Thursday, January 26, 2006

Securities Prices, Moral Outrage, and a Note on Futility

To highlight issues in and understanding of the world of finance, this article is devoted to a summary look at the effort reported by the Seattle Post-Intelligencer of a minister by the name of Ken Hutcherson of the Antioch Bible Church in suburban Seattle to punish Microsoft Corporation. The Reverend Hutcherson's particular concern is that Microsoft is one of a group of companies endorsing a bill before the Washington State legislature that would extend existing statutory civil rights protections to gays.

Mr. Hutcherson is calling upon those opposed to the measure to each purchase "one or two shares" of Microsoft stock over the next several months and then to all sell their shares in a single day, May 1, 2006. The objective is to drive down the price of Microsoft common stock, presumably thereby signaling the company of widespread and financially destructive opposition to its stance on the civil rights issue. Microsoft common stock (NASDAQNM:MSFT) trades on the Nasdaq National Market and closed Thursday, January 26, 2006, at $26.55 per share with volume traded for the day of 69,324,338 shares, slightly higher than its average daily trading volume of 64,965,500 shares over the past three months. The company has 10,644,674,000 shares of common stock outstanding.

As is evident from the numbers provided above, Microsoft common stock is traded at levels in the tens of millions of shares every trading day. The purchase of one or two shares by even a hundred thousand people would have no material effect on the price, nor would the selling of those shares in a concerted action have any adverse price impact. Securities markets do not operate by the kind of willful action that a single-interest group such as Mr. Hutcherson's could manage to muster. In fundamental ways, his design is like believing that, as a collective group, his followers could all blow in the same direction and affect the course of a cold front: the molecules in the atmosphere behave by the actions of untold numbers of individual components, each operating according to its own dynamics to create a mechanical system entirely different from that of any one or any group of its constituents.

A one-time purchase or dump of stock like that of Microsoft isn't going to change a thing for the fate and fortunes of the company, its investors, or those affected by its policies. It will, however, have a material, adverse impact on those who follow Mr. Hutcherson's advice. They will be purchasing common stock not in "round lots" (100 shares is one round lot), but in minimal odd lots. The transactions costs alone, even at discount brokerages, will be breathtaking in comparison to the actual value of the securities they are purchasing: even at, say, $4.00 per trade, the purchase of a single share of Microsoft common stock at today's closing price would cost the investor a total of $30.55, meaning that a whopping 13% ($4.00÷$26.55) of that total would be transactions cost. Put another way, the investor loses money as long as the security does not rise from its current price level by 13%; and in fact, even if the security does rise by that percentage, the investor may still lose money on a risk-adjusted basis if an alternate investment would earn that much or more in the same amount of time.

Now, in the so-called "penny stock" markets, there is an old gambit called "pump-and-dump" whereby insiders of a very small company pour out favorable (if untrue or overly optimistic) information to induce outside buyers to purchase substantial quantities of the company's stock, thus driving up its price, at which time the insiders unload their stock in the company, thereby causing the stock price to collapse back to its pre-pump level. This can be done with penny stocks because of the "thin" capitalization and trading in those securities: the markets are not what is termed "complete"; but that's what distinguishes those companies (which are, these days, heavily regulated by the self-policing organizations like the National Association of Securities Dealers) from companies with hundreds of millions or billions of shares outstanding and trading every day. Games like pump-and-dump simply cannot be played to any meaningful effect on stocks that have massive amounts of information about them flowing at every second.

To a second point this summary must then turn, a point related to but separate from the exposition above. The Reverend Ken Hutcherson is openly proposing what some might deem a questionable, if not illegal, activity in seeking to manipulate the price of a stock. The Securities Act of 1933 confers upon the Securities and Exchange Commission broad power to review the "overall plan or scheme" of transactions, plans, and other activities within or related to securities and the markets in which they are traded. The Securities Act of 1933 in its main thrust does not regulate the secondary securities markets (that is, the markets where trading of securities occurs subsequent to their issue), so Mr. Hutcherson's activities would principally fall under the Securities Exchange Act of 1934, as amended. More broadly, the considered and announced plan by the minister could fall under what might in some judgments be the statutory umbrella of laws prohibiting "conspiracies," which is to say that an argument can be made that Mr. Hutcherson is soliciting participation in a scheme to cause adversity to the operations of a business enterprise outside of state and federal boundaries on legitimate competitive and consumer actions. That Mr. Hutcherson could not succeed in his contemplated conspiracy is irrelevant: its illegality does not hinge on its probability of full fruition or its probability of desired effect. Such matters are the domain of prosecutors in competent jurisdictions at both the state and federal levels.

Beyond the matters already noted, Mr. Hutcherson could also be seen as rendering investment advice regarding the purchases and sales of securities. Whether or not his efforts are legally actionable is another matter, although those participating in his scheme may find in retrospect that their losses on the endeavor would have been avoided had they not taken his advice.

Furthermore, even in the impossible event that Mr. Hutcherson's scheme did somehow work and he escaped criminal prosecution, he would very likely draw the attention of Microsoft's legendary battery of attorneys, who would calculate the (liquidated) damages he had wrought and contemplate all manner of civil actions ranging from allegations of tortious interference with a business contract (in the event, say, that a new issue of Microsoft stock were to sell at a lower price than expected because of the price suppression effort by Hutcherson) to various types of infringements and stock price manipulation adverse to the shareholders as a body. The causes of action would be limited only by the wide imaginations of Microsoft's attorneys, paid as they are quite well to defend one of the largest, most powerful enterprises on Earth.

In conclusion, Mr. Hutcherson's designs of affecting Microsoft are those of an ant planning to bring down an elephant: the first insurmountable hurdle for the ant is getting the elephant's notice by kicking its toenail; the second insurmountable hurdle for the ant is surviving the stomping the elephant would deliver were it to actually feel its toe being disrespected.

The prudent observer is therefore advised to stay far from Mr. Hutcherson's silliness. First, most people don't like to see ants embarrass themselves; and second, few are the individuals who have any taste at all for seeing insects summarily and prejudicially dispatched in a tiny squirt of bug goo.

The Dark Wraith has spoken.

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