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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Guy Hingston, an Australian cancer surgeon, sued Google in Federal Court.

"When an individual computer user types 'Guy Hin ...', into the Google search engine as a search, the words 'Guy Hingston Bankrupt' appears," the complaint states. "When the link(s) is clicked on, the article(s) to which the user is directed has absolutely nothing to do with a bankruptcy associated with Dr. Hingston. Dr. Hingston is not bankrupt." (Parentheses and grammar as in complaint).

"Dr. Hingston is a surgeon practicing in Port Macquarie, New South Wales, Australia," the complaint states. "Dr. Hingston's surgical practice focuses on breast cancer. Given his professional practice and position in his community, maintaining his good reputation is critical. Dr. Hingston has lost a number of patients and financiers who are refusing to associate and/or deal with Dr. Hingston as a consequence of the reference on Google to a bankruptcy."

Port Macquarie surgeon Guy Hingston bought the 19-year-old business 2½ years ago.

Dr Hingston said the main reason for CoastJet’s demise was the loss of a $2.8 million deposit on two new jets when American company Eclipse Aviation Corporation went into bankruptcy. The business was made more vulnerable, he said, by its heavy investment in a new partnership with Sweden’s Lund University School of Aviation.

He said CoastJet was preparing for its first intake of 24 students from Sweden at the end of March.

Dr Hingston said he and CoastJet’s staff were devastated. “We had two jets we were about to take delivery of, but with the manufacturer going bankrupt, we’ve lost everything,” he said.

The jets were destined to for CoastJet’s growing air ambulance service, Dr Hingston said, as well as for international airline pilot training and charters.

Hingston claims Google's automatic search result is defamatory, show him in a false light, and are "highly offensive to a reasonable person."

He claims Google was "was negligent in determining the truth of the information or whether a false impression would be created by its publication."

"This issue, and Google's continued failure to remedy this issue, despite numerous demands to do so, has caused significant harm and economic loss to Dr. Hingston in excess of the minimum jurisdiction of this court," the complaint states.

Hingston seeks at least $75,000 in damages for false light, and court costs.

Since November 2007, EMI Music and EMI Music Publishing have been engaged in a lawsuit with MP3tunes and its principal, Michael Robertson, in connection with Mr. Robertson's facilitation of widespread copyright infringement on MP3tunes.com and Sideload.com. These sites have built their businesses on the unauthorized distribution of music, at the expense of EMI's songwriters and artists.

Now on the eve of trial, and after an ongoing press campaign claiming that MP3tunes would fight to vindicate its 'right' to infringe, Mr. Robertson has filed for bankruptcy protection for MP3tunes in the Southern District of California. After four and a half years of Robertson's bluster and rhetoric, it is apparent to EMI that Robertson has finally realized that his case has no merit.

While Robertson may believe that MP3tunes will be able to escape liability in the upcoming trial through this bankruptcy, Robertson himself is still a named defendant in the case and the Court has already determined that both he and MP3tunes have infringed EMI's copyrights. As such, he is facing personal liability both for infringements that the Court has already determined have occurred and for the further alleged infringements that will be addressed at trial. Accordingly, EMI will continue to pursue its case against Robertson, to ensure that its songwriters and artists are properly compensated for their creative work.

At every opportunity EMI dragged out the legal process making it costly and burdensome. One example is the interrogation of company employees in all-day inquisitions called depositions where attorneys try to trick people into making admissions. In our case, they deposed not just management but nearly everyone in the company all the way down to clerical help and customer support personnel. They even paid $25,000 to get an ex-employee to agree to a deposition. For management they deposed everyone - some multiple times with me getting deposed 3 separate times.

The legal pressure was not just confined within MP3tunes. EMI sent legal demands to existing partners and potential partners were told they could not work with MP3tunes or risk losing their license to sell EMI music. More than one digital company told us they wanted to work with us, but were prohibited from doing so by EMI. They used their government-granted copyright monopoly to get MP3tunes blackballed in the industry.

EMI spent an estimated $10 million dollars with multiple law firms to arm their attack against MP3tunes in an attempt to thwart unlicensed personal lockers. They know it's difficult if not impossible for startups to fight long costly legal battles. Their hope is that the startup cannot fund a protracted legal battle and they win by default. This happened with the music search engine Seeqpod, Muxtape, Favtape and many others that have quietly faded away. They know that even if the digital upstart prevails in court, they will be terminally weakened. Veoh won multiple rounds of their copyright battle outright only to be forced into bankruptcy after spending $7 million on legal bills.

Some potential bidders for the patents are wary of proceeding because a purchase may amount to a so-called fraudulent transfer if Kodak is insolvent, said the people, who asked not to be named because the talks are private. Kodak confirmed that it hired Jones Day to advise it on considering options and said it doesn’t plan to seek bankruptcy protection.

“I always knew Righthaven would file bankruptcy if things got rough,” Kincannon told me by e-mail. “They were set up as a limited liability company just so they could do that. Fortunately, Stephens Media, MediaNews Group, Sherman Frederick, Steve Gibson, and Dickinson Wright all seem to have plenty of money.”