Jammin' Java and Fantasy Sports

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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Jammin'.

Would you buy coffee from this company?

We intend to be a business specializing in electronic waste collection, electronic waste recycling, and resource recovery. We believe that the disposal of electronic waste, or "e-Waste" is becoming a serious global issue. Electronics that have been discarded in landfills are releasing toxins and polluting the environment. The existing incineration recycling processes for e-Waste are releasing Green House Gas (GHG) Emissions and other dangerous air pollutants such as dioxins, heavy metals and hazardous acids.

That's from the 2007 annual report of Global Electronic Recovery Corp., a publicly traded shell company that in 2008 merged with Marley Coffee and "announced that it was transitioning from the waste management business to the premium roasted coffee business." Delicious!

That quote, in turn, is from this Securities and Exchange Commission complaint against Jammin' Java Corp., Marley's successor, and various people associated with it, accusing them of a massive pump-and-dump scheme to inflate Jammin' Java's stock price, secretly sell unregistered shares, and profit by fleecing the public. As pump-and-dump schemes go, this one seems pretty standard, although it did allegedly bring in $78 million. But the joy is in the details, which are numerous, and joyful. Marley, for one thing, got its name from Rohan Marley, a son of Bob Marley, though his "involvement in the management of the business was minimal." For another thing, when the alleged pump-and-dump promoter (not Marley) resigned his executive job at the company, he was replaced by someone "whose prior experience included managing an online adult film business." Oh also:

Charged with fraudulently promoting Jammin’ Java stock to investors are British twin brothers Alexander Hunter and Thomas Hunter, who were previously charged in a separate SEC case for touting multiple penny stocks using a fake stock picking robot. 

The fake stock picking robot was named "Marl" (no relation to Marley), and if you haven't read the SEC's 2012 complaint against the Hunters, go do that right now. Here is how it starts:

Starting at the age of sixteen, the defendants, twin brothers Alexander John Hunter and Thomas Edward Hunter, developed an elaborate scheme to manipulate the prices of penny stocks at the expense of unwitting investors. The Hunters concocted and hyped the tale of a "stock picking robot" that they claimed could identify penny stocks that were poised to appreciate sharply in value. In their email newsletters and websites (doublingstocks.com and daytradingrobot.com), the defendants represented that the "robot" was a highly sophisticated computer trading program and the product of extensive research and development.

Sports betting.

I'm a pretty tolerant guy, I go to the casino now and then, and I mostly think that online gambling should be legal, but I cannot deny that daily fantasy sports is the gamblingest gambling that ever did gamble. Here is Eric Schneiderman's comically overdetermined case against FanDuel and DraftKings, where every time you think "boy these companies can't possibly look any more like gambling," they look even more like gambling. "FanDuel’s DFS contests were designed by a veteran of the legal online betting industry in the United Kingdom," and it "admitted to an early investor that its target market is male sports fans who 'cannot gamble online legally.'" DraftKings' chief executive officer "called DFS a 'mash[-]up between poker and fantasy sports,' suggested that DraftKings operates in the 'gambling space,' and described its revenue model as 'identical to a casino.'" Both companies applied for "licenses from the U.K. Gambling Commission." And:

DraftKings has also embedded gambling keywords into the programming code for its website. Some of these keywords include “fantasy golf betting,” “weekly fantasy basketball betting,” ‘‘weekly fantasy hockey betting,” “weekly fantasy football betting,” “weekly fantasy college football betting,” “weekly fantasy college basketball betting,” “Fantasy College Football Betting,” “daily fantasy basketball betting,” and “Fantasy College Basketball Betting.”

It is so, so gambling. Not that there's anything wrong with that! Except that it's illegal.

Fiduciary duties.

One thing that I would really like to read is a thoughtful independent persuasive argument against the Department of Labor's proposed fiduciary duty rule for certain retirement advisers, since the arguments that I read for it often seem sort of confused and simplistic and overwrought. But I don't want to write that argument against it, because I feel like giving non-fiduciary retirement planning advice is pretty scammy and the rule is probably fine.

But here is a paper critical of the rule from the American Council for Capital Formation, and like most criticisms it focuses on the risk that a fiduciary rule will reduce people's access to, or at least use of, financial advice. Fiduciary advisers with disclosed transparent fees will look more expensive than old-style non-fiduciary advisers who were paid through secret kickbacks, so people will avoid them and make terrible investing mistakes. Mistakes like buying high and selling low, or like just not investing at all. This seems intuitively plausible to me? But also sort of gross, obviously.

Sometimes I think about "nudges." We want people to save. They should want to save too! But they don't save. They need to be nudged. Maybe the best way to nudge them is by giving non-fiduciary financial advisers the opportunity to fleece them a little (not too much!) with secret fees, if concealing the fees helps convince people to save. It is gross and second-best, but that is behavioral economics for you.

Mens rea.

I tend to think that you shouldn't go to prison unless the government proves that you intentionally did a bad thing. Not everyone agrees

Elsewhere, "Federal prosecutors are actively pursuing criminal cases against executives from Royal Bank of Scotland Group PLC and J.P. Morgan Chase & Co. for allegedly selling flawed mortgage securities, people familiar with the probes said, as the clock ticks down for bringing cases from the 2008 financial crisis." And in China:

Policy makers say “now we’re innovating, so you can all come in -- using high-frequency trading, hedging, whatever -- to play in our markets,” Gao Xiqing, a former vice chairman of the China Securities Regulatory Commission, told a forum in Beijing on Nov. 6. “A few days later, you say no, the rules we made are not right, there are problems with your trading, and we’re putting you in jail for a while first.”

Air mergers.

"Air Liquide to Buy Airgas for $10.3 Billion in U.S. Push" says this headline, and I feel like there is just a right answer? Air is a gas. It is not a liquid, or a liquide. I don't even want to hear about it being a BnB. Bloomberg Gadfly's Tara Lachapelle and Breakingviews' Kevin Allison discuss how much of an improvement this deal is, or isn't, over Air Products' failed hostile bid for Airgas in 2010, and air really shouldn't be a product either.

Tarullo on shadow banking.

Here's a speech called "Thinking Critically about Nonbank Financial Intermediation" by Fed Governor Daniel Tarullo, and it goes without saying that if you are interested in nonbank financial intermediation you will be interested in Tarullo's thoughts about it:

While I favor assessment of the specific risks and costs associated with a particular form of nonbank intermediation, I also believe that the greatest risks to financial stability are the funding runs and asset fire sales associated with reliance on short-term wholesale funding, and thus I place particular emphasis on this factor. If there is one lesson to be drawn from the financial crisis, it is that the rapid withdrawal of funding by short-term credit providers can lead to systemic problems as consequential as those associated with classic runs on traditional banks.

People are worried about unicorns.

Square's initial public offering is set to price today, and there is a fair amount of hand-wringing about What It Will All Mean for future unicorns:

If these companies continue to stumble in public offerings—the finish line for venture-capital firms—investors could become stingier about funding other startups.

I assert the following:

  1. Square has a conflicted part-time CEO, burns through a ton of cash, is going public at a $2 billion discount to its private valuation and faces a dilutive ratchet. And it's not clear if it's "a high-growing Internet company versus a lower-multiple payment processor." Not ... every ... unicorn is like that.
  2. The fact that Square's IPO started marketing (two weeks ago) at a multi-billion-dollar discount to its last private round is the troubling sign for unicorns, regardless of where it prices.
  3. Meanwhile Lyft "is seeking about $500 million at a valuation of approximately $4 billion." During the Square IPO. And somehow "Uber is meeting with investors about a new round as well."

Elsewhere, the SEC is worried about unicorn valuations at public mutual funds:

Startup shares are “not traded on an exchange, so a market quote is not readily available,” said Jay Baris, a partner and chair of the law firm Morrison & Foerster’s investment-management practice. “The question is, how do you put a fair value on it when you’re looking at squishy data?”

People are worried about stock buybacks.

Here is Martin Wolf at the Financial Times arguing that corporations have "contributed substantially to the savings glut," and that:

The behaviour of the corporate sector also raises important policy questions. Corporate taxation, for example should surely encourage both investment and the distribution of profits. The way to achieve these joint objectives could be through higher tax rates on retained earnings, together with full deductibility of both investment and dividends.

Corporate tax should encourage distribution of profits! We don't have enough buybacks!

People are worried about bond market liquidity.

"KCG Holdings Inc. and Virtu Financial Inc. are the newest members of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association," which meets with Treasury "to discuss debt issuance and borrowing plans" and generally provide market advice. There's also a Citadel representative, making three high-frequency-trader types on the committee. If your worry about Treasury market liquidity is that Treasury and regulators don't fully understand all the implications of modern electronic trading of Treasuries, then this seems like a step in the right direction. If your worry is that modern electronic trading of Treasuries is bad and that high-frequency-trading firms are evil, then this seems like capture.

Elsewhere, John Kay doesn't care about liquidity: "Regulation of unit trusts and other open-ended investment products, and of insurance and pension funds, today imposes requirements for marketability far in excess of anything required by the underlying needs of savers."

People are worried about swap spreads.

Here is an interesting though inconclusive note about negative swap spreads and the futures market

Data journalism.

Here's when people arrive at Goldman Sachs by taxi:

"The top neighborhoods for taxi pickups that drop off at Goldman Sachs or Citigroup on weekday mornings are: 1. West Village 2. Chelsea-Flatiron-Union Square 3. SoHo-Tribeca," and honestly you can walk to 200 West Street from Tribeca.

Me yesterday.

I wrote about activism and competition.

Things happen.

The High Cost of Networking at Business School. Goldman CFO Defends Investing and Lending Businesses. The mysterious Laizer Kornwasser. Barclays faces another heavy forex fine. Yahoo/Alibaba taxes could exceed 100 percent. The "global transmission of money shocks." Delaware Merger Objection Lawsuit Filings Decline in Response to Chancery Court’s Rejection of Disclosure-Only Settlements. Bumpatrage. Here Are Some of the Big Bets Being Made at the Robin Hood Investor's Conference. David Zaring on the SEC's conflict with Congress over an insider trading investigation. TPG Puts Certain Beijing Staff on Leave Amid Insider-Trading Probe. "Obviously, we did not make money in credit." Large Banks Postpone Debt Sale as Investor Appetite for Riskier Loans Wanes. Goldman Sachs Casts Focus on Millennial Women. Why Men Have More Help Getting to the C-Suite. Machines Are Better Than Humans at Hiring the Best Employees. Robots capture 2015 business book award. Quaker Steak & Lube files for bankruptcy protection. Super Fly. “I dread to think what the merger will do to my platinum-for-life status.” A Chinese billionaire bought a $170 million painting with an American Express to get the points.

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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 of this story:
Matt Levine at mlevine51@bloomberg.net

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