'I guess this is goodbye'; A behind-the-scenes look at Lehman Brothers' last gasp before bankruptc
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Canwest News Service
It is Sunday, Sept. 14, 2008, in New York and an intense weekend spent trying to prevent the collapse of Lehman Brothers and the market chaos that would cause was drawing to a close. There would be no white knight to rescue the company. This excerpt from Too Big to Fail by Andrew Ross Sorkin details the curtain call made to Lehman's board of directors.
Henry Paulson, Treasury Secretary, checked his watch and saw that it was past 7 p.m., which meant the Asian markets were opening, and Lehman still hadn't filed for bankruptcy.
"Has Cox talked to them yet?" he barked at his chief of staff, Jim Wilkinson.
Wilkinson said that he had been trying to get Chris Cox, chairman of the SEC, to call Lehman directly, but that he had been resistant.
"He hasn't done s?t," Wilkinson said dismissively. "I went in there and repeated what you said, and it's like he's frozen. Like a f?ing deer in the headlights."
Cox, for whom Paulson had very little respect to begin with, was proving how over his head he really was. Paulson had assigned him the task of co-ordinating Lehman's filing by, well, now. "This guy is useless," he said, throwing his hands in the air and heading over to Cox's temporary office himself.
After barging in and slamming the door, Paulson shouted, "What the hell are you doing? Why haven't you called them?"
Cox, who was clearly reticent about using his position in government to direct a company to file for bankruptcy, sheepishly offered that he wasn't certain if it was appropriate for him to make such a call.
"You guys are like the gang that can't shoot straight!" Paulson bellowed. "This is your f?ing job. You have to make the phone call."
The Lehman board had already begun its meeting when the bankruptcy lawyers from Weil Gotshal, towing wheeled suitcases stuffed with documents, finally arrived.
Then Richard Fuld's assistant came in and handed a slip of paper to her boss, who began to slump in his chair as he read it. "Chris Cox is calling and he wants to address us."
The board members looked at one another, their surprise etched in their expressions. No one could recall a time when the chairman of the SEC had asked to address a corporate board. One director questioned whether they should even take the call, but he was overruled. What did they have to lose? The lawyers, however, cautioned that if there were any questions, only the directors themselves should speak.
Fuld leaned in toward the speakerphone and said in a weary voice, "Ah, Chris, this is Dick Fuld. We got your message, and, ah, the board is in session here, everyone is here, all the directors and the firm's counsel."
A Lehman bankruptcy, Cox argued deliberately, stiffly, as if he were reading off a script, would help calm the market. It would be in the best interests of the nation, he said. He then introduced Tom Baxter, general counsel of the Federal Reserve of New York, who told the directors that the Fed and the SEC were in agreement that Lehman should file for bankruptcy.
One of Lehman's outside directors, Thomas Cruikshank, who had led the oil services company Halliburton through the 1980s oil bust before anointing Dick Cheney his successor as CEO, was the first to speak. "Why is it so important," he asked, with a slight air of umbrage, "for Lehman to be in bankruptcy?"
Cox repeated that the markets were in turmoil and that the government had taken everything into consideration. Others followed up with variations of that same query, but Cox and Baxter stayed on message. The directors grew increasingly and visibly frustrated by the vagueness of the two men's answers.
Finally, Cruikshank stated point-blank: "Let me see if I understand this. Are you directing us to put Lehman into bankruptcy?"
For several moments there was silence on the other end. Then Cox said, "Ah, give us a few moments, and we will get right to you."
After one of the lawyers reached over the table and pushed the mute button on the speakerphone, the Lehman directors erupted with questions. Is the SEC telling us to file? Is the Fed? What the hell is going on here?
To the best of anyone's knowledge, the government had never ordered a private firm to declare bankruptcy, essentially hanging the Going Out of Business sign on the door itself.
Ten minutes later, Cox, clearing his throat, got back on the line. "The decision on whether to file for bankruptcy protection is one that the board needs to make. It is not the government's decision," Cox said in the same steady, methodical tones. "But we believe that in your earlier meetings with the Fed, it was made quite clear what the preference of the government is…"
John Akers, the former chief executive of IBM, interrupted. "So you're not actually directing us?"
"I'm not saying anything more than what I just said," Cox replied before ending the conversation.
The directors looked around at one another dumbfounded as Fuld sat impassively, his head buried in his hands.
Tom Russo, Lehman's chief legal officer, stood and outlined the board's responsibilities under securities laws. As he spoke, some directors talked quietly among themselves. Bankruptcy seems inevitable. Do we file now? Next week? The government, they all knew, had plenty of leverage. If they did not do what Cox wanted, who knew what the consequences could be?
The Fed, which had agreed to lend money to Lehman's broker-dealer unit to allow it to fund trades, could just as easily close it and force Lehman into liquidation. There was a motion to vote on filing for bankruptcy.
Henry Kaufman, an 81-year-old former Salomon Brothers economist who headed the Lehman board's risk-management committee, haltingly stood up to speak. Known as "Dr. Doom" for his downbeat outlooks in the 1970s, Kaufman had been sharply critical of the Fed earlier in the year, accusing the central bank of "providing only tepid oversight of commercial banking." Now he again took aim at the government for pushing Lehman into bankruptcy.
"This is a day of disgrace! How could the government have allowed this to happen?" Kaufman thundered. "Where were the regulators?" He went on for another five minutes without stopping, and when he finally slumped into his seat, the other directors could only look on in sadness.
As midnight approached, the resolution to file was put to a vote and passed. Some of the directors had tears in their eyes. Fuld looked up and said, "Well, I guess this is goodbye."
One of the bankruptcy lawyers, Lori Fife, laughed. "Oh, no. You're not going anyplace," she said. "The board will be playing a pivotal role going forward."
Miller elaborated on her point: "You're going to have to decide what to do with these assets. So it's not goodbye. We're going to be seeing each other for a while."
Fuld looked at the lawyers for a moment, dazed. "Oh, really?" he said softly, and then slowly walked out of the room, alone.
Warren Buffett, just back in Omaha from Edmonton, had received word of Lehman's pending bankruptcy before he arrived at the Happy Hollow Country Club for a late dinner with Sergey Brin, the co-founder of Google, and his wife, Ann.
"You may have saved me a lot of money," he said to the Brins with a laugh in the grand dining room. "If it wasn't for getting here on time, I might have bought something."
Mayor Michael Bloomberg, who had been on the phone with Paulson, called Kevin Sheekey, his deputy mayor for government affairs, from his brownstone. "I think we have to cancel our trip to California," he told Sheekey, who was already packing his bags for a high-profile event with Governor Arnold Schwarzenegger that he had been planning for months.
"The world is about to end tomorrow," Bloomberg explained, without a hint of sarcasm.
"Are you sure you want to be in New York for that?" Sheekey deadpanned.
Peter G. Peterson, co-founder of the private-equity firm Blackstone Group and the CEO of Lehman in the 1970s before being ousted by Glucksman, was watching television with his wife, Joan Ganz Cooney, when she passed him the phone. It was a New York Times reporter asking him to comment on the day's events.
After pausing for a moment to take it all in, he said: "My goodness. I've been in the business 35 years, and these are the most extraordinary events I've ever seen."
Christian Lawless, a senior vice-president in Lehman's European mortgage operation in London, still at the office, emailed his clients Sunday night with a final sign-off : "Words cannot express the sadness in the franchise that has been destroyed over the last few weeks, but I wanted to assure you that we will reappear in one form or another, stronger than ever." ? Reprinted by arrangement with Viking Penguin, a member of Penguin Group (USA) Inc., from Too Big to Fail by Andrew Ross Sorkin.
Saturday, March 6, 2010
Saturday, February 27, 2010
Silicon Valley Is Not Wall Street
FEBRUARY 25, 2010
By TOM PERKINS
Too often, there is confusion between investment banking and venture capital. This isn't helped by investment bankers' occasional assertions that they too do venture capital. They don't. In light of the attention both of these activities have lately received in Washington, it seems a perfect time to explain what makes them so very different.
Venture capitalists work with entrepreneurs to start new companies from the ground up. We earn our reward only when companies become successful.
Investment bankers are deal makers. They're in charge of bringing companies public and advising on acquisitions. Their money is earned by the transaction, and in the fraction of the time it takes a venture capitalist to realize a profit.
Whereas Wall Street has been the source of what feels like endless scandals and financial catastrophes, venture capital has created jobs, jobs, and more jobs of the highest caliber. It's no surprise that Silicon Valley's Sand Hill Road in Menlo Park has been the locus of our national high tech activity and the envy of the world, while Wall Street is secure in its reputation as the planet's frequent scourge.
The facts speak for themselves. Approximately 11%, or 12.1 million, of private-sector jobs reside at companies that were founded with venture capital. These companies include Intel, Genentech, Google, FedEx and Starbucks. Another 500,000 jobs are currently housed in newer start-up companies that are still privately held, and are poised to grow exponentially over the next decade.
In 2009, a year with nearly universal shrinkage in employment, 35,000 new jobs were posted on the job board StartUpHire.com, all created by companies backed by venture capital. This job creation has occurred in every one of the 50 states. Wall Street's share? Zip, zero, nada.
Yet the politicians on Capitol Hill don't seem to recognize these differences. Venture capital is constantly at risk of being swept up in federal tax and regulatory initiatives aimed at curbing Wall Street's abuses.
Last year our industry was originally included in new SEC rules aimed at hedge funds and other sources of systemic risk. But the managers of venture capital firms, usually partnerships, are not risking capital raised from the general public or guaranteed by the federal government. They are not financial advisers in any sense of the term.
But the default mode in Washington is to regulate broadly, without regard for unintended consequences. Thankfully, Congress listened to our concerns and ultimately exempted venture capital from these rules. Still, it was an arduous process to help them understand who we are. That process continues.
Our industry is a very patient one. We invest over the long term, striving for capital gains. And we invest continuously in bull and bear markets.
As Wall Street came to a screeching halt in 2009, our industry nevertheless invested more than $17 billion in emerging companies. Many of those companies will take a decade or more to mature. It would be killing the golden goose to tax venture capitalists as if they were hedge fund or investment banking casino operators.
How has our industry been able to keep its skirts so clean and continue to serve as our country's economic engine? Why is it so unlike the age-old crash-and-burn pattern of Wall Street? I think the answer goes back to venture capital's earliest days in Silicon Valley (before the name of that place had even been coined). The first practitioners, including Eugene Kleiner and me, had familiarity with Wall Street operators and we set up our partnerships to avoid specifically problematic practices.
These parameters included: no leverage; audited statements; never investing personal capital where the partnership could or should do so (that is, no "cherry picking" at the investors expense); no profit participation until the investor's entire capital had been repaid; limited partnership life and no investments of new capital in older deals. These early ideas have become nearly universal over the decades. And in my opinion, they have kept our industry healthy, profitable and largely scandal-free.
It is time the venture industry is rewarded for the work that we do and how we go about doing it. We are not asking for bailout money or additional tax breaks. We simply want those in the Beltway to leave us alone and let us do our jobs -- which means creating more jobs for our country.
Mr. Perkins is a former president of the National Venture Capital Association, a partner emeritus of Kleiner Perkins Caufield & Byers, and author of "Valley Boy: The Education of Tom Perkins" (Gotham, 2007). He is a director of News Corporation.
By TOM PERKINS
Too often, there is confusion between investment banking and venture capital. This isn't helped by investment bankers' occasional assertions that they too do venture capital. They don't. In light of the attention both of these activities have lately received in Washington, it seems a perfect time to explain what makes them so very different.
Venture capitalists work with entrepreneurs to start new companies from the ground up. We earn our reward only when companies become successful.
Investment bankers are deal makers. They're in charge of bringing companies public and advising on acquisitions. Their money is earned by the transaction, and in the fraction of the time it takes a venture capitalist to realize a profit.
Whereas Wall Street has been the source of what feels like endless scandals and financial catastrophes, venture capital has created jobs, jobs, and more jobs of the highest caliber. It's no surprise that Silicon Valley's Sand Hill Road in Menlo Park has been the locus of our national high tech activity and the envy of the world, while Wall Street is secure in its reputation as the planet's frequent scourge.
The facts speak for themselves. Approximately 11%, or 12.1 million, of private-sector jobs reside at companies that were founded with venture capital. These companies include Intel, Genentech, Google, FedEx and Starbucks. Another 500,000 jobs are currently housed in newer start-up companies that are still privately held, and are poised to grow exponentially over the next decade.
In 2009, a year with nearly universal shrinkage in employment, 35,000 new jobs were posted on the job board StartUpHire.com, all created by companies backed by venture capital. This job creation has occurred in every one of the 50 states. Wall Street's share? Zip, zero, nada.
Yet the politicians on Capitol Hill don't seem to recognize these differences. Venture capital is constantly at risk of being swept up in federal tax and regulatory initiatives aimed at curbing Wall Street's abuses.
Last year our industry was originally included in new SEC rules aimed at hedge funds and other sources of systemic risk. But the managers of venture capital firms, usually partnerships, are not risking capital raised from the general public or guaranteed by the federal government. They are not financial advisers in any sense of the term.
But the default mode in Washington is to regulate broadly, without regard for unintended consequences. Thankfully, Congress listened to our concerns and ultimately exempted venture capital from these rules. Still, it was an arduous process to help them understand who we are. That process continues.
Our industry is a very patient one. We invest over the long term, striving for capital gains. And we invest continuously in bull and bear markets.
As Wall Street came to a screeching halt in 2009, our industry nevertheless invested more than $17 billion in emerging companies. Many of those companies will take a decade or more to mature. It would be killing the golden goose to tax venture capitalists as if they were hedge fund or investment banking casino operators.
How has our industry been able to keep its skirts so clean and continue to serve as our country's economic engine? Why is it so unlike the age-old crash-and-burn pattern of Wall Street? I think the answer goes back to venture capital's earliest days in Silicon Valley (before the name of that place had even been coined). The first practitioners, including Eugene Kleiner and me, had familiarity with Wall Street operators and we set up our partnerships to avoid specifically problematic practices.
These parameters included: no leverage; audited statements; never investing personal capital where the partnership could or should do so (that is, no "cherry picking" at the investors expense); no profit participation until the investor's entire capital had been repaid; limited partnership life and no investments of new capital in older deals. These early ideas have become nearly universal over the decades. And in my opinion, they have kept our industry healthy, profitable and largely scandal-free.
It is time the venture industry is rewarded for the work that we do and how we go about doing it. We are not asking for bailout money or additional tax breaks. We simply want those in the Beltway to leave us alone and let us do our jobs -- which means creating more jobs for our country.
Mr. Perkins is a former president of the National Venture Capital Association, a partner emeritus of Kleiner Perkins Caufield & Byers, and author of "Valley Boy: The Education of Tom Perkins" (Gotham, 2007). He is a director of News Corporation.
Sunday, February 21, 2010
Turning Patents Into ‘Invention Capital’
February 18, 2010
Turning Patents Into ‘Invention Capital’
By STEVE LOHR
BELLEVUE, Wash. — Nathan Myhrvold wants to shake up the marketplace for ideas. His mission and the activities of the company he heads, Intellectual Ventures, a secretive $5 billion investment firm that has scooped up 30,000 patents, inspire admiration and angst.
Admirers of Mr. Myhrvold, the scientist who led Microsoft’s technology development in the 1990s, see an innovator seeking to elevate the economic role and financial rewards for inventors whose patented ideas are often used without compensation by big technology companies. His detractors see a cynical operator deploying his bulging patent trove as a powerful bargaining chip, along with the implied threat of costly litigation, to prod high-tech companies to pay him lucrative fees. They call his company “Intellectual Vultures.”
White hat or black hat, Intellectual Ventures is growing rapidly and becoming a major force in the marketplace for intellectual capital. Its rise comes as Congress is considering legislation, championed by large technology companies, that would make it more difficult for patent holders to win large damage awards in court — changes that Mr. Myhrvold has opposed in Congressional testimony and that his company has lobbied against.
Intellectual Ventures spent more than $1 million on lobbying last year, according to public filings compiled by OpenSecrets.org. In the three most recent election cycles — 2006, 2008 and 2010 — Intellectual Ventures executives, led by Mr. Myhrvold, have contributed more than $1 million to Democratic and Republican candidates and committees.
Mr. Myhrvold makes no apology for playing hard under the current patent system. If his company is going to help change things, it must be a force to be reckoned with. “We have to be successful,” he said.
The issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation. “How this plays out will be crucial to the American economy,” said Josh Lerner, an economist and patent expert at the Harvard Business School.
Mr. Myhrvold certainly thinks so. He says he is trying to build a robust, efficient market for “invention capital,” much as private equity and venture capital developed in recent decades. “They started from nothing, were deeply misunderstood and were trashed by people threatened by new business models,” he said in his offices here.
Mr. Myhrvold presents his case at length in a 7,000-word article published on Thursday in the Harvard Business Review. “If we and firms like us succeed,” he writes, “the invention capital system will turbocharge technological progress, create many more new businesses, and change the world for the better.”
In the article and in conversation, Mr. Myhrvold describes the patent world as a vastly underdeveloped market, starved for private capital and too dependent on federal financing for universities and government agencies, which is mainly aimed at scientific discovery anyway. Eventually, he foresees patents being valued as a separate asset class, like real estate or securities.
His antagonists, he says, are the “cozy oligarchy” of big technology companies like I.B.M., Hewlett-Packard and others that typically reach cross-licensing agreements with each other, and then refuse to deal with or acknowledge the work of inventors or smaller companies.
Ignoring the patents of others is “deeply ingrained in parts of certain industries,” he writes in the article, “most notably software, computing and other Internet-related sectors.”
Large technology companies complain about patent suits but, Mr. Myhrvold says, their actions often invite litigation. “The attitude of the big guys has been that unless you sue me or threaten to sue me, get lost,” he said in the interview. “I know, I was one of those guys.” Indeed, Mr. Myhrvold, 50, supplied his considerable brain power to Microsoft for 13 years, serving as chief technology officer until 2000.
Mr. Myhrvold personifies the term polymath. He is a prolific patent producer himself, with more than 100 held or applied for. He earned his Ph.D. in physics from Princeton and did postdoctorate research on quantum field theory under Stephen Hawking, before founding a start-up that Microsoft acquired.
He is an accomplished French chef, who has also won a national barbecue contest in Tennessee. He is an avid wildlife photographer, and he has dabbled in paleontology, working on research projects digging for dinosaur remains in the Rockies.
His Intellectual Ventures is not simply a patent hedge fund. Its 650 employees include scientists and engineers, and it has an in-house invention effort and lab that last year applied for 450 patents. To date, the company has paid $315 million to individual inventors.
He calls patents “the next software,” noting that software did not become a market on its own until the 1980s, spurred by innovators and the enforcement of intellectual property laws. “I’m trying to get inventions that kind of respect as an economic entity,” he said.
Yet while Mr. Myhrvold is saying one thing, his company’s main activity is quite another, according to Mark Bohannon, general counsel and senior vice president for public policy for the Software and Information Industry Association.
Intellectual Ventures, Mr. Bohannon says, is the largest of the category of firms that hold patents, but do not make products. Lawyers call such firms nonpracticing entities, NPEs, though they are often labeled as patent trolls. “Our concern is that it games the patent litigation system so it can extract licensing fees and investments from technology companies that create jobs, innovate and make products,” said Mr. Bohannon, whose trade association includes I.B.M., Google, Oracle, SAP and Adobe.
Several analysts say that Intellectual Ventures has been primarily a master practitioner of exploiting the current rules of the game to its advantage. Many companies in the patent field use shell companies to mask their activities, and Intellectual Ventures seems to employ them with uncommon frequency. A report last month by Avancept, an intellectual property consulting firm, said that up to 1,110 shell companies and affiliated entities appear to be linked to Intellectual Ventures. The secrecy, said Thomas Ewing, principal consultant for Avancept, makes it “far more difficult to confidently negotiate with Intellectual Ventures.”
Intellectual Ventures, founded in 2000, began operating in 2003. It says it has returned $1 billion to investors and collected more than $1 billion in license fees to date. Most of the revenue has apparently come from 16 so-called strategic investors — big companies that pay to license patent rights and get a stake in an Intellectual Ventures fund.
The companies must sign strict nondisclosure agreements to even talk with Intellectual Ventures. Only Microsoft has publicly stated that it is one of the group. In 2008, The Wall Street Journal reported that Verizon Communications had agreed to pay Intellectual Ventures $350 million. Other companies that have agreed to sizable payments to Intellectual Ventures include Intel, Nokia and Sony, according to people told of deals. And Intellectual Ventures has sought deals with others, including I.B.M. and Amazon, so far without success, say people informed of the talks.
Intellectual Ventures’ penchant for secrecy, Mr. Myhrvold says, is partly a legacy from its early days as an upstart when it did not want to tip its hand. Personally, he says he advocates not only the public disclosure of patents but also license agreements, but he will not give up the competitive edge of secrecy unilaterally. “If everybody in the industry does it, I’ll be right there,” Mr. Myhrvold said.
Turning Patents Into ‘Invention Capital’
By STEVE LOHR
BELLEVUE, Wash. — Nathan Myhrvold wants to shake up the marketplace for ideas. His mission and the activities of the company he heads, Intellectual Ventures, a secretive $5 billion investment firm that has scooped up 30,000 patents, inspire admiration and angst.
Admirers of Mr. Myhrvold, the scientist who led Microsoft’s technology development in the 1990s, see an innovator seeking to elevate the economic role and financial rewards for inventors whose patented ideas are often used without compensation by big technology companies. His detractors see a cynical operator deploying his bulging patent trove as a powerful bargaining chip, along with the implied threat of costly litigation, to prod high-tech companies to pay him lucrative fees. They call his company “Intellectual Vultures.”
White hat or black hat, Intellectual Ventures is growing rapidly and becoming a major force in the marketplace for intellectual capital. Its rise comes as Congress is considering legislation, championed by large technology companies, that would make it more difficult for patent holders to win large damage awards in court — changes that Mr. Myhrvold has opposed in Congressional testimony and that his company has lobbied against.
Intellectual Ventures spent more than $1 million on lobbying last year, according to public filings compiled by OpenSecrets.org. In the three most recent election cycles — 2006, 2008 and 2010 — Intellectual Ventures executives, led by Mr. Myhrvold, have contributed more than $1 million to Democratic and Republican candidates and committees.
Mr. Myhrvold makes no apology for playing hard under the current patent system. If his company is going to help change things, it must be a force to be reckoned with. “We have to be successful,” he said.
The issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation. “How this plays out will be crucial to the American economy,” said Josh Lerner, an economist and patent expert at the Harvard Business School.
Mr. Myhrvold certainly thinks so. He says he is trying to build a robust, efficient market for “invention capital,” much as private equity and venture capital developed in recent decades. “They started from nothing, were deeply misunderstood and were trashed by people threatened by new business models,” he said in his offices here.
Mr. Myhrvold presents his case at length in a 7,000-word article published on Thursday in the Harvard Business Review. “If we and firms like us succeed,” he writes, “the invention capital system will turbocharge technological progress, create many more new businesses, and change the world for the better.”
In the article and in conversation, Mr. Myhrvold describes the patent world as a vastly underdeveloped market, starved for private capital and too dependent on federal financing for universities and government agencies, which is mainly aimed at scientific discovery anyway. Eventually, he foresees patents being valued as a separate asset class, like real estate or securities.
His antagonists, he says, are the “cozy oligarchy” of big technology companies like I.B.M., Hewlett-Packard and others that typically reach cross-licensing agreements with each other, and then refuse to deal with or acknowledge the work of inventors or smaller companies.
Ignoring the patents of others is “deeply ingrained in parts of certain industries,” he writes in the article, “most notably software, computing and other Internet-related sectors.”
Large technology companies complain about patent suits but, Mr. Myhrvold says, their actions often invite litigation. “The attitude of the big guys has been that unless you sue me or threaten to sue me, get lost,” he said in the interview. “I know, I was one of those guys.” Indeed, Mr. Myhrvold, 50, supplied his considerable brain power to Microsoft for 13 years, serving as chief technology officer until 2000.
Mr. Myhrvold personifies the term polymath. He is a prolific patent producer himself, with more than 100 held or applied for. He earned his Ph.D. in physics from Princeton and did postdoctorate research on quantum field theory under Stephen Hawking, before founding a start-up that Microsoft acquired.
He is an accomplished French chef, who has also won a national barbecue contest in Tennessee. He is an avid wildlife photographer, and he has dabbled in paleontology, working on research projects digging for dinosaur remains in the Rockies.
His Intellectual Ventures is not simply a patent hedge fund. Its 650 employees include scientists and engineers, and it has an in-house invention effort and lab that last year applied for 450 patents. To date, the company has paid $315 million to individual inventors.
He calls patents “the next software,” noting that software did not become a market on its own until the 1980s, spurred by innovators and the enforcement of intellectual property laws. “I’m trying to get inventions that kind of respect as an economic entity,” he said.
Yet while Mr. Myhrvold is saying one thing, his company’s main activity is quite another, according to Mark Bohannon, general counsel and senior vice president for public policy for the Software and Information Industry Association.
Intellectual Ventures, Mr. Bohannon says, is the largest of the category of firms that hold patents, but do not make products. Lawyers call such firms nonpracticing entities, NPEs, though they are often labeled as patent trolls. “Our concern is that it games the patent litigation system so it can extract licensing fees and investments from technology companies that create jobs, innovate and make products,” said Mr. Bohannon, whose trade association includes I.B.M., Google, Oracle, SAP and Adobe.
Several analysts say that Intellectual Ventures has been primarily a master practitioner of exploiting the current rules of the game to its advantage. Many companies in the patent field use shell companies to mask their activities, and Intellectual Ventures seems to employ them with uncommon frequency. A report last month by Avancept, an intellectual property consulting firm, said that up to 1,110 shell companies and affiliated entities appear to be linked to Intellectual Ventures. The secrecy, said Thomas Ewing, principal consultant for Avancept, makes it “far more difficult to confidently negotiate with Intellectual Ventures.”
Intellectual Ventures, founded in 2000, began operating in 2003. It says it has returned $1 billion to investors and collected more than $1 billion in license fees to date. Most of the revenue has apparently come from 16 so-called strategic investors — big companies that pay to license patent rights and get a stake in an Intellectual Ventures fund.
The companies must sign strict nondisclosure agreements to even talk with Intellectual Ventures. Only Microsoft has publicly stated that it is one of the group. In 2008, The Wall Street Journal reported that Verizon Communications had agreed to pay Intellectual Ventures $350 million. Other companies that have agreed to sizable payments to Intellectual Ventures include Intel, Nokia and Sony, according to people told of deals. And Intellectual Ventures has sought deals with others, including I.B.M. and Amazon, so far without success, say people informed of the talks.
Intellectual Ventures’ penchant for secrecy, Mr. Myhrvold says, is partly a legacy from its early days as an upstart when it did not want to tip its hand. Personally, he says he advocates not only the public disclosure of patents but also license agreements, but he will not give up the competitive edge of secrecy unilaterally. “If everybody in the industry does it, I’ll be right there,” Mr. Myhrvold said.
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