Coinbase, Google, TikTok and Other Catalysts

on all major markets. Our coverage includes over two thousand equities and credits, and we have outlooks on more than ninety industries and one hundred market indices, currencies and commodities. This podcast series examines the intersection of business policy and law, and today we'll be looking at the litigation and policy catalysts that we're watching in September twenty twenty four and that we think will impact companies across a number of

different sectors. My name's Elliot Stein. I'm a senior litigation analyst covering litigation in the financial sector, and I'll be your host for today, September third, twenty twenty four. If you have any questions about any of the matters we discuss on this episode, please don't hesitate to reach out to us at your convenience with questions. So we'll be

discussing a handful of sectors today. First, Matt Schettenhelm, who covers TMT policy and litigation, we'll discuss a key hearing in TikTok's fight against the US government's sale or ban

law targeting the platform. After that, we'll talk antitrust and we'll bring in Jen Ree to update us on the trial in the FTCs challenge to the Kroger Albertsons deal, and Jen will also tell us about a key post trial hearing coming up in the Justice Department's case against Google over search, and she'll also tell us about a preliminary injunction here in the FTC's challenge of the Tapestry

Capri deal. Sticking with anti trust, Justin Tarsi will then preview a trial starting September ninth in the Justice Department's case against Google over the company's two hundred billion dollar ad tech stack. After that, Holly Frome will tell us about a securities fraud trial against bouch Health, and she'll also talk about a separate trial starting September thirtieth against Abbott and Reckett's Meet Johnson unit concerning the safety of

their infant formula products. Sticking with healthcare, Dwayne Wright, who covers healthcare policy in Washington, will update us on drug pricing cuts under the Inflation Reduction Act. We'll then move to financials and we'll bring in Nathan Dean, our financials policy analyst in Washington, to talk about what a Kamala Harris presidency could look like in terms of industry impacts. And Nathan will also talk about his views on the

possibility of a marijuana rescheduling. I'll wrap up after that with some previews of a few things I'm watching in September, including a proposed class action a legend rigging of UK government bonds filed against several banks. I'll also talk about a Robinhood bid to beat class certification in a lawsuit over best execution disclosures. And I'll briefly talk about a September twenty seventh hearing in a coinbase lawsuit seeking to

force the SEC to engage in crypto rulemaking. So all of this research is available on the Bloomberg terminal at BIG But with all that out of the way, let's get started with the content, and Matt, let's bring you in to talk some TikTok Us government, as most people probably know, pasted the law that would force TikTok to either be divested or to be banned in the US. And it sounds like there is a key hearing in

the case later this month. Why don't you come in tell us more about the case and this hearing, and in particular, should my kids be worried that they might lose access to their precious TikTok.

to sell, so everything is about this litigation. That's the only way that the company is going to be able to continue to operate in the US after January nineteenth. TikTok and its users have brought a lawsuit in the DC saying that the court should block this law because it violates the First Amendment right of the company and of its users. Will TikTok succeed in blocking that January nineteenth date? So let me first say why there's a chance it may not. First of all, the US usually

wins in this court. It wins about two thirds of its cases.

for real concern here. I don't find this an easy case to call. I think it's close more likely than not though I think TikTok convinces the Court to stop

this January nineteenth deadline. I give it a sixty percent chance to win at that stage, and why despite all the points above, I think the Court is going to take the First Amendment seriously here, and one of the most important things they're going to ask is did Congress have to go this far or could it have addressed this potential risk with something that was less disruptive to speech?

And I think Congress's problem here, the US's problem is that there's very little record to justify the approach that it did take, and Congress went so fast that it really didn't show its work. So I think it's very likely that even though the US can win this case, I bet it won't win the case right away in the first round, and more likely than not, the Court says, no, go back and tell us why you needed to do

that build a record to justify it. So key dates to watch, though, as Elliott said, September sixteenth, is the oral argument here in Washington, DC before that three judge panel. That's going to be the best chance to evaluate how these three judges are thinking about the case. Then we should see a decision from this court. This case has

been expedited. We should see a decision in early December on whether that's going to prevail or not, and then based on how they decide, we'll either see a scramble for en banc review at that court or Supreme Court review all before that January nineteenth deadline. So, in my view, real risk for TikTok, which means real upside for its competitors, but I think more likely than not TikTok wins this opening round of the litigation.

FTC's case challenging the Tapestrie Capre deal. Why don't you come in tell us about all these cases and what investors should be watching.

happening here. The FTC challenged this merger because they say, in thousands of local markets, the combination of Kroger and Albertson stores will create a market concentration presumed to be anti competitive, and that means that basically, it just doesn't leave enough options for consumers to shop traditional grocery stores, which is how the FTC views the market, and that

could allow these companies to increase prices. So to try to fix this, the companies offered to divest almost six hundred stores and some ancillary assets to a company called CNS, which is primarily a grocery wholesaler. The FTC didn't accept this as sufficient to replace the competitions that's lost by virtue of Albertsons and prose merging. So I think really the main issue with this trial is going to be over cns's suitability as the buyer, and another issue will

be about how the market's being defined. But I think really what's going to be dispositive here is CNS, and so the testimony in this first week wasn't good for the companies.

they're a bigger wholesaler than they are retailer. Now, the companies did a better job last week than I expected them to in supporting their defense and rehabilitating some of their witnesses, but I still think over all, the FTC scored more points than the companies did in that first week. The judge isn't really helping much. She's pretty unreadable. She says very little and asks no questions, so there's not a lot of insight coming from there on which arguments that she may or may not.

There was a decision that was issued in August and the judge basically ruled that Google had unlawfully acted to maintain its monopoly and it general search market and a search text advertising market by entering exclusionary agreements with third parties that foreclosed access to the market by search competitors and then prevented those competitors from gaining the scale that

they need to improve. So the next phase is the remedy, and that launches this week because on September sixth, there will be a hearing to work out the next steps and a schedule. I think the DOJ will be seeking in order to try to break up the company, but we really think that that's probably not how this is

going to come out. It's more likely going to be a series of behavioral modifications like a ban on these exclusionary agreements that Google has, possibly some required data sharing, maybe choice screens on Android phones, and possibly even some bands on Google in the way it uses other websites to train AI models, So it could be some sort of grouping like that. I don't think it's going to

end up being a structural remedy in this case. And I also think we're several months away from the decision on the remedies this starting with this Friday meeting, but that meeting might shed some light on timing and when the judge intends to decide. Last coming up in front of us on Monday, FTC versus Tapestry and Caprie. So this is another effort to block a proposed merger between

two American fashion houses. And the concern here is about a market that the FTC calls affordable or accessible luxury handbags.

And that's because Tapestry manufacturers and selles coach In Kate Spade handbags, and Caprete makes some manufacturers Michael Core's handbags, and according to the FTC, these are in a category called affordable luxury, and they define this market as new handbags as opposed to resold used ones that range from one hundred dollars to one thousand dollars and are apparently purchased by households with average incomes of seventy five thousand

to eighty thousand a year. And in that define market, the combined company would have well over fifty percent market share and would be able to raise prices. Now, if this all sounds it's a little bit silly to some people, I note that the FTC's mission under the antitrust laws is to try to stop any proposed consolidation that could harm a market, no matter how trivial that market might seem, or how discretionary those purchase purchases in that market might be.

And apparently in this case, there is overwhelming evidence gathered from the company's files during the investigatory period did show that they really view each other as their only competitor and that they price against each other. So if one goes on sale, the other goes on sale and the others. They don't view other brands as competitors, and other brands don't constrain their prices, and this is particularly so in outlet stores. All that competition would be lost if they merged.

So the trial starts Monday, September ninth. This is before Jennifer Roshan in the Southern District of New York.

at the outset. I lean toward the FDC for one main reason, and that's because the vote to sue was five to zero and the two Republican commissioners voted yes based on the evidence that they saw, and that suggests

the FTC isn't exaggerating these extent of bad documents. But where the FTC might have a lot of trouble is establishing the successful luxury handbag market definition and explaining who's in it and who's not, and how they get to that fifty percent share, because that is a very difficult thing to do where you have a big sliding scale in terms of price, and I think that's going to

be where the biggest fight is in this deal. And I think the second biggest fight is going to be with respect to whether or not this judge accepts new merger guidelines the FTC issued on a partisan basis in twenty twenty three, because those guidelines say the FTC that a deal is anti competitive if the FTC can prove that the two companies are each other's main competitors.

and the dominance and conduct of Google in that particular sector. First, what we're talking about when we say are ad tech, Well, think of those ads you see when you visit most websites like CNN dot com or Facebook, those little ads that appear in the sidebar or within the page content itself. And if you think those ads seem like they're tailored to you, you're right, because they absolutely are. How it works is there are three main components of how those

ads get placed. There's the advertiser side or buyer side, which, as it sounds is simply the companies that are seeking to place an advertisement, usually in hopes of reaching a target demographic. There's all to the publisher side or sell side, which involves the use of tools by those websites who have advertising space to sell. And lastly, there's an advertising exchange, which acts as sort of a middleman between those two in a fraction of a second. At exchanges work to

match bids by advertisers with pricing offered by publishers. At the same time seek to match website visitors through cookies and other information like user profiles, with advertising that they're likely.

exclusion of its potential competitors. So dj alleges that it was once the case that Google only had dominance on the advertise a re side of that spectrum with its AdWords product, but it wasn't quite happy with that and instead endeavored to build a moat around the entire industry. In two thousand and eight, Google acquired double Click, which gave it the Double Click for Publisher's Product or DFP, which at the time already had a sixty percent market

share of the cell side for publisher websites. It also acquired add Acts, which at the time was a nascent ad exchange. These purchases and subsequent behavior by Google really set the stage for the anti trust issues that are at play here. So the alleged anti competitive behaviors by Google over several years to solidify its dominance in every

segment of the ante stack. Those include configuring adds on Addicts in such a way that it actually increased the price of advertising to the benefit of publishers and to the detriment of Google's own advertising customers, effectively effectively strengthening its cell side DFP product and making it difficult for

ribal ad exchanges to compede at all. It also gave of its own addicts an advantage over those rival at exchanges through a process known as dynamic allocation, which essentially gave addicts the opportunity to buy prime website placement opportunities before anyone else could get their hands on them, often

at artificially low prices. So DJ also alleges that whenever competitions attempted to spring up over the past decade, Google's either simply acquired that threat or tweaked its own algorithms in a self preferential manner, notably in the case of a competing technology known as header bidding, which was an

attempt to circumvent Google's ecosystem. In response to that, Google launched something called open bidding, which DOJ says actually was a trojan horse that was packaged nicely, but in reality gave Google is seated in almost every auction out there with visibility into how rival ad exchangers were bidding on placements.

So as a result of this contact, the government says Google now receives thirty five cents of every advertiser advertising dollars spent through its services through fees levied at HND of the transaction and actuality. There's no viable alternative now

for advertisers or publishers in this space. According to DOJ, So lots of questions here about remedies and what they could look like if Google's found liable, and we'll definitely talk about that again in a later episode, but for now, what's important to know is this sub bench trial taking place before Judge Leoni Brinkhema in the Eastern District of Virginia, and it's proceeding that way without a jury after Google took steps to pay a government experts estimation of what

the government's actual monetary damages was, thereby refute removing their right to a jury in the civil action.

but it's taken the matter under advisement. We'll note ourgue that while a court order breakup is an extremely rare remedy, the nature of this case could be such that this risk really is on the table, and the government is sure to at least try this to get this remedy if they win.

Investors claimed Bousch, which was then Valiant, already officially inflated earnings by booking fictitious sales to a pharmacy created and misled investors about price increases. The first test trial was a case filed by an investor fund, which claimed damages.

term babies, which is a very serious disease. It affects the intestines of infants. Babin and Record faced about a thousand of these lawsuits, halfa which are in federal court, in a multi district litigation in Illinois and the restaurant state court. The September trial is occurring in the same court where a jury recently returned a five hundred million dollars award to a plane off flu alleged neck which

led to brain damage from formula allegedly. An earlier verdict and a wrongful death case out of Illinois State Court awarded the plane iff their sixty million dollars. In the federal cases, a motion of our experts will be heard in March, with the decision likely before the first federal Bell Weather trial schedules for May. We don't think the companies will settle federal cases until after that motion is decided.

We said, if three thousand cases are filed, total set of value could be around two point five billion dollars. And with that, I'll turn it back to you Elliott.

their net price. We saw that for the most part the prices were pretty steep from the list price, but for the most part closer to the net price, with the maybe the one exception being a cancer drug change Ay's in BRUVCA. And so right now, the next shoot to drop will be one of two things, and there's some flexibility for the administration in terms of how it rolls out. The next phase one we have the next set of fifteen Part D drugs that will be selected

for negotiation beginning next year. That could include Novo's Zepic and wake go V, as well as other cancer drugs. We assume there'll be about five cancer drugs bread up around by companies like Pfizer, Bristol Myers and Estellas, and then astrozenic is also on the list That negotiation will start in twenty twenty five. Those prices will go into effect twenty twenty seven. The other shoot to drop will be the explanation of how medicare arrived at the for

the first ten party drugs. Now that's due no later than March twenty twenty five, though we've heard that the agency could release that data sooner than that, so we'll have some more clarity on one how the administration got to the prices, but to whether it actually provides a rope nap of how it will handle negotiations.

set of drugs, one set of drugs to another. But really all eyes on kind of the next phase of who's getting get picked and what the process is going to be like. And I should add as a final point in terms of when these prices going to effect for these first ten they'll go into affect January first, twenty twenty six. And with that all turn it back to you, Elliott.

a couple of themes that are merging. And really it's this idea of being tough on consumed Sorry I was gonna say tough on consumers, but tough on consumer sectors,

you know, sectors that essentially are consumer facing. And she's talking a lot about trying to play to these individuals and say, you know, we want to take care of bad actors, we want to give you tax credits, we want to essentially support you and make sure that if you're interacting with a company, you're not you know, you're not taking advantage of But what I will say is that always just remember how Washington works, and there really

is just a couple of ways. It's the regulation, there's legislation, and then there's executive orders. It comes to legislation, Just remember that you don't have to be us to know that legislation is difficult to come by. So when Kamala Harri says something that I want to pass a bill that says this, More often than not, it's going to have to be a targeted bill or a negotiated bill. She's going to have most likely work with Republicans on that.

When it comes to regulation, I want to direct the Federal Trade Commission to do this or the Securities in Exchange Commission to do that. Well, regulation, you can bypass the opposition, but many times, as we've said on this call before, you know, the courts are actually going to keep you in checked and so the regulators can't go forth. And it also takes a little bit more time talking quarters,

if not years. And then finally, these executive orders, and I would estimate around eighty five percent of the executive orders out there are fancies ways of picking up the phone and the president telling his or her staff to do things either the regulatory route or the legislative route.

moving it to Schedule three. Schedule one drugs are like heroin and cocaine. Moving to the Schedule three you think tile on, tiling on with coding, and then as a result, you know, there's a lot less regulatory scrutiny of this. Companies can actually use it for medical research. And the key caveat for marijuana companies is that there is a tax change called to ADE where your effective tax rate goes from around forty percent simwhere to round five to

eight percent depending on who you are. So obviously that's a lot of cash back coming in the tax environment. Now, this is going the regulatory route what I just mentioned, so you can hogely bypass opposition. The Republicans that are posted to this, there's not much they can do. However, while there is this thought out there that this would get done this year, President Biden will want to get it done either before the election during the lame duck.

We put out a piece on the terminal essentially saying that we don't think it's going to go and get done until twenty twenty five.

how regulators go forth and conduct rulemakings. And when the DEA put out a proposal saying that they are going to think about moving it to schedule from Schedule one to Schedule three, the DEA even said in that proposal the language was, and I'm just narrative paraphrasing here, that we aren't even sure if schedule three where is where it should go, because we've heard anecdotally through the through the DC gossip mill that the DEA staff over there

is not really largely supportive of this move. So I don't think you can actually go from proposal with that language to having an administrative hearing to going through forty three thousand comments and then to have potentially a political decision to overrule DEA staff within six months. And that's essentially what the opposite side of my argument would say is is that the White House would essentially overrule this and get it done in six months.

on this proposal. Maybe it would have to sit for a year, a couple more months, couple more quarters, but then we'll see ultimately how the Trump administry decides, But I think this proposal does get done in twenty twenty five under a Kamala Harris, just not this year, to the sugrina of a lot of marijuana investors.

nine to twenty thirteen. This is just one of many similar cases that have alleged that banks manipulated the price of bonds or rates. Several of the cases were dismissed at the motion to dismissed stage pretty early, but a few cases survive dismissal and wound up settling, sometimes for tens of millions of dollars, sometimes for hundreds of millions,

sometimes for billions. In this case, the banks will be in court on September sixth to argue their emotions to dismiss and we give them a seventy percent chance of winning dismissal since we feel the complaint lacks specific allegations of a conspiracy. But the case is at a very early stage, so there's a good chance that the judge gives the plaintiffs an opportunity to amend their complaint, in which case the banks will have to move to dismiss

the amended complaint. If we're wrong and the case survives dismissal, we think it'll fall on the lower end of the settlement range that we've seen in other cases, likely resulting in settlements of tens of millions of dollars per bank, obviously very manageable for the big banks that are named in the case. The second case watching this month involves Robinhood,

the online broker. It's a lawsuit filed by Robinhood customers who claim the company didn't disclose that it's sacrificed execution quality in favor of the highest order flow payments from market makers. This was an issue that the sec find Robinhood over for about sixty five million dollars back in twenty twenty, and this lawsuit essentially piggybacks on those claims.

We think Robinhood has about thirty four million dollars at stake in this litigation, which represents the amounts that customers allegedly lost due to what they claim were inferior trade prices resulting from Robinhood's prices. And for context, thirty four million dollars for Robinhood is about four percent of its

consensus adjusted EBITDA for twenty twenty four. This case has survived a motion to dismiss and we're currently in the class certification phase where the customers are seeking to proceed as a group as a class. Robinhood will be in court on September tenth to try to beat that class certification motion, and Hood wins, you know, in beating class certification, they essentially got the case because it's very unlikely that a lot of individual customers would proceed on their own.

So we actually think Robinhood has a good chance of beating class certification. We think that the individualized issues that are tied to you know, specific trades or customer losses or reliance on Robinhood's statements sort of predominate and weigh against plaintiffs proceeding as a class. And then Finally, the third case I'm watching this month involves Coinbase and the SEC. You know, there's actually two cases between Coinbase and the SEC.

The case most people are probably familiar with is the SEC's enforcement action against Coinbase for allegedly acting as an unregistered securities exchange and broker. But this case that I'm talking about and that i'm watching at the end of the September, it's not the SEC's enforcement action, but it is related and it's a case actually that Coinbase filed against the SEC. And the background here is that Coinbase wanted the SEC to engage in rule making around cryptocurrencies.

The SEC refused to do that, so Coinbase then sued, and its argument was that the SEC's refusal was arbitrary and capricious and an abusive discretion, and that the SEC is exceeding its authority by refusing to engage in rule

making while pushing a very aggressive enforcement agenda. The parties will be in court on September twenty seventh in the Third Circuit for argument on this issue, and we give Coinbase only about a thirty percent chance of prevailing in this action, since the SEC generally has very broad discretion to set its rule making agenda, and courts are reluctant to truth upon that discretion. You know, given separation of powers concerns, we think it's exceedingly difficult to get a

court to force an agency to promulgate rules. But having said all that, coinbases lead lawyer in the case is Eugene Scalia, a former guest on this Votes and Verdicts podcast, and he has a tremendous track record going up against the SEC. So you know, you can never really discount him, and you cannot discount the possibility that coinbase defies my odds. But so you know, stay tuned on all these cases. I, as everyone else, will be updating accordingly as things develop.

All right, so I think with that we will wrap up this episode of Votes and Verdicts. As always, thank you for listening, and as a reminder, you can find all of our research on the Bloomberg terminal at bi Go, and we encourage you to reach out to us with any questions you may have, and we also encourage you to listen to other episodes of Votes and Verdicts on whatever platform you'd like to get your favorite podcasts. Thank you again and have a great day.