Blow Off
FTX
We talk a lot about FTX and its ignominious former owner SBF around here because it is rare we witness the public collapse of a giant Ponzi-like thing in real time. Weeks ago I naively speculated whether prosecutors would have a difficult time rebutting SBF’s claims of ignorance or whether a jury would believe he and his team made honest mistakes when they diverted customer funds to cover trading losses. Fortunately (?) things in this case are moving at light speed and less than a month later we are learning that oh yes they very much Did Fraud in the Group Chat:
Former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang pleaded guilty to charges tied to FTX's collapse, U.S. Attorney Damian Williams announced Wednesday night.
[…]
In a statement, SEC Deputy Enforcement Director Sanjay Wadhwa said the three “were active participants in a scheme to conceal material information from FTX investors, including through the efforts of Mr. Bankman-Fried and Ms. Ellison to artificially prop up the value of FTT, which served as collateral for undisclosed loans that Alameda took out from FTX pursuant to its undisclosed, and virtually unlimited, line of credit."
Right, okay. So Ellison and Wang have flipped on SBF and are giving sworn testimony that he was the mastermind behind all the fraud, which is not going to be great for him at trial. The ‘fraud’ at the center of the SEC case is investor fraud, and thanks to SBF and Ellison’s many public claims that everything was hunky dory at FTX while they secretly moved money to paper over billions in trading losses. Two of the masterminds have already plead guilty in exchange for reduced sentences that still may be years in prison, which is not great news for SBF who may have agreed to be extradited to the US with the hopes the government would have a hard time assembling a case so quickly. Whoops.
The government seems to be setting SBF up as the primary villain in this case, and given his majority ownership and alleged control over FTX and Alameda this is a rational strategy. He was involved, if not solely responsible for much of the wrongdoing at FTX, and with company insiders turning state’s evidence against him, it seems likely he will go to prison for a very long time. Incidentally, he is out on $250 million dollar bail as I write this, which means he put up at least $25 million to a very confident bondsman which begs the question - where did the money they paid themselves go?
It is hard to wrap your head around just how much cash FTX distributed to its executives and employees, but here is a soft-focus piece on one so-called ‘whistleblower’ who conveniently raised concerns to authorities a few days before the company death spiraled:
On Nov. 9, two days before FTX filed for bankruptcy, Bahamian regulators began investigating potential problems at FTX, according to a public court filing. During a phone call with Mr. Salame and other FTX employees, Mr. Salame told Christina Rolle, executive director of the Securities Commission of the Bahamas, that customer money at FTX Digital had been transferred to Alameda “to cover financial losses of Alameda,” according to the filing.
Salame, like Ellison and Wang, perhaps thought that by helping authorities he would divert scrutiny away from the estimated $55 million in personal loans he received from FTX to do things like fly on private jets, buy five restaurants in his Western Mass hometown, and donate $24 million to various Republican candidates and PACs during the last election cycle - including funding his girlfriend’s failed run for Congress.
What I am saying is it seems like anyone even loosely associated with SBF at FTX had access to eye-watering amounts of money to essentially do whatever they wanted with and, perhaps more importantly, no one in the US government gave a shit while the campaign contributions rolled in from a bunch of crypto twenty-somethings and the finance press wrote glowingly about FTX and SBF’s investing acumen.
We may not see another crypto Ponzi of FTX’s size operate so openly in the tradfi world, but we might! We seem to be pretty bad at learning any sort of lessons from the last few years’ endless stream of crypto rug pulls and token collapses. Maybe the inevitable raft of movies and documentaries about this debacle will help inure us to fantastical notions that a scrappy bunch of math nerds can build a multibillion dollar futures exchange overnight, but I wouldn’t bet on it.
Another company that can’t keep itself out of the news lately is Twitter, more specifically Musk’s Twitter, because the two have fully entangled since he wildly overpaid for the website a couple months ago. Before the purchase, Twitter made nearly all of its revenue from advertisers. Musk has claimed he can make up for lost ad billions by charging $8 dollars a month for a verification service that shows users less ads - a claim sure to excite said advertisers - but anyone with access to a calculator knows this is impossible even if Twitter were to double or triple its userbase, which is very unlikely even if Elon dogwhistles himself up an entire QAnon army.
According to a recent analysis, Twitter has lost a staggering 70 of its top hundred advertisers by spend and is in no danger of convincing them to return:
In meetings with advertisers in recent weeks, Mr. Musk’s lieutenants have tried to calm fears and drum up interest in the site. They’ve promised innovations such as ads that allow users to make purchases directly, more video capabilities and tools to keep ads from appearing near objectionable content, according to ad executives familiar with the meetings.
This is a very Muskian play - promise ‘ad innovations’ that sound doable but are unachievable or flat out impossible given Twitter’s skeleton engineering crew and the general nature of the platform - if policing objectionable content was so easy, wouldn’t Facebook have solved it with twenty times the staff? Unsurprisingly, advertising executives are incredulous, and the money isn’t going to reappear in Q4, if ever. In a sign they are not desperate, the ad team is offering huge coupons:
Twitter has offered advertisers incentives, including an offer to match spending up to a $1 million cap for ads that run before the end of the year, in a buy-one-get-one style deal, the Journal has reported.
The problem Musk’s team faces is that unlike federal transportation authorities or NASA, advertisers have easy access to real-time reporting on the performance of their ads on Twitter and, again, barring a Pangeaic shift in Twitter’s userbase, the platform will continue to be a small, largely unproductive slice of big brand ad budgets, though one that Twitter can literally not survive without.
Cocaine
Since we’re talking niche products with a small but rabid userbase, let’s talk street drugs. VICE asks the burning question: is cocaine bad now?
We spoke to 12 people across the continent—including cartel and wholesaler sources, street users, recent college grads, and wealthy working professionals who have a love/hate relationship with the drug.
I like to joke that cocaine was invented by a marketing executive - while it is a powerful stimulant, one of its most common side effects I’ve, uh, heard, is that doing cocaine makes you want to do more cocaine. Genius!
The real trick with stories like this one is the evidence is, by nature, anecdotal. Cocaine sales are neither regulated nor tracked by any sort of statistical body, and recreational drug users willing to speak to a reporter are, by necessity, a limited sample size. I assume VICE had access to cartels and distributors via one if its editorial staff or its founder’s contact list but it is probably a fun assignment.
However! What little science we do have on the purity of the cocaine supply tells us that, contrary to popular fears dealers are cutting the drug with dangerous synthetic fentanyl or rat poison, most cocaine is stepped on with more mundane household items to increase its volume and profit margins:
In one study, researchers from the U.K. identified at least 48 “impurities” found in the global cocaine supply and concluded that rumors about crushed glass, rat poison, and other toxins tended to be hogwash. “Contrary to popular belief, cocaine is more commonly adulterated with benign substances such as caffeine and sugars than toxic household products or other illicit drugs,” the 2010 paper found.
Have drug dealers become sadistic murderers in the last twelve years? Probably not. Wiping out your limited customer base is simply not good business. Even actual sadistic murderers involved in the cocaine trade are trying to improve the user experience:
A Sinaloa Cartel comandante told VICE News the highest-purity cocaine is called “La Lavada” because it’s been “washed” of impurities. The latest innovation, he said, is adding artificial flavors so that the drip tastes like grape, cherry, peach, or other fruits.
Grape drip! What will they think of next. Anyhow, the article is obviously intended as clickbait and not strenuous shoeleather reporting that cocaine consumers will find in any way useful, but it is grimly funny to read that drug dealers have embraced price gouging like many of the large American corporations we talk about in these pages:
Bri said one of her suppliers offered to sell her better product for $100, but users often have no way of knowing if the more expensive stuff was higher-quality or if the cheaper batches were being intentionally stepped on. “If you have shitty coke, I don’t even want it. Don’t sell it to me,” Bri said she told the dealer.
Sorry, Bri, inflation is working on us all.
TGI Friday’s
It has been far too long since we’ve talked about food lawsuits, and after the year we’ve had I think we’re deserving of a small holiday treat:
A judge agreed to let TGI Fridays off the hook in a class action lawsuit that claims a TGI Fridays-branded mozzarella stick snack is misleading because it contains no mozzarella cheese, but also ruled the lawsuit can proceed against the food's manufacturer.
It is perhaps a little unfair to title this with the restaurant’s name since they are allowing the manufacturer to use their brand to sell mozzarella sticks but hang on wait a second:
The back label specifies the sticks contain no mozzarella, but Joseph said she would’ve still “reasonably” believed the product contained mozzarella given the prominence of the words “Mozzarella Sticks” and “her reasonable understanding that mozzarella sticks, by definition, contain mozzarella cheese,” court documents show.
What?! I mean, it seems very reasonable to anticipate the presence of the cheese named in giant letters on the product’s packaging:
Mozzarella is a type of cheese - this is not a case of something claiming vanilla or lime flavor or whatever, it is a specific reference to a type of cheese! Words mean things!
In a quest to find out why a company would substitute cheddar for mozzarella I visited The Cheese Maker dot com and learned that the baseline price of mozz is…exactly the same as cheddar?
At the top end, cheddar is more expensive than mozzarella. Also, the popularity of the Italian cheese is only growing, while cheddar has flatlined. Why would these cheese crooks use a less popular, more expensive cheese rather than, you know, simply doing what I assume most other brands do and using mozzarella in their Mozzarella Sticks? Did their lawyers put them up to this? If I were TGI Friday’s I’d sue the manufacturer for brand damage. For once, I am in favor of lawyers getting paid for a food company’s dumb marketing decisions. Throw the book at them.
Short Cons
LA Times - “In its defense, Tesla lawyers said that “mere failure to realize a long-term, aspirational goal is not fraud.””
CNET - “Almost as soon as it hit the web, users questioned Galactica with all sorts of hardball scientific questions. One user asked "Do vaccines cause autism?" Galactica responded with a garbled, nonsensical response: "To explain, the answer is no. Vaccines do not cause autism. The answer is yes. Vaccines do cause autism. The answer is no."”
NYT - “At the same time, new revelations uncovered by The Times — including the omission of key information on Mr. Santos’s personal financial disclosures, and criminal charges for check fraud in Brazil — have the potential to create ethical and possibly legal challenges once he takes office.”
Know someone considering perpetrating a multibillion dollar crypto fraud? Share these important tips to avoid your co-conspirators turning state’s evidence!