New Law Could Hold Service Providers Liable For Investor Misrepresentations

from the safe-harbors? dept

In general, we're big fans of the safe harbors found in the DMCA and the CDA, as they do what common sense should do instead: make sure that a third party is not held liable for actions of its users. Unfortunately, common sense isn't always so common, and some people have trouble understanding this concept. In fact, it appears that a new bill may go in the other direction when it comes to investor information. A proposed bill that is supposedly designed to allow the SEC to better protect investors from bad info would potentially hold service providers liable for information posted by users if the service provider has "actual knowledge that the material contains a misrepresentation [or] in the absence of actual knowledge, is aware of facts or circumstances from which it is apparent that the material contains a misrepresentation [and] upon obtaining such knowledge or awareness, fails to act expeditiously to remove, or disable access to, the material."

That would go against the basic Section 230 CDA safe harbors, so I'm not quite sure how you reconcile the two. In general, you can understand why it seems to make sense that service provider needs to remove such info, but it opens up all sorts of questions. Say someone in our comments posts some sort of misrepresentation. Are we now going to need to police that? If someone else tells us it's a misrepresentation, will we now need to delete the comment? Are we expected to investigate whether or not some random comment on the site is a misrepresentation? Policing such things on forums all over the place would place an incredible burden on any website that allows user generated content. Why not keep the Section 230 safe harbors and focus on holding the actual parties (those who posted it) responsible, rather than the tools they use?

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Universal Music Told, Once Again, It Can't Sue Veoh's Investors For Veoh's Actions

from the good-news dept

Back in February, Universal Music got slapped down for its highly questionable attempt to sue the investors in Veoh for the actions performed by the company itself. We've never quite understood why the major record labels have tried, repeatedly, to sue the investors of sites and services they don't like. It's hard to see how that's justified, because if those investors are found liable, it would create a huge liability for any investor. Investors don't have day-to-day control over a company, and trying to make them liable for the actions of the company makes no sense. However, not only was Universal shot down in this attempt, but it tried to refile the lawsuit against the investors... and was shot down yet again. The judge noted that Universal Music presented no evidence as to why the investors should somehow be responsible for the actions of the company and tossed out the lawsuits against them again. Hopefully this wakes up EMI, who recently sued the investors in a small startup as well.

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EMI Continues Suing Innovators And Their Investors

from the someone-smack-them-down dept

Warner Music has led the way for the big record labels to combat any innovation: it tends to sue every new startup that does anything remotely innovative with music, and as part of any "settlement" demands they either shut down or give a big equity stake to Warner Music. It's extortion by lawsuit -- and it's designed to prevent any sort of innovation. However, it looks like EMI is quickly following suit. Despite its new (non record industry) owners who declared that it was time for EMI to take a new approach to the industry, and even hiring some tech industry hotshots, the company just can't stop suing small innovative startups. It's sued MP3Tunes for letting people store and listen to their own, legally purchased music. It's sued Hi5 and VideoEgg for having user-uploaded videos that include music -- despite the DMCA's safe harbors that remove liability from them.

Even worse, however, is EMI's habit of trying to drag other parties into the lawsuit. For example, in the MP3Tunes lawsuit, beyond suing just the company, EMI sued founder Michael Robertson personally. The latest case is another example of that. EMI has sued both Seeqpod and Favtape. EMI is a bit behind Warner Music on this one. Warner sued Seeqpod last year. Favtape is similar to a number of other rather useful online services for creating playlists. It actually uses Seeqpod as its main search engine. Seeqpod is merely a search engine for music, looking across a variety of public sources for music. It doesn't host any of its own music, and has no way of knowing whether or not the music it finds is authorized or not. It's quite difficult to see how Seeqpod is doing anything illegal at all, and since Favtape is simply built on top of that, using Seeqpod's APIs, it's even less obvious how Favtape is doing anything wrong. In fact, this raises some very troubling legal issues: if you use someone's APIs, are you legally liable for the actions of the company powering the underlying service? That would create a massive chilling effect on innovation if true.

But, of course, EMI is making the situation even worse. Rather than just suing the companies, it's also suing investors and the founders personally. This isn't just highly unusual, it's a clear attempt to pressure these companies into settling, as no matter how legitimate your stance is, it's quite a scary thing to be sued personally, and potentially have personal assets at risk. Suing the founders personally is legal bullying. It's a clear abuse of the legal system to try to force a settlement, rather than an actual attempt to raise a legal issue.

Suing the investors is equally as ridiculous -- and is a clear attempt to try to get those investors to push the companies to settle. This tactic has been used in the past a few times by the big record labels, initially with Universal Music's attempt to sue Napster's investors. Most recently, Universal Music tried to do the same thing with Veoh, but a court slapped them down. Hopefully, the investors in question will point this ruling out to the court in question in asking for a quick dismissal. Furthermore, hopefully a judge will sanction EMI for abusing the legal process to bully these companies and individuals.

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Universal Music Group Slapped Down (Again) In Case Against Veoh

from the can't-sue-the-investors dept

The ongoing lawsuit between Universal Music Group and online video site Veoh is seen by many as a precursor to the various lawsuits against YouTube (or, more specifically, the "big" lawsuit from Viacom). So far, it's not going well for the content companies. In another lawsuit, filed by an adult video company, Veoh won easily. In the UMG case, the judge has already shot down Universal Music's arguments for why Veoh shouldn't get DMCA safe harbor protection.

The latest news is that the judge has also dismissed Universal Music's attempt to include Veoh's investors as a part of the lawsuit. Universal's attempt to do this matched Universal's decision to sue Bertelsmann, a competitor who was also an investor in Napster. This made little sense to us at the time. Making an investor liable for actions of a company they invest in seems to open up a pandora's box of problems. Think of all the "shareholder lawsuits" you now see against management for corporate misdeeds... and turn that around, whereby anyone hurt by a company's actions could sue all of the investors. If investors are liable for a company's misdeeds, then suddenly it becomes a huge liability to invest in anything.

Eventually, Universal Music bought Bertelsmann... and rather than continue suing itself, Bertelsmann "settled." Bertelsmann (now UMG) later settled similar lawsuits brought by other labels, so the full issue of investor liability wasn't really addressed. In this case, the judge found that the only way Universal could make a credible claim that the investors were also liable was to show that they were actively encouraging increased copyright infringement after it was established that Veoh was infringing. That hasn't been established yet, at all, and it appears that the investors were actively pushing Veoh to block infringing content. So, Universal's claim against the investors has absolutely no merit whatsoever.

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Investors Recognizing How ProIP Is Bad For The Entertainment Industry

from the it's-not-a-bad-thing dept

Kevin Stapp writes in to point out an interesting article over at the Motley Fool, where the author, Anders Bylund, points out why the new ProIP law is bad for the big entertainment companies from the perspective of an investor in those companies. Basically, he recognizes what some of us have been saying for years. If you rely on stronger copyright as a crutch to protect an old business model, you're much slower to adopt newer business models that can greatly increase the size of your market. In other words, by denying the growth potential of infinite goods, you shrink the potential size of your market, and that's bad for the company and bad for investors:

As much as I love my Walt Disney investment and the great entertainment the company has created over the years, it's also part of a boneheaded industry that can't deal with the digital revolution.... Disney, Warner Music, and their colleagues could handle rampant piracy in a much more delicate manner and turn today's massive problem into free distribution and dirt cheap marketing. Yes, there are ways to make money when others copy your dearly beloved content for free. The PRO-IP Act is a step in exactly the wrong direction, though.

Exactly. And this reinforces the point that it's a mistake to keep trying to find the right "balance" between content producers and content consumers. There's no need for a balance if the content producers adopt business models that both expand their market (by properly defining the market) and leave consumers free to share and promote the content in a way that actually helps the bottom line of the content producer. It's quite rare to see short-term investor-types recognize such strategies, so it's quite interesting to see a discussion like this on a mainstream site like the Motley Fool. Hopefully others will start recognizing this reality soon as well.

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Finding The Last Sucker To Invest

from the how-the-game-is-played dept

Valleywag points us to a rather scathing profile of late stage "investment" firm Advanced Equities in Chicago. Valleywag refers to the operation as a venture capital firm, but the details suggest it's a bit different than a traditional VC firm, which tends to raise a fund and then invest it as deals come up. Instead, it looks like AE is more of an investment hunter. While it does appear to have some money under management, it sounds like other VCs come to AE to go out and find investors to invest in the latest round. Tellingly, rather than referring to these investors as "limited partners" like a regular VC firm, AE refers to them as "customers." And, from the Forbes story, it sounds like those "customers" are basically unsophisticated investors who don't recognize what they're getting into.

Rather than billionaires, say former AE brokers, many clients are doctors, lawyers and dentists who lack the sophistication of typical institutions and ultrarich VC investors.

As an example, they cite one such case:

In 1999 AE sold Constance Kamberos, now 82, $330,000 worth of "bridge" notes issued by Hymarc, a firm it backed. Kamberos says the notes were pitched as a relatively safe way to earn a 12% yield. When she didn't get paid by Hymarc, Kamberos visited AE in Chicago's Loop. After she had a heated exchange with Daubenspeck, AE had the cops haul her away, Kamberos says (AE says she visited repeatedly and was hauled out by building security)

These aren't stories you hear with a typical VC firm. These sound more like stories you hear from "boiler room" operations tricking unsophisticated investors out of their hard-earned savings. Yet, as Forbes notes, big Silicon Valley VC firms like Kleiner Perkins and NEA love to talk up AE. Hmm. Then, let's recall that the IPO market has pretty much dried up for startups lately, and you can start to put two and two together.

In the bubble years, the "business model" of certain venture backed startups, was basically to sell equity to the last sucker. In the late 90s that was the public market -- consisting of a bunch of unsophisticated retail investors who would overpay for junk. But it's harder to get access to the public markets, and at least a few of the suckers have learned at least some of the lesson. However, if you can convince those suckers that they're getting in on a special deal -- say a "late stage, pre-IPO startup backed by the biggest names in Silicon Valley" the lessons learned from the last bubble go out the window. Reading this, it would appear that AE's function is to bring those "last suckers" to these startups and their VCs without going through the painful public market IPO process.

What's not clear is whether or not the VCs (and startup founders?) are taking money off the table directly during these late stage financings -- but it wouldn't be all that surprising (such deals are increasingly common these days). And, it would explain situations like the one in the Forbes article where AE helped gather up $45 million from "customers" to invest in a company called Agami. Five months later, the company no longer existed. Even people who worked at the company had no idea what happened to the money. The Forbes piece also notes that AE often pumps up the valuation of the startups in question, meaning that an earlier stage VC could be selling its shares as part of that "investment" (i.e., the money would go straight to the earlier investors, rather than the company), allowing them to still get a positive ROI on a company about to go broke.

If the Forbes report is accurate, then it certainly sounds like VCs may have figured out a different way to find that "last sucker" it needs to cash out certain investments without having to take a company public. It doesn't necessarily sound illegal (though that may depend on the details -- and there are apparently a bunch of lawsuits floating around AE). Never underestimate the ability of early stage investors to eventually find a bigger sucker to take their bad investments off their hands.

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Not Recommended: Trying To Boost A Company's Stock By Bombing Investment Banks

from the this-stock-is-ready-to-explode! dept

Investors do all sorts of odd things in trying to get the stocks they like to go up, rather than down. However, there's a limit -- and apparently one guy went way past that limit in trying to boost the stock of networking firm 3com. He sent bomb threats to 17 different investment firms, demanding that they boost the stock. Apparently, he actually did send two bombs, though it doesn't sound like they exploded. Either way, if you suddenly feel that you need to send bombs (or even just threats) to investment banks to make your investments rise, perhaps you should consider different investment opportunities.

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Bertelsmann Agrees To Pay One More Time To Finally Settle All Of Napster's Mistargeted Lawsuits

from the bad-precedents dept

It never made sense that the various record labels and music publishers sued record label Bertelsmann for the Napster affair. Yes, it's true that Bertelsmann was the only major record label to view Napster as an opportunity rather than a threat. And it's true that Bertelsmann invested quite a bit of money into Napster. But, the other record labels' misguided complaint was with Napster -- not with Bertelsmann. The problem was that after winning the original Napster lawsuit, the other record labels realized that Napster had no money. So they sued Bertelsmann instead, for being the only record label with forward-thinking management to invest in Napster. However, it makes no sense to put any kind of liability on investors in a company. Otherwise, it would make life quite difficult for any investor today -- who could then be sued for the actions of the company he or she invested in. It would greatly increase the liability for retail investors as well as institutional investors. It's for that reason that it would have been nice to see Bertelsmann fight this case and win it.

Unfortunately, before the case had a chance to get anywhere, Universal Music (who was the first to sue Bertelsmann) bought Bertelsmann. Then, rather than sue itself, the company quickly settled that portion of the lawsuit and proceeded to settle the other portions as well, with the final part of the case finally settling late last week. Bertelsmann eventually had to pay out approximately $300 million in all of these "settlements," which is a real shame since all the company did was invest in a service that its executives (who were soon fired) realized could have revolutionized the music business. While these are all settlements, meaning that there's no court precedent, this could still encourage companies to sue investors in companies rather than the companies themselves. Venture capitalists and private equity firms might want to take note.

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