The mystery of blackmail The basic "mystery of blackmail" is: - If I know that you have done some bad secret stuff, it is totally legal for me to publish that information.
- It is also totally legal for me to keep it quiet.
- In general, if it is legal for me to do or not do something, and you'd prefer that I (not) do it, I can ask you for money in exchange for (not) doing it.
- But if I ask you for money in exchange for not publishing bad stuff about you, that's blackmail, and it's a crime.
The mystery is why blackmail should be illegal when its component parts aren't. But there's another practical mystery about blackmail, which is: - If you have done some bad stuff to me, and no one knows about it, I am once again free to tell everyone, or not.
- If I go to you and say "give me a million dollars or I will tell people," that is blackmail and I go to prison.
- But if I go to you and say "I am going to sue you for doing the bad stuff to me, I am filing my case on Monday, but I am willing to settle for $1 million and sign a nondisclosure agreement in connection with the settlement," that is fine, that is just how lawsuits work.
That's not legal advice, and you definitely want to get a lawyer involved because the details can trip people up, but it does seem to basically describe the situation. One thing about the American legal system is that it gives a prominent role to entrepreneurial lawyers. If a company is dumping poison in a lake, the people who will hold it to account are not really the people who drink the poison lake water; they're the enterprising lawyers who notice the poisoning and decide to bring a lawsuit. In general those lawyers aren't sitting by the phone waiting for poisoned victims to call them; they're going out looking for cases, and then trying to round up victims to act as their clients. It's not that the lawyers are bringing lawsuits because clients want them to; the clients sign up for the lawsuits because the lawyers want them to. The lawyers are the ones actively pursuing the lawsuit. And the lawyers and clients split any winnings: The clients get a share (for being harmed, and for signing up to give the lawyers a case), but the lawyers also get a substantial share (for coming up with the idea to bring the case, for litigating it successfully, for taking financial risk, etc.). Even that overstates the clients' role in many cases. There are lots of, for instance, consumer class actions in which the victims know almost nothing about the case and get almost nothing out of it, while the lawyers do all the active work and get substantially all the money. A well-known recent case is the Zappos data-breach settlement: Zappos exposed usernames and passwords of millions of customers, lawyers sued, and the lawyers won for the victims … a 10% discount on a Zappos purchase. The way the settlement works is that the victims give money to the culprit. Meanwhile the lawyers got $1.6 million. The named plaintiffs—the nine individual victims who agreed to put their names on the case so the lawyers could get paid—get a token $2,500 each. You can think that this is bad (the lawyers are making money without providing any real value to the victims, while Zappos is basically getting cheap marketing), or you can think it is … fine … ish? (the lawyers are holding companies accountable, and getting paid for that general public service), but in any case it is definitely a thing. In other cases the victims will get nothing but the company will, say, donate to a relevant charity, or fund educational efforts or something; the lawyers will still get paid.[1] If you combine the stuff about blackmail with the stuff about entrepreneurial lawyers you get the following hypothetical possibility: - There is a trove of video showing a bunch of prominent wealthy having sex with underage and coerced women.
- That video falls into the hands of some entrepreneurial lawyers.
- Those lawyers go to the men and say "hey, we have these tapes of you doing bad stuff, you wouldn't want them to get out, would you?"
- The men say "no, we'd pay money to keep those tapes quiet."
- The lawyers say "okay, we are lawyers, we will settle with you on behalf of the victims. To settle the victims' potential lawsuits against you, you'll pay them money. And in exchange we—I mean they—will agree not to publish the tapes."
- Then the lawyers go out and find the victims, sign them up as clients and agree to the settlements, splitting the proceeds.
- And if the lawyers can't find the victims, that's no problem: They could reach some sort of settlement in which the money goes to, say, a general charity for victims of sexual abuse (with the lawyers of course getting a fee), rather than to the victims themselves.
- If any men refuse to settle, the lawyers release the video of them.
Honestly I apologize for typing all of that, it is callous and cynical even for me; sure it is a technically plausible consequence of some features of the U.S. legal system but it's not like enterprising lawyers would really get into an assembly-line blackmail business hoping to sign up clients later, I hope. I insist that you go read the Jeffrey Epstein story from the New York Times this weekend, which is absolutely amazing. For our purposes the relevant details are that an apparent con man calling himself Patrick Kessler approached prominent lawyer John Stanley Pottinger with supposed video from Jeffrey Epstein's houses that supposedly "captured some of the world's richest, most powerful men in compromising sexual situations — even in the act of rape," and Pottinger brought in super-duper-prominent lawyer David Boies to meet with Kessler, and … then … uh … well … then it all fell apart, there were no tapes, nothing happened, but boy it sure sounds like Pottinger and Boies were contemplating some version of my entirely hypothetical business? For instance, they contacted the Times and asked it to assist their scheme: They would give the tapes to the Times and then tell the paper which people to expose (the ones who hadn't settled) and which ones to protect (the ones who had). Mr. Boies told an editor for The Times that they would be willing to share everything, on one condition: They would have discretion over which men could be written about, and when. He explained that if compromising videos about particular men became public, that could torpedo litigation or attempts to negotiate settlements. The Times editor didn't commit. There is talk of setting up a charitable organization called the Astria Foundation and getting the men to donate to the foundation as part of their settlements. Settlements would be split between actual victims, the charity, Kessler and the lawyers. Or that was one option: In one, which he called a "standard model" for legal settlements, Mr. Pottinger said the money would be split among his clients, the Astria Foundation, Kessler and the lawyers, who would get up to 40 percent. The other option cut the actual victims out entirely: In the second hypothetical, Mr. Pottinger wrote, the lawyers would approach the videotaped men. The men would then hire the lawyers, ensuring that they would not get sued, and "make a contribution to a nonprofit as part of the retainer." "No client is actually involved in this structure," Mr. Pottinger said, noting that the arrangement would have to be "consistent with and subject to rules of ethics." Which makes sense because the lawyers were not representing the actual victims. I mean, they were involved because they have been representing victims in the Epstein sex-crimes case, but it's not like they were hired by the women in these videos, because after all these videos apparently don't exist. That did not stop the lawyers from planning to represent those women as soon as they found out who they were! Here is Boies's defense of his actions: Would they have brokered secret settlements that buried evidence of wrongdoing? Did the notion of extracting huge sums from men in exchange for keeping sex tapes hidden meet the definition of extortion? Mr. Boies said the answer to both questions was no. He said he and Mr. Pottinger operated well within the law. They only intended to pursue legal action on behalf of their clients — in other words, that they were a long way from extortion. In any case, he said, he and Mr. Pottinger had never authenticated any of the imagery or identified any of the supposed victims, much less contacted any of the men on the "hot list." It's "a long way from extortion" in the technical sense that they were lawyers and knew the proper incantations to utter to make it not extortion. It's not a long way from extortion in the sense that they were planning to go to rich men and say "we have compromising videos of you and we will publish them unless you pay us money." But the incantations make all the difference! Mozambique In general big international banks don't want to finance crimes. If you are trying to borrow a lot of money in the bond or bank-loan markets and then steal it all, reputable banks will be reluctant to help you. They have compliance officers and regulators and supervisors and rules and checklists and procedures, and if you write "theft" under "purpose of loan" they will reject your application. However! If you are doing big crimes, you will not just be filling out an online form to borrow money; you will have a relationship banker who covers you and who can advise you on the best strategy to get the money. So you can go to your banker and say "I need to borrow a billion dollars for crimes" and he can say "hmm yes but on the application form you should write 'general corporate purposes' and not mention the crime stuff." Now, he shouldn't do that. He is also subject to compliance rules, and if he covers up your crimes to get them financed then he runs a big risk of getting in trouble himself—getting fired for breaking his bank's compliance rules, getting arrested for breaking the law, etc. How can you persuade him to help you anyway, at significant risk to himself? One obvious answer is, you give him a suitcase full of money. There might be some amount of personal kickbacks that can make it worth his while for him to assist you in crimes. On the other hand if that ever comes to light it looks really bad; personal kickbacks for the coverage banker are a pretty strong giveaway that crimes are involved. Another very important possible answer is, you don't give him any money—that would be too obvious—but instead you just pay his bank a lot. Like if you want to raise a billion dollars for crimes, and the usual fee for raising a billion dollars is $5 million, you could negotiate a $50 million fee with your coverage banker. Under the ordinary compensation structure of most banks he will effectively get a cut of that fee: He'll get a bigger bonus, he'll get promoted, etc., for bringing in all that revenue. So his incentives will be aligned with yours, almost as much as they would be with a straight bribe. Also he might have an easier time of getting the deal through the compliance review: He'll say "the client wants to borrow this money for general corporate purposes," and the compliance officer will say "why are you looking at the floor when you say that, maybe we need to double-check this deal," and he'll reply "look that is up to you, if you want to explain to the management committee of the bank why you stood in the way of $50 million of desperately needed revenue be my guest, but I don't think they'll appreciate that." I don't know if that will work—if I were a compliance officer, I'd be especially suspicious of trades that bring in unusually high revenues—but, uh, empirically it sometimes seems to work. Banks like compliance, but they also like money! They sometimes trade one against the other. You can combine these approaches. Most notably, in Goldman Sachs Group Inc.'s 1MDB scandal, the coverage bankers both got huge personal bribes and brought in tons of revenue for the bank. The personal bribes motivated the bankers, as did the bonuses they got for bringing in all that revenue, while the revenue seems to have made it harder for compliance officers and higher-ups to question the deals.[2] We have talked before about Credit Suisse Group AG's Mozambique scandal, in which several bankers pleaded guilty to taking bribes to push a suspicious loan deal through Credit Suisse's internal compliance procedures. When we first talked about it, I was a little sympathetic to the bankers, pointing out that the stuff they did to push the deal through compliance didn't seem that egregious. On the other hand, I said, the taking of the bribes was really egregious: If you're accepting personal kickbacks for getting a deal through compliance, then that totally undercuts any defense that you were actually working in good faith to get a compliant deal done. But of course if you didn't take bribes, if you instead just charged a really big fee, then you might still have that defense. And if you charged a big enough fee then you'd probably end up getting a chunk of it anyway in the form of a bonus. Really the move is to align everyone's incentives—the criminal's, the banker's, and the bank's—by charging a big fee, rather than splitting them up with individual bribes. But the Mozambique case is even weirder than I thought, because the bribes weren't just to motivate the bankers to get the deals approved, they were to motivate the bankers to cut the fees. Here's a Wall Street Journal article about the case: Andrew Pearse said he negotiated his first bribe while sipping vodka at a hotel in Maputo, the capital of Mozambique, in February 2013. His employer, Credit Suisse Group AG CS -0.15% , was financing a $370 million coastal security contract between Mozambique and Privinvest Group, a shipbuilder owned by Lebanese billionaire Iskandar Safa. Poolside after deal meetings, Mr. Pearse said he and a Safa lieutenant struck an agreement for Mr. Pearse to receive millions in cash. In exchange, Privinvest would pay a lower fee on Credit Suisse's loan for the Mozambique security contract. ... Over a bottle of vodka at the Radisson Blu hotel, Messrs. Boustani and Pearse agreed Privinvest would pay Mr. Pearse $5.5 million in exchange for an $11 million reduction in the fee, Mr. Pearse recounted in court. ("A Privinvest spokesman said that no bribes were paid and Privinvest is proud of its work in Mozambique.") It is honestly a bit mysterious to me how this could work. If you're a banker and you come to your bosses with a hairy deal with a higher-than-usual fee, they will be repulsed by the hair but intrigued by the fee. If you come to your bosses with a hairy deal and a below-average fee, because you are pocketing a bribe-in-lieu-of-fees yourself, what's in it for them? Blockchain blockchain blockchain A pretty standard bit of conventional wisdom these days is that cryptocurrency is a good way to launder money. "Cryptocurrencies are great if you're trying to hide or launder money," U.S. Federal Reserve Chairman Jerome Powell told Congress last year. Lots of other U.S. government officials have expressed similar views. If a crime boss came to me and put a gun to my head and demanded that I tell him how to launder money, and that I limit my answer to one word, my answer would be "cryptocurrency." And then if he asked me for more detail I'd be like "I dunno the basic approaches and all the technical specs are on the internet, would you like me to Google them for you?" The whole crypto project is pretty open-source-heavy; if you want to know how Bitcoin works or whatever the details are all online. Also you only need so many technical details. It's not like you need to build your own cryptocurrency to launder money; in fact, that would probably be counterproductive. Just, like, get a Bitcoin wallet, buy some Bitcoins, and send them where you want them to go without any further contact with the fiat banking system. That's not legal advice, or illegal advice; it's just sort of inherent in the notion of "censorship resistant money" etc. etc. etc. Anyway here's a guy who was arrested for going to North Korea to tell them how to use cryptocurrency to evade sanctions: Geoffrey S. Berman, the United States Attorney for the Southern District of New York, John C. Demers, the Assistant Attorney General for National Security, John Brown, Assistant Director of the Federal Bureau of Investigation ("FBI") Counterintelligence Division, and William F. Sweeney Jr., the Assistant Director-in-Charge of the New York Field Office of the FBI, announced today the unsealing of a criminal complaint charging VIRGIL GRIFFITH, a United States citizen, with violating the International Emergency Economic Powers Act ("IEEPA") by traveling to the Democratic People's Republic of Korea ("DPRK" or "North Korea") in order deliver a presentation and technical advice on using cryptocurrency and blockchain technology to evade sanctions. I assume that the advice he gave them was somewhat more detailed and technical than "a great way to avoid sanctions is by using cryptocurrency and you can probably Google how to do it." I am not sure it was much more detailed, though; from the complaint: GRIFFITH discussed in more detail his presentation in the DPRK. He stated, in sum and substance, that the DPRK government approved the topics within his presentation in advance and that, in his estimation, attendees left the DPRK Cryptocurrency Conference with a better understanding of cryptocurrency and blockchain than when they arrived. GRIFFITH claimed that this information included basic concepts accessible on the internet. Anyway the obvious (though not legal advice) conclusion here is don't travel to North Korea to explain how to launder money using cryptocurrency. The laws he is accused of violating don't actually require traveling to North Korea, though, and I suspect lots of other people have provided just as much technical help to North Korea just by posting publicly on the internet. Elsewhere: "Nearly $50 Million of Ether Swiped From South Korean Cryptocurrency Exchange," of course. And: "In-game virtual items as a form of criminal money." The wrong Coke Here is a thing that keeps coming up and that I keep meaning to write about, and since it's the Monday after Thanksgiving today might as well be the day. There is a company called Coca-Cola Consolidated Inc. Its ticker symbol is COKE. It is in the business of producing and distributing the brown fizzy drink that you know as Coca-Cola, or as Coke. You might think that this company is the iconic American company that, uh, does those things, but in fact it is not. That company is Coca-Cola Co., and its ticker symbol is KO. KO has the secret recipe for Coke and a market capitalization of about $228 billion. COKE is a Coke bottler, producing drinks licensed to it by KO, and its market capitalization is about $2.5 billion. Some short sellers are betting against Coca-Cola Consolidated (COKE), and they keep producing fun short research notes, which have various complaints about performance and valuation and corporate governance. One complaint is that COKE's chief executive officer "believes that the business is really owned by God; with the clear implication of this being that the company is not truly owned by its shareholders." I also tend to believe that public companies are not "truly" owned by their shareholders, so I am tempted to explore this theory further, but we have other, sillier things to talk about. Because the most popular short seller complaint about COKE is the name. From a Bireme Capital quarterly note from last week: And yet, incomprehensibly, the stock trades at 47x trailing EPS. Why? One theory is that retail investors are confusing the company with the "real" Coca-Cola (i.e. KO, the $200b market cap company). And in fact, COKE appears to be intentionally encouraging this confusion. In January 2019, the company removed "Bottling Co." from its name, resulting in the current, vague name "Coca-Cola Consolidated." We can't think of a legitimate reason why you would remove the sole differentiating component from your company's name… unless confusion is your goal. And an Upslope Capital Management short note from May points out that if you search "Coke" in the Robinhood brokerage app, the first result is "Coca-Cola (COKE)," while the second result is "Coca-Cola (KO)," making it pretty easy for retail investors to buy COKE when they mean to buy KO. The basic short thesis is that they do that, leading to artificial demand for COKE and an overpriced stock. We talk all the time around here about people buying the wrong stock out of name or ticker confusion, so I can easily believe this part of the thesis. Of course for this to be a really good short thesis you might want another component, along the lines of "… and then something will happen that will cause people to stop being confused and dump COKE for KO." I don't know what that catalyst would be. The people buying COKE because it's the first search result for "Coke" are presumably not also the people reading short research notes? Another theory that sometimes accompanies the short thesis is that COKE intentionally set out to confuse investors, by changing its name to be more similar to that of KO. I have no idea if that was the intent, but I will say that it is normal for companies to try to appeal to more investors, and not only by improving their business results. We have talked about the decision that several private equity firms made to convert to C corporations, which will cause them to pay more taxes (and reduce their net income) but which will also make them more appealing to index and other institutional investors and so might raise their stock prices. Is this … similar? If you are the CEO of a public company and you have the opportunity to confuse investors into thinking that you're a bigger public company, do you have a fiduciary obligation to your existing investors to do that? Things happen Morgan Stanley Bet That Went Awry Has Junior Trader at Center. Goldman to avoid setting strict financial targets at investor day. Private-Equity Cash Piles Up as Takeover Targets Get Pricier. Rush to avoid cash crunch boosts demand at NY Fed's repo auction. How Credit Unions Outgrew Their Down-Home Reputation. Assets held in exchange traded funds surge to record $6tn. Hedge fund TCI vows to punish directors over climate change. Saudis Push for Longer-Lasting OPEC Cuts as Aramco IPO Approaches. Kuwait Bourse IPO More Than 8.5 Times Oversubscribed. Chancery orders 11th hour records for CBS Corp. investor's probe of Viacom merger plan. "Asset flows to hedge funds have declined and their 'flow-performance sensitivity' has risen since the [Volcker Rule] was implemented." SoftBank Pulls Out of Deal for KPMG's Private Club in U.K. Nuns berate SEC over planned shareholder rules. Streets vs Avenues: Where to eat in Manhattan. "I don't know how to deal with a word on that scale. … And that does frighten me." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] In *securities* cases you get the infamous "disclosure-only settlement," in which a company gets sued for making misleading disclosures, the company agrees to make different disclosures, the victims get zero dollars and the lawyers get a big fee. Judges hate these and have more or less gotten rid of them. [2] Disclosure, I used to work at Goldman. Usually here I put a snide little "but I didn't take bribes or do crimes," but I guess I should emphasize that I really didn't do that, or witness it, and that my discussion of getting illegal deals past compliance is based on first principles rather than on actual experience. |
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