Jesse Fried

A new stock exchange backed by Silicon Valley heavyweights is opening for business Wednesday. The Long-Term Stock Exchange can now trade all U.S. exchange-listed stocks, and it will now start soliciting new listings from companies that commit to policies around diversity, sustainability and long-term planning...Silicon Valley entrepreneur and "Lean Startup" author Ries designed the exchange to reward founders and investors who are thinking years down the road. Quarterly reports are still an SEC regulation, but the LTSE requires companies who list on the exchange to agree to a set of five principles designed to promote long-term thinking, including which stakeholders are important, a company's environmental and community impact, a company's approach to diversity, how a company invests in its own employees, and how it rewards them for its long-term success. The exchange doesn't set strict quotas or standardized rules, like requiring a woman on the board, but companies interested in listing have to set up policies that adhere to the principles to be eligible to list... "I'm in favor of experimentation, innovation and more competition — so I applaud those trying to make the LTSE work," Harvard professor Jesse Fried told Marker in February. "However, I have trouble seeing why the LTSE is necessary. R+D spending by public firms is at a record high in absolute terms and relative to revenues. Long-term investors have done and continue to do very well."

This simple and important question does not get anywhere near the attention it deserves. And, just to be clear, I don’t mean are they worth $20 million in any moral sense. I am asking a simple economics question; does the typical CEO of a major company add $20 million of value to the company that employs them or could they hire someone at, say one-tenth of this price ($2 million a year) who would do just as much for the company’s bottom line? This matters not only because a thousand or so top executives of major corporations might be grossly overpaid. The excessive pay of CEOs has a huge impact on pay structures throughout the economy. If the CEO is getting $20 million it is likely the chief financial officer (CFO) and other top tier executives are getting in the neighborhood of $8-12 million. The third echelon may then be getting paid in the neighborhood of $2 million. And these pay structures carry over into other sectors...If we want to raise pay for the bottom in a big way, we have to drive down pay at the top. This would be a problem if we actually had to pay the CEOs $20 million to get them to perform well, from the standpoint of producing profits for the company or returns to shareholders, but the evidence is that we don’t. The best place to start on the evidence is the great book by Lucian Bebchuk and Jesse Fried, Pay Without Performance...It compiles much of the literature available at the time on the relationship of CEO pay to returns to shareholders. It includes many studies that show CEOs pay often bear little resemblance to what they do for shareholders. For example, the pay of oil executives skyrockets when the world price of oil rises, an event for which they presumably are not responsible. Another study found that CEOs tend to get big pay increases when they appear on the cover of a major business magazine, even though returns to shareholders generally lag the overall market.

Last month, the United States Senate signed a bill that would increase regulation on Chinese companies listed on American exchanges. Listed companies will be required to prove that “they are not owned or controlled by a foreign government,” in addition to being subjected to three consecutive years of audit inspection by American regulators.  How did we get here, and how is this bill gaining rare bipartisan traction? The answer lies in investigative investment firm Muddy Waters.  According to Muddy Waters’s website, it produces three types of research reports: “Business fraud, accounting fraud, and fundamental problems.” It is known for publishing research on Chinese companies believed to be fraudulent...Muddy Waters more recently published research on Chinese online tutoring company GSX Techedu, accusing the company of fabricating online user traffic with bots. While GSX’s listing on the NYSE was not hit as hard, Muddy Waters’ due-diligence research sure gained its fair share of attention. This prompted a protectionist reaction from Congress; legislators were motivated by a desire to defend American investors. It received almost nonexistent legislative opposition...If Chinese firms are indeed in danger of being delisted from American exchanges, some experts note potential backfiring on Wall Street. Harvard Law Professor Jesse Fried predicts the transfer of these Chinese companies to exchanges in Hong Kong or the mainland as a response. He also expects a sharp fall in stock prices if Beijing disallows American inspections on Chinese-owned company audits–which could seriously hurt American investors just before these firms privatize. Fried also notes China’s desire to build up its domestic exchanges. Abandoning American trading soil could open up an opportunity to further develop local stock markets, increasing the attractiveness of the region. He says that China is therefore not desperate to keep listings in the U.S.

Moderna Inc. (NASDAQ:MRNA) is one of the biotech companies that are developing COVID-19 vaccines, and if the company wins, it could earn billions in stock appreciation and sales. However, if it doesn’t succeed, its value could decline. For now, the CEO of Moderna, Stephane Bancel is earning millions of dollars each month through the sales of stock, which has almost tripled in value on COVID-19 vaccine development progress. Since January to June 26, 2020, Bancel’s share sales, which include those held under his children’s trust and companies, have been around $21 million.  Also, Moderna Chief Medical Officer, Tal Zaks, sold most of his available shares in the company since January, earning almost $35 million. Bancel has set a schedule of the sale of his shares under the 10b5-1 plan before the COVID-19 crisis. These kind of stock-sale plans are meant to prevent insider trading from company executives. The plans prevent advance selling from executives who might have knowledge about bad news on the way or putting off selling of stock until when there is a positive announcement. On March 13, 2020, Zaks put in place a new plan which has seen him cash on almost all his interest. This was days before the biotech company announced the first-in-human dosing of its COVID-19 vaccine setting the stock on a 24% surge. Executive compensation experts indicated that these lucrative liquidations are a reflection of the unusual incentives for company executives to highlight development milestones for products that aren’t sold or approved. They stated that an optimistic company statement on COVID-19 vaccines can result in overpaying for stock or create false optimism among health officials and the public. Harvard Law School professor Jesse Fried stated that sales give the executives a rare opportunity to earn big on short-lived market optimism. Fried added that for company execs, this could be chance of profiting should the vaccine fail to work. Normally company executives have discretion of information, and as a result, they have the motivation to keep share prices up.

Biotech firm Moderna Inc could reap tens of billions of dollars in sales and stock appreciation if it wins the race for a COVID-19 vaccine. If it loses, the early-stage company’s value could crash. In the meantime, the firm’s chief executive is pocketing millions of dollars every month by selling shares that have tripled in price on news of Moderna’s development progress, a Reuters analysis of corporate filings shows. The sales - by CEO Stéphane Bancel, his childrens’ trust and companies he owns - amount to about $21 million between January 1 and June 26, including $6 million in May. The company’s chief medical officer, Tal Zaks, has cashed out the majority of his available stock and options, netting over $35 million since January, the filings show...Zaks sharply increased the pace of his sales with a new plan he put in place on March 13. That was three days before Moderna announced it had dosed the first human with a vaccine candidate, news that sent its stock price up 24% and signaled that future development milestones might push the shares higher. The sales give the firm’s executives an unusual opportunity to lock in big profits on what could be fleeting market optimism, said Jesse Fried, a Harvard Law School professor who wrote a book about executive compensation. “This may be their one shot at making a boatload of money if the vaccine doesn’t work out,” Fried said. Executives have wide discretion in releasing information, he said, and Moderna’s chiefs have a powerful motivation to “keep the stock price up.” Reuters found no evidence that Bancel, Zaks or Moderna has exaggerated the company’s vaccine progress.

Pinduoduo (Nasdaq: PDD) is one of the fastest-growing internet companies in the world, nearly surpassing Alibaba and JD in gross merchandise value, active users, and revenue growth in just five years, but is much less well-known to global investors. It sprinted past the trillion yuan GMV mark after less than five years, shattering the 14-year and 20-year records set by Alibaba and JD respectively...Founder and ex-CEO Huang Zheng, a former Googler and serial entrepreneur, became China’s second richest person with a net worth of $45.4 billion dollars, according to Forbes’ Real-Time Billionaires Rankings on June 22. He has expressed his vision for the company as “an exemplification of a multi-dimensional space, seamlessly integrating cyberspace and the physical space. It would be a combination of ‘Costco’ and ‘Disneyland.’” On July 1, Huang unexpectedly announced he would give away nearly 14% of his PDD holdings and step down as CEO. According to a regulatory filing, Huang reduced his personal holdings in PDD from 43.3% to 29.4% that day, worth roughly $14 billion. He still holds near-complete control over PDD, however, as his voting power was only reduced from 88.4% to 80.7%. Additionally, the CEO role in Chinese startups is ambiguous; stepping down from the office is unlikely to have a big impact on Huang’s control, as long as he holds on to his voting power and position as chairman. Also worth mentioning is that PDD does not have a CFO. It constitutes a red flag for the company, according to Harvard Law School corporate governance expert Jesse Fried: “That’s true even if a corporate controller serves as board chair and CEO, but not CFO. But what’s unusual and particularly worrisome here is that the controller is also effectively the CFO.” PDD claims it is looking for a CFO, but has not hired one for years.

As shares of biotech firm Moderna soared in May to record highs on news that its novel coronavirus vaccine showed promise in a clinical trial, the nation’s senior securities regulator was asked on CNBC about news reports that top executives had been selling their stock in the company. Jay Clayton, chairman of the Securities and Exchange Commission, responded that companies should avoid even the appearance of impropriety. “Why would you want to even raise the question that you were doing something that was inappropriate?” he said. Notwithstanding Clayton’s statement, there is little public evidence that company leaders slowed their stock selling. Now, corporate governance experts and some lawmakers say the trades could cast a shadow over Moderna, one of the biopharmaceutical industry’s most remarkable stories...Bloomberg in May estimated Bancel’s stake in the company as worth more than $2.2 billion, when measured at Moderna’s peak stock price. He has sold about $17 million worth of shares since Jan. 21, according to the Equilar analysis. Flagship’s 11 percent share of the company was worth $3.2 billion, Bloomberg said, and its sales of Moderna stock represented about 2 percent of that value. Given the large value of those holdings, the relatively small value of stock sales does not raise a major concern, said Jesse Fried, a Harvard Law School professor and expert on executive pay and insider trading. “You don’t want to be exploiting a crisis to make money, but the truth is that any company that is going to sell the vaccine is going to be making money on the crisis,” Fried said, “and that’s great, because we want to incentivize people to wake up early in the morning and stay in their labs late at night coming up with something that will help us.”

The most valuable company in the world never to have made a quarterly profit is on a stock market run.  Pinduoduo, which claims to have reinvented online shopping in China, has seen its share price rise by more than 130 per cent in the past three months, giving it a market value of $101bn, above that of Uber or Sony and twice that of Baidu or Foxconn.  Its founder and chief executive, Colin Zheng Huang, who earned his master’s from the University of Wisconsin-Madison and later worked at Google, is now China’s third-richest man, behind Jack Ma, the founder of Alibaba. He attributes Pinduoduo’s success to a magic formula of bargains and entertainment — he has said he wants his company to be both “Costco and Disneyland”...Pinduoduo has never had a formal chief financial officer despite its US listing. The company’s previous “vice-president of finance”, Tian Xu, resigned for personal reasons in April last year after just 10 months in the job. “Concentrating almost all corporate power in the hands of a single individual should raise a red flag, as it creates substantial corporate governance risk,” said Jesse Fried, a corporate governance expert at Harvard Law School. “That’s true even if a corporate controller serves as board chair and CEO, but not CFO. But what’s unusual and particularly worrisome here is that the controller is also effectively the CFO.”

As the U.S. looks to crack down on Chinese companies with public listings on its exchanges, firms are being fed buyout proposals. Amid the pandemic, Sino-U.S. trade tensions have been picking up smoke, as President Trump has been blasting China for its lack of transparency on Covid-19. The other issue has been over the beverage maker Luckin Coffee Inc. (Nasdaq: LK) after the company allegedly fabricated $314 million in sales. The Chinese rival to Starbucks (Nasdaq: SBUX) has not only been halted from trading but now faces delisting from Nasdaq. Following the Luckin Coffee scandal, SEC chairman Jay Clayton warned against investing in Chinese stocks for lack of access to audit papers. In May, the U.S. passed a bill that could delist around 800 Chinese listed firms on American bourses, according to Bloomberg...At the time of the report in March 2019, 60 companies had gone private since 2013. Jesse Fried, a professor of law at the Harvard Law School, told CapitalWatch last week that if the delisting bill becomes a law, "stock prices for Chinese firms trading in the United States are likely to decline," which makes "buy-out proposals more appealing to Chinese controllers and increasing buyout deals." He also noted that firms trading on American bourses need to follow the laws, regardless if they are from China, Germany, or the U.S. "We can't let a subset of listed firms, those based in China, refuse to comply. That could end up undermining the integrity of our market, and investors' confidence in it," Fried said...Fried said that if the bill becomes a law and China "does not back down on PCAOB inspections," he believes that they will be "forced to delist." The biggest loser, if this happens, will be U.S. stock exchanges and investment banks. According to a Bloomberg report, the NYSE and Nasdaq would lose millions of dollars in fees that Chinese firms pay to be listed on their bourses.

While the U.S. Senate has unanimously passed a bill to delist Chinese companies trading on American bourses, the legalization must clear the House of Representatives before signed into law by President Donald Trump. If the bill does indeed become law, the real loser here is the U.S. stock exchanges and investment banks. According to a Bloomberg report today, the NYSE and Nasdaq would lose millions of dollars in fees that the Chinese firms pay to be listed on their bourses. On the other hand, the new law, proponents argue, would help protect American investors from widespread fraud and safeguard national security. The Luckin Coffee Inc. (Nasdaq: LK) scandal, in which the company allegedly fabricated $314 million in sales and hurt investors, will likely be seen as the straw that broke the regulators' back...Assuming the bill does pass, China must allow PCAOB inspections to avoid delistings. However, Jesse Fried, a professor of law at the Harvard Law School, told CapitalWatch he is skeptical that China will allow them to do so. "So if the law is passed, I expect to see a migration of Chinese firms from our [U.S.] exchanges," Fried told CapitalWatch on Tuesday. He added, "They will either be taken private, probably with the objective of relisting in Hong Kong or elsewhere after a year or two, or they will transition to trading on another exchange."

Is now the time to invest in Chinese e-commerce giant Alibaba (NYSE:BABA)? Shares in the company have had a rocky ride in 2020, but that’s true of most stocks. Despite the havoc cause by the novel coronavirus and escalating tensions with China, Alibaba stock has now virtually bounced back. Before the markets tanked earlier this year, BABA had increased in value by 142% in just the past four years. After riding out the pandemic, I think this A-rated stock is back on the growth path...The coronavirus pandemic is one thing, but there’s potentially a bigger threat to American investors in Chinese stocks — including Alibaba. When the trade war between the U.S. and China flared up again last fall, President Donald Trump’s administration floated the idea of delisting Chinese stocks. In May 2020, Trump once again raised the prospect of delisting Chinese companies. If they don’t adhere to the Sarbanes-Oxley (SOX) Act, they could lose their Nasdaq or New York Stock Exchange listing. That would not be good news for investors in Alibaba stock. However, it’s not time to hit the panic button yet. In order for the delisting to take place, legislation would need to pass a vote in the House of Representatives. And significant effort is being put into ensuring it doesn’t even get that far. Speaking to CNBC, Harvard law professor Jesse Fried noted: “Wall Street will be lobbying to try to block it, because it makes a lot of money off of listings of Chinese companies in the United States. They will probably be asserting pressure on people in the House to block the legislation from being put to a vote.” Professor Fried also makes the point that while Trump is a frequent China-basher, he likely has mixed feelings about actually following through with delisting: “…Trump is very interested in maintaining the primacy of our exchanges and he’s not going to want to see these companies flee to Hong Kong or London or mainland Chinese exchanges.”

Alibaba (NYSE:BABA) stock has held up relatively well in a chaotic 2020. Alibaba stock’s 5.3% year-to-date gain is nothing to get excited about. However, there are at least three potential bullish catalysts that could make for a big second half of the year for BABA investors. The first potential catalyst to love about the stock is its technical picture. This week, Alibaba closed above $220 for the first time since February. It also closed above its April and May peaks. Since the initial novel coronavirus sell-off in March, BABA shares have been making a series of higher highs and higher lows, a textbook market uptrend....A lot of U.S. investors are freaking out about a potential delisting of BABA stock. I say it’s unlikely to actually happen. First of all, losing Alibaba and other Chinese stocks would cost Wall Street stock exchanges, brokers and investment banks millions of dollars. They would lose trading fees, underwriting fees and other income. “Wall Street will be lobbying to try to block it, because it makes a lot of money off of listings of Chinese companies in the United States,” Harvard Law School professor Jesse Fried said. Fried said the House may not even bring the bill up for a vote. Voting against it would make representatives look weak on China. But voting for it would anger their deep-pocketed Wall Street donors. I think people may be underestimating how much of an impact the investment community has on U.S. politics. When it becomes clear to investors that BABA stock isn’t going anywhere, it could trigger a relief rally.

Online finance marketplace Jiayin Group’s stock price [NASDAQ:JFIN] surged more than 10 times during trading yesterday as a number of Nasdaq-listed Chinese companies saw their stock price somersault as the tech-heavy New York bourse advanced to close at a record high. Wins Finance Holdings [NASDAQ:WINS], a financial services company, was up more than two and a half times and gained more than seven-fold during the day. China Finance Online [NASDAQ:JRJC] closed up 51.5 percent after seeing its price double in the day. Shenzhen-based real estate firm Fangdd Network Group [NASDAQ:DUO] surged 13 times on June 9. It rose 30 percent yesterday before plummeting 66 percent to close at USD15.82. These major price fluctuations could be down to the fact that some of these companies do not have a large number of stocks in circulation...Last month, the US Senate passed a bill requiring businesses listed in the country to prove that they are not “owned or controlled by a foreign government” and to adhere to stricter audit requirements, a move that could squeeze out a number of Chinese firms. There are around 248 Chinese companies worth USD 1.6 trillion listed in the US, according to incomplete statistics. But the Senate’s move appears to have done little to dampen investor sentiment. Its bill could not only “backfire” on American investors, but could also hurt Wall Street, in which case investment institutions are likely to lobby against the legislation, Jesse Fried, professor at the Harvard Law School, told CNBC on June 9.

Shares of US-listed Chinese mainland companies set off on a roller coaster on Wednesday, with multiple stocks seeing turnovers surging dozens of times and the trade-halting circuit breaker being triggered more than 100 times. The volatility might have been triggered by the news that Wall Street is reportedly hindering the US government from taking action against mainland companies listed there, experts said. On Wednesday, some Chinese companies listed in the US saw their share prices flying high and then tumbling abruptly. The share price of mainland fintech company Jiayin Fintech at one point skyrocketed a stunning 900 percent but fell suddenly approaching closing. The company closed at $5.80 per share, up 96.61 percent. Wins Finance, another mainland finance company listed in the US, saw its share price surge 169.01 percent by closing...Harvard Law School Professor Jesse Fried recently said in an interview that the Holding Foreign Companies Accountable Act - designed by the US government to improve financial reporting by China-based firms trading on US stock exchanges that might force mainland companies to delist from US markets - is unlikely to pass due to opposition from Wall Street. According to Fried, Wall Street will be lobbying to block the legislation as it makes a lot of money from Chinese listings in the US.

On May 20, the Senate passed the Holding Foreign Companies Accountable Act (HFCAA), a bill that would potentially delist Chinese stocks that fail to comply with Public Company Accounting Oversight Board’s (PCAOB) audits for three years in a row. On the surface, the bill is intended to protect U.S. investors from potential fraudulent accounting by Chinese companies. Bank of America analyst Michael Carrier said Wednesday that delisting foreign stocks like Alibaba Group Holding Ltd - ADR (NYSE: BABA) and JD.Com Inc (NASDAQ: JD) could have a negative impact on Wall Street...He estimates the exchanges could lose between 2% and 3% of listing revenue, between 1% and 2% of US equity transaction revenue and roughly 1% of total revenue. Carrier’s comments come a day after Harvard Law School professor Jesse Fried told CNBC that the bill is unlikely to pass due to opposition from Wall Street.  “Wall Street will be lobbying to try to block it, because it makes a lot of money off of listings of Chinese companies in the United States,” Fried said.

An attempt by the Senate to prevent China from using American investments in Chinese firms against the United States might prove to be self-defeating in the long run. Already an epicenter of anti-Chinese communist sentiment, the Senate on May 20 overwhelmingly approved the "Holding Foreign Companies Accountable Act (S. 945)," a bill that might lead to Chinese firms being barred from listing on U.S. stock exchanges. The bill will require foreign companies doing business in the U.S. to certify they’re not controlled by their governments. They will also have to submit to audits by U.S. regulators for three consecutive years...The intent of S.945 is laudable but the real world application might not redound to the benefit of the U.S., contended Jesse Fried, a professor of law at the Harvard Law School. “So, I think in terms of protecting American investors, this bill if it becomes law, could backfire” and might also hurt Wall Street, warned Fried. He told CNBC he's “not sure that this bill ... will actually make American investors better off" because there’s a good chance Chinese firms will stop trading on Wall Street after three years if the bill becomes law...Fried also noted not much can be done to protect the interests of American investors in Chinese firms. He believes there’s “good reason” to think S. 945 won’t be signed into law because of staunch Wall Street opposition. “Unfortunately, I think that money that American investors have already paid for stocks in Chinese companies -- especially money that’s gone back to mainland China -- is basically money that these people may never see again. But there’s not really that much you can do to protect them at this point."

Under a new bill, passed by the U.S. Senate last month, Chinese firms risk being delisted from U.S. stock exchanges if they don't adhere to U.S. audit standards. But, if the law is passed, it's unclear if U.S. investors will be left "better off," says Jesse Fried, a professor of law at the Harvard Law School.

An article by Jesse Fried: Last month, the US Senate unanimously passed a bill aimed at improving the reliability of financial statements by China-based companies trading in the US. The legislation focuses on a real problem with these businesses, whose total market capitalisation is about $1tn. Over the past decade, alleged fraud at China-based, US-traded companies — including most recently Luckin Coffee — has cost American investors billions of dollars. Unfortunately, the bill’s remedy may end up making them worse off. To reduce fraud, the Sarbanes-Oxley Act of 2002 requires audits of every US-traded company to be inspected by the Public Company Accounting Oversight Board. But those based in China refuse to comply. They, and the Chinese government, say PCAOB inspection of China-based audit records would violate state-secrecy laws. Why block PCAOB access? Inspections might well reveal bribes to high-ranking officials, embarrassing the Chinese Communist party. The US bill requires the Securities and Exchange Commission to prohibit trading in the stock of any company that goes three consecutive years without PCAOB inspection. Its apparent goal is to force China to agree to inspections. If the strategy succeeds, it should be harder for insiders of China-based companies to defraud American investors. The bill has bipartisan support in the House of Representatives.

Financial crises follow a sequence. One of the steps is outrage. Then comes regulation — think Dodd-Frank, Sarbanes-Oxley and the like. During the pandemic that is both a heath and a financial crisis, a lot of outrage is aimed at stock buybacks. Over the past three years, S+P 500 companies spent $2 trillion on buybacks. Pundits are quick to point out that U.S. airlines spent nearly all of their free cash flow on buybacks over the past decade. Many now argue that if these companies kept more cash on hand, they wouldn’t need bailouts now. This criticism joins longer-running arguments over whether buybacks encourage short-termism and limit investment in research and development. But there are good reasons to support buybacks. They allow capital to be deployed efficiently and stop managers from spending excess cash on vanity projects. And contrary to conventional wisdom, buybacks don’t benefit shareholders alone. Jesse Fried of Harvard Law School has testified to Congress that, for every $100 in repurchases, companies issue $80 of equity, meaning public investors net just $20. Employees are probably the biggest beneficiaries: Companies, particularly tech firms, use stock buybacks to repurchase stock options...To be sure, there are issues with buybacks. Mr. Fried has ably documented how executives can time them to their personal benefit, something akin to insider trading. Companies do buy back shares when they’re too expensive or otherwise spend money that should be saved. And in other cases, stock buybacks have encouraged a short-term focus.

One of the most moving responses to coronavirus has come from home-quarantined Italians singing together from their balconies. They were belting out Il Canto della Verbena or Volare. The subtext was that interdependence is the only defence humans have against their own fragility. For postwar individualist philosophers like Ayn Rand — cheerleader for the primacy of private capital — the jig is well and truly up. Witness the extraordinary efforts by governments to stabilise their economies and forestall the collapse of business. The US signed off on a $2tn aid package in the early hours of Wednesday morning and the global bailout — central bank liquidity support included — will have a sticker price of more than $4.5tn. That is a big number, even by the standards of recommended takeovers...Whole sectors — notably airlines, hotels and cruise lines — will lack a raison d'être for months. For many companies, revenues will fall short of overheads. But state support, and the quid pro quos that go with it, are preferable to going bust. “This is analogous to a war we have to mobilise to deal with,” says Jesse Fried, an economist and Harvard law professor. “It is not part of the normal boom and bust cycle.”