by Red Bull but, had the chalice been caffeinated back in 1020 CE, he would have been.  There’s a lot that’s cool about Eilmer (or EFM as I imagine his hip, rad Red Bull sponsored code name would be today).  Historians suggest that he may have been one of the few millennials in the 11th century to actually see Halley ’s Comet twice – first in 989 and second in 1066.  But EFM’s 200 meter flight, like the Icarian myth from which it was inspired, actually set in motion innovation that is alive and well today.  Well, let’s pause for a moment.  Popular culture suggests that between 1930 and 1961, 71 of the 75 people working on perfecting the design for the wingsuit paid for their efforts with their lives making this one of the most lethal innovations when measured by mortality rates (much higher than Skydiving 3.3/1000 or summiting K2 104/1000) so we need to be careful with the “alive” part of “alive and well”.

Now what do Greenspan, EFM, and flying squirrel suits have to do with the economy, you ask?  Greenspan and my all-time favorite Fox News demigod Vice President Dick Cheney (who stated that, “I don’t think anybody saw it coming”) continue to recite their conviction that “no one” could have seen the fiscal house of cards collapse risk despite mountains of published evidence (including my own from 2006) that is available to contradict their assertions.  Why would these pilots of policy fail to update their self-evident imbecilic statements?

Well the answer is really quite simple and has four degrees of freedom: Lift, Drag, Thrust and Weight.  These four variables are what makes something fly or, conversely, hang in the air the way bricks don’t (thanks Douglas Adams!).  In this metaphor, I seek to explain economic ideals through the understanding of what it takes to fly.  And the reason for this is really quite simple.  In all human endeavors, lateralized thinking – the ability to apply observed principles from one discipline to another – is helpful in assessing where we might need to go to solve for what seem to be intractable obstacles in the consensus view.

If one aspires to take-off or remain in flight, a fluid dynamic conspiracy must be engaged.  If one seeks to keep an economy going, a fluid dynamic conspiracy must be engaged.  For the purposes of our conversation, let’s unpack the analogy a bit.

For flight, lift is the aerodynamic force that is created when contour creates differential pressures perpendicular to the flow of the wind above and below the wing.  For economics, lift can be understood as the momentum of flow of transactions through the wind of trade.

For flight, drag is the mechanical form that interacts with fluid resistance.  For economics, drag is the expansiveness and complex contour of all types of transactions in trade and exchange. 

For flight, thrust is the acceleration of mass to propel an object into the flow of the fluid.  For economics, thrust is the animation and stimulus of activity in the market.

For flight, weight is the force of gravity opposing lift and creating the higher pressure on the lower surface of the wing to stimulate lift.  In the economy, weight is the carrying cost of the system that includes the entire utilitarian expectations of all things dependent on money.

Our current economic theorists, regrettably, are attempting to fly with only two variables – thrust and drag.  For over 5 years, the Federal Reserve has mistakenly increased the thrust using a variety of ill-conceived stimuli that have added viscosity to the flow.  At the same time, they continue to insist that housing is the wing that will lift the economy back into flight.  They’ve done nothing to alter the momentum of flow – which would require massive expansion of domestic production and consumption rebalancing as the flow is relevant at the surface of the wing – not in bi-lateral or multi-lateral trade agreements far from home.  And they’ve added weight by increasing the number of areas where the economy must serve humanity – more public employment, more indirect government expenditure dependency – relative to all previous periods.  At this time in our economic evolution, we need greater contour and adaptability on the upper surfaces of our wings – more agile businesses and business models; more adaptation at the margins (attack and flaps) – and we need weight reduction (less monetary dependency) if we expect to soar. 

Housing does not a flightworthy wing make.  The financing for housing still requires government intervention (Freddie and Fannie) to sustain what has become an orgy of over-consumption.  Far from shelter, our mini-palace definition of home has seen our houses grow in size 69% from 1973 to 2010.  Like our waistlines (60% of Americans are now overweight and obese), our gluttony has made our capacity to soar diminish.  Now as we blubbered our way into bigger homes, did we actually achieve a more stable economy?  Absolutely not.  Did any of our ‘growth’ actually come organically?  Absolutely not.  We grew our economy by adding weight and increasing drag.  We ignored lift and attempted to make up for our design failures by adding throttle.  The bad news is that this formula works for landing – not for taking off.

We need to regain the svelte attitude of flight.  Highly adaptable models that can respond to flight conditions at the wing.  Highly distributed transactions – more and smaller.  Lower viscosity of the fluids through which we move.  And less dependency on monetary intermediation of all of our transactions.   If we want to fly, we can.  And like EFM, we don’t need to wait for our drunken pilots to climb into the cockpit to crash all over again.  We The People can actually start living on the wing and before long, we can realize that we don’t need Daedalus anymore.  Climb up on the tower (or the face of a giant, Red Bull sponsored cliff), feel the wind on your wings..., breathe, then go ahead, jump with a tail on the back part!