One possible reaction to Apple’s gigantic tax-optimized share repurchase program is to think that spending a lot of time fiddling with how to optimize your share repurchase program might mean you’re out of better ideas. You can ponder whether this Intel share repurchase trade described in a Lehman Brothers bankruptcy lawsuit filed yesterday supplies any evidence on that question. Intel decided to buy back $1bn of its stock in August and September of 2008, and rather than just buy it in the market it entered into a pretty fiddly forward contract with Lehman like so:¹

• Intel gives Lehman $1bn on August 29.
• Lehman hands the $1bn back to Intel for safekeeping – it’s Lehman’s money, but Intel keeps it as collateral.
• On September 29, Lehman gives Intel some shares, based on the average price of Intel stock from August 29 to September 26.²
• The dollar amount of shares Intel buys is $1bn, if the average price is $21 or below, or $250mm, if the average price is $25 or above, or some amount linearly in between if the average price is between $21 and $25:

• If the dollar amount Intel buys is less than $1 billion, Lehman gives back the extra money.
• So in other words as the stock price goes up Intel buys fewer shares, and vice versa, which is kind of wrong-way for them³ but right-way for Lehman.
• In exchange for that risk Lehman agrees to give them a discount of 10.6 cents per share.⁴
• The number of shares Intel buys is equal to the dollar amount divided by the average price minus 10.6 cents:

• When they entered the contract, on August 1, Intel was at $22.35; on August 29, when the averaging started, it was at $22.87.

But then Intel’s stock price dropped rather sharply over the next two months, because all stock prices dropped rather sharply, because – well, among other things, because Lehman went bankrupt on September 15. So the average price ended up being $19.8872 and the number of shares was 50,552,943.⁵ But on September 29, when it was due to get the shares and give back Lehman’s collateral, Intel’s stock price was just $17.27, making those shares worth only about $873mm. That $873mm was less than the $1bn of collateral that Intel was holding for Lehman.

Intel, sensibly enough, decided it would rather have $1 billion of cash than $873mm worth of its own stock. So it decided to DK the trade and keep the collateral instead. This was not exactly sporting – it probably wasn’t exactly legal – but Lehman … I guess had bigger problems? In any case they seem to have been okay with this for five years, and only got around to suing about it yesterday.

Lehman’s basic argument is that it didn’t owe Intel $1bn, it owed 50.55mm shares, and so Intel had no right to seize its collateral instead of taking the shares. This is surely right. The question of damages is a harder one; basically Intel really ought to give Lehman back the difference between (1) $1bn and (2) the value of 50.55 Intel shares. But, when? On September 29, 2008, those shares were worth $873mm, so Intel should owe Lehman’s estate some $127mm. Lehman’s lawyers have a clever argument that Intel was required to cover its missing shares in the market, and that it couldn’t do so until November 2008 because it was in an earnings blackout, and if it had bought in the market over the course of November 2008 then it would have paid only $688mm for the shares and so I guess Intel owes Lehman $322mm.⁶ On the other hand, I suppose if I were Intel I’d say “okay, fine, we’ll give you back your $1bn with interest, you just give us 50.55 million Intel shares.” As of today those shares would seem to be worth about $1.2bn, making it basically a wash.⁷

We talk sometimes about how bad companies are at share repurchase and this Intel trade is no exception. Intel didn’t just decide to buy back a billion dollars of its stock six weeks before the market fell off a cliff in 2008:⁸ it decided to do so with a structured trade that amplified its risk, buying more stock if the market crashed and less if it went up. In exchange for this, Intel got a ten cent discount on its share price. It saved about $5 million – ten cents times 50mm shares – by entering a trade that ended up losing it $127 million.⁹

Or would have if it’d actually completed the trade. While Intel’s contract was sort of wrong-way – the lower the market goes, the more shares it buys back at an average price incorporating earlier higher prices – it had one, probably fortuitous but pretty important, right-way element. If the market went up, Intel would buy shares at the average price over the month of September, which would probably turn out to be a good price. If the market crashed, Intel would buy more shares at that average price, which would turn out to be too high. But if the market crashed and Lehman went bankrupt, then Intel would just take its billion dollars back and dare Lehman to sue it – saving $1bn that it would otherwise have spent buying back stock at pre-crash prices. So far that bet has worked out well for Intel.

Lehman v. Intel complaint [via Bloomberg]

• Exhibit 3 – forward confirm
• Exhibit 4 – CSA
• Exhibit 5 – termination letter
• Exhibit 6 – loss calculation

Lehman Brothers Sues Intel Over $1 Billion in Seized Collateral [Reuters]

1. Most of this is from the confirm helpfully filed with the lawsuit as an exhibit. Intel does not seem to have publicly disclosed it, since a $1bn share repurchase for Intel is kinda small.

Here in this footnote I’ll say what’s obvious to the, like, twenty people who do these trades, one of whom is sort of Harvey Schwartz: this is an “accelerated share repurchase” without the acceleration. Companies often do trades similar to this to accelerate the accounting benefit of buying back stock, as well as to buy shares at a discount to VWAP. Intel’s approach – which is intraquarter and collateralized, has no accounting benefit, and is done just for the discount – is somewhat less common. Of course if you did the normal sort of ASR with Lehman in August 2008, in which you prepaid the purchase price and Lehman didn’t post collateral, you got screwed.

2. Actually Lehman can end the averaging period as early as September 22, giving it a bit more optionality.

3. Why is this wrong-way? Simplistically, if you’re buying stock and your stock craters, you might decide to buy back more stock at the new, lower price – but not at the one-month average price that reflects all of those days when your stock was higher. This contract in effect says “if your stock crashes, you’ll buy more shares at the new lower price – but you’ll also go back in time and buy more shares at the old, higher price.” If you had a time machine you would not, on your own, choose to do that.

4. The discount is actually on a sliding scale but it turned out to be 10.6 cents per this letter from Intel also filed with the lawsuit.

5. Again from that letter. I get like 100 more shares than they do but I guess that’s rounding.

6. From the complaint:

Furthermore, Intel is subject to securities regulations in connection with purchases of its own stock and in accordance with Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, cannot trade in its securities while in the possession of material non-public information. Accordingly, Intel could not have purchased its shares from the open market on September 29, 2008 and for a certain “blackout period” thereafter while it was in the possession of material non-public information. On information and belief, this “blackout period” ended on November 4, 2008. Upon information and belief, Intel could have acquired 50,552,943 shares of its own common stock in a related trade over the period from November 5, 2008 through December 1, 2008, for approximately $688 million, far less than the $1 billion it seized.

That seems wrong but I still admire its cleverness.

7. Ooh I’m sure that’s not right either – not really how Loss works under ISDA – but, still, it’s what I’d say.

8. In all, Intel “repurchased 324 million shares of common stock at a cost of $7.1 billion” in 2008, for an average purchase price of around $22. Intel ended 2008 at $14.66, and didn’t see $22 again until March 2010. In 2009, when INTC was cheap, it bought back about 88 million shares, and all in the third quarter when it was less cheap.

9. On the simplest and probably most defensible math, just the amount Intel paid ($1bn) minus the value of its shares on delivery date ($873mm).

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Apple is working with the government to shut down those who mislead consumers.

"When they came in it almost looked like a drug raid," Said Abella.

Abella claims there were 20 ICE agents and two people from Apple in his small Bird Road store.

Abella says he began fixing Apple Products because everyone else was.

"We got the parts from a company in California. To this day that vendor is still selling parts," Said Abella.

"Why did the come after me?” he added.

As a partner of Apple, we have an obligation to respect its policies for apps and the books offered in apps. Based on our understanding of those policies, we believed that Saga #12 could not be made available in our app, and so we did not release it today. We did not interpret the content in question as involving any particular sexual orientation, and frankly that would have been a completely irrelevant consideration under any circumstance. Given this, it should be clear that Apple did not reject Saga #12.

After hearing from Apple this morning, we can say that our interpretation of its policies was mistaken. You'll be glad to know that Saga #12 will be available on our App Store app soon. We apologize to Saga creator Brian K. Vaughn and Image Comics for any confusion this may have caused.

A sign that Big Brother has won is when you start censoring yourself, instead of simply speaking your mind and stand the critics afterwards.

The app, "jingdian shucheng", offered access to ten books via the iPhone and iPad. Mr Hao said he believed three titles by Wang Lixiong, a political writer and activist, had prompted the ban, according to The Financial Times. Mr Wang is a prominent critic of Chinese policy in Tibet.

Concern over Apple’s weakness in the booming Chinese smartphone market has been seen by investors as a potential problem for its continued growth. It has been a major cause of a share price slump in recent months that has forced Mr Cook to repeatedly defend his strategy. The firm has been repeatedly rumoured to be developing a cheaper iPhone designed to court Chinese consumers but it has not yet revealed its plans.

Reports are coming in that the digital comics distributor Izneo has had to radically prune their catalog or face banishment from iTunes.

Izneo has been selling digital comics on the iPad since they released an iPad app in mid-2010, and they successfully built a catalog of over 4000 French and Belgian titles.

Everything was going fine until late Friday night when one of Apple’s censors noticed that Izneo sold adult comics. And since Apple clearly cannot allow their precious iPad to be sullied by salacious content, the censor gave Izneo 30 hours to remove all adult comics.

IDBoox broke the story earlier today, and they report that Izneo had absolutely no warning that there was a problem or guidance as to which titles needed to be removed. All they were reportedly told by Apple was that the adult content had to go, so Izneo drastically pruned any comic that showed a breast, cleavage, and even ones with characters evoking a suggestive gesture.

Encryption used in Apple's iMessage chat service has stymied attempts by federal drug enforcement agents to eavesdrop on suspects' conversations, an internal government document reveals.

An internal Drug Enforcement Administration document seen by CNET discusses a February 2013 criminal investigation and warns that because of the use of encryption, "it is impossible to intercept iMessages between two Apple devices" even with a court order approved by a federal judge.

Which brings us to the question of why, exactly, this sensitive law enforcement document leaked to a news outlet in the first place. It would be very strange, after all, for a cop to deliberately pass along information that could help drug dealers shield their communications from police. One reason might be to create support for the Justice Department’s longstanding campaign for legislation to require Internet providers to create backdoors ensuring police can read encrypted communications—even though in this case, the backdoor would appear to already exist.

The CNET article itself discusses this so-called “Going Dark” initiative. But another possible motive is to spread the very false impression that the article creates: That iMessages are somehow more difficult, if not impossible, for law enforcement to intercept. Criminals might then switch to using the iMessage service, which is no more immune to interception in reality, and actually provides police with far more useful data than traditional text messages can. If that’s what happened here, you have to admire the leaker’s ingenuity—but I’m inclined to think people are entitled to accurate information about the real level of security their communication enjoy.

Meanwhile the evidence of international patent filings is looking increasingly ominous. According to data compiled by the World Intellectual Property Organization, the world’s single most prolific filer of international patents as of 2011 was ZTE, a Chinese telecommunications corporation. Its filings were up an astounding fivefold from 2009. Another Chinese corporation, Huawei, moved up to third in the 2011 league table. The only United States corporation to make the Top 10 was Qualcomm.

All this is the more troubling because United States patent law has now been drastically weakened. Congress has made it much harder for small American inventors to protect their intellectual property from infringement and theft.

Pat Choate, the author of “Hot Property,” a book on the theft of intellectual property, maintains that if the new patent regimen had existed when corporations like Apple and Microsoft first got going, they might never have made it out of the little leagues. Their patents would have been quickly infringed by predatory larger corporations, and rather than engage in unequal litigation battles against deep-pocketed and ruthless opponents, they could have felt forced to share their technology on concessionary terms.

If people had understood how patents would be granted when most of today's ideas were invented, and had taken out patents, the industry would be at a complete standstill today. I feel certain that some large company will patent some obvious thing related to interface, object orientation, algorithm, application extension or other crucial technique. If we assume this company has no need of any of our patents then the have a 17-year right to take as much of our profits as they want.

Anyone with any level of understanding that's had the opportunity to play Sweatshop HD knows the defense-style game isn't about glorifying the practice of hiring underage workers to toil away in unsafe conditions to create designer clothes for wealthy foreigners. Instead it's an exploration of the pressure put on people in all aspects of the sweatshop business model. It's about raising awareness, and communicating the sick feeling one gets when seemingly the only way to win is to subject workers to dangerous conditions.

Given the size of its market, it's quite unfortunate that Apple has decided to take this sort of hardline stance on game approvals. The platform's reach could prove invaluable in advancing awareness and understanding of serious topics, but with each banned game, Apple's position becomes clearer — iOS is not a place for serious games, and other developers are beginning to get the message.

Moreover, Apple's system will fail, just as all the other approaches to "protecting content" have failed. Anything involving copy protection is regarded as a challenge by certain people; it's not a question of "if" the particular scheme employed by Apple will be broken, but "when". And there's another, deeper reason why such attempts won't ever work. As Moglen explained to me all those years ago:

The switch that most threatens that pipe is the one at the end. If the switch closest to your eyeball and your eardrum is under your complete technical control, the whole rest of the aqueduct can be as leak-proof as they like, and it won't do them any good. And the switch is under your control, of course, if the software is free software.

While there's free software, the data pipe will always be leaky.

Follow me @glynmoody on Twitter or identi.ca, and on Google+

In 2006, while a sophomore at Harvard, Zuckerberg created a website called “Facemash” which compared photographs of Harvard’s entire population, asking users to compare two photos and vote on who looked better. Zuckerberg allegedly got access to these photos by “hacking” into each of Harvard’s nine House websites and then collecting them all on one site. It’s not clear what this “hacking” was, but since the charges against him included “breaching security,” it may have fun afoul of the law.

Columbia Law Professor Tim Wu notes in the New Yorker that Apple co-founders Steve Jobs and Steve Wozniak, did acts that were “more economically damaging than, Swartz’s.” The two college roommates made what were called “blue boxes,” cheap devices that mimicked a certain frequency that allowed them to trick AT&T’s telephone system into making free long-distance calls. They also sold blue boxes before moving onto bigger and better ideas.

In his autobiography, Allen told the story of when the two future billionaires “got hold of” an administrator password at the company they worked at before starting Microsoft. The company had timeshared computers and Allen and Gates were getting charged for using them for their personal work.

The two men used the password to access the company's accounts and set about trying to find a free runtime account so that they could carry on programming without having to pay for the time. They also copied the account database for later perusal. However, management got wise to the plan.

"We hoped we'd get let off with a slap on the wrist, considering we hadn't done anything yet. But then the stern man said it could be 'criminal' to manipulate a commercial account. Bill and I were almost quivering."

“Experiences like that taught us the power of ideas…And if we hadn’t have made blue boxes, there would’ve been no Apple.”

Apple’s motion for an increase in the jury’s damages award is DENIED. The Court declines to determine the amount of prejudgment interest or supplemental damages until after the appeals in this case are resolved.

Because the Court has identified an impermissible legal theory on which the jury based its award, and cannot reasonably calculate the amount of excess while effectuating the intent of the jury, the Court hereby ORDERS a new trial on damages for the following products: Galaxy Prevail, Gem, Indulge, Infuse 4G, Galaxy SII AT&T, Captivate, Continuum, Droid Charge, Epic 4G, Exhibit 4G, Galaxy Tab, Nexus S 4G, Replenish, and Transform. This amounts to $450,514,650 being stricken from the jury’s award. The parties are encouraged to seek appellate review of this Order before any new trial.

... it is apparent that the jury failed to follow the Court’s instructions on the law, and awarded damages based on a legally impermissible theory. This award cannot stand.

This winter, the company, long barred from Apple's digital storefronts because of its pornographic associations, will package a nudity-free version of its content together for the launch of its first iPhone app, featuring lifestyle tips, articles from the magazine and, of course, photos of beautiful women.

So, mobile readers will have to actually read Playboy for the articles, with a little lingerie on the side. This could totally work. What could go wrong?

Given that Apple has not clearly shown how it has in fact been undercompensated for the losses it has suffered due to Samsung’s dilution of its trade dress, this Court, in its discretion, does not find a damages enhancement to be appropriate.

The U.S. Patent and Trademark Office granted Apple's request last week for trademarks on the minimalist design and layout of its retail outlets, the office's records show. The description of the trademarks includes "a clear glass storefront surrounded by a paneled facade" and, within the store, an "oblong table with stools...set below video screens flush mounted on the back wall."

"The million dollar question in this instance, as in pretty much all trade dress cases, is just how close a competitor can come to the design without infringing," [Christopher] Sprigman said.

In August 2007, I received a call from Steve Jobs, the Chief Executive Officer of Apple. In the months before the call, several employees had moved between the two companies. On the call, Mr. Jobs expressed concern about employees being hired away from Apple by Palm. As a solution, Mr. Jobs proposed an arrangement between Palm and Apple by which neither company would hire the other's employees, including high tech employees. Mr. Jobs also suggested that if Palm did not agree to such an arrangement, Palm could face lawsuits alleging infringement of Apple's many patents.

I did not agree to Mr. Jobs's proposal and responded by sending an email on 15 August 24, 2007

Steve, we don't want to hurt Apple. As I said on the phone, Palm is focused on building the best team in the industry, and we know there is a lot of quality talent outside of Apple. On the other hand, this is a small space, and it's inevitable that we will bump into each other. Threatening Palm with a patent lawsuit in response to a decision by one employee to leave Apple is just out of line. A lawsuit would not serve either of our interests, and will not stop employees from migrating between our companies. This is a very exciting time for both of our companies, and the market is certainly big enough for both of us. We should focus on our respective businesses and not create unnecessary distractions.

That said, I want to be clear that we are not intimidated by your threat. Palm has a very robust portfolio of patents, having been in the handheld and smartphone businesses since the early 90's. in addition, Palm now owns the former Siemens mobile patent portfolio, most recently held by BenQ Corporation. This mobile computing and communications portfolio includes over 1500 patent assets, the majority filed in Europe. If you choose the litigation route, we can respond with our own claims based on these patent assets, but don't think litigation is the answer. We will both just end up paying a lot of lawyers a lot of money.

I'm sure you realize the asymmetry in the financial resources of our respective companies when you say: "We will both just end up paying a lot of lawyers a lot of money."

Just for the record, when Siemens sold their handset business to BenQ they didn't sell them their essential patents but rather just gave them a license. The patents they did sell to BenQ are not that great. We looked at them ourselves when they were for sale. I guess you guys felt differently and bought them. We are not concerned about them at all. My advice is to take a look at our patent portfolio before you make a final decision here.

Apple has pulled the apps from photography network 500px from its App Store because, after 16 months of use, their clearly marked nude photo galleries suddenly became intolerable.

In addition for 500px's own app, the third-party 500px app ISO500, whose parent company 500px acquired because of ISO500's excellent integration, has also received notice that its app will be removed from the App Store shortly - for the same reason.

Just as it has the whole time, the app defaults to a Safe Search mode that excludes nudity, and you have to log in on the desktop version to change that.

The app was removed from the App Store for featuring pornographic images and material, a clear violation of our guidelines. We also received customer complaints about possible child pornography. We've asked the developer to put safeguards in place to prevent pornographic images and material in their app.

But here's the thing: Flipboard integrates completely with 500px as well. Everything you can do on 500px's app, you can do on Flipboard. Is Apple going to pull Flipboard as well? What about Tumblr, Instagram and all browsers - including Apple's own Safari? You can get to nude images with them pretty easily, too.

Tchebotarev has responded to us, saying that 500px was not told about the child pornography complaints and that Apple had not mentioned any issues around nudity until a phone call yesterday. "We've never ever, since the beginning of the company, received a single complaint about child pornography. If something like that ever happened, it would be reported right away to enforcement agencies."

"This decision is a shame really as it makes it hard to talk about the real world," said designer Tomas Rawlings.

"We had hoped that Apple would be more nuanced in how they applied this rule but we got a bit worried when it had been in submission for around two weeks without a decision - we then figured that because of the controversy of using the gaming medium to cover an ongoing war meant passing the game had become an issue for them."

“We are pissed,” Edison Junior CEO Jamie Siminoff told me on the phone today. “I think they are being a bunch of assholes, and I think they’re hurting their customers.”