But is it securities fraud?On Friday, after market hours, Twitter Inc. announced that it would "permanently suspend" U.S. President Donald Trump from its platform for violating its "Glorification of Violence" policy.[1] Twitter's stock was down about 7% as of 10:30 this morning. Last Wednesday, a Trump-inspired mob stormed the U.S. Capitol in a deadly effort to overturn an election and keep Trump in power. And on Thursday, I asked, because readers kept asking me: Is that securities fraud? I asked it in a footnote, and not very seriously, but I did say that "I would not be entirely surprised if someone sues Twitter Inc. or Facebook Inc. alleging securities fraud for their role in amplifying Trump's incitement." The theory went like this. Twitter has publicly announced moderation policies, but those policies seem to be applied with a certain amount of discretion and subjectivity. There is a popular view that Trump was a serial violator of those policies, that under its own rules Twitter should have banned him, and that it didn't out of some combination of fondness for Trump, appreciation for the attention he brought to Twitter's product, and fear of retaliation. If Twitter's stock price dropped after, say, Trump encouraged a violent coup using Twitter (and the stock was down a little during and after Wednesday's events), or (more to the point) if Twitter faced a legislative backlash and stricter regulation for failing to enforce its policies, then Twitter's shareholders could sue. "You told us you would moderate content in a sensible way, we believed you and bought stock; you didn't do what you said, so we were deceived; your failures were bad for business, so we lost money from your deception." Everything is securities fraud, I often say: Any bad thing that a public company does is arguably bad for its stock price, so the shareholders can sue. But "bad thing" is a vague and subjective description. Some people think it was bad that Trump used Twitter to incite a violent insurrection and that Twitter let him do it, but other people think that it is bad for a quasi-public utility like Twitter to ban a hugely popular political figure from its platform. (And, again, Twitter's policies allow for some discretion, and Twitter has made statements and decisions in the past that might lead you to expect it would never ban a major U.S. politician over political speech.) Trump is mad and threatening to find another platform to communicate with his millions of followers, while other Republicans have renewed calls for more regulation of social media after the Trump ban. If Twitter's stock price dropped after banning one of its most popular users (and it did), or if Twitter faced a legislative backlash and stricter regulation for kicking Trump off (and it could), then Twitter's shareholders could sue for that, too. "You told us you would be a neutral platform for free political speech with fairly enforced rules; we believed you and bought stock; you didn't do what you said, so we were deceived; your failures were bad for business, so we lost money from your deception." I don't mean to endorse either of these views, or to suggest that either is all that likely to be a winning securities-fraud lawsuit. (Actual judges are not as fond of "everything is securities fraud" as I am, or as securities plaintiffs' lawyers are.) I am just saying that they both have, like, the shape of a securities-fraud argument. They both have the form "you made public statements, and we believed them, but then your actions differed from your public statements, and the stock went down." In the theory of "everything is securities fraud," that is probably good enough to sue and see what happens. Last Tuesday, I wrote that "everything is securities fraud" is a sort of universal deterrent of corporate bad behavior: "If you do anything shady," even something that isn't actually illegal, "people who specialize in extracting money from public companies will extract some money from you." Many of the cases that we talk about involve things that are perhaps controversially securities fraud, but that are uncontroversially bad: When a tech company suffers a massive data breach, or when a company has a long history of condoning sexual harassment, no one argues "actually data breaches and sexual harassment are good." They are bad, there are perhaps difficulties in deterring them in direct ways, so securities lawyers leap into the gap and deter them through securities law. But lots of things are not like that. Lots of companies do things that some people think are bad and that other people think are good—or, more accurately, they do things that some people think are bad and that other people think it would be bad to stop. There are securities-fraud-ish lawsuits against energy companies accusing them of worsening global warming by drilling for oil, but I bet there'd be a lot of securities-fraud-ish lawsuits against them if they stopped, too. ("Defendants told investors they were an oil company but then stopped drilling for oil and the stock went down," etc.) Banks face shareholder pressure to stop financing fossil fuels and guns, but they also face regulatory pressure to keep doing it. I feel like so far "everything is securities fraud" lawsuits tend to lean more to the progressive side, but there's nothing stopping a right-wing securities lawyer from trying to make a buck when companies do progressive things and their stocks go down. We talk occasionally around here about "everything is securities fraud" as a sort of alternative to democratic governance, a way around politics: U.S. politics are broken in various ways and sometimes unable to regulate activities that people want to regulate, so they regulate those activities through securities lawsuits instead. In the long run that is perhaps not a stable equilibrium. In the long run, if something is a way around politics, eventually politics will creep into it. BoredomI insist that in normal years, this guy would have better things to do: Gavin Mayo, a 19-year-old student at the University of North Carolina at Chapel Hill, says he typically spends anywhere from one to five hours a day scrolling TikTok, YouTube and other platforms for ideas on what to trade while churning out video snippets to more than 60,000 of his TikTok followers.
I know that plenty of famous investors started out trading in their dorm rooms, but those are usually stories of monkish devotion, of nerdy kids who loved finance so much that they skipped out on a normal college social life to obsess over the markets. Nobody has a normal college social life these days. Now social life consists of talking to people on screens. You can talk to them about things other than stocks, sure, but you can't, like, go to a football game with them. There are many fewer social options when you're limited to screens. Talking to people about stocks on screens is relatively more attractive, as a social pastime, than it was a year ago. And so that quote is from a story about how "TikTok and Discord Are the New Wall Street Trading Desks," which would be very funny if it was about that—if JPMorgan's equity index vol desk, unable to meet in person due to a pandemic, hung out on TikTok all day—but it's not. It's about retail traders egging each other on in online communities "including TikTok, Twitter, YouTube, Reddit, Instagram, Facebook and messaging platform Discord," where they "gather to talk about hot stocks like Tesla Inc., boast of gains and commiserate about losses." It is about retail stock trading as an online social phenomenon, and while that has been going on for decades—we talked about a Reddit version last February—it seems to have picked up steam during the pandemic: Some new investors are drawn by the camaraderie that the platforms offer. Georgina Allen, who is 26, waded into stock and options trading after two of her friends convinced her to join a Discord server dedicated to trading. While she was furloughed from her job during the pandemic, the federal government worker turned her attention to markets. She often followed a routine: She would wake up at 6 a.m., assess premarket stock moves and look over her option positions. When markets opened, she would jump on a Zoom call with other members of her Discord group. "We actually would join like a Zoom call, and we would live-trade together. And that was pretty much my life," said Ms. Allen, who is now back at work.
Pre-pandemic, I will blindly assert without actually knowing her, she had a rich life full of work and social and leisure and family activities that left no time to hang out on Zoom and Discord with internet friends talking about stocks. During the pandemic she woke up at 6 to look over her options positions. Going back to work seems to have helped. I doubt too many people went the other way; I doubt anyone was frantically day-trading options in 2019 but gave it up in March 2020 to spend more time, like, meditating. On the other hand I suppose some professional traders got worse at providing liquidity in 2020: They weren't in their offices with their colleagues, their counterparties and brokers weren't in their offices, the whole system got a little bit more inconvenient and disjointed. When everyone moved to Zoom and Slack and Discord, retail investors ended up talking much more about stocks, but professionals might have talked about them less. It is not hard to believe that that might, uh, have an effect on markets: Shares of Chinese electric-vehicle maker NIO Inc. are an example. The stock has received some of the most enduring interest from individual investors, joining the ranks of dozens of others, including fuel-cell company Plug Power Inc. and Tesla. Though hardly a household name, NIO is among the most searched stocks on Google. Video snippets under the tag #nio have accumulated more than 33 million views on the social-media platform TikTok, with many young investors encouraging others to buy shares of the company or questioning if it is the next Tesla. And the buzz is alive on Twitter, where it was mentioned nearly 6,800 times on a single day in November, up from about 100 mentions a day at the start of 2020. The excitement online has coincided with a rush of trading activity. NIO has been the second-most actively traded stock in the U.S. market over the past year, with about 111 million shares changing hands on average each day, according to Dow Jones Market Data as of Thursday. That only trailed trading in Apple Inc., which has a market valuation more than 20 times that of NIO. … Fetching under $4 at the beginning of 2020, NIO's U.S.-traded American depositary receipts closed at $58.92 a share Friday, a record. Its market value of $92 billion is well above that of General Motors Co.
We have talked before about my " boredom market hypothesis," which says that retail investors will trade stocks more actively to the extent that (1) it is fun and (2) nothing else is fun. My calculation has generally been that (1) free trading, Robinhood Financial LLC's gamified trading app, Elon Musk's … whole … thing, and a pretty good bull market since March have all made trading more fun, while (2) the pandemic has made everything else less fun. But I wonder if I have underestimated the effect. The pandemic has been particularly difficult in that it has cut off sources of socialization. If trading stocks can give you back that human connection you lost—if you haven't seen your parents since March, but you can see the rest of your day-trading Discord server on Zoom—then, sure, I guess that's a reason to open some options positions. BriberyOn Friday, Deutsche Bank AG agreed to settlements with the U.S. Department of Justice and Securities and Exchange Commission for bribing various foreign officials between 2009 and 2016. We talk from time to time around here about funny bribery scandals, where people use outlandish euphemisms to pretend, in a sort of nudge-nudge-wink-wink way, that they're not doing bribes. I am not generally impressed. We once talked about some bankers who called bribes "chickens," and who got caught. "It does seem to me," I wrote, "that if you are looking for a code word for 'bribes,' 'success fees' is almost infinitely superior to 'chickens.'" Deutsche Bank called its bribes "success fees." Also "consultancy charges" and "goodwill payments." The impression one gets from these settlements is that Deutsche Bank paid bribes in a professional way, that it had a brisk and businesslike approach to bribes. I do not want to suggest that bribery was exactly a standard practice; the settlements mention only a handful of cases worldwide over eight years. But it wasn't a weird practice; Deutsche Bank didn't get all flustered and start talking in weird codes when someone asked it for a bribe. When someone asked it for a bribe, it took the request in stride. The basic issue is that "Deutsche Bank contracted with third-party intermediaries, which it called 'Business Development Consultants' or 'BDCs,' to obtain and retain business globally." Sometimes a BDC is someone who knows a lot about local business conditions and regulations, who has won the trust of various government and business leaders, and who for a fee will share her knowledge with a foreign bank to help it break into a new market. Other times a BDC is a relative of a local government official, who for a fee will share a portion of that fee with the official. You give a big bag of money to the consultant (for consulting!), the consultant gives a slightly smaller bag of money to the government official who is also her relative, and, what, you never paid a bribe, you just paid for consulting. The consultant paid a bribe, sure, but the consultant lives in the foreign country and tries to stay out of U.S. jurisdiction. This is not exactly legal, of course, if you are a U.S. company (or a foreign company with U.S.-listed securities, like Deutsche Bank). The U.S. Foreign Corrupt Practices Act prohibits companies from paying bribes to foreign governments and state-owned enterprises ("SOEs"), and you have to do due diligence on your consultants and can't ignore red flags about how they are obviously passing along bribes. Still one can see how, say, an English employee of a German bank working in Dubai and trying to win the business of an Abu Dhabi sovereign wealth fund would not try her absolute best to live up to the spirit of American regulation.[2] "What, I'm not paying the bribes," she might say, and leave it at that. The Justice Department gives the example of a deal with "an investment vehicle indirectly owned by the government of Abu Dhabi." ("The deal was known internally at the defendant DEUTSCHE BANK AG as 'Project X,'" which is quite a codename; I feel like you need to save "Project X" for your biggest and weirdest deals.) To help win this business, Deutsche Bank hired a consultant who "was a relative of a high-ranking official of, and a decision-maker for, the Abu Dhabi SOE," and who "was acting as a proxy for" that official. The consultant "really is the gate keeper to" the official, one Deutsche Bank managing director said to another in email. That managing director emailed yet another, saying "We need to close the [consultant] angle within the next 48hrs. Need ur leadership and influence on getting it thru" a risk committee. They got it through, won the Project X deal, and ultimately paid the consultant almost $3.5 million in consulting and success fees, "without any invoices and with minimal evidence of services provided." Meanwhile Deutsche Bank made about $30 million from Project X, so the fees were worth it, until the SEC caught them anyway. Also separately there is "the fact that the Abu Dhabi SOE Official was also pressuring Deutsche Bank to finance a yacht in which the Abu Dhabi SOE Official had an ownership interest (the 'Yacht') in exchange for winning additional business from the Abu Dhabi SOE": For example, on or about May 17, 2010, a subordinate of the Abu Dhabi SOE Official sent an email to a Managing Director of the defendant DEUTSCHE BANK AG, copying the Abu Dhabi SOE Official, which was then forwarded to Deutsche Bank AG Managing Director 1 and others at Deutsche Bank. The email stated, "[Abu Dhabi SOE Official] has asked me to get in touch with DB: reputationally, this financing is regarded as absolutely crucial, and [the Abu Dhabi SOE Official] made the point very forcefully that those institutions which participate in it can expect in future to enjoy 'most favoured status' with . . . [the Abu Dhabi SOE]." … Deutsche Bank ultimately provided financing for the Yacht.
Again, these are the good euphemisms. "Reputationally, this financing is regarded as absolutely crucial." "Those institutions which participate in it can expect in future to enjoy 'most favoured status.'" All of that conveys: "I want a bribe, and I have done this before." Though actually just demanding financing for your yacht implies that you have had a lot of past success in receiving bribes. You don't buy a yacht with your first bribe, you know? Or there is the "BDC contract with a special purpose vehicle ('SPV') beneficially owned by the wife of an individual who was responsible for managing the family office and the personal investments ('the Family Office') of a" member of the Saudi royal family.[3] Deutsche Bank helped set up a British Virgin Islands shell company to pay the bribes to (why not?), and then paid some bribes. The first payment was falsely described as an "exceptional payment" of $150,000 that was cleared through New York, New York on or about December 22, 2011. The Saudi BDC was not entitled to this payment under the terms of the BDC contract with DEUTSCHE BANK AG. However, an email among Deutsche Bank bankers, including Deutsche Bank Director 1, Deutsche Bank AG Managing Director 2, a DEUTSCHE BANK AG Managing Director and regional Private Wealth Management officer ("Deutsche Bank AG Managing Director 3"), and another DEUTSCHE BANK AG Managing Director who was a regional Private Wealth Management officer ("Deutsche Bank AG Managing Director 4"), explained that this exceptional payment would "provide [Deutsche Bank AG Managing Director 2] with additional influence to persuade the client to upsell/invest existing large cash balances." In another email regarding this payment, Deutsche Bank AG Managing Director 2 stated that he needed to make the payment to "incentivise" the Family Office Manager, and further urged approval of the "exceptional" payment, stating, "Money paid to [the Family Office Manager] will remain in an SPV opened for that purpose with us."
"Exceptional payment" is not a great euphemism for "bribe" but I'll allow it. Later: The defendant DEUTSCHE BANK AG also made a payment falsely recorded as a "goodwill payment" to the Saudi BDC that was not authorized by the BDC contract. In or about December 2012, in response to the Family Office Manager's complaints about the amount of money he personally was receiving under the Saudi BDC's contract, DEUTSCHE BANK AG made a second exceptional payment to the Saudi BDC of €220,000. In an email advocating for this payment, sent on or about November 30, 2012, Deutsche Bank Director 1 stated, "[Deutsche Bank's] single largest relationship [in the region] . . . is at risk" and there was the "serious potential of the client withdrawing and closing his relationship" if the payment were not made. To appease the Family Office Manager, and to retain the Family Office's business, DEUTSCHE BANK AG made the corrupt payment and falsely recorded it as a "goodwill payment."
See, the person they were bribing complained about not receiving enough bribes, which made him mad, so he threatened to stop giving Deutsche Bank any more business, so they paid him an extra bribe to keep in his good graces, and sensibly called it a "goodwill payment." It's just sort of bland and efficient and unembarrassed. There are a couple of other cases mentioned (an Italian tax judge, a Chinese consultant). The totals come to $7 million in bribes or otherwise under-explained payments, in four cases in four different countries. It does not seem like a lot, for a giant multinational bank over eight years, though neither does anyone exactly say that it's an exhaustive list. These cases led to $35 million of bribe-based revenue for Deutsche Bank (so like a 20% commission rate), and over $130 million paid to the U.S. authorities for getting caught. The Foreign Corrupt Practices Act, which makes it illegal for U.S. companies to pay bribes abroad, has always been a bit controversial and quixotic. (Especially when, as here, the U.S. company it regulates is actually a German company.) The point of the FCPA, I suppose, is to try to change business norms in foreign countries: U.S. and multinational companies can't pay bribes, the theory goes, so foreign governments who want to work with them can't demand bribes, so they will clean up their acts and no one will demand bribes anymore. Cases like this—where the foreign government officials seem totally unembarrassed about demanding bribes, and make it clear that they'll take their business elsewhere if they don't get them—undermine that theory a bit. It sometimes feels like an alternative analysis might be that this is just the U.S. taking its cut. If you're a German bank bribing Saudi officials to win Middle Eastern business, you have to budget some money to pay off the U.S. government too. Things happenGoldman, JPMorgan, Citi Suspend Political Donations. Supreme Court Orders New Look at Insider-Trading Convictions. Fading allure of urban life leaves dent on US mortgage bonds. U.K. Regulator Warns Crypto Investors Risk Losing ' All Their Money.' How Asset Managers Value Their Relationships With Institutional Investors. Bootmaker Dr. Martens Plans London Stock Offering. Some good legal realism. "The Section 7702 Christmas miracle." LMAO. 2020 Didn't Sap Americans' Appetite for Dry January. 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] And also (perhaps, more cynically) for losing a legislative majority and thus making it more likely that Twitter will face onerous regulation if it *doesn't* ban Trump than if it does. [2] "English," "Dubai" and "her" here are hypothetical—I did not see any indication of the the nationality, location or gender of the people paying the bribes in these settlements—though "German" and "Abu Dhabi" are based on the facts in the settlements. [3] The Justice Department says "a Saudi official," while the SEC says "a senior member of a Middle Eastern Royal Family." | 
Post a Comment