Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
Speaker 2: The evidence is in in the US government's landmark antitrust
Speaker 2: case against Google. During a ten week trial, DC Federal
Speaker 2: Judge Amitt Meta heard from more than fifty witnesses, including
Speaker 2: Google's CEO, Microsoft's CEO, and Apple executives. But the most
Speaker 2: damning evidence may be the internal documents. The Justice Department
Speaker 2: introduced the email slides and other records to show how
Speaker 2: Google's lavish payments to other companies ensured its search engine
Speaker 2: became the pre selected option almost everywhere that people access
Speaker 2: the Internet. Joining me is Bloomberg Intelligence Senior litigation analyst
Speaker 2: Jennifer ree Jen. Were the documents more convincing than the testimony?
Speaker 3: You know, I think so, And I actually tend to
Speaker 3: agree that that is the case most of the time
Speaker 3: in the anti trust trials, because the testimony as to
Speaker 3: whether something causes harm or whether a business strategy is
Speaker 3: pro competitive and legitimate. You know, the testimony will be
Speaker 3: whatever it will be, and it's as good as the
Speaker 3: trustworthiness of the witness. But the documents tell the truth.
Speaker 3: I mean, the documents show what the business was thinking about,
Speaker 3: what was presented to the board, how it was viewed,
Speaker 3: how competition was viewed, and what the intention of certain
Speaker 3: strategies are. And those speak the truth because they're made
Speaker 3: in the ordinary course, they're not made with litigation in mind.
Speaker 3: So I do think, particularly in this case, these documents
Speaker 3: are very important.
Speaker 2: This got so much attention that Google spends twenty six
Speaker 2: billion dollars to be the default. So what documentary evidence
Speaker 2: are we talking about there?
Speaker 4: Well, I mean this is just their profit law statements.
Speaker 3: I mean it was a document that showed what they
Speaker 3: call their traffic acquisition costs, and this is sort of
Speaker 3: translates into you know, what they have to pay to
Speaker 3: be the default search engine in many different places where
Speaker 3: somebody might go to search like Safari, let's say, or
Speaker 3: you're going to Chrome and you're searching something on the Internet,
Speaker 3: the default that's set is basically Google Search. So the
Speaker 3: twenty six billion was this cost, and what that is
Speaker 3: are payments that are made in order to have that
Speaker 3: default position. One to Apple, there are payments made to
Speaker 3: the phone makers like Samsung that make the Android mobile devices,
Speaker 3: and I should say mobile devices because it's not just phones,
Speaker 3: it's tablets and computers as well, so there was a
Speaker 3: document that showed this number, and Google was actually trying
Speaker 3: to keep this hidden in trial, but the judge decided, no,
Speaker 3: We're going to make it public. And I think it
Speaker 3: was a bit of a shock because there were some
Speaker 3: estimates of what this number might be and people were
Speaker 3: talking about eighteen billion, maybe ten billion paid to Apple,
Speaker 3: maybe another eight So this was a surprise when we
Speaker 3: got to that twenty six.
Speaker 4: It's a very high number.
Speaker 2: We all know about search ads because they're annoying, and
Speaker 2: there were notes prepared for a speech by a Google
Speaker 2: finance executive in twenty seventeen talking about just how lucrative
Speaker 2: search ads are.
Speaker 3: They are annoying and in fact getting more and more
Speaker 3: prevalent June, and this is one of the things that
Speaker 3: DJ is saying, Look, Google, you have this monopoly on
Speaker 3: general search. And because of the monopoly on general search,
Speaker 3: that means that advertisers feel they must advertise via your
Speaker 3: search results. And I don't know if you've noticed most
Speaker 3: people have, but sometimes the top results that come up
Speaker 3: when you do a search, they look like their search results,
Speaker 3: but they are actually sponsored ads. And so this is
Speaker 3: part of what the DJ says is degradation of quality.
Speaker 3: And I think that we saw in the Google documents.
Speaker 3: You know that they make this huge profit and what
Speaker 3: they charge for advertising, and there were also some documents
Speaker 3: that supported the idea that they could kind of raise
Speaker 3: the prices to advertisers as they saw fit and not
Speaker 3: really suffer from it. I mean, one of the ways
Speaker 3: that you can understand that a company has a monopoly
Speaker 3: is that it can raise its prices and not see
Speaker 3: demand go down, but demand stays the same. When the
Speaker 3: prices are raised, it means, you know, the advertisers don't
Speaker 3: go somewhere else they need to advertise there. So there
Speaker 3: were documents that bore that out. They bore the enormous
Speaker 3: amount of profit they make from advertising, but they also
Speaker 3: showed that when they needed to show a little bit
Speaker 3: of a better margin, at one point, they were able
Speaker 3: to just raise advertising prices and it didn't hurt them.
Speaker 2: Google's most important default deal was with Apple, and there
Speaker 2: was a provision negotiated in twenty sixteen that the two
Speaker 2: would support and defend their packed against antitrust scrutiny. Yeah.
Speaker 3: I mean that showed up in the documents too, and
Speaker 3: that's why those documents are so important because I'm not
Speaker 3: so sure that that's something that would have been elicited
Speaker 3: through testimony. There was an agreement that if there was
Speaker 3: some antitrust challenge to the default agreement that was struck
Speaker 3: between Google and Apple, that they would both defend it
Speaker 3: in cord or defend it as needed. Now, let me
Speaker 3: say one thing about that, because it sounds really bad, right, Yeah,
Speaker 3: it sounds bad. But at the end of the day,
Speaker 3: antitrust monopolistic conduct is adjudged by a reasonableness standard.
Speaker 4: I know that sounds kind of strange, but it's very
Speaker 4: very much of a gray area.
Speaker 3: So companies are often asking lawyers, well, we would like
Speaker 3: to do X, we want this new strategy. Is this
Speaker 3: going to violate the anti trust laws? And a lot
Speaker 3: of times the answer is, well, maybe and maybe not.
Speaker 3: You might get challenged. We think this is OA, We
Speaker 3: think that the benefits of this outweigh the harms that
Speaker 3: could come from this. But it doesn't mean you won't
Speaker 3: be challenged. So just the fact that they've decided they
Speaker 3: had this side agreement where they will both defend this
Speaker 3: agreement if they are challenged doesn't necessarily mean that it's illegal.
Speaker 2: I know, we talked about being the default before and
Speaker 2: whether it matters. I think it matters to most people.
Speaker 2: But what kind of testimony or documentary evidence was there
Speaker 2: about that?
Speaker 3: You know, first of all, I think that the fact
Speaker 3: that Google's paying twenty six billion dollars a year in
Speaker 3: order to have that position suggests there's some serious value
Speaker 3: to being there. And if people willing nearly were changing
Speaker 3: their default search engine to Being or DUC dot Go,
Speaker 3: which are the two main competitors to Google Search, I
Speaker 3: don't think they'd be paying that kind of money. So
Speaker 3: that's one thing that speaks for itself. But the other thing,
Speaker 3: I thought there was really compelling evidence from a Department
Speaker 3: of Justice expert who was an expert in behavioral economics,
Speaker 3: and he has spent his time studying how people behave
Speaker 3: when they're confronted with the default, not just in the
Speaker 3: digital world, but in many types of different examples.
Speaker 4: He was even looking at organ.
Speaker 3: Donation right, And I thought his testimony was really compelling
Speaker 3: because my personal position going into this was.
Speaker 4: Well, I changed the defaults. I think it's easy to do.
Speaker 4: I think it's quick.
Speaker 3: I use Microsoft and I change from Being which is
Speaker 3: set to Google because I like it better people can
Speaker 3: just do this and there's nothing exclusive about it. But
Speaker 3: you know, he kind of changed my mind on it
Speaker 3: because he showed how people simply don't change defaults. That
Speaker 3: a very small percentage, I think, I don't remember the
Speaker 3: exact numbers, but it's low people who know and actually
Speaker 3: would change the default. And he had studies that showed
Speaker 3: even if somebody knows they can change the default, if
Speaker 3: they're going to have to do something to figure out.
Speaker 4: How to do it, they don't do it.
Speaker 3: So sadly, I think the upshot of his testimony was
Speaker 3: that people tend to be uninformed and a little lazy.
Speaker 4: But that was his testimony and it was pretty compelling.
Speaker 2: There's an argument that the more and more people are
Speaker 2: on Google and inputting information, the better and better Google
Speaker 2: gets and that's an advantage over other search engines. Was
Speaker 2: that part of the trial.
Speaker 3: Oh yeah, that is a big part of the trial
Speaker 3: because that is one of the issues that the reason
Speaker 3: that Google wanted to hold down, let's say, wanted to
Speaker 3: have these default positions and sort of not provide a
Speaker 3: place in the marketplace for being or for ductut go
Speaker 3: to have a lot of search activity is because they're
Speaker 3: aware of this wheel right where the more searches you have,
Speaker 3: the better you get, and it was a way for
Speaker 3: them to keep the quality of those two rivals down
Speaker 3: and improve its own quality at the same time. And
Speaker 3: absolutely the Department of Justice has made that allegation. Google
Speaker 3: has said we are the best and we are better,
Speaker 3: and they have also said, oh, by the way, it's
Speaker 3: not just about the data, it's about the algorithm.
Speaker 4: We have a great algorithm. We put in loads of resources.
Speaker 3: We've spent billions of dollars over the years with R
Speaker 3: and D, we hire great people, we put loads of
Speaker 3: resources towards this, and that's why we're great. And you
Speaker 3: know what, Microsoft hasn't put those same kind of resources
Speaker 3: toward it. But on the other side, the Department of
Speaker 3: Justice would argue, well, Microsoft wouldn't put the resources when
Speaker 3: there's no place for them to get out there and
Speaker 3: get people to use being other than maybe on some
Speaker 3: Microsoft computers.
Speaker 2: But there was a presentation by a Google engineer called
Speaker 2: Google is Magical.
Speaker 3: Well, I will say that from the testimony, many who
Speaker 3: work for Google and have worked on the search engine
Speaker 3: are very proud of what they've done. And no one
Speaker 3: is saying that they shouldn't be, and no one was
Speaker 3: saying that it wasn't completely innovated. Google's very innovative and
Speaker 3: that you know, years ago when it first introduced a
Speaker 3: search engine, that it wasn't innovative. It's just a fantastic,
Speaker 3: useful product for consumers.
Speaker 4: But what the DJ has alleged is that.
Speaker 3: At some point in time, along the road of developing
Speaker 3: and becoming this massively popular search engine, I mean a verb,
Speaker 3: you know, that along the time they decided, not only
Speaker 3: have we developed this great search engine and we're fantastic
Speaker 3: and we're innovative, but now we're going to stop any threats.
Speaker 3: We want to stay where we are and we want
Speaker 3: to block any threats. That's really what they're claiming, not
Speaker 3: that it's not a great search engine and not an
Speaker 3: innovative company.
Speaker 2: I'm sure we've spoken before about things being put in
Speaker 2: writing that shouldn't be put in writing, and I always
Speaker 2: wonder why in companies they put things in writing. So
Speaker 2: Google actually told its employees what not to say, and
Speaker 2: the Jaluas department has quote Google's five rules of Thumb
Speaker 2: for written communications.
Speaker 4: To prove it that's exactly right. But let me say
Speaker 4: this that looks awful.
Speaker 3: But as an ex anti trust lawyer, I'll make one
Speaker 3: comment about this, or maybe many comments about this, But
Speaker 3: this is one of the jobs of outside council two big,
Speaker 3: huge companies. They do what's called anti trust compliance training,
Speaker 3: and many companies are actually advised and in writing exactly
Speaker 3: as Alphabet employees were advised. You shouldn't talk about dominance,
Speaker 3: you shouldn't talk about your market power, you shouldn't say, hey,
Speaker 3: you're number one in the market. It's actually pretty commonplace.
Speaker 3: So that kind of advice that came from I'm guessing
Speaker 3: the Anti Trust Council for Alphabet, I think for very
Speaker 3: very big companies is fairly common.
Speaker 4: But don't use the.
Speaker 2: Terms like crush, kill, hurt, or block when talking about rival.
Speaker 3: That's I myself have written compliance manuals that said almost
Speaker 3: that exact same thing. They're even online and maybe some
Speaker 3: compliance attorneys go online and see, hey, what are all
Speaker 3: the words that a big dominant company shouldn't use.
Speaker 4: So honestly, it looked so bad.
Speaker 3: I get that, But at the end of the day,
Speaker 3: it is pretty common practice for a really big company
Speaker 3: to have that kind of guidance internally.
Speaker 2: So how did Google do on defense or on defense,
Speaker 2: I should say.
Speaker 3: Well, I think actually they did fairly well, because you know,
Speaker 3: I'm going to go back to something I said earlier
Speaker 3: that monopolization cases are judged on what's called reasonableness, and
Speaker 3: it's called the rule of reason. That's the standard. And
Speaker 3: what the rule of reason asks the judge to do,
Speaker 3: which sounds incredibly difficult and I'd never want to be
Speaker 3: faced with this as a judge, is to ask does
Speaker 3: the conduct cause harm? That the conduct that's highlighted by
Speaker 3: the DJ is anti competitive? Has it caused harm to
Speaker 3: a market? And the DJ has to prove that. But
Speaker 3: once the DJ has proved that, the other side, the
Speaker 3: defense and this is an any case, not just this
Speaker 3: Google search case, has to show well, what are the
Speaker 3: pro competitive aspects of what we do? And once they've
Speaker 3: shown that there are pro competitive aspects and they've kind
Speaker 3: of verified those through the evidence it's not just made
Speaker 3: up or pretextual, the judge they have to weigh it.
Speaker 3: They have to ask which one is stronger, there's some harm,
Speaker 3: there's some benefit, which one stronger, and whichever one wins
Speaker 3: out that's the answer. It's really it sounds like a
Speaker 3: crazy thing. To have to do and very difficult, and
Speaker 3: it sounds really subjective, and I think this judge knows
Speaker 3: that he's going to be faced with that.
Speaker 4: And it's going to be difficult.
Speaker 3: And what Google did, which I think is a good defense,
Speaker 3: is they said, look, you know, we have some of
Speaker 3: these agreements because we want ease of consumer use. We
Speaker 3: want them to be able to take out a new
Speaker 3: phone that they just bought and.
Speaker 4: Have a great experience.
Speaker 3: We don't want them to be faced with a million
Speaker 3: things they have to pick, like a choice screen going okay,
Speaker 3: you have a default search engine here, which one do
Speaker 3: you want? You have a default search engine in this
Speaker 3: other place, which one do you want. We want these
Speaker 3: phones to come pre installed with all the Google apps
Speaker 3: that somebody really wants an Android phone, like YouTube and
Speaker 3: Google Play, Stoor and Chrome. And it's a really seamless
Speaker 3: consumer experience to just automatically use Google Search because it's
Speaker 3: the best. And Apple would say the same thing. They'd say, hey,
Speaker 3: we looked into it, we thought about it, we looked
Speaker 3: at some of the other options. We've even talked to
Speaker 3: Microsoft at some point about having being but we also
Speaker 3: want our users to have the best experience and having
Speaker 3: the best experience is having Google Search installed as default,
Speaker 3: and that's certainly pro competitive. And they've also said, look,
Speaker 3: we're just the best. We put loads of money into this,
Speaker 3: loads of time, loads of people, loads of resources, and
Speaker 3: we're constantly innovating to get better. So, you know what,
Speaker 3: even if our advertising prices are going up and some
Speaker 3: companies believe they have to advertise through general search, it
Speaker 3: pops up when somebody does a search.
Speaker 4: They're getting better value, They're.
Speaker 3: Getting more clicks there, maybe getting more buys from that
Speaker 3: because of all the innovation that we do.
Speaker 4: So I think they did a good job.
Speaker 3: Face with some not so great facts like twenty six
Speaker 3: billion a year you know, paid for this. They did
Speaker 3: a good job of showing that there was this pro
Speaker 3: competitive side and that the judge is really going to
Speaker 3: have to weigh them against each other.
Speaker 2: Closing arguments will take place in early May, and the
Speaker 2: judge has actually said that he has no idea what
Speaker 2: he's going to do. Thanks so much, Jen, that's Bloomberg
Speaker 2: Intelligence Senior litigation analyst Jennifer Ree. What should you do
Speaker 2: when a regulator doesn't respond to your petition? Well, you
Speaker 2: could just proceed as planned but one cryptocurrency exchange has
Speaker 2: taken a less used path. Coinbase Global, has decided to
Speaker 2: sue the sec over its alleged foot dragging on the
Speaker 2: company's request for crypto ruling, and it's asking an appellate
Speaker 2: court to order the agency to respond. Joining me is
Speaker 2: Anthony Sabino, a professor in the law department at the
Speaker 2: Peter Tubin College of Business at Saint John's Universe. How
Speaker 2: unusual is it to sue a securities regulator to get
Speaker 2: them to make rules.
Speaker 5: It is highly unusual. But what we're witnessing here is
Speaker 5: it might be the beginning of a trend where it
Speaker 5: becomes a little more frequent, although I don't think it
Speaker 5: would ever become commonplace, because essentially, for business, the best
Speaker 5: mode of operations to say, okay, don't prod these securities
Speaker 5: in Exchange Commission or for that matter, any other governmental regulator,
Speaker 5: especially at the federal level. Never bother them, don't post
Speaker 5: the sleeping bear, leave them alone, okay, and let them
Speaker 5: make rulemaking on their own. However, we're seen in the
Speaker 5: cases that we've been discussing here June is the fact
Speaker 5: that these are companies that are more innovative, more on
Speaker 5: the cutting edge again, especially in the crypto space, and
Speaker 5: they really are impatient. They can't wait, and one can
Speaker 5: sympathize with that, and one can understand it to a
Speaker 5: fair degree. But by the same token, you know, the
Speaker 5: possibility is they may get a result that they don't
Speaker 5: really want, and this may rebound to their detriment. But
Speaker 5: again it remains to be seen. But the good news,
Speaker 5: if you will, is the fact that under the Administrative
Speaker 5: Procedure Act, which was inaugurated in the nineteen fifties to
Speaker 5: deal with the plethora of administrative agencies that had cropped
Speaker 5: up thirty years before into Franklin, Ellen or Roosevelt, it
Speaker 5: does provide an avenue of relief where by a party
Speaker 5: can say, look, dear agency, all right, we're in such
Speaker 5: and such business. We're not sure what to do here.
Speaker 5: We would like you to promulgate a rule about that.
Speaker 5: And it is basically Americans and American businesses saying, look, okay,
Speaker 5: we understand there has to be some modicum of government regulation,
Speaker 5: but we need clarity, we need predictability. Otherwise the wheels
Speaker 5: of free enterprise grind to a halt. And we're going
Speaker 5: to exercise our rights to say, okay, look, government works
Speaker 5: for the people, Government works for us, so therefore we
Speaker 5: want to get a result here. You just can't sit
Speaker 5: around and keep us waiting in Limba.
Speaker 2: Do you think the SEC hasn't written the rules for
Speaker 2: crypto because they're not quite sure how it works yet
Speaker 2: and what the problems.
Speaker 5: Are, June, I could not agree with you more exactly right, okay,
Speaker 5: because let's face it, okay, crypto is brand new for everybody,
Speaker 5: and again that's both good and bad. The crypto industry
Speaker 5: itself is constantly innovating. They're inventing new stuff up on
Speaker 5: the guardment. I'm sure as we're sitting here, in the
Speaker 5: next few minutes, some crypto entrepreneur is going to come
Speaker 5: out with a new device, okay, a new form of cryptocurrency.
Speaker 5: And that's wonderful because that's free enterprise and freedom at
Speaker 5: its best. But on the other hand, what that means
Speaker 5: is the SEC isn't sure what to do. And I
Speaker 5: think really that's the danger here for the agency, and
Speaker 5: this I can sympathize with the agency on this account,
Speaker 5: is the fact that how can they make rules for
Speaker 5: things that they do not yet fully understand? How can
Speaker 5: they make comprehensive rules for situations that are constantly cropping up. Okay,
Speaker 5: is newer things come up, There is yet to know
Speaker 5: who's on the on the playing field, if you will,
Speaker 5: and to understand what rules need to be made. So
Speaker 5: the agency to some extent is in the right when
Speaker 5: they say, look, we've got to look at this, we've
Speaker 5: got to analyze, et cetera. Because certainly no one in
Speaker 5: any industry wants to have rules that will stifle innovations,
Speaker 5: stifle competition in other ways, basically be detrimental to business.
Speaker 5: You want agencies to take a measured, logical approach and
Speaker 5: to act on a fully informed basis. And again, as
Speaker 5: we have all these innovations cropping up like weeds in
Speaker 5: a field, the bottom line is you have to give
Speaker 5: them some space to do that, which I also think
Speaker 5: explains to some extent why as a general matter, and
Speaker 5: again this could be evolving into something else, but as
Speaker 5: a general matter, today courts are reluctant to push agencies
Speaker 5: to act because they understand the limitations agencies have in
Speaker 5: terms of personnel, resources, budget and also the fact that
Speaker 5: again they need to make informed decisions because a rule
Speaker 5: that's made on a poorly informed basis is the one
Speaker 5: that's going to be challenged and most likely successfully in
Speaker 5: a court of law.
Speaker 2: Tell us what Coinbase is asking for here? What happened here?
Speaker 5: Yeah, well, as I understand it, basically, they had put
Speaker 5: forth a proposal to the SEC say look, we want
Speaker 5: some clarity here because we want to know whether you're
Speaker 5: going to regulate us or not. And again, the essence
Speaker 5: of that is something that we've been dealing with now
Speaker 5: for a couple of years, and we'll continue to deal
Speaker 5: with the need more years to come. Is that is
Speaker 5: crypto a commodity which would be put under CFTC Commodity
Speaker 5: Futures Trading Commission jurisdiction or is it a security as
Speaker 5: to find under the long standing Supreme Court test of
Speaker 5: how we from decades ago and therefore in the SEC jurisdiction.
Speaker 5: And so they want some clarification here. But that's part
Speaker 5: of the problem because again, as Coinbase continues to innovate,
Speaker 5: as any crypto merchant continues to innovate, they come up
Speaker 5: with new things. In the SEC isn't too sure what
Speaker 5: to do. Also, let's keep in mind that the SEC
Speaker 5: is absorbing the continued school diversity of court opinions. We
Speaker 5: had a few months ago, District Judge Anna Lisa Torres
Speaker 5: here in the southerns of New York, again the financial
Speaker 5: capital of America, if not the world, saying okay, this
Speaker 5: particular crypto product, I think it was a non fungible token,
Speaker 5: This digital token is not a security, so SEC, it's
Speaker 5: not within your bailiwick. CFTC can regulate this as a commodity.
Speaker 5: But in other instances, a different kind of investment is
Speaker 5: a security. Therefore it's being offered. Therefore it's like an
Speaker 5: IPO in this instance, the corollary the ico initial coin offering.
Speaker 5: SEC go ahead and regulate this.
Speaker 6: Now.
Speaker 5: A couple of months after that, okay, we had Judge
Speaker 5: Raycoff Jed ray Coloff, the eminent securities expert, eminent judge
Speaker 5: of the Southern District, basically in the same building saying no, no,
Speaker 5: here's the case. I believe the name was terrorform and said, no,
Speaker 5: this is definitely a security under the Howie test, it's
Speaker 5: an investment made then exposition of profit, those profits derived
Speaker 5: from the efforts of others. So therefore, SEC, you regulate this.
Speaker 5: This is your job to do, and the SEC is
Speaker 5: currently trying to absorb that. We all are trying to
Speaker 5: absorb that, and we don't know what the next judge,
Speaker 5: not necessarily in New York, but anywhere in the country
Speaker 5: June is going to say about this. And until we
Speaker 5: have further judicial clarification, the SEC is going to be
Speaker 5: reluctant to basically issue its own rules in that process.
Speaker 2: Didn't Gary Gensler say it was a security?
Speaker 5: He did? He did? And again that's interesting because and
Speaker 5: I say this with respect for mister Gensler, because I
Speaker 5: think pretty much he's doing a very good job, and
Speaker 5: he did a very good job at the CFTC where
Speaker 5: he was saying, crypto is a commodity, so my agency
Speaker 5: regulates it. Now he changed task in an office addresses.
Speaker 5: Now he's at the SECC. No, no, crypto is a security.
Speaker 5: So now my agency, my new agency, we get to
Speaker 5: regulate that. And again, this is one of the reasons
Speaker 5: why we can understand the Commission's reluctance to promulgate comprehensive rules,
Speaker 5: or maybe even the inability to do so, because they're
Speaker 5: still not sure their contention is. Look by and large,
Speaker 5: as I understand, if mister Genzu's contention is basically, it
Speaker 5: doesn't matter what form, what iteration of crypto it is.
Speaker 5: Crypto is a security under our long standing definition, and
Speaker 5: therefore we get to regulate it. But he's got to
Speaker 5: reconcile that position, because really that's nothing thing more than
Speaker 5: a position of the Commission the SEC with what the
Speaker 5: courts are telling him and trying to find a balance here.
Speaker 5: And once again, the agency doesn't want to over commit.
Speaker 5: And as Americans and especially those of us in interesting
Speaker 5: free market, we don't want the agency to over commit
Speaker 5: because if they again have these overly stricts, okay and
Speaker 5: poorly informed rules, that's going to stifle innovation in the
Speaker 5: market and it's going to create more regulatory problems for
Speaker 5: folks who honestly don't deserve it.
Speaker 2: The SEC has received eighteen petitions for rulemaking so far
Speaker 2: in twenty twenty three, which is in line with previous years.
Speaker 2: Cara Rowlands of the New Civil Liberties Alliance, which is
Speaker 2: a Washington, DC based civil rights group, in a recent study,
Speaker 2: found the SEC substantively responded to only five of the
Speaker 2: nearly eighty petitions filed from January twenty eighteen to May
Speaker 2: twenty twenty three. Right is that too much, even for
Speaker 2: an agency that's maybe overworked.
Speaker 5: Yeah, and I would have to say this, I have
Speaker 5: not studied ms Rollin's research, but I have no reason
Speaker 5: to assume it's other than valid. So assuming that it
Speaker 5: is valid research, then I give for the right of
Speaker 5: that argument, because that's correct. The SEC is there too, again,
Speaker 5: a sure provide for investor confidence, provided for integrating the
Speaker 5: market to punish the wrongdoers. Part and parcel of that
Speaker 5: is making rules. And when you have petitions where are
Speaker 5: specific parties asking for rulemaking in certain areas, then the
Speaker 5: agency is supposed to respond to that. And quite frankly,
Speaker 5: just based on that quantitative analysis by Ms Rollins, I
Speaker 5: have to say that that is an inadequate response by
Speaker 5: the agencies. Okay, they've got to get their numbers up.
Speaker 5: And yes, the SEC does have a limited budget, limited personnel. Okay,
Speaker 5: they've got a lot of irons in the fire to
Speaker 5: use that expression. But again that's nothing new. The agency
Speaker 5: has always been in that mode of operation, always playing
Speaker 5: catch up since it was formed in nineteen thirty four.
Speaker 5: So they have to deal with these issues. And once again,
Speaker 5: if they want to instill confidence in the market, a
Speaker 5: sure market integrity. They've got to be proactive on this,
Speaker 5: and I think the bottom line is they've got to
Speaker 5: do better. They've got to do better. So I would
Speaker 5: agree with the critics than what the research is saying
Speaker 5: in that regard. And so it's fine. And I think
Speaker 5: this is going back to your point, if I may,
Speaker 5: I understand it a little better now, is that if
Speaker 5: mister Gogeler says, look, okay, crypto is a security, we
Speaker 5: want to regulate it. Well, by golly, if you say
Speaker 5: it's a security, then promulgate some rules. And the rulemaking process,
Speaker 5: by itself, as I'm sure many of your listeners know,
Speaker 5: is quite complicated. It's a three step process. Provide a
Speaker 5: full buy again the administrative proced Director of the fifties. First,
Speaker 5: the agency, any agency, and will be specific the SEC
Speaker 5: in this regard. They have to propose a new rule
Speaker 5: and allow for public commentary. Then they have to allow
Speaker 5: the public commentary to come in typically over a period
Speaker 5: usually ninety days, and listen to that commentary and take
Speaker 5: it into their calculus and as necessary, revised the rule, amended,
Speaker 5: tweak it a little bit, whatever. Then they promulgate a
Speaker 5: final rule, and then that goes through the SSET test. Again,
Speaker 5: if somebody challenges and court so on and so forth.
Speaker 5: But once again, since that rulemaking process is already laborious
Speaker 5: and already close for public involvements, then I honestly think
Speaker 5: that the SEC has got to put more people into
Speaker 5: this push. Okay, get more folks involved and be responsive
Speaker 5: and get that big machinery known as the going to
Speaker 5: make these rules when they need it. Because again, when
Speaker 5: you have a petition for rulemaking, you're having someone coming forward,
Speaker 5: and again, to their credit, they're not trying to play
Speaker 5: with the rules as they're not trying to guess. They're
Speaker 5: go into the Commission saying, look, you're the regulators in
Speaker 5: the securities domain, all right, help us out here. Okay,
Speaker 5: we want to follow the law, but we're not sure
Speaker 5: what your position is. We want you to make some
Speaker 5: rules here. Okay. If they're asking for a rule, then again,
Speaker 5: try to satisfy that need.
Speaker 2: I've done so many stories about challenges because an agency
Speaker 2: didn't follow the rule making process exactly as required. How
Speaker 2: long does it take the SEC from start to finish
Speaker 2: to draft a rule and put it into effect.
Speaker 5: It varies, and I have no empirical evidence on that
Speaker 5: to share with your Jim. But the bottom line is
Speaker 5: it takes a lot longer than that ninety the typical
Speaker 5: ninety day public comment period because for one reason, sometimes
Speaker 5: that public commentary period is extended. I think a very
Speaker 5: stark example that's illustriof here is when the sec he
Speaker 5: promulgated regulation BIGBI best interests okay about what brokers have
Speaker 5: to disclose the clients to demonstrate that there's no conflict
Speaker 5: of interest. That was met with the opposition, if not
Speaker 5: outright derision by the broken dealer industry, by the security stenizens,
Speaker 5: and they basically said, no, no, we don't want this rule.
Speaker 5: We know what our rules are in terms of you know,
Speaker 5: who's a fiduciary who's not where this pushion is too
Speaker 5: close to being classified as fiduciaries. So they had almost
Speaker 5: violently opposed it. The public commentary was absolutely massive. It
Speaker 5: ran into his I recall hundreds of thousands of pages.
Speaker 5: The commission took a long time because it needed to
Speaker 5: be analyzed. Then the commission came out with i think,
Speaker 5: initially a position that again the industry opposed. They modified
Speaker 5: that a little bit to get something a little more
Speaker 5: palatable to the broken dealer sector. And then they finally
Speaker 5: came out with Regulation BI as you know as it
Speaker 5: exists today. But the bottom line, it was not a
Speaker 5: smooth path at all. Indeed was the antithesis of that.
Speaker 5: It was a very rocky road indeed, okay, with a
Speaker 5: lot of opposition. And again that to me, as much
Speaker 5: as it creates a lot of work and creates difficulties,
Speaker 5: the bottom line for the agency is that, look, the
Speaker 5: road is hard enough. Okay, it's hard enough to promulgate
Speaker 5: rules as it is. The sooner you start down the
Speaker 5: path to promulgate the rules, the better off you are.
Speaker 5: And also, and I think this is something that's been permeating,
Speaker 5: know DC with the agencies and certainly in the federal
Speaker 5: court systems more recently, is Americans and American businesses are
Speaker 5: demanding more and more accountability from regulators and federal agencies because,
Speaker 5: let's face it, nobody elected the five persons who sit
Speaker 5: on the SEC or any of the other members of
Speaker 5: the multi member commissions like the FTC, the FAA, etc.
Speaker 5: But these are public servants who are supposed to be
Speaker 5: accountable to us. And I think this is just one
Speaker 5: iteration of that overall push to say, Look, government serves
Speaker 5: the people, not the other way around. So we want
Speaker 5: government to be more accountable to us. And again, rulemaking
Speaker 5: to satisfy the needs of any particular industry is part
Speaker 5: of that process.
Speaker 2: According to the Bloomberg article, one court found the Occupational
Speaker 2: Safety and Health administration six year delay in responding to
Speaker 2: a petition was reasonable. Another court said the agency's three
Speaker 2: year delay and another request was simply too long. In
Speaker 2: this case, the third Circuit recently asked the SEC to
Speaker 2: respond to some questions. What do you think that indicates?
Speaker 5: First of all, it indicates what the wonderful things about
Speaker 5: our justice system, which is, you have courts in different localities,
Speaker 5: even though they were all federal courts, reaching different decisions.
Speaker 5: But again, it also demonstrates that there is justice in
Speaker 5: that because every case is too generous. I for one,
Speaker 5: really can't comprehend how a six year delay by OSHA
Speaker 5: could be deemed to be reasonable. But then again, I
Speaker 5: didn't sit on that panel, okay, so maybe there were
Speaker 5: remarkable circumstances there where that federal court said, okay, yeah,
Speaker 5: it takes that long because it's extremely complex. On the
Speaker 5: other hand, you have the other court saying look, three
Speaker 5: years is too long to wait for this particular regulation,
Speaker 5: and I'm sure they were right on that as well,
Speaker 5: because in that instance they didn't find sufficient grounds to wait.
Speaker 5: And it's not until the Supreme Court steps in and
Speaker 5: basically provides guidance on these issues, a bright line rule,
Speaker 5: if you will, that it's going to be resolved. But
Speaker 5: you know what, I don't think that they will ever
Speaker 5: come because it's all very suet generous. It's all very
Speaker 5: much case by case basis, but upon the agency, the
Speaker 5: subject matter. And again one has to look at what's
Speaker 5: the question being asked Before one says okay, when is
Speaker 5: the answer to It's not like taking a test on
Speaker 5: a specific day okay. There are a lot of complicated
Speaker 5: issues here, and that's why I think that the courts
Speaker 5: have generally been reluctant to step in, although they're being
Speaker 5: a little bit more proactive. And again part of that too,
Speaker 5: and I can understand the courts here that have been
Speaker 5: reluctant to push the agencies. You've got a very fundamental
Speaker 5: constitutional issue here, June, and that's separation of powers. Once again,
Speaker 5: the courts are there to resolve controversies between American citizens
Speaker 5: and government agencies among other things. And the bottom line is,
Speaker 5: if they start to push agencies, isn't that tantamount to
Speaker 5: them making the rules. That's judicial legislation, and that is
Speaker 5: not the American way at all, just the way. We
Speaker 5: don't want the executive branch to push around Congress or
Speaker 5: the judicial branch. We don't want to have the judicial
Speaker 5: branch pushing around the administrative agencies because they are a
Speaker 5: component of the executive branch. And the best avenue for
Speaker 5: addressed by all Americans is, well, all these agencies, who's
Speaker 5: their boss, the fellow who's at sixteen hundred Pennsylvania Avenue.
Speaker 5: So you right to the presidents. And since the agencies
Speaker 5: are accountable to the presidents and the president's accountable to
Speaker 5: the people, that's how we the people keep these agencies
Speaker 5: in line. So again, they serve us, not the other
Speaker 5: way around.
Speaker 2: Thanks so much for being on the show, Anthony. That's
Speaker 2: Anthony Sabino, a professor in the law department at the
Speaker 2: Peter Tobin College of Business at Saint John's University. In
Speaker 2: other legal news today, crypto giant Binance and its chief
Speaker 2: executive officer, Chen Peng Jao pleaded guilty to criminal charges
Speaker 2: for anti money laundering and US sanctions violations, including allowing
Speaker 2: transactions with Hamas and other terrorist groups. Under a sweeping
Speaker 2: deal with the Justice Department designed to keep the company operating,
Speaker 2: Binance agreed to plead guilty to criminal charges and pay
Speaker 2: more than four billion dollars in penalties. Joo, who agreed
Speaker 2: to step down and pay a fifty million dollar fine
Speaker 2: as part of the settlement, appeared in court and Seattle
Speaker 2: Tuesday to plead guilty. Federal prosecutors say Binance wilfully looked
Speaker 2: away as terrorists, cyber criminals, and child abusers used the
Speaker 2: company's crypto exchange, and at a press conference, Attorney General
Speaker 2: Merrick Garland said Binance and its employees were well aware
Speaker 2: that criminals were using the crypto exchange.
Speaker 1: In a February twenty nineteen chet, one compliance employee wrote
Speaker 1: that they needed a banner that said, quote is washing
Speaker 1: drug money too hard? These days come to Binance, We
Speaker 1: got cake for you.
Speaker 2: Binance's violations included failure to prevent and report suspicious transactions
Speaker 2: with terrorists including Hama US Palestidian Islamic Jihad, Al Qaeda,
Speaker 2: and the Islamic State of Iraq, and Syria. Garland said
Speaker 2: that Binance placed profits over US national security.
Speaker 1: In part because of the crimes it committed. Finance became
Speaker 1: the largest cryptocurrency exchange in the world. Now Finance is
Speaker 1: paying one of the largest corporate penalties in US history.
Speaker 2: After entering his plea, Joo was released and free to
Speaker 2: return to his home in the United Arab Emirates while
Speaker 2: awaiting sentencing. His agreement includes a waiver of his right
Speaker 2: to appeal provided that his sentence doesn't exceed eighteen months.
Speaker 2: He's also barred from any involvement in Binance until three
Speaker 2: years after a monitor is appointed. Coming up next, AI
Speaker 2: class action lawsuits. I'm Jim Gross when you're listening to Bloomberg.
Speaker 2: As generative AI continues to explode in popularity, attorneys have
Speaker 2: never been more mindful of the privacy and data security
Speaker 2: challenge is presented by its rising use and rapid development.
Speaker 2: Several class action lawsuits have already been filed against companies
Speaker 2: that provide these smart tools, alleging serious federal and state
Speaker 2: privacy violations. Recent survey data shows these challenges are putting
Speaker 2: attorneys on alert. Joining me is Michael Benedetti, senior legal
Speaker 2: analyst at Bloomberg Law, who's written about this. Everyone seems
Speaker 2: to be worried about AI. Are attorneys any different? I
Speaker 2: know you did Bloomberg Law survey. What did it tell you?
Speaker 1: So?
Speaker 6: Bloomberg Law recently conducted a survey among four hundred plus
Speaker 6: legal practitioners and house some law from attorneys, and ninety
Speaker 6: seven percent of those attorneys indicated some level of concern
Speaker 6: with data privacy and generative AI. And actually seventy percent
Speaker 6: of those respondents admitted that they were either moderately or
Speaker 6: extremely concern So that's a fairly staggering number and attorneys
Speaker 6: are definitely thinking about this.
Speaker 2: Will you explain how AI depends on these huge data sets.
Speaker 6: Jude, That's where the devil's really in the details, is
Speaker 6: with the data. So I'm not an engineer. I'm an attorney,
Speaker 6: so I like to have the engineers in the room
Speaker 6: when I have this conversation. But the concern is around
Speaker 6: the webscraping practice. And what web scraping is is the
Speaker 6: mass collection of information off the open Internet, and once
Speaker 6: that data is selected, it's been aggregated and fed into
Speaker 6: AI training models that ultimately result in actual tools like
Speaker 6: chat GPT or Bard tell.
Speaker 2: Us about some of the laws that involve AI.
Speaker 6: AI's data appetite potentially clashes with privacy laws in Europe
Speaker 6: with GDPR and California CCPA, as well as Illinois biometric
Speaker 6: privacy law, and this is putting companies at legal red
Speaker 6: those laws, they're fairly dense, but some of the basic
Speaker 6: concepts that they require are transparency, that adequate notice is
Speaker 6: provided to individuals when their data is being collected or
Speaker 6: used or shared. Consents, we're appropriate. Sometimes you have to
Speaker 6: get written consent to use, share, or do anything with
Speaker 6: this data.
Speaker 2: Do you know how many class action lawsuits have been
Speaker 2: filed over AI alleging privacy violations.
Speaker 6: We don't have a total number. This is a very
Speaker 6: new area. My article covers three very prominent ones against
Speaker 6: very large companies. There's Alphabet, parent company of Google. There's
Speaker 6: Open Ai, owner of the chat GPT service. And there's
Speaker 6: more of these cropping up at a pretty quick pace.
Speaker 6: Dinnerative AI like chat GPT and Google's barred hinge on
Speaker 6: on vast data sets, including personal and biometric data. And
Speaker 6: this is raising privacy red flags.
Speaker 2: So give us some details about the JL versus Alphabet
Speaker 2: case filed in the Northern District of California.
Speaker 6: Yeah, this is a class action comprised of anonymous plaintists,
Speaker 6: some of which are minors. And these plaintiffs are alleging
Speaker 6: that Google's webscraping practices used to train the AI services
Speaker 6: that Google offers, Barred and some others are violating users
Speaker 6: privacy rights by not providing sufficient notice and obtaining consent.
Speaker 2: The case against Prisma Labs is a little different. Tell
Speaker 2: us about that.
Speaker 6: There is a case against Prisma Labs, a mobile app
Speaker 6: developer that publishes photo and video editing tools enhanced by AI,
Speaker 6: and like the Open Ai case, that case is also
Speaker 6: alleging biometric privacy violations. And thank us here for claiming
Speaker 6: that billions of images found online containing people's faces, those
Speaker 6: facial images were scanned and used to train the AI
Speaker 6: algorithms that power the Prisma tools.
Speaker 2: Just a few of the many cases that we'll be
Speaker 2: coming up having to do with AI. Thanks Michael. That's
Speaker 2: Michael Benedetti, Senior legal analyst at Bloomberg Law, and that's
Speaker 2: it for this edition of the Bloomberg Law Show. Remember
Speaker 2: you can always get the latest legal news on our
Speaker 2: Bloomberg Law podcasts. You can find them on Apple Podcasts, Spotify,
Speaker 2: and at www dot bloomberg dot com, slash podcast, Slash Law,
Speaker 2: and remember to tune into The Bloomberg Law Show every
Speaker 2: weeknight at ten pm Wall Street Time. I'm June Grosso
Speaker 2: and you're listening to Bloomberg