Seeking Settlement
Purdue Pharma
We have talked before about Purdue Pharma and the Sackler family. After years of negotiation, it seemed the Sacklers were going to finalize a bankruptcy plan that turned over ownership of Purdue to a group of creditors - including various states and victims’ groups - and dissolve it, distributing the proceeds and funding things like opioid addiction treatment initiatives. The Sackler family was going to kick in around $4.5 billion dollars of their nearly $12 billion dollar fortune. The contentious bit of the settlement shielded the Sacklers from personal liability via a “third-party release”. When the bankruptcy was about to be approved, the DoJ and some other complainants objected to this provision, and a district court judge agreed with them:
The ruling Thursday by U.S. District Judge Colleen McMahon, which overturned a multi-billion dollar settlement to end the bankruptcy of Purdue Pharma, has implications well beyond that case because her New York federal court district is one of three that oversee the vast majority of the nation’s biggest bankruptcies. McMahon ruled that members of the Sackler family who own Purdue can’t use the drugmaker’s Chapter 11 filing to end all current and future lawsuits over their role in the opioid-addiction epidemic.
This throws not only this case but an oft-used legal strategy for the rich to avoid personal liability in corporate bankruptcy cases into question. I would point out that the DoJ objecting to a bankruptcy judge shielding the Sacklers from personal liability maybe a little bit on them, because they had years to bring criminal charges against Sacklers and instead reached multiple settlements, preferring to accept money rather than pursuing jail time. But, nevertheless, here we are.
Matt Levine gives a lawyerly breakdown on why cases like this are so difficult to settle - mostly because the Sacklers are rich and can drag them out for years, and have also stashed the billions they extracted from Purdue in offshore trusts that a bankruptcy court cannot easily access.
The DoJ could pierce those trusts if they wanted to, if they determined the funds were criminally acquired, or the result of fraud. I don’t know how many more books or TV shows or articles need to be written detailing the Sacklers making fraudulent claims, mislabeling a highly addictive opioid, running aggressive sales campaigns to put it in every drug store and doctor’s office around the country, etc before anyone in law enforcement decides it might be a good idea to threaten something more stringent than a fine, but this is how America operates. We don’t pass laws preventing companies from breaking the law, we rely on victim or shareholder lawsuits to punish them monetarily for bad behavior. We aggressively shield malevolent actors like the Sacklers from any personal liability with a legal system designed by and for the rich. It has taken a case this egregious - contributing to the deaths of hundreds of thousands of citizens - to get Congress to propose laws that many of us may be surprised didn’t already exist:
In response, some members of Congress have proposed legislation to curb such practices. A bill backed by Dick Durbin, the second-ranking Democrat in the U.S. Senate, would prevent owners of a failed company from using bankruptcy to shield themselves from lawsuits.
“Purdue Pharma can go into bankruptcy and somehow we’re protecting the Sackler family’s personal assets from lawsuits? I just think it’s fundamentally unfair,” Durbin said in a telephone interview. “To think that they were not party to the bankruptcy and they’re receiving this favored treatment is fundamentally wrong.”
Is it fair that the Sacklers drained billions of dollars from their company into offshore trusts while selling a product they knew was killing people, and now the worst the legal system can do is maybe take back a third of their ill-gotten gains? Of course not. Is it the best we can hope for in our dystopian kleptocracy? Maybe. There’s a chance that if this case plays out the Sacklers could win and pay no penalty at all.
Bitcoin
You may - I would be suspicious if you did not - have an opinion about Bitcoin. That opinion may be “I don’t understand Bitcoin, and I don’t want to,” which is fine and probably affords you a better quality of life than those of us who read about Bitcoin. If you are interested in an explanation of whether Bitcoin is like a Ponzi, or more like a pump-and-dump stock scam, here is a pretty good one. It starts with a cheeky subhed:
In this post McCauley argues that comparing bitcoin to a Ponzi scheme is unfair to Ponzi schemes.
One thing I find funny about Ponzi schemes is they’re named after a largely unsuccessful con man from the twenties. Unfortunately for Charles Ponzi, none of the far more prodigious scammers who’ve come along since could shake the name. Anyhow, why is a Bitcoin not really a Ponzi? The author argues that victims of a Ponzi scheme often have the opportunity to get some of their money back:
Of the $20bn in recognised original investments in the [Madoff Ponzi] scheme (which the victims had been told had reached a value more than three times that sum), some $14bn, a striking 70 per cent, has been recovered and distributed. Claims of up to $1.6m are being fully repaid.
This was surprising to me, since most of the things I’d read about the Madoff scheme implied his investors had lost all their money. It’s good to know a dogged trustee has recovered that much of the stolen money.
By contrast to investments with Madoff, Bitcoin is bought not as an income-earning asset but rather as a zero-coupon perpetual. In other words, it promises nothing as a running yield and never matures with a required terminal payment. It follows that it cannot suffer a run. The only way a holder of bitcoin can cash out is by a sale to someone else.
The core argument the author makes is that Bitcoin isn’t a Ponzi because if it were to collapse, there isn’t any one person (or group of people) sitting around with Bitcoin holders’ money in a bank account. They haven’t used it to buy yachts or Palm Beach mansions, so there’s nowhere for the Bitcoiners to seek relief.
Here’s McCauley on the pump-and-dump angle:
In its cashflow, bitcoin resembles a penny-stock pump-and-dump scheme more than a Ponzi scheme. In a pump-and-dump scheme, traders acquire basically worthless stock, talk it up and perhaps trade it among themselves at rising prices before unloading it on to those drawn in by the chatter and the price action. Like the pump-and-dump scheme, bitcoin taps into the pure desire for capital gains. Buyers cannot stand the sight of friends getting rich overnight: they suffer an acute fear of missing out (FOMO). In any case, bitcoin makes no promises and cannot end as a Ponzi scheme ends.
Another reason it’s maybe not a Ponzi is the concept of a “negative sum” game, meaning that there is a cost in creating, buying, and selling Bitcoin. When you read people comparing the electricity usage of Bitcoin to a small island nation, this is what they mean:
How big a cost? At the beginning of 2021, [Jorge] Stolfi put the cumulative payments to bitcoin’s miners since 2009 at $15bn. At the then price of bitcoin, he put the increase in this sum at about $30m per day, which mostly pays for electricity.
At today’s higher bitcoin prices, the hole is growing faster. About 900 new bitcoin a day require most of $45m a day in electricity. Thus, the negative sum in the bitcoin game is in tens of billions of dollars and rising at over a billion dollars per month. If the price of bitcoin collapses to zero, the gains of those who sold would fall short of the losses of holders by this growing sum. To liken bitcoin to a Ponzi scheme or a pump-and-dump scheme, both basically redistributive, is to flatter the cryptocurrency system.
It requires a lot of energy to mine Bitcoin, and more energy to buy and sell it - the “block” in blockchain means the transactions take a lot of computing power, which uses electricity, etc.
It is probably an academic argument at this point - as the author notes, Bitcoin is a trillion dollar speculative asset, and as more institutional money pours into crypto, it seems unlikely Bitcoin will suffer a run or a crash severe enough to wipe out all of its holders. Society may not ever come to an agreement on what to call Bitcoin, but perhaps we can agree it’s not a Ponzi. Progress!
RadioShack
I do not want to talk much about this, because it is ridiculous and I am so tired:
RadioShack DeFi, the website now reads, "will be the bridge between the CEO's [sic] who control the world's corporations and the new world of cryptocurrencies."
According to documents on the website, "RadioShack, and RadioShack alone, can bridge the gap and 'cross the chasm' of mainstream usage for Cryptocurrency."
A couple of crypto bros bought the RadioShack brand out of bankruptcy and are going use it to build a bridge across the crypto chasm. One big challenge the crypto world faces is explaining how any of it works. Can you think of a better brand to bridge the generational gap than RadioShack, the store our parents and grandparents spent hours in, fiddling with technology they didn’t need or understand?
As legacy companies go out of business due to market changes, they may become ripe targets for crypto-adjacent ventures with money to burn, trying to cash in on brand recognition. I can’t wait to buy NFTs at TCBY and spend my SearsCoin to charge my self-driving Saab.
LendUp
I read a lot of announcements from government agencies detailing settlements they’ve reached with companies that have - allegedly - broken the law. Typically I do not write about them because they are civil fines, or companies don’t admit fault, or some combination of things that doesn’t sound much like justice. Basically, if a company is paying a fine and not fixing its behavior, I’m not interested.
This week the CFPB announced a settlement with the VC-backed payday lending company LendUp that has some teeth:
Today, the Consumer Financial Protection Bureau (CFPB) announced that LendUp Loans has agreed to halt making any new loans and collecting on certain outstanding loans, as well as to pay a penalty, to resolve a September 2021 lawsuit alleging that it continued to engage in illegal and deceptive marketing in violation of a 2016 CFPB order.
That is…a pretty comprehensive settlement! LendUp is shutting down operations in 2022, which is good news for people who owe them money, if the company keeps its promise not to collect. We’ve certainly seen what can happen when predatory lenders sell their customer data to collections agencies.
LendUp was backed by big VC firms and tried to paint itself as something other than a payday lender. They certainly acted like one, though, and the behavior detailed in the lawsuit is truly egregious:
The agency has long accused the company of misrepresenting the benefits of repeat borrowing by claiming that certain borrowers would gain access to larger loans at lower rates.
Instead, the agency said that LendUp charged 140,000 repeat borrowers the same interest rate or a higher one even after the consumers repaid their loans on time and took free courses offered through the company’s website. The lawsuit also claimed LendUp reduced the maximum loan size for many borrowers, and it said LendUp failed to provide timely and accurate notices to consumers whose loan applications were denied.
The company also gouged members of the military with predatory interest rates - the CFPB obtained a judgement against the company for that. This is the third time the agency has taken them to court.
The company claims it is in dire financial straits, and will only pay a small fine, so while exploited borrowers may not see proper restitution, at least the company can’t do any more damage.
Short Cons
KSL.com - “Rust and two others — his now ex-wife Denise Rust and son Joshua Rust — were indicted in May 2019 on multiple fraud and money laundering charges after federal investigators say the three conspired to defraud investors in a silver trading Ponzi scheme.”
Bloomberg - “Bluestone Capital Management’s Brian Shevland said Digital World Chief Executive Officer Patrick Orlando was behind an August regulatory filing in which Shevland’s name was quietly removed from the SPAC’s board, according to a lawsuit filed in a Miami federal court on Tuesday.”
WSJ - “What Mr. Musk hasn’t said, and what few people know, is that for roughly a year he has also been living in a waterfront estate in Austin owned by a rich friend nicknamed “Kenny,” people familiar with the matter say—a home so extravagant that it was the most expensive listed in the Texas capital when it was sold just a few years ago.”
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