Another Silicon Valley Reckoning Is Coming: “Star Entrepreneurs” and Way Too Much Money

Another Silicon Valley reckoning is on the horizon.  We have seen cyclical events like this before, the 2001 bubble burst being the most recent memorable reckoning. The talk in 2001 was about too much “dumb money.” The coming reckoning, however, is on a massive, unprecedented scale, fueled by the same excess of global capital that has fueled the bubbles in housing markets in attractive locations around the World. The problems with Uber, Travis Kalanick, and the now obvious difficulty of the Uber Board of Directors to exercise meaningful governance should have been the “canary in the coal mine.” CNBC’s reporting on the excessive Silicon Valley “unicorn” valuations and media reports that New Enterprise Associates would divest $1 Billion in startup investments that cannot be made liquid has now made the situation blatantly obvious. After a long silence, the Wall Street Journal has finally joined the reporting on the crisis. What more does one need to take to the exit?

 

Source: In ‘Founder Friendly’ Era, Star Tech Entrepreneurs Grab Power, Huge Pay – WSJ

In ‘Founder Friendly’ Era, Star Tech Entrepreneurs Grab Power, Huge Pay

Silicon Valley financiers are losing leverage to star entrepreneurs

Two brothers who are co-founders of online payments startup Stripe, John Collison, left, president, and Patrick Collison, chief executive, have supervoting shares in the company, which was valued at $9 billion in its latest round of fundraising. PHOTO: DAVID PAUL MORRIS/BLOOMBERG NEWS

The Wall Street Journal

By Rolfe Winkler and Maureen Farrell

May 28, 2018 4:25 p.m. ET

Founders of highflying startups are increasingly wresting control of their companies from venture-capital backers and extracting huge pay packages tied to going public.

Venture capitalists had long called the shots in startup boardrooms and continue to be the primary backers of private companies. But in recent years they have had to compete against new classes of investors including mutual funds, sovereign-wealth funds and now Japan’s SoftBank Group Corp. , which has a $92 billion Vision Fund investing in startups.

That has reduced their leverage, shifting power toward star entrepreneurs and adding pressure on VCs to cultivate “founder friendly” reputations that will help them get a piece of the next hot startup. The flood of capital also gives entrepreneurs the ability to pick not just their investors but also when and whether to go public. An initial public offering is the primary way in which VCs cash in on their gains from startup investments.

VCs say empowering founders—through special voting shares, governance rights and other tools—frees them to follow ambitious long-term strategies once their companies go public without having to worry that poor performance will bring pressure from activist investors that scoop up stock. They point to founder-controlled tech companies such as FacebookInc., where founder Mark Zuckerberg had power to make bold moves and resist early pressure to sell the company. Facebook, which went public at around $100 billion, is now valued at roughly five times that.

Venture-capital backers of Stripe Inc., whose software is used by businesses to accept and track digital payments, recently gave the company founders an incentive to go public: special supervoting shares. The move was meant partly to assuage the founders, brothers Patrick and John Collison, that they would keep significant control of the company they founded in 2010 if it went public, people familiar with the matter said.

Many of Stripe’s investors say the founders have earned the right to control the company because it has performed so well. It was valued at $9 billion in its last fundraising round. Until March, when Stripe added its first independent director, the Collison brothers’ only fellow director was Michael Moritz, a partner at Sequoia Capital, one of the company’s earliest investors. Stripe and Sequoia representatives declined to comment.

Glenn Kelman, the longtime chief executive of online real-estate brokerage Redfin Corp.that went public last July, said that in the run-up to the IPO he was pushed to be more disciplined with expenses by two big investors who traditionally buy public-company stocks but also back later-stage private companies. Redfin’s shares are up about 50% since the IPO.

“There is a new world of VCs who really can’t perform their governance functions on boards because they want to preserve their relationship with you,” Mr. Kelman said of the venture-capital industry.

Star founders of private companies often get to pick their own investors, but as public-company CEOs they can’t. Supervoting shares—typically a second class of stock held by insiders that have 10 votes per share—give founders more power to elect directors and approve other items up for shareholder vote and protect them from investors who may have different priorities.

Last year, 67% of U.S. venture-backed tech companies that staged IPOs had supervoting shares for insiders, according to Dealogic, up from 13% in 2010. The proportion of non-tech U.S. venture-backed IPOs with supervoting shares has stayed between 10% to 15% every year over that period.

The proportion rises as tech companies get larger: 72% of founders of U.S. tech startups valued over $1 billion that had IPOs over the past 24 months have supervoting shares, according to a Wall Street Journal analysis.

Empowering a founder has risks. Uber Technologies Inc. co-founder and former CEO Travis Kalanick built a ride-hailing juggernaut valued at $68 billion with a pugnacious leadership style, but that approach ultimately contributed to a series of scandals. His supervoting shares and de facto control of the board made it more difficult for investors to push him out.

They did so last year, and then abolished supervoting rights and adopted a “one share, one vote” policy ahead of a planned 2019 IPO, something Mr. Kalanick ultimately voted in favor of.

Spotify Technology SA’s shareholders issued special “beneficiary certificates” to its founders in February, in part because co-founder and Chief Executive Daniel Ek wanted to maintain control, a person familiar with the arrangement said. The certificates boosted Mr. Ek’s and his co-founder’s voting control to a combined 80.5%, double their economic ownership. Spotify listed its shares in April. A Spotify spokesman declined to comment.

Snap Inc., whose two co-founders control about 90% of its voting power, sold shares with no voting rights in its 2017 IPO, meaning public-market investors don’t have any say on corporate matters.

Evan Spiegel, co-founder and CEO of the Snapchat parent, received a $625 million stock package that vested with the IPO as an incentive to get it done, people familiar with the deal said.

Drew Houston, co-founder and CEO of online-storage company Dropbox Inc., in December got his own stock package worth potentially $590 million partly tied to his company’s March IPO, according to offering documents. The stock vests based on Dropbox’s share price, among other milestones, and he can earn the full amount only if shares reach $90, triple their current value. Mr. Houston already holds nearly $3 billion of Dropbox’s shares.

Bankers and lawyers who work on IPO deals say there is little precedent for big stock packages offered to founders ahead of public offerings, a reflection of venture-capital firms’ decreasing leverage. Snap and Dropbox representatives declined to comment.

Some star founders may even be emboldened to overstep boardroom norms.

WeWork Cos. co-founder and Chief Executive Adam Neumann, who has 65% voting control, is one of two members of his board’s compensation committee, along with longtime company investor Benchmark, according to WeWork’s recent bond-offering documents. Public companies aren’t usually allowed to have their executives on compensation committees—which set executive pay—to avoid conflicts.

A WeWork spokesman said Mr. Neumann takes $1 a year in salary and declined to comment on whether he receives stock compensation or recuses himself from committee discussions of his pay. It is unclear when WeWork will tap the public markets, but the company’s $4.4 billion investment from SoftBank in 2017 was seen as pushing out its need for a public offering potentially for years.

WeWork bond documents show that in 2016 and 2017, the company paid more than 1.3 million shares of class B stock compensation, worth more than $50 million at the company’s current valuation. Mr. Neumann controls 78% of class B shares, which come with supervoting rights.

—Eliot Brown contributed to this article.

Write to Rolfe Winkler at rolfe.winkler@wsj.com and Maureen Farrell at maureen.farrell@wsj.com

Trump’s radical new foreign policy portends much worse to come

Trump Blows Off the Rest of the World

Trump Climate Change Speech More About Political Power Than Climate Change

Donald Trump and Philippine President Rodrigo Duterte

Fareed Zakaria has pointed out this week in the Washington Post and on CNN GPS, that we now have a Trump foreign policy doctrine, and it is not reassuring for the World. It is openly declaring its intent to destroy the World as we know it. New York Times Conservative columnist David Brooks reached the same conclusion. Obviously heavily influenced by Bannon, who many had thought had been relegated to backseat status by McMaster, we have been fooled again. As Trump demonstrates his Henry Kissinger RealPolitik admiration for authoritarians like Putin, Xi Jinping, Erdogan, and Duterte, more sinister scenarios begin to crystallize.  Trump’s speech justifying the withdrawal of the United States from the COP21 Paris Climate Change Agreement is a frightening exposition of this new Trump Doctrine. It is Trump thumbing his nose at the World. It is the United States against the World, led by a coterie of plutocrats and their money.  It was moved along by a campaign carefully crafted by fossil fuel industry players, most notably Charles D. Koch and David H. Koch, the Kansas-based billionaires who run a chain of refineries (which can process 600,000 barrels of crude oil per day) as well as a subsidiary that owns or operates 4,000 miles of pipelines that move crude oil. The reality is that the evidence points to an ongoing seizure of executive power by Trump that destroys our Constitution in the name of our national security.  The big rhetorical question is what we can do about it?

Read more: Gary Cohn and H.R. McMaster Wall Street Journal editorial: The New Trump Foreign Policy Doctrine

Read more: Fareed Zakaria Washington Post editorial: Trump’s radical departure from postwar foreign policy – The Washington Post

Read more: David Brooks New York Times editorial:

Read more:

 

Bayer’s Proposed $56 Billion Monsanto Acquisition No Done Deal

Global Agribusiness On A Consolidation Spree

Once Again, Consumers Are The Likely Losers

The global agribusiness industry has recently seen a feeding frenzy of merger and acquisition activity. The announcement this week of Bayer‘s proposed purchase of Monsanto after months of difficult negotiation is only one among other such industry consolidation deals.  Dow Chemical and DuPont agreed last year to merge their crop science businesses, a deal currently under Justice Department review. Canadian fertilizer companies Potash Corporation and Agrium, Inc. also agreed to merge this week. Finally, Swiss pesticide giant Syngenta AG agreed to a $43 billion takeover by China National Chemical Corp., a state-owned conglomerate that already sells generic agricultural chemicals.  The bigger picture suggests severely reduced competition, higher prices for farmers and consumers, and increased  global corporate control of crop seeds, particularly GMO’s.

Antitrust authorities have challenged deals ranging from oilfield services mergers to health insurance buyouts, while other regulators have sought to crack down on deals that aid tax avoidance or risk harming national security. Wednesday’s announced tie-up between Monsanto and Bayer, the largest-ever all-cash acquisition, will inevitably face an intense and lengthy regulatory process in the United States, the European Union and elsewhere, regulatory experts said. Meanwhile, The Wall Street Journal is crowing about the Monsanto/Bayer deal.

“This merger is not a slam dunk,” said Diana Moss, president of the American Antitrust Institute.

In my view, this is just one more case of the disturbing growth of global corporate power, and the difficulty of governments around the World to control it.  Monopoly comes to mind. Where we end up on Apple’s €13 Billion tax liability,  or this consolidation in agribusiness will not be resolved for years, but they represent the greatest threats to our economy and the survival middle-class prosperity.

Bayer’s Monsanto acquisition to face politically charged scrutiny

Reblogged from REUTERS

By Diane Bartz and Greg Roumeliotis | WASHINGTON D.C./NEW YORK

As the global agricultural sector races to consolidate, Bayer AG’s $66 billion all-cash deal to acquire Monsanto Co will test growing political and consumer unease in the United States and abroad over the future of food production.

Bayer’s pesticide-focused agricultural business has few overlaps with Monsanto’s dominant seed franchise, according to the companies’ executives. Still, marrying two of the world’s top farm suppliers, at a time when rivals are also merging, is fuelling concern over fewer players competing in the $100 billion global market.

Monsanto and Bayer “have chosen to do a deal in the year of merging dangerously,” said David Balto, a former policy director at the U.S. Federal Trade Commission. “They are in for a tough time.”

U.S. Senate Judiciary Committee Chairman Chuck Grassley has called a hearing next Tuesday to scrutinize the wave of consolidation. Farmers in Iowa, the Republican senator’s home state, are worried that seed and chemical costs are rising while a global glut of grain has pushed prices close to their lowest levels in years. Farm incomes have plunged.

Monsanto agreed to sell itself to Bayer for $128 per share in cash, yet its shares were hovering around $107 on Wednesday, reflecting the significant regulatory uncertainty surrounding the deal in the minds of investors. Bayer has agreed to pay Monsanto a $2 billion breakup fee if regulators thwart the deal.

The German company aims to create a one-stop shop for seeds, crop chemicals, and computer-aided services to farmers.

That was also the idea behind Monsanto’s swoop on Syngenta AG last year. The Swiss company fended off that offer only to agree later to a takeover by China’s state-owned ChemChina.

U.S. chemicals giants Dow Chemical Co and DuPont plan to merge and later spin off their respective seeds and crop chemicals operations into a major agribusiness.

If all of the deals close, three companies would control nearly 70 percent of the world’s pesticide market and 80 percent of the U.S. corn-seed market.

Other agricultural sectors are also consolidating.

Canadian fertilizer producers Potash Corp of Saskatchewan Inc and Agrium Inc said on Monday they agreed to merge, sparking questions of whether the new company’s potential pricing power would attract tough regulatory scrutiny.

INEVITABLE SCRUTINY

Dealmakers trying to push through aggressive mega-deals in corporate America have had a tough year.

Antitrust authorities have challenged deals ranging from oilfield services mergers to health insurance buyouts, while other regulators have sought to crack down on deals that aid tax avoidance or risk harming national security.

Wednesday’s announced tie-up between Monsanto and Bayer, the largest-ever all-cash acquisition, will inevitably face an intense and lengthy regulatory process in the United States, the European Union and elsewhere, regulatory experts said.

“This merger is not a slam dunk,” said Diana Moss, president of the American Antitrust Institute.

Hugh Grant, Monsanto’s chief executive, told reporters on Wednesday the companies will need to file in about 30 jurisdictions for the merger.

The value of the assets that Bayer is willing to divest is to be revealed by next week, when details of the merger agreement with Monsanto become public, according to sources familiar with the deal.

Areas of potential overlap include some soybeans, canola and cotton seeds.

Bayer’s share of the U.S. cotton seed market sits at 38.5 percent, while Monsanto is at 31.2 percent, according to data compiled by the Konkurrenz Group.

Monsanto and Bayer have had “initial contacts with regulatory agencies describing what this combination would be about,” Bayer Chief Executive Officer Werner Baumann said on an investor call on Wednesday, and “received encouraging feedback.”

TOUGH YEAR

But U.S. antitrust enforcers will look at more than product overlaps in assessing the proposed merger, said Moss.

“People don’t get the enormous impact that these deals can have on innovation markets. You need more innovators in there battling it out so that you actually do produce new technology for farmers,” she said.

The deals would leave farmers facing a duopoly in seed (Bayer/Monsanto and Dow) and two big firms in chemicals (Syngenta and Bayer/Monsanto), she said.

In terms of the U.S. corn seeds and traits market, according to Morgan Stanley Research, a merged Dow and DuPont would have about a 41 percent market share, while a merged Monsanto-Bayer would have about 36 percent share. In soybean seeds and traits, the group estimated a merged Dow/DuPont would have about 38 percent. Monsanto-Bayer would have 28 percent.

One unknown factor that will influence these ag-related deals is the U.S. political landscape after the November federal election.

Maurice Stucke, formerly in the Justice Department now with the Konkurrenz Group, said it was highly unlikely that Obama administration antitrust enforcers, who have knocked down a long list of big mergers in concentrated industries this year, would make the final decision in the Bayer-Monsanto deal.

“Merger reviews of this complexity would take six to nine months,” Stucke said. “This would be the first major test of the new administration.”

(Additional reporting by Ludwig Burger in Frankfurt, Germany, and Karl Plume in Chicago. Writing by P.J. Huffstutter in Chicago; Editing by David Gregorio)

The Panama Papers and Thomas Piketty

UPDATE May 5, 2016:  National Public Radio’s Takeaway news analysis program, today interviewed James Henry, senior adviser at the Tax Justice Network and a senior fellow at the Columbia Center for Sustainable Investment. He’s examined World Bank and IMF data over the last 45 years, and has found that kleptocrats have taken $12.1 trillion from developing countries. James’ interview specifically discusses the foreign dark money driving the housing markets in Miami, New York and Vancouver, providing further confirmation of my points.  Audio of the interview begins at 19:45 in the podcast below.

I am sharing this because of its particular relevance to the ongoing revelations about connections between global tax evasion shell companies and real estate markets: London, Miami, New York City, San Francisco and Vancouver.

Reblogged from Foreign Affairs

How the Leak May Transform Politics

By Henry Farrell

The Panama Papers—the massive collection of leaked documents from Mossack Fonseca, a Panamanian law firm that helps set up offshore shell corporations—have already had political consequences. Iceland’s prime minister, Sigmundur David Gunnlaugsson, resigned after the leak revealed that he had partly owned an offshore firm. David Cameron, the British prime minister, is facing criticism over an offshore company that his father set up. In Brazil, many of the people connected to the country’s unfolding corruption scandal appear to have held offshore shell companies set up by Mossack Fonseca. And in Russia, Sergei Roldugin, a cellist who is a close friend of Vladimir Putin, appears to control assets of over $100 million. Roldugin hasclaimed that this fortune is the result of donations from Russian businessmen to help buy expensive musical instruments for poor students. Clearly, classical music has some very generous friends among the Russian business elite.

At first glance, the Panama Papers leak looks a lot like other big leaks, such as the classified documents that U.S. Army soldier Chelsea Manningprovided to WikiLeaks or the former NSA contractor Edward Snowden’s trove of information on international surveillance. Like those leaks, the Panama Papers highlight the hypocrisy of prominent politicians and officials. The leak also recalls a series of less glamorous data leaks on the customers of secretive Swiss and Liechtenstein-based banks, which put pressure on governments to crack down on tax havens and allowed some authorities to pursue cases against tax evaders. Although few may remember, WikiLeaks began with a similar leak from the Swiss bank Julius Baer.

Yet the best comparison—and the best guide to what may happen next—is not to Snowden or Julian Assange but to Thomas Piketty, the famous French economist. Piketty’s book, Capital in the 21^st Century, has been interpreted as an economic history, as a grand economic theory and a gloomy political prognosis. Yet few have paid attention to its closing pages, where Piketty lays out the political bet that underlies his research program: that people simply do not know the full extent of economic inequality, and that politics would be transformed if they ever found out.

Piketty’s research and his political program are motivated by a belief that the true extent of economic inequality is invisible. Everyday statistics simply cannot capture the extent to which the rich are different from ordinary people. They are not designed to. Common techniques of measuring inequality, by comparing the income or wealth of the top ten percent of the population to the rest, do not capture how much richer the top one percent is than the top 10 percent, or how much richer the top 0.1 percent is than the mere one-percenters. As the American political commentator Chris Hayes observed in Twilight of the Elites: America After Meritocracy, inequality is like a fractal in that it gets deeper and stranger the further one investigates it. One reason why Piketty’s research has influenced other economists is that it figures out clever ways, such as using university endowment funds as a proxy for hidden fortunes, to measure the consequences of inequality despite imperfect data.

Piketty’s aspirations may yet be fulfilled, but only if the Panama Papers create a new, self-sustaining politics that demands ever more information on the ways in which wealth is being hidden.

But the problem goes beyond deficient datasets. The truly rich have the means and the incentives to hide their staggering wealth. Piketty’s collaborator, the Berkeley economist Gabriel Zucman, estimates that $7.6 trillion is hidden in offshore arrangements. The London real estate market has been reshaped by oligarchs from Russia and elsewhere who use shell corporations to park their capital in a safe and predictable economic system. Activists run Hollywood-style bus tours of the houses of the new kleptocracy.

YVES HERMAN

An activist shows fake banknotes during a demonstration outside the European Commission headquarters after the Panama Paper revelations, in Brussels, April 2016.

As the economist Branko Milanovic argues in his new book, Global Inequality, these trends are reshaping economic and political development. It used to be that economic elites had an interest in building up the rule of law in their own country, if only to protect their own property. Now they can just transfer the loot to London or New York, where “nobody will ask where the money came from,” Milanovic writes. Financial globalization is building a world similar to the one depicted in William Gibson’s grimly satirical science fiction novel, The Peripheral, in which the truly rich are unaccountable to anyone but themselves.

Piketty wants to map this hidden world and destabilize it. He believes that ordinary people simply don’t understand the extent of wealth because they aren’t able to comprehend it. There is thus an urgent need to generate new information that will help people understand how important wealth is, and who has it. This explains, for example, why Piketty wants a utopian global tax on economic capital. It’s not because such a tax would be a complete solution to inequality but because the tax would generate reporting requirements, and hence information on who holds which assets, allowing democracies to hold a “rational debate about the great challenges facing the world today” and who should pay for them.

Piketty’s perspective provides a different—and more fundamental—way of thinking about the long-term consequences of the Panama Papers. The Panama leaks, measured in gigabytes of information, are far larger than the Snowden and Manning ones. Yet compared with the true size of the offshore sector, they are less a leak than a trickle. Mossack Fonseca is not the only law firm setting up shell corporations to help people avoid taxes and scrutiny. And shell corporations are just one small part of a much larger system designed to hide people’s wealth.  The document release—although significant—is no substitute for the kind of detailed and comprehensive information that a global tax arrangement might provide.

The truly rich have the means and the incentives to hide their staggering wealth.

Still, the leak brings the world one step closer toward better information on global wealth. The United Kingdom, for example, has come under pressure to stop protecting its tax haven dependencies. France and Germany are calling for a blacklist of tax havens, which might be cut off from the SWIFT financial messaging network, a global network that financial institutions use to transmit information securely, if they do not make their ownership structures completely transparent.

STIGTRYGGUR JOHANNSSON / REUTERS

People demonstrate against Iceland’s Prime Minister Sigmundur David Gunnlaugsson in Reykjavik, April 2016.

Perhaps more important, in some countries the revelations are creating a new popular politics around tax avoidance and fraud. The Panama Papers have spurred massive public protests in Iceland and political furor in the United Kingdom. They are connecting technical questions of tax evasion and tax avoidance to everyday politics by identifying well-known politicians, officials, and celebrities who benefit from complex arrangements. Some of Piketty’s hopes for popular debate are being realized.

Even so, the effects have been sporadic. The revelations have had little popular impact in the United States, where no public figures have been identified as taking advantage of Mossack Fonseca. They have also yet to lead to substantial public outcry in countries such as Russia or China, where there are limited channels for public dissent. If this is indeed a first step toward identifying the true extent of global wealth inequality, it is only that.

Piketty’s aspirations may yet be fulfilled, but only if this release of information creates a new, self-sustaining politics that demands ever more information on the ways in which wealth is being hidden. This is a tall order given the complexities of international politics and the incentives for individual states to cheat, but the world is significantly closer to it now than anyone would have predicted three weeks ago.

Four KPMG Senior Execs Arrested on Tax Evasion Charges

Reported by The Financial Times (UK), CBC News and the Guardian (UK), November 27, 2015

Four senior executives from the Belfast office of international accountancy firm KPMG have been arrested on tax evasion charges.

Read more: KPMG Calls In Outsider In Northern Ireland Tax Fraud Investigation

Read more: KPMG Offshore Tax Sham Deceived Tax Authorities CRA Alleges

Read more: KPMG Tax Sham Used By At Least 25 Wealthy Canadians Document Says

KPMG acknowledged in a press release that four of its top executives in Northern Ireland were arrested Wednesday.

“Pending further information and enquiry, we can confirm that four partners in our Belfast office are on administrative leave. As the matter is ongoing, KPMG is not in a position to make any further comments at this stage,” the company said in a news release.

The four men who were charged and released are:

• Jon D’Arcy.
• Eamonn Donaghy.
• Arthur O’Brien.
• Paul Holloway.

From left to right: Eamonn Donaghy, Paul Holloway, Tom Alexander (not arrested or implicated), and Jon D’Arcy of KPMG Northern Ireland. Arthur O’Brien is not shown.  

New criminal offences that allow charges against people who help clients with tax evasion came into effect in the U.K. last March.

The Financial Times reports, “The arrests are the latest blow to Northern Ireland’s tightknit business community, which has been hit by a scandal surrounding the £1.2bn sale of a portfolio of property loans to Cerberus, a US private equity company. This year allegations emerged that some Northern Ireland politicians stood to gain from a £7m “fixer’s fee” linked to that deal.

The purchase of the loans is the subject of criminal investigations in the UK and the US.

As well as working together at KPMG, the four men are investors in a property company called JEAP Ltd. The company is registered in County Down and has a trading address at 17 College Square East in Belfast — the same address as KPMG. They are listed as JEAP’s directors and shareholders and its articles of association describe its purpose as “to engage in property development activities.”

It is not clear if the arrests are linked to the activities of that company. Property development was a popular investment among professionals on both sides of the border during Ireland’s property boom, which ended in 2008 when the global financial crisis hit.

An island-wide collapse in property prices triggered Ireland’s financial and banking crisis from 2008 to 2010, which reverberated almost as loudly in Northern Ireland as it did in the Republic. Many investors lost heavily in the crash.

The arrests of four such senior staff is a blow to KPMG’s presence in Northern Ireland. Its operations in Belfast are among the biggest of any professional services firm. It is understood that senior staff from the Dublin office have been sent north to ensure the office is able to carry out its day-to-day functions.” End

 

CRA alleges KPMG ‘tax scam’

Meanwhile in Canada, KPMG is fighting the Canadian Revenue Agency over tax arrangements that allegedly hide money for wealthy clients.

The CRA alleges KPMG has used “deceptive practices” that hide the money of wealthy clients in Canada..

In February 2013, a federal court judge ordered KPMG to turn over a list of multimillionaire clients who placed their fortunes in an Isle of Man tax shelter scheme created by the accountancy firm. KPMG is fighting that court order and has yet to identify the wealthy people involved.

The case is scheduled to return to court in 2016.

Legal action against the firm for violations of tax laws and links to tax shelters have been mounting in recent years.

Files leaked from Luxembourg earlier this year show KPMG among the advisers of some multinationals who have successfully shifted money to the low-tax region.

In 2005, the firm paid fines in the U.S. of $456 million US for creating illegal tax shelters to help rich clients avoid tax.

Pfizer’s Corporate Tax “Inversion” To Ireland: Masqueraded Tax Evasion

Pfizer CEO Ian Read

Pfizer’s announcement this week of its intricate $160 Billion merger/acquisition with Irish pharmaceutical company Allergan, revealed that Pfizer will be moving the new corporate headquarters to Dublin. Essentially, Pfizer, the much larger company, is providing a bridging loan to Allergan to purchase Pfizer so that it may move to Ireland.  This enables Pfizer to avoid paying U.S. taxes, even after receiving massive support for R&D from U.S. government programs. Pfizer CEO, Ian Read, has deflected questioning about the apparent tax avoidance scheme by simply saying that the price of the deal would have been different had Pfizer bought Allergan and remained in New York.  Needless to say, the reaction to this has been swift and harsh from many quarters.

Colorfully named offshore tax avoidance strategies like the “Dutch Sandwich” and the “Double Irish” have been superseded by wholesale corporate uprooting and transplantation in foreign jurisdictions.  Ireland is particularly notable for its favorable tax treatment of foreign companies, which has attracted the attention of the EU and U.S. tax authorities. Burger King’s merger with Tim Horton’s and corporate move to Canada is a recent case.  KPMG Canada’s Isle of Man scheme, while designed for high wealth individuals, is another example. The Pfizer/Allergan merger is a barely disguised form of corporate tax evasion that is for the moment legal, and evidence of the return of a Gilded Age of corporate excess and plutocracy. It is a social and political issue of the highest order, not to mention business ethics.

Included here is today’s editorial from the New York Times.

Pfizer’s Big Breakthrough: Global Tax Avoidance

THE NEW YORK TIMES

By THE EDITORIAL BOARD NOV. 24, 2015

 

The $160 billion deal to combine Pfizer and Allergan, the maker of Botox, does not appear to be illegal. But it should be. This merger is a tax-dodging maneuver that enriches shareholders and executives while shortchanging the public and robbing the Treasury of money that would pay for a host of government programs — including education, scientific research and other services that also benefit corporations.

Pfizer, with a market value of nearly $200 billion, will be acquired by the smaller Allergan, which is run from New Jersey but technically headquartered in Ireland. This will allow Pfizer, which is based in New York, to pass itself off as Irish as well. Once the paper shuffling is complete, much if not most of Pfizer’s earnings — including those that are made in the United States — will be taxed at global tax rates that are generally lower than American tax rates.

In recent years, dozens of American companies have used similar tactics, known as inversions, to reincorporate in Ireland, Britain and other countries with lower corporate tax rates than those in the United States — at a cost to the Treasury conservatively estimated at $20 billion over 10 years. Pfizer’s merger is by far the largest such move.

But if it’s a loss for taxpayers, it’s a great deal for Pfizer. As with other companies that have “inverted,” the only thing it has to lose is its tax obligations. Inverted companies almost invariably keep their headquarters and top executives in the United States. They remain listed on United States-based stock exchanges, where they raise capital under the protection of American securities’ laws. The newly combined Pfizer Inc. and Allergan P.L.C., for instance, will be renamed Pfizer P.L.C. and trade under the ticker symbol PFE, Pfizer’s current symbol, on the New York Stock Exchange, according to The Wall Street Journal.

In addition, inverted companies continue to enjoy the protection of patent laws in the United States, as well as their connections, official and unofficial, with federal research agencies — all of which are crucial to drug-company profits. Contrary to popular belief, much high-risk, pathbreaking research and development can be traced not to the big drug companies but to taxpayer-funded research at the National Institutes of Health.

Traditionally, corporate taxation was a way to repay the public for benefits companies received from federal support. But in recent decades, corporate taxes as a share of federal revenue have shriveled. Inversions will only worsen that trend, effectively bolstering corporate profits at the expense of the public.

Pfizer executives, and the executives of inverted companies, don’t put it that way. They say they cannot remain competitive if they have to pay tax on profits at the relatively high United States top rate of 35 percent.

That claim does not stand up. American multinationals routinely take advantage of write-offs that reduce the top rate to a much lower level. Moreover, even an inverted company is supposed to pay tax on earnings generated in the United States at American rates. But by having a foreign parent company in one country — Ireland in this case — while remaining headquartered in the United States, a company can lower its tax bill through an accounting gimmick known as “earnings stripping,” in which profits from the United States are shifted to the foreign parent in the lower-taxed country, thus reducing the American tax bill.

It is not hard to write legislation and draw up rules outlawing inversions, and bills currently in Congress could put a stop to them quickly. What is lacking is political will to tell powerful corporate interests to stop. The Treasury Department under President Obama has issued rules to curb the practice. But the Pfizer and Allergan hookup is expected to get around these constraints. The administration could do more, but even more aggressive executive action would not be as effective as robust legislation.

Reincorporating abroad is a sophisticated variation on the old practice of avoiding corporate taxes by renting a post office box in the Caribbean and calling it corporate headquarters. Congress put a stop to those tactics in 2004. It is past time to shut down inversions as well.

Uber’s Distortion of the Sharing Economy

I found this important editorial opinion piece in The Guardian, the UK journal. The point of this is, IMHO, a critically important moral issue. Many of these new corporate entities, Uber in particular, when viewed without their sheep’s clothing, are doing nothing more than joining the global corporate drive to eliminate the middle class, local government control, and to nullify any opposition to their strategy of  unfettered capitalist dominance.  I almost cannot believe that I just wrote those words. Jeremy Rifkin’s Third Industrial Revolution has been distorted into a monster that is eating people’s livelihoods.

Uber and the lawlessness of ‘sharing economy’ corporates

Companies including Airbnb and Google compare themselves to civil rights heroes while using their popularity among consumers to nullify federal law

Travis Kalanick, Uber CEO. ‘Nullifying companies like Uber claim they are striking a blow against regulations they consider “out-of-date” or “anti-innovation” – their major innovation, however, is to undermine local needs and effective governance.’ Photograph: Kim Kyung-Hoon/Reuters

Frank Pasquale and Siva Vaidhyanathan

In February, Airbnb chief executive Brian Chesky compared his firm’s defiance of local housing ordinances with that of Gandhi’s passive resistance to British rule. Meanwhile, a tweeter compared Uber to Rosa Parks, defying unjust laws. Chesky quickly backed down after widespread mockery. Companies acting out of self-interest comparing themselves with the noble heroes of civil rights movements is as absurd as it is insulting.

But there is a better analogy from the US civil rights era for law-flouting firms of the on-demand economy. It’s just not the one corporate leaders claim. They are engaged in what we call “corporate nullification”, following in the footsteps of Southern governors and legislatures in the United States who declared themselves free to “nullify” federal law on the basis of strained and opportunistic constitutional interpretation.

Nullification is a wilful flouting of regulation, based on some nebulous idea of a higher good only scofflaws can deliver. It can be an invitation to escalate a conflict, of course, as Arkansas governor Orville Faubus did in 1957 when he refused to desegregate public schools and president Eisenhower sent federal troops to enforce the law. But when companies such as Uber, Airbnb, and Google engage in a nullification effort, it’s a libertarian-inspired attempt to establish their services as popular well before regulators can get around to confronting them. Then, when officials push back, they can appeal to their consumer-following to push regulators to surrender.

This happened just last week in New York City, when mayor Bill de Blasio moved to limit the number of Uber cars choking city streets during the heaviest hours of congestion. Uber pushed out advertisements voiced by celebrities including model Kate Upton and urged its wealthy users to write to city hall in protest. Mayor de Blasio stood down. Consistently, these nullifying companies claim they are striking a blow against regulations they consider “out-of-date” or “anti-innovation”. Their major innovation, however, is strategic and manipulative, and it’s meant to undermine local needs and effective governance.

Between 2005 and 2010 Google shot photos of much of the world – and many of its people – without permission for its Street View project, often pushing the limits of privacy laws along the way. In addition, Google hoovered up data from Wi-Fi networks that its cars passed through. To this day, Google has not explained why it captured all that private data. It worked. Despite some incidents in which Google had to reshoot the street scenes most regulators backed down because the public had grown used to the service or Google appeased them somehow.

Google’s strategy was to flip the defaults: Anyone who took issue with a shot on Street View was welcome to apply to have it removed. So it became our burden, not Google’s, to protect privacy. Google engaged in the same strategy of shoot (digital images) first and answer questions later when scanning copyrighted books. Some people got mad over these bold moves. Some people sued. Google worked through the conflicts later – sometimes by winning in court (as in the case of book scanning) and sometimes by losing rulings in Australia, South Korea, and Japan, and Greece, where Street View was ruled illegal in 2009.

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Republican presidential candidate Jeb Bush, puts on his seat belt gets into an Uber car after speaking at Thumbtack, an online startup in San Francisco. Photograph: Eric Risberg/AP

The analogy is most obvious in the case of an American civil rights law itself. Uber has ignored advocates for the blind, and other disabled persons, when they claim Uber’s drivers discriminate against them. In response to a lawsuit by the National Federation of the Blind, Uber bluntly asserts that it’s merely a communication platform, not the type of employer meant to be covered by the Americans with Disabilities Act. Some judges and regulators accept that reasoning; others reject it. But the larger lesson is clear: Uber’s aggressive efforts to avoid or evade disability laws are nothing less than a form of corporate nullification, as menacing to the rule of law as defiance of civil rights laws in the days after courts ruled against racial segregation in the US.

In addition, Uber has confronted admittedly stifling restrictions on taxi driver licenses in France by launching a service called UberPop. Several authorities in Europe have ruled UberPop illegal, but Uber kept it operating anyway as it appealed. Now France has charged Uber’s general director for France, Thibaud Simphal, and the company’s director for Western Europe, Pierre-Dimitri Gore-Coty with enabling taxi-driving by non-professional drivers and “deceptive commercial practices”.

One could make a strong argument that France would benefit from more taxi drivers and more competition. But that’s for the people of France to decide through their elected representatives. The spirit of Silicon Valley should not dictate policy for the rest of the world. New York, Paris, London, Cairo, and New Delhi all have different values and traffic issues. Local needs should be respected.

Consider what it would mean for such a universalising approach to prevail. The business model of Uber would become that of law-flouting bosses generally. Reincorporate as a “platform”, intermediate customer requests and work demands with an app, and voila!, far fewer laws to comply with. Worse, this rebel attitude signals to the larger culture that laws and regulations are quaint and archaic, and therefore hindrances to progress. That could undermine faith in republican government itself.

In the 1950s and 60s, Southern governors thought they’d found a similar tactic to avoid the civil rights laws that they most despised. Though the strategy failed, the idea still animates reactionaries. Former Arkansas governor Mike Huckabee, now running for president, has even suggested that the US supreme court’s recent gay marriage decision should effectively be nullified by sovereign states.

Of course, a republic can’t run without authorities who follow the rule of law. Civil disobedience by citizens can be an important challenge to corrupt or immoral politicians, but when corporate leaders themselves start breaking the law in their own narrow interests, societal order breaks down. Polishing their left-libertarian veneer, the on-demand economy firms now flouting basicemployment and anti-discrimination laws would like us to believe that they follow in the footsteps of Gandhi’s passive resistance, rather than segregationists’massive resistance. But their wealthy, powerful, nearly-all-white-and-male cast of chief executives come far closer to embodying, rather than fighting, “the man”.

As Silicon Valley guru Peter Thiel has demonstrated, the goal of tech firms is not to compete – it is to so monopolise a sector that they basically become synonymous with it. Uber’s and Airbnb’s self-reinforcing conquests of markets attract more venture capital (VC) investment, which in turn enables more conquests, which in turn attracts more VC money. As that concentration of economic power continues apace, it’s more vital than ever to dispute Silicon Valley oligarchs’ self-aggrandising assertions that they follow in the footsteps of civil rights heroes.

As allegedly “innovative” firms increasingly influence our economy and culture, they must be held accountable for the power they exercise. Otherwise, corporate nullification will further entrench a two-tier system of justice, where individuals and small firms abide by one set of laws, and mega-firms create their own regime of privilege for themselves and power over others.

Frank Pasquale is a professor at the University of Maryland School of Law and the author of Black Box Society: The Secret Algorithms that Control Money and Information (Harvard University Press, 2015).

Siva Vaidhyanathan is a professor of media studies at the University of Virginia and the author of The Googlization of Everything – and Why We Should Worry (University of California Press, 2011).

Super Rich Guy to Billionaires: Get with the 99% Or Prepare for Revolution

 

Some people seem to be having a problem with Nick Hanauer.  He seems to have pissed off a lot of people, but at the same time, he seems to be talking sense and to have achieved significant traction. This often seems to happen in times of turmoil and change. A multi-millionaire in his own right, but also someone with a profound liberal arts and humanities grounding, Mr. Hanauer has called “foul,”  with the behavior of the 1%. I am personally fascinated with people like this, because I sense that Hanauer is somewhat like me. I worked with Ivy League MBA’s at Intel who said to me that they wished that they had my humanities education, while I told them that I wished I had their management education. I now teach management in a prestigious university and can comment intelligently.

I admit openly to being a capitalist, but something has gone terribly wrong with our system.  I follow the leading global investment banks. I know about Michael Lewis, Liar’s Poker, Flash Boys, LIBOR, foreign exchange fraud, commodity trading fraud, tax evasion for wealthy U.S and German clients, money laundering for drug cartels and ask myself what has gone so terribly wrong.  The worst has been Silicon Valley luminary venture capitalists like Tom Perkins, who have become an obscene embarrassment. Some of the wealthy have tried to distance themselves from Mr. Perkins, but actually have their own equivocations for why everyone misunderstands them.

I agree with Mr. Hanauer. The pendulum is swinging back as it always does and unless the rich get on board with ethical reform, the backlash will be harsh.

 

Super-Rich Guy To ‘Zillionaires’: Back $15 Minimum Wage Or

Prepare For Revolution

Reblogged from The Huffington Post  |

A Seattle millionaire is urging his super-rich peers to support a $15 minimum wage or face the possibility of a devastating populist revolt.

In an essay published this week by Politico Magazine, venture capitalist Nick Hanauer warned that the widening income gap in the U.S. would eventually spark a violent revolution.

“No society can sustain this kind of rising inequality,” Hanauer wrote in the piece, shared nearly 200,000 times on Facebook by Tuesday afternoon. “In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out.”

Hanauer, whose fortune ballooned thanks to an early investment in Amazon, first suggested raising the minimum wage to $15 last year in an op-ed published by Bloomberg View.

A February profile in the Seattle Timessaid he first became “obsessed” with the $15-an-hour figure in late 2012. Last month, with Hanauer’s blessing, Seattle’s city council unanimously passed an ordinance enshrining that wage — the nation’s highest guaranteed minimum pay — in law.

Hanauer has faced criticism from conservatives and business pundits. In 2012, his TED talk about imposing more taxes on the wealthy was banned from the conference’s site after it was deemed “too political.”

Hanauer argues in the Politico essay that the trickle-down economics evangelized by conservatives since President Ronald Reagan is “idiotic” and compared it to the way medieval monarchs and rulers claimed their fortune and power was bestowed by higher powers.

“Historically, we called that divine right,” he wrote. “Today we have trickle-down economics.”

That philosophy makes it difficult for middle-class customers to earn enough money to spend on the products people get wealthy selling, Hanauer writes.

“The model for us rich guys here should be Henry Ford, who realized that all his autoworkers in Michigan weren’t only cheap labor to be exploited; they were customers, too,” he writes. “Ford figured that if he raised their wages, to a then-exorbitant $5 a day, they’d be able to afford his Model Ts.”

Hanaeur said inaction by larger companies like Walmart and McDonald’s prove that “we should compel retailers to pay living wages – not just ask politely.”

This year has given Hanauer reasons to feel emboldened. French economist Thomas Piketty struck a nerve with his book on the widening wealth gap, Capital In The Twenty-First Century which skyrocketed to No. 1 on Amazon. Further fueling the fire, the International Monetary Fund last month urged the United States to raise the minimum wage or risk even slower economic growth.

“If workers have more money, businesses have more customers,” Hanauer wrote. “The middle class creates us rich people, not the other way around.”

Are We Facing a Future of Invisible Workers?

Are We Facing a Future of Invisible Workers? | Blog, What We’re Reading | BillMoyers.com.

February 25, 2014

This undated photo provided by Facebook shows the server room at the company’s data center in Prineville, Ore. (AP Photo/Facebook, Alan Brandt)

At The New Yorker, George Packer considers one significant way in which this Gilded Age differs from the last one. Amazon, Apple and Google are not Standard Oil, Ford or General Motors, but there are parallels.

Packer writes:

A hundred years ago, the popular image of the worker was a sweaty toiler, his face smudged with coal dust or scorched by the blast furnace, oppressed by the industrial machine but not its total victim. He was coiled with potential energy that was frightening to some and inspiring to others — he had the country’s future in his muscular hands. By the time Studs Terkel published his oral history “Working,” forty years ago next month, that image had blurred. The Chicago steelworker at the start of the book was a working stiff, bored and trapped by his job but still able to take its existence for granted. And he now had company — among others, a hospital aide, a supermarket cashier, a pair of hair stylists. These were the last days of secure blue-collar work, and the beginning of wage stagnation in the service economy.

In the decades after 1974, the archetypal worker became a store greeter at Walmart — part time, nonunion, making near-poverty wages. The animating spirit of her working life was no longer the dignity of labor, the drama of factory strife, or the slackness of union bureaucracy — it was required cheerfulness barely concealing an unhappiness that she was too afraid to show. She was isolated, anxious, and, basically, powerless, under the constant threat of having no job at all.

As the bottom fell out of the working class, this attitude spread to other kinds of work, including the once formidable assembly line: employees at the Volkswagen plant in Chattanooga, who recently voted against joining the United Auto Workers, cited the fate of their counterparts in Detroit. Solidarity had become too risky — they were lucky just to be making nineteen dollars an hour.

When I wrote about Amazon – which is as emblematic of the American corporation in 2014 as U.S. Steel was in 1914 and Walmart in 1994 — for a story in The New Yorker, earlier this month, I began to wonder what a company worker looked like. I found it hard to come up with an image. Amazon’s workforce is made up mainly of computer engineers and warehouse workers, but when you think of Amazon you don’t picture either one (and there aren’t many photographs to help your imagination). What you see, instead, is a Web site with a button that says “ADD TO CART” and a cardboard box with a smile printed on the side. Between clicking “BUY” and answering the door when U.P.S. arrives lies a mystery — a chain of events that only comes to mind if you make a conscious effort. The work is done by people you don’t see and don’t have to think about, which is partly what makes Amazon’s unmatched efficiency seem nearly miraculous.

The invisibility of work and workers in the digital age is as consequential as the rise of the assembly line and, later, the service economy… With work increasingly invisible, it’s much harder to grasp the human effects, the social contours, of the Internet economy.

Read the whole piece at The New Yorker.

Tom Perkins of KPCB, Another Silicon Valley Jerk. Where Have We Gone So Wrong?

This weekend, the media and blogosphere have been ignited with reaction to the open letter to the Wall Street Journal by venture capitalist Tom Perkins, founder of Kleiner Perkins Caufield & Byers, and the blowback from Atlantic Magazine writer Jordan Weissmann. The overwhelming reaction has been disbelief and outrage at Perkins comments.

I am so angry and sad to see this article and interview of legendary Silicon Valley venture capitalist, Tom Perkins. It is further evidence to my earlier post on the “Silicon Valley Jerk Conundrum.”  Mr. Perkins and his firm, Kleiner, Perkins, Caufield & Byers, better known in the Valley as KPCB, have spawned some of the best and most famous companies in Silicon Valley. Former Intel colleagues, Jim Lally and John Doerr partnered there. Vinod Khosla, co-founder of Sun Microsystems made his mark there, and is now the leading clean tech VC in the Valley. But Mr. Perkin’s public claim in his interview with the Wall Street Journal that there is a “war” on the rich, which is like the Nazi’s extermination of the Jews, is just too much for any decent thinking person.  Where has Silicon Valley gone so terribly wrong as to create a plutocrat like this?  As the writer says, “This is the reductio ad absurdum of a rich-guy’s persecution complex. The Jews were a minority. The rich are a minority. Therefore, criticizing the rich is akin to committing genocide against the Jews.”

Read more: The Silicon Valley Jerk Conundrum

As a Silicon Valley veteran I am deeply ashamed of this man and his thinking.

Venture Capitalist Says “War” on the Rich Is Like Nazi Germany’s

War on the Jews

In a letter to the Wall Street Journal, Tom Perkins makes the worst historical analogy you will read for a long, long time.

JORDAN WEISSMANNJAN 25 2014, 12:34 PM ET

Venture capitalist Tom Perkins (Reuters) of Kleiner, Perkins, Caufield & Byers

Tom Perkins is known is a founder of one of Silicon Valley’s top venture capital firms,  Kleiner Perkins Caufield & Byers. He is not, however, a very adept historian.

In a letter to The Wall Street Journal, he suggests that progressives protesting income inequality are today’s equivalent of Nazi’s persecuting Jews.

Regarding your editorial “Censors on Campus” (Jan. 18): Writing from the epicenter of progressive thought, San Francisco, I would call attention to the parallels of fascist Nazi Germany to its war on its “one percent,” namely its Jews, to the progressive war on the American one percent, namely the “rich.”

From the Occupy movement to the demonization of the rich embedded in virtually every word of our local newspaper, the San Francisco Chronicle, I perceive a rising tide of hatred of the successful one percent. There is outraged public reaction to the Google buses carrying technology workers from the city to the peninsula high-tech companies which employ them. We have outrage over the rising real-estate prices which these “techno geeks” can pay. We have, for example, libelous and cruel attacks in the Chronicle on our number-one celebrity, the author Danielle Steel, alleging that she is a “snob” despite the millions she has spent on our city’s homeless and mentally ill over the past decades.

This is a very dangerous drift in our American thinking. Kristallnacht was unthinkable in 1930; is its descendent “progressive” radicalism unthinkable now?

Kristallnacht was a rash of anti-Jewish riots that swept Germany, Austria, and the Sudetenland in 1938, in which ordinary Germans, with Nazi support, destroyed Jewish shops and burned synagogues. As the U.S. Holocaust Memorial Museum notes in its online encyclopedia:

As the pogrom spread, units of the SS and Gestapo (Secret State Police), following Heydrich’s instructions, arrested up to 30,000 Jewish males, and transferred most of them from local prisons to Dachau, Buchenwald, Sachsenhausen, and other concentration camps. Significantly, Kristallnacht marks the first instance in which the Nazi regime incarcerated Jews on a massive scale simply on the basis of their ethnicity.

This is the reductio ad absurdum of a rich-guy’s persecution complex. The Jews were a minority. The rich are a minority. Therefore, criticizing the rich is akin to committing genocide against the Jews. QED.