Pumping, Dumping, Hacking and Spinning

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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The JPMorgan hack or whatever.

Here are some news accounts reporting that some guys connected to last summer's JPMorgan computer hack got caught. Here are the federal civil and criminal securities fraud cases against three guys accused of manipulating some penny stocks in a very standard pump and dump scheme. Here is a separate federal case against two guys accused of operating an unlicensed bitcoin exchange. Supposedly these cases are all the same case. I am confused! The complaints never mention the hacks, the pump-and-dumpers do not sound like sophisticated computer masterminds, and their alleged pumping and dumping happened years before the JPMorgan hack. (The bitcoin guys seem to have processed a payment for the victim of at least one "ransomware" hack last summer, but they're not accused of any involvement in the hack and it's not connected to the JPMorgan thing.) I guess prosecutors feel good enough about the JPMorgan hacking connection to leak it to reporters, but not good enough to put it in court papers? Meh. 

Also, like, I would have thought that you'd hack into a bank because that's where the money is, but the theory here seems to be that they hacked into the bank because that's where the e-mail addresses are. Like, if you get the e-mail addresses of 76 million JPMorgan customers, you can send 76 million spam e-mails touting oil and gas, gold mining, energy drink, grass-fed beef, and "shoe scanning device[s] for the homeland security and loss prevention markets" companies, and then dump your stock to those JPMorgan customers who are seduced by your e-mails. But there are e-mail addresses everywhere, and I would casually guess that your success rate with the JPMorgan customer list would be no greater than your success rate with any random church bingo or bird-watching e-mail list with lesser security than a global mega-bank. But on the other hand 76 million e-mails is a lot of e-mails, and apparently JPMorgan's security wasn't that good? (Disclosure: I am a JPMorgan customer, though I don't recall getting any penny-stock pitches recently; also my e-mail address is incredibly insecure -- it's right at the bottom of every post I write -- so I get a lot of spam.) Still it is a little depressing that people apparently infiltrated one of the world's largest banks, and the most lucrative use for the information they found was sending spam e-mail.

Elsewhere, "Private Sector Pay Lures F.B.I.’s Hacking Experts," and a former FBI agent who worked on the JPMorgan hack is now helping to sell cyber-apocalypse insurance.

Speaking of spam.

Remember when people got all mad about the Consumer Financial Protection Bureau? Does that still happen? I defy you to read the CFPB's announcement of its $700 million action against Citibank for "unfair and deceptive credit card practices" without pumping your fist. Basically Citi tricked a bunch of credit card customers into agreeing to a bunch of fees for a bunch of ridiculous-sounding products (IdentityMonitor, AccountCare, Balance Protector, Credit Protection, Credit Protector, Payment Safeguard, and "expedited payment fees" for paying off overdue accounts). The tricks were maddening:

In certain telemarketing scripts, Citibank instructed telemarketers to claim a blanket “free” 30-day trial period, when Citibank still charged consumers during the initial 30 days of membership. In other instances, Citibank failed to inform consumers that they would be billed after the 30-day trial period if they did not cancel the product. Citibank also told some consumers they could avoid the fee by paying their balance in full by the due date. But to avoid the fee, consumers had to pay off the balance before the end of their billing cycle so that there would be no balance on the account when billing statements went out.

Come on. We talked last month about the Securities and Exchange Commission's crackdown on private equity fees, in which the SEC rejected the premise "that if investors have not yet discovered and objected to their expense allocation methodology, then it must be legitimate." That premise is, like, half of retail banking, which gives the CFPB a lot of easy targets.

Elsewhere, here is Mike Konczal on Dodd-Frank, and honestly even if everything else in Dodd-Frank is bunk it at least shut down this Citi credit-card nonsense. And in other Dodd-Frank news, happy Volcker Rule day!

Aabaco Holdings.

Last week Yahoo filed the Information Statement for its spinoff of Aabaco Holdings, formerly known as Spinco, which will be basically a pot to hold Yahoo's Alibaba shares. (It's structured as a closed-end investment fund, and it "anticipates that the value of its Alibaba Shares will exceed 95 percent of the value of its total assets immediately after the Spin-Off is completed.") Here is Ronald Barusch on Aabaco's takeover protections, which are pretty ample, though it seems to me like a mistake to think of Aabaco as either (1) a regular company (which might be a legitimate target for activism or takeover) or (2) a regular closed-end fund (which might be a legitimate target for conversion to an open-end fund). Aabaco is a pot of Alibaba shares behind a wall of tax structuring, and it has a single obvious destiny. (To be bought by Alibaba for stock.) Of course it wants to discourage any meddling that might risk that destiny. Though the key bit of meddling right now is from the Internal Revenue Service, whose approval of Yahoo's tax treatment is a condition of the spin-off, and whose decision remains a mystery.

Elsewhere in taxes, a lot of people dislike the U.S. system of taxing U.S.-domiciled companies on worldwide income (but only when it's repatriated), arguing that it is intellectually inconsistent, unusual internationally, and drives companies to move abroad. But Congress is committed to principles-based reform of the tax system: "All sides acknowledge that an overhaul could raise revenues for highways by imposing a one-time tax on foreign corporate earnings sitting offshore." Wait highways what? Elsewhere in sophisticated principles-based tax reform, here's a tweet from Rand Paul.

People are worried about bond market liquidity.

Well "worried" and "liquidity" might be the wrong words but this is sort of interesting:

Apollo has been raising money from wealthy investors for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit.”

This devolves into the usual discussion about whether bond exchange-traded funds are good or bad for liquidity, but I am not convinced that it matters. The thesis here is just, like, bond prices might go down. High-yield bond prices are up, the theory goes, because a lot of people who previously didn't buy high-yield bonds now do. If those bonds run into trouble, those new less experienced investors will dump their bonds, driving the prices down. That is not exactly a theory of too little liquidity; if you squint, it looks like a theory of too much liquidity drawing in flighty investors. Which makes sense; if your worry was inadequate liquidity, buying CDS is not an obvious way to express it.

Elsewhere, here is a roundup of bond-market liquidity discussions on bank earnings calls. And European banks will probably further scale back fixed-income trading.

Things happen.

Dan Davies on the 2010 Greek bailout. The 1MDB scandal. The Toshiba scandal. Noble Group accounting controversy. "On July 9, a day after the market hit bottom, just 3.2% of Chinese-listed companies could be traded normally" because of suspensions and circuit breakers. Wells Fargo & Co. Is the Earth’s Most Valuable Bank. The bank of campaigns and super-PACs. Spreadsheets are a menace. Rate hikes may kill buybacks. Credit index tranche trades are back. Highway spending is crazy. Batman is "Jeff Bezos on steroids and paint-thinner fumes." Instant Jello shots. Dutch woman will marry dog after her husband — a cat — dies. "It’s a classy alternative to a stripper."

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net