Blue moon over Washington, D.C. Image provided by NASA.
Stock buybacks used to be a species of stock manipulation. Then came the SEC. Under President Reagan, the government regulated stock buybacks by issuing a new rule. The SEC issued the new rule in 1982. It is Rule 10b-18.
Rule 10b-18 has been used as a so-called "safe harbor" by executives and the directors and officers that enable them to do so, to "buy back" stock of their corporation with immunity from prosecution for stock manipulation. (Of course, the funds for the purchase of the corporation's own stock came then and come now from the profits of the corporation, profits which used to go in generally adequate numbers toward research and development, and worker compensation, among other competitive needs of the corporation.)
The consequences of stock "buyback" for some 35 years have included increases in executive salary tied to increased earnings per share (earnings per share of stock trend upward, i.e., increase, as a result of buybacks) and increases in the value of shares held by executives (executives are riding a rising trend over the last three+ decades of being paid in shares of the corporation's stock, in addition to drawing down their rather hefty salaries). See Andrew Ross Sorkin, "Dealbook / Stock Buybacks Draw Scrutiny From Politicians" p. B1, col. 5 (New York Times Nat'l ed., Tuesday, August 11, 2015).
Is there director's and officer's coverage for these acts? For corporate executives? For the officers and directors who enable such acts? Is that why Rule 10b-18 was promulgated by their SEC, to immunize them with its "safe harbor" from being sued for such acts? Are the people who are the ones harmed by this conduct allowed by the law to sue?
Follow the money, as they say.
Is there anyone alive who seriously contends that the performance of U.S. corporations aside from making paper profits for their executives, directors, and officers has been competent by any other measure of performance in the last 35 years? If so, let them stop buying things from China. Has anyone been heard to say that the economy is in good shape at this time and that we as a society should keep running things the way they have been running for decades? Anyone?
P.S.
The writer of the linked newspaper article addresses the idea that government regulation of stock manipulation is not an answer to stock buybacks, but that the answer must come from the market. If government regulation is not an answer to stock manipulation, and stock buybacks are stock manipulation regardless of whether government regulates them or not, then why did the SEC provide the immunity of Rule 10b-18 in the first place? Until Rule 10b-18 was issued, stock buyback was not a problem because it was not done; it was stock manipulation, punishable as a crime as well as civilly. So, why not withdraw Rule 10b-18, roll it back, make it void? If issuing that rule in the first place caused the problem, then the solution would clearly seem to be to remove it. In other words, to deregulate.
Please Read The Disclaimer. ©2015 by Dennis J. Wall, author of "Lender Force-Placed Insurance Practices" (American Bar Association 2015). All rights reserved.
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