When the Shark Bites: Why Did PaidContent Miss the Point?

“Oh the shark, babe, has such teeth dear
And it shows them pearly white…
Ya know when that shark bites, with his teeth dear
Scarlet billows start to spread”

Mack the Knife, from The Threepenny Opera
Written and composed by Kurt Weill, E. Bertolt Brecht and Marc Blitzstein

Great prosecutors are often compared to sharks.  I’ve never thought the comparison to be an apt one, but probably not for the obvious reason.  I don’t like it because it gives the shark too much credit.  Next time you see a shark just look in its eyes and I think you’ll see what I mean.  Those are nasty little windows on a soulless creature who runs on two speeds, kill and kill.  This is instinct, not intellect.  Now imagine it reversed–intellect not instinct and you realize that it is a good thing for you that the shark is, in the end, just a shark.

Despite the best efforts of shark spokespeople churning out spin and those who repeat it uncritically, sharks have been given an almost mythical role in the panoply of things that go bump in the night.  But the fact is that a shark’s sense of smell is no greater that many others of its taxonomic rank.  The science tells us that a shark cannot, for example, smell a drop of blood in the ocean a hundred yards away any more accurately than others in its class.   Even so–when the shark does smell blood in the water, admit it–would it really surprise you, would you be shocked, would you be startled if the shark’s predictable reaction was to locate its prey and then either kill it or at least give it a try.

While the shark may not be able to smell the blood in the water with supernatural powers, a gifted prosecutor can smell fear in a defendant.  The gifted prosecutor can particularly smell fear in reaction to a line of questioning that the defendant finds, shall we say, unwelcome if not downright frightening.

And at a recent U.S. Senate Antitrust Subcommittee hearing, I could smell the fear radiating off of Eric Schmidt even from ten feet away and so could Senator John Cornyn.  And this was particularly true when Schmidt refused to answer Senator Cornyn’s questions about the “Google Drugs “debacle ” on the advice of counsel”.  In other words, he more or less “took the Fifth”.  He was slick about it (which actually made it worse in my view), but in the end he didn’t answer Cornyn on the advice of counsel.  (See below–apparently due to the smartest guy in the room being “confused”.)

Now you should not come away from that description thinking the exchange was like something out of The Godfather or a re-enactment of the Valachi hearings because it wasn’t.  It was much more genteel.  And yet it sure sounded to me like Schmidt “took the Fifth” without saying those exact words.

I was sitting directly behind Schmidt in the Judiciary Committee hearing room–well actually, directly behind about five rows of suits who were apparently Googlers (some of whom I recognized as Google lobbyists and lawyers) who were seated directly behind Schmidt.  My visual field was limited to the back of Schmidt’s head but I had a full view of the Senators who were questioning him.

When Senator Cornyn asked his questions of Schmidt, he said he wanted to get an understanding of what kind of “corporate citizen” Google was.  So Senator Cornyn lead with questions about Google’s recent $500,000,000 drug fine and the deal that kept Google executives from being indicted for violating U.S. laws regarding the importation of controlled substances–the “no indictment” agreement with the U.S. government (also called a “nonprosecution agreement”).

And this was where Schmidt made a mistake.  Schmidt had been sworn in and so was under oath.  However, not only was Chairman Schmidt’s veracity at issue in Senator Cornyn’s questioning, but also this paragraph from the “no indictment” agreement (at page 12-13):

“The Company [i.e., Google], through its attorneys, agents, officers, directors or employees who have authority to speak [such as a Google spokesperson], and are speaking on behalf of the Company, shall not make any public statement contradicting any part of [the statements of fact in the no-indictment agreement upon which the criminal charges were based and to which Google agreed were truthful]. If the Government notifies the Company that it has preliminarily determined, in its sole discretion, that the Company has made any such contradictory statement, the Company may avoid a finding of breach of this Agreement by repudiating such statement, in a manner satisfactory to the Government, both to the recipients of such statement and to the Government within 48 hours after receipt of notice from the Government. The Company consents to the public release by the Government of any such repudiation.”

Meaning that if at any time after the government and Google agreed to the “no-indictment” agreement a Googler like Schmidt denied anything that was in it, the prosecutors could force a public repudiation of that false statement–or the deal’s off and the prosecution would continue.  (While other paragraphs of the no indictment agreement are time-limited, this one appears not to be.)

So when Chairman Schmidt told Senator Cornyn that Schmidt was unable to answer the senator’s questions because the “no indictment” agreement prohibited him from discussing its contents publicly–which was what Schmidt said at first–you can see that wasn’t quite right.  Actually, not right at all–the agreement carefully avoids dictating what Google can or can’t say.  It just describes the consequences of a false statement.  Because even though at the Googleplex copyright infringement means only having to say you’re sorry, violating the no-indictment agreement is a bit more concrete.

And it was at this moment of Chairman Schmidt’s initial dodge that I perceived Schmidt to become fearful–a certain modulation in the voice, a smarmy abruptness, a slightly condescending tone as though Schmidt thought he had a well-rehearsed strategy to trump this line of questioning.

The dodge caused a light rustle from the audience in the hearing room–I heard someone whisper “That’s not true”.  I was looking directly at Senator Cornyn when Schmidt said what was clearly incorrect and watched the hundred microscopic tells radiate over the Senator’s face which became abruptly stoney.  At that moment, I think Senator Cornyn became Judge Cornyn again, or perhaps Attorney General Cornyn.

I have to wonder what Senator Cornyn thought (particularly given the flurry of whispering that went up at that moment).

Because at that moment Google’s Executive Chairman became just another guy who was dodging questions from a prosecutor about drug charges after lawyering up.  Judge Cornyn has seen that movie before and he knows how it ends.

To believe otherwise is to believe that Eric Schmidt did not know personally the contents of a 15 page document that kept him from being indicted under the U.S. controlled substances laws. and under which he was approving his company write a check for $500,000,000 of the stockholders’ money.  It is also to believe that Schmidt and his prep team did not practice answering questions like those of Senator Cornyn and to believe that Schmidt was unprepared for the obvious question.

It is also to believe that no one in the five rows of Googlers present–and no doubt dozens more located elsewhere–who were involved with preparing for the proceedings and watching it never thought to make sure their capofamiglia or client was prepared to answer questions about the no-indictment agreement.

And was not only prepared, but well prepared–typically after achieving, shall we say, a consensus among the key advisors–to deflect the questions when they came up.  This is what would likely have been the subject of considerable practice and discussion.  And so by telling Senator Cornyn that he was prohibited by the no indictment agreement from answering questions about the agreement, Schmidt may actually have violated the very agreement he was avoiding answering questions about.  Among other things.

Senator Cornyn submitted written questions to Schmidt after the hearing, which Schmidt answered:

“[Cornyn:] At the hearing, you referenced Google’s Non-Prosecution Agreement (“NPA”) with the U.S. Department of Justice. As you may recall, I asked you about that agreement and provided you the opportunity to provide a complete and accurate picture of Google as a corporate citizen. There appeared to be some confusion as to whether you could discuss the NPA. You stated that you had been advised by your lawyers not to “speak about the details” or “comment” on the NPA.

a. Did you know before your testimony that the agreement explicitly states that you are “prohibited from contradicting” the factual statements?

[Schmidt:] Under the terms of the NPA, Google and its management have to be mindful of the NPA’s limitations on making public  statements about the facts or the investigation to avoid any breach of our obligations under it. For this reason, I was very measured in my remarks at the hearing, but as you state and as I understand better now, I can restate the facts stipulated in the NPA and could have restated those facts with you at the hearing. I apologize for my confusion.” [emphasis mine]

Sorry, but the idea that the smartest guy in the room was “confused” and did not know what the “NPA” said just does not scan.  This moment may well have been the beginning of the great unraveling of Google because at this moment the entire company lost the disguise of “two guys in a garage” who do no evil, and became just another company that tried to obfuscate their bad deeds from the American people.  That list is long and distinguished, to be sure, but evil nonetheless.  (Imagine if Ken Lay had done something similar.)  What just happened to the capofamiglia could not be undone and now there were many Senators–a majority of the subcommittee by my count–who seemed convinced to one degree or another that where there was fire there was smoke.  (Notwithstanding Schmidt’s somewhat odd fixation on comparing himself to “corporate predecessors” by which he must have meant you know who–whether this investigation turns out to be Google’s Jena remains to be seen.)

So what does this have to do with PaidContent?

PaidContent posted an odd little story about a “screed” written by a “senior copyright lawyer” in the Huffington Post, a “screed” that “concluded” that Google could not support its stock price due to its profits from its collaboration with rogue sites (like the sites at issue in the seven different sting operations that lead to the no indictment agreement).  This view is, according to the eponymous PaidContent, “stupid” because Google’s stock price is “through the roof.”

As far as I know, the only “senior copyright lawyer” who has written such a “screed” in the Huffington Post is…me.

PaidContent did not cite or link to this “screed” but did mention that the PaidContent writer had received an email from a Google “spokesperson”, also unnamed.  That email apparently discussed the stock price issue in the PaidContent story.

It must be said that such emails from companies like Google often pitch a particular spin to journalists.  I don’t know as that is what happened with this story or where the receipt of the Google email fits in the writer’s timeline, but if Google did pitch the story it wouldn’t be the first time.  Another source is quoted in the story, which makes me think that the reporter actually spoke to that source who was mentioned by name.  I was not mentioned by name and no one contacted me.  In fact, no one at PaidContent has returned my call to the reporter or my email in a couple weeks.

However, the conclusion of the piece that was “stupid” was referred to by PaidContent as my conclusion.  It was not, rather it was the conclusion of a “commentator” with whom I concurred–clearly stated in the “screed”.  While I did not mention him by name in my HuffPo post, that commentator and “senior copyright lawyer” is the brilliant Professor Eric Goldman of the Santa Clara School of Law, quoted in the New York Times as follows:

“Web companies can be held liable for advertising on their sites that breaks federal criminal law, and Google and other search engines have faced similar issues over ads for illegal online gambling sites [see, e.g., “Poker Money and the Ethics Professor“]. Eric Goldman, director of the High Tech Law Institute at Santa Clara University, said the latest investigation raised questions about Google’s dependence on such sources.  ’How much of Google’s overall revenues are tied to product lines that are questionable?’ he said. ‘For investors, I think they just got a little bit of a jolt [after Google reserved $500,000,000 to pay its forfeiture in the drugs case] that maybe Google’s profits are due to things they can’t ultimately stand behind.’”  (emphasis mine)

Of course, what is interesting about Professor Goldman’s quotation in the NYT is that it demonstrates anew the professor’s even handed and objective approach to matters Google, a company I think he would agree that he frequently views favorably.

I take issue with the characterization of Professor Goldman’s views as “stupid.”  His quotation is actually anything but “stupid” and is, I would think, quite obvious. While he may be brilliant about many things, I think he would be likely to agree that it requires little brilliance to notice that when a company is found to be engaging in incriminating activity, the market will punish the stock.

So what did happen with the stock price on about April 14, 2011 when Google announced its 10-K, and May 13, 2011 (a Friday) after news reports surfaced that Google announced it had reserved $500,000,000 of the stockholders money with which to pay a forfeiture under the no indictment agreement?

So that’s the trading on the stock in the days around the announcement.  April 14, closed at 578 on unusually high volume of about 4x the recent average–another interesting fact.  April 15, closed at 530, down 48 points (down about 8%) on very heavy volume.  In fact, volume that was about 10x over the range and was the highest one-day trading volume for 2011.

When the news stories about the no-indictment deal started to run around May 13 (a Friday), here’s what the stock did:

The stock closed at 529 on Friday, May 13 and opened at 526 on Monday, May 16, closing that day at 518.  A 10% drop from pre-10K levels.  The news stories ended up not having any legs because no one aside from the U.S. Attorney for Rhode Island and the FDA seemed particularly interested in finding out why the dominant search company in the world almost got indicted for violations of the controlled substances laws.  The point that I think Professor Goldman was making is that the stock took a beating in reaction to shocking news.  Is that really such a surprise?

Did Google’s stock price recover?  Sure it did.  Would it have recovered if the U.S. Attorney had been permitted to get an indictment against Google and its executives?  Do you think Google will be able to dodge that bullet twice?

So what about this “through the roof” business?  If you compare GOOG to a growth stock, say Apple, here’s what it looks like over time:

Pretty much in a trading range.  Did the stock price recover?  Yes, but that story’s not over.

So when you say “through the roof” let’s be clear what a growth stock with a price through the roof actually looks like.  It looks a lot more like Apple than it does Google.  (Hat tip to The Register for noting this comparison.)

There are many more shoes to drop in the many investigations of Google and there may be another validation of Professor Goldman’s view as quoted in the New York times.  Google is probably considerably closer to having the kind of problem that doesn’t go away after the “Google Drugs” no indictment agreement than before.  Admit it–would it really surprise you, would you be shocked, would you be startled, to learn that Google’s phones are tapped by a myriad of law enforcement agencies at this point?

I would not.  But then I’m just a stupid country lawyer from Texas and I’m just not as smart as these city fellers.

Just like Senator John Cornyn, I suppose.  And just like Chairman Lamar Smith.

I would point out that if in 1985 you had said to a group of gung ho MBAs that in a few years time Michael Milken would be in jail and Drexel would be bankrupt you would have been laughed out of the room.

Because that was just a stupid idea.