
Banks Forgot Who Was Supposed to Own Dell Shares - dsri
http://www.bloombergview.com/articles/2015-07-14/banks-forgot-who-was-supposed-to-own-dell-shares
======
pash
This is why NASDAQ and other trading venues are exploring the possibility of
using Bitcoin's blockchain to disintermediate the clearing process. The idea
is to use asset-tracking protocols (commonly called "colored coins" in Bitcoin
land) to associate ownership of an asset with possession of a small, low-value
unit of Bitcoin, which then can be transferred in the usual way.

NASDAQ Private Market, the firm's venue for trading private listings, has
repeatedly advertised its intention to start testing a blockchain-based
clearing process within the next year [0, 1]. The fast, cheap clearing NASDAQ
hopes the blockchain will provide may make it much easier to trade shares in
private companies (including pre-IPO startups). There are higher regulatory
and technological barriers to clearing publicly listed securities, but
tracking the ownership of an abstract commodity that is as often traded as a
share of stock seems like an obvious application of Bitcoin's decentralized
ledger.

0\. [http://www.technologyreview.com/news/539171/why-nasdaq-is-
be...](http://www.technologyreview.com/news/539171/why-nasdaq-is-betting-on-
bitcoins-blockchain/)

1\. [http://www.wired.com/2015/05/nasdaq-bringing-bitcoin-
closer-...](http://www.wired.com/2015/05/nasdaq-bringing-bitcoin-closer-stock-
market/)

~~~
jedberg
So a while ago there was an article that someone was getting close to
controlling 50% of the network, which means that they could make arbitrary
changes to the blockchain. Whether true or not, if NASDAQ was using the
blockchain to track stock ownership, it seems like there would be a HUGE
incentive to try and control 50% so you could manipulate it. This seems bad.

EDIT: As I type this my comment sits at 0 points, as does every comment I make
even remotely critical of bitcoin and the blockchain. Why does HN hate people
that are critical of bitcoin?

~~~
Hermel
I downvoted you because - while you raise a generally valid concern - your
statement is exaggerated to a degree that makes it grossly misleading. You
say:

> which means that they could make arbitrary changes to the blockchain

This makes it sound like the 51% attacker could make arbitrary changes to the
ledger, thereby stealing arbitrary shares. That is not the case. For example,
such an attacker cannot forge any signatures and thus cannot manipulate
transactions. All the attacker can do is censor new transactions or slowly
unroll past transactions. In case of 51% of the computing power, unrolling
could happen at a speed of (51% - 49%) = 2% of time, i.e. if the attack lasts
for 50 days, the attacker could unroll one day worth of transactions. What
makes the unrolling problematic, is that it enables the attacker to double-
spend. One potential measure for NASDAQ to prevent this is to demand known
signatures to be used for transactions (i.e. whenever you transfer shares, you
must use a signature you previously registered with NASDAQ). With colored
coins, the issuer can enforce such restrictions by refusing to redeem shares
that were not properly obtained. So even in case of such an attack, NASDAQ
could identify the attacker (or the person collaborating with the attacker in
order to attempt a double-spend) and initiate legal measures (i.e. sue the
attacker for damages).

~~~
ricardobeat
Your point is valid but not a reason to downvote - on HN downvotes are
supposed to weed out aggression, trolling and other unwanted behaviours, not
to express disagreement.

~~~
Flimm
Sadly, that's not the case, according to Paul Graham:
[https://news.ycombinator.com/item?id=117171](https://news.ycombinator.com/item?id=117171)

~~~
astrobe_
Fortunately that was ~8 years ago. I think the current interpretation is
upvote="thank you", downvote="less than uninteresting".

~~~
philbarr
That's what the interpretation _should_ be. But because of a comment Paul
Graham wrote ~8 years ago, people think they can downvote just if they
disagree.

Anyway, we're not allowed to talk about downvoting because it's against the
rules. It's the great HN Catch 22.

~~~
maxerickson
The pretext of the discussion of what sorts of downvotes are okay is that
someone is watching and is going to do something about it.

That seems like it might happen in egregious cases, but I'm not sure why
people think someone is going to spend a couple of minutes analyzing whether
the 4 down clicks on their tossaway comment were fair minded (whatever that
means) or not.

So the problem isn't just that it's a boring discussion, it's also just not a
reasonable expectation that every single click be fair (whatever that means).

------
tptacek
All this stuff suggests to me (someone shoot me down) that it's an especially
good idea to be incorporated in Delaware. This is the level of drama
associated with something as mundane as who has physical possession of stock
certificates!

~~~
dtap
The physical holding of a stock certificate is a dangerous thing. If you are
an investor in a company that gets sold or goes public (and you have to
surrender your shares) and misplace them, it is an expensive mess, even in
Delaware.

~~~
erichurkman
Thus the existence of companies like eShares that do away with this very
problem for privately-held companies by issuing stock electronically and
providing transparency (audit trails) to stockholders that paper certificates
suck at.

Full disclosure: I work there.

~~~
dtap
eShares is an interesting solution but with so many parties involved (company,
lawyers, several investor groups) how do you get one person to drive the
solution? My experience is that something like that may be rocking the boat a
little bit too hard.

~~~
erichurkman
Apologies for the late reply. Most of the time, the company is the driver,
since they are the ones with the highest motivation to actually get a clean
cap table. Law firms also drive – smart lawyers and paralegals will recognize
they can use something like eShares to cut down on work and free up time for
more valuable work.

Sure, there are a few companies that it takes a while for everyone to agree on
the facts (example: prior CEO raised a bunch of angel capital on bridge notes,
but some notes are missing, incomplete, or not executed...) but we have a lot
more companies with near 100% acceptance rate of their outstanding cap.

------
golergka
I find it interesting how abstractions in law are similar in abstractions in
software engineering: they are created to simplify complex stuff underneath,
which are there for historical and backwards compatibility reasons. These
abstractions also tend to be leaky, and while beginners rely on them, advanced
users dig down and know the stack (or, at least, have a pretty good
understanding of what they don't know about the stack) down to the physical
realm.

So, I hope that at least software engineers wouldn't be fast to blame "evil
lawyers" for purposefully creating a complex system, but rather understand how
this clusterfuck comes into being by himself, out of mismanagement and
laziness over generations.

------
savanaly
I'll say it again, one glance at the post title and I knew it was Levine. His
title's are always one point.

>Here are three stylized facts about stocks

Hmm..."stylized facts", I'm going to have to remember that phrase, it's a good
one.

~~~
logical42
[https://en.m.wikipedia.org/wiki/Stylized_fact](https://en.m.wikipedia.org/wiki/Stylized_fact)

------
D-Coder
"The financial system is built up in layers of abstraction over some vast and
unwieldy machinery... Sometimes the machinery pokes out a bit through the
fabric of the abstraction." What does that remind me of? Maybe the concept of
"layers of abstraction" applies to many things in life.

------
ak217
I love Matt Levine's writing. He has the incredible knack for making finance
seem entertaining.

~~~
anigbrowl
Also the rare ability to be critical without being condescending.

------
tedunangst
Worth reading all the footnotes.

> BONY found the stock certificates for the shares beneficially owned by
> Manulife and Milliken and redeposited them with DTC in the FAST Account.

I was waiting the whole article to find that sentence.

~~~
jsmeaton
May I ask why? The article was enjoyable, but I didn't really grok some of the
particulars. Why is this specific footnote interesting?

~~~
tedunangst
The sheer predictability. As soon as I got to the part where it was stated
that banks don't like keeping certificates in their own vault, I knew what was
coming next. The bank ordered the certificate, somebody noticed it in the
vault, and then sent it straight back. It just add to happen. But then it
didn't, or at least no mention was made. Until I got all the way to end, and
there it was.

------
zekevermillion
The system of record ownership of stock does seem prone to abuse and mistake,
and I can see why Patrick Byrne and others would like to move this into the
blockchain. That might open up new avenues of abuse, of course, and I'm not
sure those exploits will be any more predictable than the results of this
human abstraction.

~~~
huac
Well, the results are now absolutely predictable now that there is established
case law.

~~~
zekevermillion
I suppose the benefit of a human system is that we can correct errors that we
haven't fully anticipated, by using a general rule such as legal precedent.
Remote edge cases in a purely machine system would lead to uncorrectable
errors, from time to time. I think an ideal system would combine machine rules
to avoid dumb-ass mistakes like mislabeling a share cert on transfer, with
human systems to overrule unexpected bad results (e.g., transfers that were
obviously not intended by the parties, though processed mechanically).

------
lsaferite
My take away from that is that DTC would be a really juicy target for state-
sponsored hackers. Twiddle a few bits here and there and you suddenly own lots
of stock.

~~~
sidko
Except, individuals don't own accounts at DTC, so you'll have to hack and
twiddle a few bits here and there of the custodial bank as well. But these are
reconciled each day against Security Position Reports generated at the end of
the day, so your bits need to reconcile with trades. So you need to hack and
twiddle a few bits here and there for a chosen counterparty as well. Except,
the exchanges keep track of trades too, so you'll have to twiddle a few bits
here and there for an exchange as well.

It's not as simple as this at all, which is why the system has existed for
decades. It's not the most efficient, but it's not something that will be
replaced by a hackathon project either.

~~~
colinbartlett
My startup is, in fact, disrupting the custodial stock ownership space right
now and we grew out of a FinTech hackathon last year.

I'm joking of course, but it's only a matter of time until someone tries to
Uber (can we make that a verb?) their way over these regulations. And fails
miserably at it.

~~~
tedunangst
But who would use it? As far as I know, the banks are pretty happy with this
system. And while it's possible to be "that guy" with paper stocks, it's a
pain in the butt since you can basically only trade them with people you find
on Craigslist. A single centrally managed monopoly seems to be exactly what
everybody wants.

~~~
erichurkman
As-is, if you hold a paper stock certificate for a privately-held company, you
likely cannot sell it. Private stock typically has transfer and sales
restrictions; you can only sell if the company approves of the sale or
transfer.

------
zaphar
This article reads like the description of a legal Rube Goldberg machine.
Fascinating to watch in action but horrifying to imagine your money caught up
in.

------
SonOfLilit
I sent a friend xanderjanz's TL;DR and a link, and he replied:

> I have to admit I don't know much about stocks, but the grammar of those
> sentences hints that this was a C++ problem of misusing pointers :)

My response below, with a warning that if you're not a low level programming
geek you should probably not even try to read it:

Actually, it's more like a C# problem of misusing non-pinned-pointers, where
the generational garbage collector isn't aware that some invoked C library
holds a pointer to something and happily moves it around in memory, and then
the C library segfaults.

This is the full story:

Some laws were written under the assumption that owning stock is like calling
VirtualAlloc(), but in the 70s there was a paperwork crisis (too many calls to
allocate and free pages, the system grinded to a halt) and the US government
wrote an stdlib malloc(), which everyone's been using.

There are legacy libraries (laws) written under the assumption that "owning
memory" means that the OS page table marks this page as yours, but it's silly
because now all pages are marked as malloc()'s. There is case law (bugfix
patches) to try and make some sense of it, but in this case malloc() had to
free() most of a large allocation but keep some of it allocated and a legacy
library that remembers and compares page region base pointers (changed,
because most of the large region was free()d) and doesn't look at the malloc()
allocation lists (where there was no change in ownership) decided that this
memory no longer refers to the same stuff and declined to provide services to
it (specifically, a service called "appealing appraisal" that would net the
owner of that memory a lot of money).

The CPU (the judge) said he knows this code is buggy and it's not what the
user OR the programmer wanted, but he's only the CPU and all he can do is
execute the buggy code, and someone please call a programmer (Congress) to fix
this code.

------
tzs
Are Delaware appraisal rules being applied, and interpreted under Delaware
law, in the cases discussed because Ancestry.com and Dell are both Delaware
corporations, or because the entity that actually owns the shares is a
Delaware corporation?

While many big public corporations are incorporated in Delaware, there are
also quite a few that are not. About 36% of the Fortune 500 are not. Some
prominent tech examples are Microsoft (incorporated in Washington) and Apple
(incorporated in California).

~~~
lmm
Because the companies that the shares are of (Dell) is a Delaware corporation.
The whole appraisal process is a Delaware thing.

------
cesarb
That system sounds convoluted. Here in Brazil, everyone who holds stock has an
individual account at the stock exchange (BM&FBOVESPA), managed indirectly
through your broker. It's always clear who owns what, since every transfer
goes through its systems.

~~~
addicted
That system exists in the US as well.

However, that system exists at a level of abstraction WELL above what the
author is describing.

In computing terms, you are talking about the system at the HTTP level of
abstraction. The author is talking about the system at the transistor level of
abstraction.

~~~
cesarb
From what I understood, it's not a matter of levels of abstraction: the system
here really is simpler.

According to BM&FBOVESPA's own website ([http://www.bmfbovespa.com.br/pt-
br/servicos/servicos-de-pos-...](http://www.bmfbovespa.com.br/pt-
br/servicos/servicos-de-pos-negociacao/central-depositaria/central-
depositaria.aspx?idioma=pt-br) \- unfortunately in Portuguese only), it has
fiduciary ownership of the assets, and individual accounts for each end
investor. The brokerage doesn't "owns is an entitlement to stock" or similar;
there's a single indirection layer. Your brokerage manages that account for
you, but the account is in your name, not in the brokerage's name; you can
even login directly to the bmfbovespa site (your login is your national tax
ID) and monitor it.

------
mifreewil
If there ever was a reason to work on smart property, here it is.

------
melvinmt
That's why: block chains.

~~~
geofft
How do block chains solve this problem, compared to, e.g. patio11's LAMP app
proposal?

[https://twitter.com/patio11/status/583696870704152576](https://twitter.com/patio11/status/583696870704152576)

It doesn't seem like decentralization or proof-of-work are important here,
given that everything is going through a small number of exchanges, and even
if not, through a single SEC. The existing system already works on mutual
trust between the exchanges and DTC, and it's not the trust that's an issue
here, just complexity. Blockchains are complexity.

Cryptographic history and authorization of transfers may be useful, but it
just requires some straightforward digital signatures, not blockchains.

~~~
nmj
You're thinking small. Imagine a world where there aren't parasitic entities
littered throughout a process. Imagine a world where I do not need to trust
any third parties in order to exchange any sort of value. Imagine a world
where you can exchange your stake in a company directly, with another person,
P2P.

~~~
geofft
In such a world, I imagine a good number of investors will only want to trade
when there's an overseer who can promise violence to right wrongs, because
trading is historically a great way to get scammed. At the moment, given the
state monopoly on violence, an organization like the SEC is a good way to do
that. There are other ways to accomplish this without a state monopoly on
violence, but the ones that come to mind don't sound like worlds I want to
live in.

~~~
nmj
You trust violence more than mathematical improbability? Okay.

~~~
geofft
How is it mathematically improbable that someone will engage in insider
trading?

------
ksec
Any TL;DR ?

~~~
xanderjanz
Group A bought Dell stock with the intention of legally seeking a higher
appraisal. But Delaware corporate law has a strange feature of saying
appraisal seekers must own their shares continuously after demanding
appraisal. But in this case, Group A's bank had changed ownership of the stock
with another bank "behind the scenes", which caused a Delaware judge to
reluctantly rule Group A's appraisal rights void.

~~~
mirimir
Thanks! My eyes tend to glaze, reading about arcane finance.

So how come Group A's bank isn't liable for any loss that A incurred?

~~~
lmm
They might be - it will presumably depend on their contract (or possibly
another lawsuit). This was purely a ruling on group A's application for
appraisal.

~~~
mirimir
Thanks. Contract or not, the bank was arguably negligent. Unless the court's
interpretation was unprecedented.

------
brucefancher
They didn't lose the records -- Cohagen stole them!

