Flip the Bird
Those of us without generational wealth are undoubtedly familiar with the concept of paying bills. A bill is due, and if you have the money available, you pay it. If you don’t pay it, something bad might happen like your utility company or landlord or bank will charge you late fees and eventually send you to collections or try and repossess your belongings, etc.
These companies have legal standing to come after you for recompense because you have entered into an agreement or contract making you liable for payments or charges incurred by turning on your lights or buying a car on credit. It’s all very standard and there are entire court systems (small claims, civil) set up to arbitrate these disputes or, more broadly, to make sure debtors pay their debts.
There is a saying that if you owe the bank a hundred dollars that is your problem and if you owe the bank a hundred million that is the bank’s problem, and the concept broadly applies to paying bills. If you are a litigious millionaire you can build up a decades-long history of stiffing vendors and contractors and people will still do business with you. If you are a litigious billionaire you can buy a company and stop paying rent:
To cut costs, Twitter has not paid rent for its San Francisco headquarters or any of its global offices for weeks, three people close to the company said.
Or vendors:
They have also instructed employees to not pay vendors in anticipation of potential litigation, the people said.
Or employees you’ve fired:
Twitter’s leaders have also discussed the consequences of denying severance payments to thousands of people who have been laid off since the takeover, two people familiar with the talks said.
You might read this and think ‘Wow! He can’t do that! That’s totally illegal!’ and you are correct in the sense that his actions do violate various laws and breach legally binding contracts, but Musk is making a calculated bet that he will come out ahead when the lawsuits and dust settle.
We talk a lot around here about how America’s consumer protection system is reactive - people wronged by companies can sue them in court and perhaps after years of litigation receive monetary compensation (after the lawyers take their cut) or regulators can sue companies for malfeasance and secure non-admissions-of-wrongdoing often after years of legal wrangling. It’s disheartening and exhausting because the bad actors can spend years doing evil and only pay back a fraction of their ill-gotten gains in penalties. Absent a strong regulatory infrastructure in this country, civil lawsuits and slow-moving courts are how we enforce the rules like, for instance, whether a billionaire must pay his workers and rent and server bills.
Elon faces cash liquidity issues with his expensive Twitter takeover - he overpaid by probably 2 or 3x, and the company is bleeding money as he turns the platform into his personal soapbox to spew hatred and conspiracy. When you’re looking at a balance sheet sliding further into the red, what’s the best way to staunch the bleeding? You stop paying your bills! That’s Business 101, baby.
The uncomfortable reality is that for you and I, failure to pay a bill can have legal and financial consequences. We have credit scores to worry about, we risk being blacklisted via eviction, and perhaps more importantly we’ve been led to believe that in a functioning society if you say you’re going to pay for something, you pay for it. Like most things in America, however, the same rules do not apply to the rich and powerful. For them, contracts are meaningless, obligations are optional, and paying your bills is something suckers do, because they can simply just…not, and nothing happens to them. They become richer, more successful, or sometimes get elected president.
Hertz
On a totally unrelated note, Hertz settled the claims threatening to hold up its bankruptcy restructuring for $168 million dollars last week. You may recall we talked about these claims - Hertz employees had a habit of calling the police on customers claiming they’d stolen cars the company couldn’t locate. It resulted in at least hundreds of people being criminally charged, and many spending time behind bars.
Since we’re talking about actions and consequences, it’s worth noting that Hertz believed arrest and imprisonment was an appropriate punishment for failing to return one of its rented vehicles - and it was within its rights under the law, because it had signed contracts. It used law enforcement to enforce those contracts - the only reason these obscene tactics made the news was the hundreds of people who got caught up in it by mistake. Undoubtedly many thousands more were arrested for returning a car late, which does not seem like an appropriate punishment.
The size of the settlement indicates the company knows just how badly it messed up, and it was willing to pay half a million dollars per plaintiff to sweep it under the rug. As of this writing the company has a market cap of $5 billion dollars and its new CEO has characterized these ‘mistakes’ as ‘unfortunate’ so I guess everything is fine now. When a large corporation violates an agreement maybe you go to jail, but they can pay a modest settlement (mostly to lawyers!) and utter a few apologetic words on CNBC and it’s all forgotten.
Twitter Again
Whatever you may think about Twitter as a website, it is undeniable that Musk’s takeover has made life worse for the company’s employees, its vendors and landlords and advertisers and - save a handful of right wing trolls and neo-Nazis who Musk has personally reinstated - its users. The only group of people who benefitted from the Twitter sale were its investors and shareholders, who were paid a significant premium over what the company was probably worth.
There are many articles detailing Musk’s frantic struggle to keep Twitter afloat amid a sea of debt he voluntarily incurred. But, wasn’t his stated goal to save the site, and didn’t he promise to make it wildly profitable? Cutting staff and costs to the bone under a billion-dollar-a-year debt anvil doesn’t seem to indicate he will achieve either goal.
Looking at Twitter’s stock chart over its existence tells an unusually boring tale, given what’s going on at the company today. The stock barely moved from an IPO price of forty-one dollars a share in 2013 to its eventual sale at fifty-three dollars nine years later. A financial writer might say this is a bad thing - Twitter investors barely broke even! A tech writer might say it was indicative of Twitter’s glacial pace of development - they weren’t innovating, their DAUs (daily active users) were flat! It’s true Twitter didn’t make much money but it also didn’t lose much money, it existed in a weird equilibrium - and ironically much of its proportionally small user base were the same financial and tech journalists skewering it for being boring. Twitter gave them a place to share their stories about Twitter being boring, and they liked that just fine.
The people who ran Twitter - it’s CEO, directors, etc - had a fiduciary duty to entertain Musk’s clearly ridiculous offer, and were duty bound to accept it when he signed the fateful term sheet. Despite the fact Twitter was doing just fine - even if its stock had sunk to twenty or thirty dollars a share during the latest market slump, it would still have been worth tens of billions of dollars and had plenty of access to the capital it needed to keep the lights on - the perversities of public markets meant it had to accept Musk’s offer because he was willing to wildly overpay and, at the end of the day, Twitter’s executives and directors were not legally bound to make sure the site was free of Nazis or child porn. They were required to return maximum value to their shareholders, however!
If they hadn’t sold Twitter, its leadership would absolutely have been sued by those same shareholders because they’d have ‘lost’ billions of dollars - the current value of Twitter versus what Musk had been willing to pay. It seems likely at least some of the people involved in the sale knew it was a bad idea - Musk fired a bunch of them the day he took over - but they had to choose between cutting a deal with an abusive billionaire and being sued by a bunch of hedge funds run by equally abusive billionaires.
It is unusual to have such transparency into what happens after a company is sold, but I am willing to bet Musk’s situation at Twitter is not unusual - if exaggerated due to his chaotic personality - for companies who sell themselves and take on huge debt loads. Twitter did not have to sell, it was not in any financial distress - it was a stable if boring tech firm providing a platform a small number of highly influential people liked to use. Now, it is a smoking tire fire, its new owner as obsessed with gutting the company as he is with using it to feel cool and settle petty grievances. The world will survive without Twitter, and if necessary the people who made the site interesting will migrate elsewhere and start over, but the whole debacle is a stark lesson in a foundational business truth - it’s not about the product, or the users, or the vision. It’s only ever about money.
FTX
Members of the inner circle of power at collapsed cryptocurrency exchange FTX formed a chat group called “Wirefraud” and were using it to send secret information about operations in the lead up to the company’s spectacular failure.
Listen, anyone Online enough to have group chats, or WhatsApps, or Discords or whatever has probably made a silly name for at least one of them, and while FTX’s leadership team clearly had a tenuous understanding of securities law at best, if you are in charge of a multibillion dollar enterprise facing potential collapse DO NOT name the brainstorm group chat after one of the many crimes you may soon be accused of. Just don’t do it!
I should say that SBF denies being in the chat blah blah but as more backstory is written about the FTX debacle it seems increasingly clear his crew was up to something awfully fraud-y that may have involved wires. Here is Matt Levine earlier this week discussing an emergent theory of the FTX collapse:
Here is how you do fraud at a futures exchange:
You set up a futures exchange.
You advertise, and also have, all of the standard risk-management stuff, with thoughtful margining and liquidation. You make the exchange look safe.
You also do a lot of trades on the exchange with your own money.
Without telling anyone, you exempt yourself from all the risk-management stuff.
If your bets move in your favor and your account gets bigger, you take the money out to spend on luxury condos or political campaign contributions or venture capital.
If your bets move against you and your account gets smaller, or negative, you don’t put more money back in, and you don’t close out your bets. You just let your negative balance accrue and don’t worry about it.
This is in response to an SEC filing and SBF’s arrest in the Bahamas at the request of US authorities. We talked a bit about Alameda, SBF’s hedge fund that seems to have blown a giant hole in FTX’s finances and hastened its collapse. Well, it turns out FTX’s fancy risk algorithms were disabled for Alameda:
Alameda was exempt from FTX’s “auto-liquidation” risk engine functions, which would automatically liquidate (sell) a customer’s open position when their “Maintenance Margin Fraction” fell below a certain determined level. All customers who took on too much leverage or risk on FTX would thus be auto-liquidated by the exchange. Alameda was exempt from this—it could not be liquidated on FTX Trading under any conditions. This exception was hard coded into FTX’s system.
This meant that Alameda could pile up trading losses and FTX would never liquidate its positions - in fact SBF and his team moved more and more of FTX customer money to prop up Alameda’s creaky balance sheet.
Last week I asked:
The question might seem to be: what did depositors think FTX was doing with their money? Or, more accurately, what did FTX’s lawyers say the company was doing with their money? A central issue in the inevitable FTX lawsuit(s) and trial(s) is going to be SBF sending FTX ‘customer’ funds to his hedge fund Alameda to cover trading losses because that would be fraud if a bank or investment firm did it. But! Was FTX ever claiming depositor funds were safe? Did it have the same fiduciary responsibility a big bank does?
And Levine says:
But — as we have also discussed before — another important element of the alleged fraud is that FTX advertised good risk management and had bad risk management. Bankman-Fried has been going around on a weird media tour whose essential message is “I made mistakes and was careless, sorry,” presumably thinking that that is a defense to fraud charges, that “carelessness” and “fraud” are entirely separate categories.
[…]
If you attract customers and investors by saying that you have good risk management, and then you lose their money, and then you say “oh sorry we had bad risk management,” that is not a defense against fraud charges! That is a confession!
He’s got a point. SBF is facing a slate of criminal and civil charges from the SEC and the DoJ for doing fraud, so whatever else they’ve found was damning enough for them to move at absolute hyper speed by federal investigatory standards. Last week I conceded whether SBF knowingly defrauded his retail consumers was besides the point, because there was undoubtedly language in his investor contracts saying any misrepresentations or false statements would constitute breach and they could sue him over that, and in this case the SEC is doing it on their behalf because this is what the SEC loves doing, whether they’d been asked to by FTX’s creditors or not.
It is not easy to establish intent in a fraud case when the principals involved in the fraud are doing it in smoke-filled rooms and not writing anything down, but it seems a lot of things were written down that could be read as fraud or fraud-like, and now the US government has gotten involved to protect the rights of uh, VC and hedge funds who handed a billion dollars to a kid in cargo shorts who said he had a magic bean trading platform with good risk controls. It turns out he didn’t, and was pretty bad at trading magic beans between his own companies, even when he put his thumb on the scale.
Binance
It is worth briefly discussing the state of Binance, the largest offshore crypto trading and exchange platform. This week, news came out that a large crypto trading firm had withdrawn a lot of assets from Binance, which led to a run on the exchange, with $3 billion dollars’ worth of withdrawals hitting the platform on Tuesday. CZ, the company’s CEO, was tweeting through it, as billions of dollars moved in and out of his exchange.
All this comes on the heels of a Reuters story detailing talks at the DoJ over whether to charge Binance and its executives with fraud and money laundering. It is probably not comforting to crypto enthusiasts to read things like this:
Binance's defense attorneys at U.S. law firm Gibson Dunn have held meetings in recent months with Justice Department officials, the four people said. Among Binance's arguments: A criminal prosecution would wreak havoc on a crypto market already in a prolonged downturn. The discussions included potential plea deals, according to three of the sources.
One problem with the crypto industry is that by global financial standards it is still very small - dare I say centralized - and even a single large exchange facing legal or financial trouble is enough to cause turmoil. If a bank or trading platform had people withdraw a few billion dollars in a day and stories swirling about its founder considering a plea deal with the feds, you might think that was a sign the whole thing was falling apart, but in crypto that’s just a Tuesday.
Short Cons
Philly Inquirer - “Companies linked to ABC Capital helped move hundreds of properties in Philadelphia, through a network of more than 600 LLCs set up largely on behalf of overseas investors.”
Rest of World - “Wang, who runs an agency that helps Chinese students study abroad, told Rest of World he had helped more than 100 students cheat on the Test of English as a Foreign Language (Toefl) exam since at-home tests became available in 2020.”
ProPublica - “Flush with money after receiving the largest-known political advocacy donation in U.S. history, conservative activist Leonard Leo and his associates are spending millions of dollars to influence some of the Supreme Court’s most consequential recent cases…”
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