Issues & Opinions

Regarding the recent festivities between Dow Jones and News Corp, the first legal shots have now been fired.

Unsurprisingly, there are criminal investigations of potential insider trading, if not yet indictments. Perhaps a bit surprising under the circumstances, there’s also a civil suit brewing.

In an article from today’s WSJ, we find an instance of proper use of the system, with “Regulators Probe Suspicious Trading in Dow Jones“. No shock, that. The NY Attorney General, federal prosecutors, and the SEC have once again become noticeably more vigilant to potential insider trading abuses, and that’s all for the good.

The authorities likely will be looking at trading in Dow Jones options from late April. More than 10,000 call options on the stock changed hands in that period, compared with about 7,000 during the entire first quarter.

Trading on material non-public information happens all the time, and while it may seem heretical to say, its mere existence isn’t the problem. The problem occurs when the fact of insider trading becomes blatantly obvious, eroding confidence in the market.

The markets aren’t fair, and aren’t even designed to be fair, but instead to give the reasonable appearance of being so. And in pursuit of that goal, prosecutors and regulators don’t like statistical oddities such as these. Those tempted to trade on inside information should realize that the tactic only works if done under the radar, which in this case would mean they’d have to hope they were the only ones doing so. Never a safe assumption, of course, and I’d hope the inside traders soon regret their folly. That folly? Stupidity and greed, not specific to insider trading.

As also related in the story, the civil side of the court docket has been started, but in what seems to be an overtly silly manner:

Separately, Nora Vides, a Dow Jones shareholder, filed suit May 3 in New York state court, claiming that Dow Jones directors, including members of the Bancroft family, breached their fiduciary duty through a “hasty” rejection of News Corp.’s bid. The bid was rejected, the plaintiff claimed, so that the directors could maintain “their controlling voting position against any real or perceived threat.” Ms. Vides filed the suit, which seeks class-action status, on behalf of other shareholders. Legal representatives for the family couldn’t be reached for comment. Dow Jones said it hadn’t received the complaint and didn’t have any comment.

As previously mentioned here and elsewhere, the presumption of a fiduciary duty to the other shareholders on the part of the Bancroft family is incorrect. Likewise, the 4 (of 16) separately elect directors on the board have a duty to the Bancrofts’ B-shares, over and above their duty to the holders of the A-shares. For democracy advocates, it’s important to remember that the Bancrofts’ board representation, unlike their voting rights, is quite proportional to their economic interest in the company’s equity, and that those four directors could not, by themselves, block the sale of the company. It seems that Nora Vides’ complaint is based on the fact that the full board rejected the offer too quickly, and that this is somehow a bad thing. I find myself wondering whether her attorney was present in class they day they were teaching law.

It’s not as though the board didn’t check with the shareholders to see if there was interest in a deal. Quite the contrary, based on the dual-class share structure, the board as a whole was in a position to easily determine what the shareholder vote would be.

So I guess her basis for suit (or the ludicrous basis on which some attorney convinced her to file) is that, while the results of a putative shareholder vote were easily and quickly determined, the board should have waited much longer to announce them. The purpose that would have served is beyond me, but then I’m not a class action plaintiff. In any event, the DJ board didn’t reject the offer, they simply decided to take no action at this time.

Ms. Vides will probably not end up having wasted any money on this action, since the attorney likely took it on a contingent fee basis. Consider how silly that attorney will look, when the Murdoch bid ultimately succeeds (as is my guess on the matter), and when that attorney will be trying, fruitlessly, to gain recompense for expenses in what will end up a moot case. Luckily for the defendants, should such a thing happen, the basis for that expense claim will be just as sketchy as that of the original class action suit.

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