What Is Vringo?
Vringo (VRNG) is a patent litigation company currently suing Google (GOOG). Vringo claims to hold patent rights for search engine filtering. Google argues that Vringo's patent rights were granted by the USPTO for unrelated ideas. Vringo, a small cap, is trading primarily based on this lawsuit. A $600MM settlement with a 3x forward multiple could push the current share price up eight-fold. But a loss would be devastating for the company's investment narrative, and could potentially bring shares below one-third of their current value.
Who Owns Vringo?
Three extremely prominent hedge funds disclosed significant long positions in 13F filings with the SEC. The founders exhibit similar political tendencies, suggesting a potential connection with Vringo trading.
1. Highbridge Capital Management
According to Katya Wachtel of Business Insider in 2011, Glenn Dubin is a "staunch Democrat". But opensecrets.org shows Dubin gave a total of $5,000 to Mitt Romney's campaign in 2011 and 2012, and $2,500 to the Republican National Committee.
2. Millenium Management
According to campaignmoney.com, Israel Englander made several political donations to Democrats from 2000-2005. In the 2006 Senate race Englander gave $4,200 to Friends of Joe Lieberman. This election marked a point of departure for Lieberman from the Democratic Party. It also marked Englander's final contribution to the Party.
3. Citadel Investment Group
Ken Griffin supported Barack Obama in 2008 and now supports Mitt Romney and other Republicans.
4. Bonus: Mark Cuban
Who Is John Galt?
Not unexpectedly, most financiers have voiced disapproval of the President's increased financial regulations. But the above four individuals whose funds hold VRNG appear to have acted on deeper, more personal political instincts when they "disappeared" from the Democratic party. Rather than speculating on the specifics of their ideologies, and how they permeate office culture, I will document the other side of the coin: what is the likely political aesthetic of an investment in Vringo?
Why Should Investors Care?
Vringo is trading in a realm of extreme uncertainty. In fact, almost none of the articles in publication compare Google and Vringo's actual IP claims in detail, instead focusing on anecdotes such as: who the lawyers are, what words the Markman hearing allows them to use, and how big patent settlements have been in the past. Ultimately, no one is sure how important the details of the patents will be relative to the pragmatic context of litigation. Most people on either side of the VRNG debate will acknowledge this.
When there is a scarcity of tangible information, decision makers tend to fall back upon instincts. Since Vringo is at the center of a hot political topic (intellectual property), it is entirely prudent and necessary for independent investors to consider the political instincts of Vringo's institutional traders, because these political instincts could be driving share price. Furthermore, these instincts could be shared by the broader range of VRNG longs, and insight into these instincts can help predict future moves.
What's This About Posner?
Richard Posner is an appeals judge whose economic analysis of software patents has been cited by the Supreme Court in landmark case Mayo v. Prometheus. Posner recently volunteered to preside over, ridiculed, then tossed out a software patent lawsuit against Google brought by Apple. Again, Vringo's lawsuit is also for software patents.
Posner forms an illustrative contrast with the political aesthetics of the four VRNG investors. While they once leaned left and appear to have moved right, Posner once leaned right and appears to have moved left:
Today, although generally viewed as to the right in academia, Posner's pragmatism, his qualified moral relativism and moral skepticism, and his affection for the thought of Friedrich Nietzsche set him apart from most American conservatives. As a judge, Posner's rulings have always placed him on the moderate-to-liberal wing of the Republican Party, where he has become more isolated over time. In July 2012 Posner stated that "I've become less conservative since the Republican Party started becoming goofy."
How Does "Creatio Ex Nihilo" Tie This All Together?
Creatio ex nihilo (latin) is a metaphysical philosophy established by The Chuch in 100 AD. "Creation from nothing" asserts that something can come out of nowhere. It is a corollary for personal responsibility, free will, and self-determination: people create our own destinies independently of external predestination.
Broadly speaking, conservatives tend to favor this philosophy. It supports a doctrine of private property and low taxation: people create our own success and therefore deserve to retain the fruits of our labor. Throughout Atlas Shrugged, entrepreneurs assert moral entitlement to the results of their actions. Private property is considered an inherent good (Kant would approve).
An alternative justification for private property is as an incentive system. Such a system rewards profit-generating behavior, but the focus is on incentivizing overall positive economic activity, rather than on the inherent virtue of rewarding winners. Posner, who disbelieves in free will, and is among today's most influential lawyers, advocates this alternative perspective. It means: when conflicts exist between rewarding inventors and supporting the broader economy, the broader economy will be prioritized. Private property is considered an extrinsic good (Nietzsche, who is Posner's hero, despised Kant).
Specifically speaking, creatio ex nihilo is intimately tied to patent law, beyond the broad property philosophies described above. Creatio ex nihilo supports a narrative in which an inventor creates a technology without relying on the ideas that came before it.
What Is The Economic Framework?
From a creatio-ex-nihilo perspective, the minds of geniuses are natural resources, and inventions are the products. Contrastingly, from Posner's perspective, the existing body of science is the natural resource, and inventions are the products.
From one perspective, inventors are the natural resource. From another perspective, existing science is the natural resource. Deciding which one is the natural resource means deciding which one should be protected. It is not necessarily a "yes or no" answer, but a spectrum on which one could lean towards either side.
Why Hedge Funds Bought Vringo
Courts have yet to decide whether Lang invented the idea Vringo claims he did. Even if Lang invented it, there is a question of whether the idea should be patentable. But of more fundamental concern to Vringo investors is the sustainability of intellectual property in software.
Ultimately, hedge funds invested because Vringo's lawsuit is not supposed to be a "one hit wonder". This is a company that is supposed to lead a crusade into the future for the rights of inventors. For this reason alone, the principle of creatio ex nihilo is central to Vringo's valuation. This contention is supported by the notable absence of any left-leaning institutional VRNG investors.
I believe that the pendulum is swinging towards a reduction in the amount of software ideas that are patentable. This is evidenced by Mayo v. Prometheus. Investors would be wise to take note of any subjective political biases which could distract from this objectively visible pendulum swing.
Why Google Won't Settle
Google has a motto of "don't be evil". A settlement with Vringo would give the company a war chest of hundreds of millions of dollars to fund new software lawsuits. From Google's perspective, this would be the moral equivalent of giving nuclear bombs to terrorists, in exchange for the promise that only neighbors will be bombed. Just as moral aesthetics push some to invest in Vringo, they are pushing Google to fight this to the Supreme Court if necessary.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.