(Bloomberg View) -- How's Martin Shkreli doing?
Great, amazing, just delighted honestly:
Shkreli said he was "delighted in many ways" with the verdict, especially with the fact that he was acquitted of the charge that he looted Retrophin, which he called the "government’s attempt to theorize that I robbed Peter to pay Paul."
Yes sure of course Shkreli was convicted on Friday of three federal felonies, but he was also acquitted of five other felonies, and five is more than three, as his lawyer astutely pointed out:
Shkreli's lead lawyer, Benjamin Brafman, told a group of journalists, "I hope tomorrow's reports inform the public that Martin Shkreli went to trial and despite being Martin Shkreli he won more than he lost."
Look, we can occasionally be tough on Martin Shkreli around here, but it's worth saying: That's true! Martin Shkreli sure seemed to be guilty of everything he was charged with, and he is Martin Shkreli, so the fact that he was acquitted on five out of eight fraud counts really is an impressive feat of lawyering.
Of course, this is where I'd usually point out that getting convicted of three federal fraud felonies is really quite a lot worse than getting convicted of zero, and not that much better than getting convicted of eight. They tend to build some redundancy into the charges, and fraud defendants seem to get sentenced based on a general sense of their overall crime rather than the specific counts on which they were convicted.
But here I am not so sure. The story of the charges against Shkreli was that he lied to investors to start a hedge fund, lost all its money, lied to investors about it, started another hedge fund, lost all its money, lied to investors about it, started a pharmaceutical company called Retrophin Inc., took it public, made hundreds of millions of dollars for Retrophin's investors, and took some of Retrophin's money illegally to pay back the investors in the hedge funds. (The fact that Retrophin made its money by jacking up drug prices, while very much a part of the Martin Shkreli story, was not part of the case against him.) Shkreli was convicted of one count of fraud for each of the two hedge funds, plus a fraud scheme "in which he tried to quietly control a huge portion of Retrophin stock." But he was acquitted of the charge of looting Retrophin to pay off his hedge funds' investors.
That punctures the prosecution's story: Instead of a series of frauds ending in fraud, the jury viewed Shkreli's career as a string of frauds ending in wild and legitimate success. That matters because, when the series was completed, the alleged Retrophin looting is the only fraud where anyone lost money: The hedge-fund investors eventually got their money back, with huge profits. (From Retrophin.) This is not a defense to the fraud charges -- you're not allowed to steal money from people just because you later give it back -- but it could be very important at sentencing. The Sentencing Guidelines for fraud focus mostly on the amount of loss, and because Shkreli wasn't convicted of any frauds that actually harmed anyone, he might even avoid prison time:
Benjamin Brafman, Shkreli's lawyer, said because the hedge fund investors ultimately profited, his client's sentencing range should be zero to six months, which allows for probation in lieu of prison.
Or not, of course: "Prosecutors are expected to argue the intended losses of the fraud were much higher," though even so, the hedge-fund frauds were much smaller than the alleged Retrophin fraud. (They could also ask the judge "to factor in the conduct involving Retrophin despite the acquittals.") Also of interest: Because Shkreli has already paid back everyone harmed by the frauds he was convicted of, he may not be ordered to pay any restitution, saving him quite a bit of money. "I'm one of the richest New Yorkers there is, and after today's outcome it's going to stay that way," Shkreli told his for-some-reason-still-loyal YouTube viewers, and while he's probably wrong about the first part of that, he might be right about the second.
Meanwhile, how's the other Martin Shkreli doing?
A man with the same name as the notorious "pharma bro" Shkreli was arraigned in the same courthouse, in the same courtroom, with the exact same judge on different criminal charges as those facing Shkreli on Friday.
Blockchain blockchain blockchain.
"Bitcoin extended gains to a record" of $3,292, "ignoring a split in the cryptocurrency over its future," as Bitcoin Cash has been weaker, suggesting that Bitcoin Cash wasn't quite as "forky" as people initially thought.
Here is an amusing theory that bitcoin (BTC) miners may be mining Bitcoin Cash (BCH) in order to keep the price of BCH down. The gist is that if not enough people mine BCH, then the difficulty of BCH mining is automatically reduced, which would incentivize people to mine BCH and push its price up relative to BTC. If you wanted people not to mine BCH -- say, if you're a BTC miner with a lot of BTC -- then you might do just enough mining to keep the difficulty level up (and the price down), particularly because the difficulty reductions are discontinuous: Doing a little mining yourself might prevent a big reduction in difficulty, which would pull a lot of people into BCH mining.
I have no idea if that's happening, and at some level it doesn't sound economically sensible. ("I'm going to keep the price of widgets down by buying them all myself, so no one else does.") But it is fun to ask: If BTC and BCH were securities (they're probably not), and you were a securities regulator, would you call this market manipulation? It does look a little like non-economic trading done with the purpose of influencing the price in a related market.
As cryptocurrency gets a bit more ... domesticated ... there will be lots of questions like this, as regulators and exchanges and market participants work out what sorts of behavior are allowed and what sorts are off-limits. This happens in all sorts of financial markets -- bond markets are still trying to figure out their basic norms -- but it's particularly hard in cryptocurrency markets. Those markets sometimes seem to be based on the proposition that there shouldn't be any norms at all, that law and trust are antiquated notions, that immutable code and market economics will sort everything out.
Elsewhere, blockchain for pork:
Wal-Mart Stores Inc., the world’s largest retailer, was one of the first to get on board, just completing a trial using blockchain technology to track pork in China, where it has more than 400 stores. The time taken to track the meat’s supply chain was cut from 26 hours to just seconds using blockchain, and the scope of the project is being widened to other products, said Frank Yiannas, Wal-Mart’s vice president for food safety, in an interview Thursday.
The LOTOS.network project aims to create a complete ecosystem for Buddhist and secular meditation on the Ethereum blockchain.
From the whitepaper:
Karma tokens are the first effort to instantiate “Buddhist Economics” on the blockchain, offering an alternative vision to standard corporate capitalism. Lotos’ underlying values guide the economic programming of the platform so that accumulation and usage of KRM are in accordance with the Noble Path. In economic terms, people are guided to allocate their time between consumption and meditation — with optimal allocation occurring when meditation lowers the desire for consumption with no change in satisfaction.
So it's a coin for avoiding consumption? Hmm. We talked on Friday about Dentacoin, a cryptocurrency for dentistry, and I scoffed a bit. A useful thing about old-style national fiat currencies is that they can be used to pay for lots of different things: Instead of paying for dentistry with dentacoins and food with foodacoins and rent with rentacoins and drugs with bitcoins, you can pay for everything with dollars. But I seem to be on the wrong side of history on this one. In the future, every possible economic transaction will have its own currency. Even not doing economic transactions will have its own currency. Karma tokens: the money that you spend when you're not spending money.
And: "There's a house full of cryptocurrency gurus in San Francisco, and it's like a modern-day commune." Oh it's like a commune is it? I wonder how they divide up the chores. "I will exchange 0.65 takeoutthetrashcoins for 1 doingthedishescoin," one resident's bot is probably saying to another's on the local cryptochore exchange.
Fines, etc.
It can't be a huge surprise that "Wall Street regulators have imposed far lower penalties in the first six months of Donald Trump’s presidency than they did during the first six months of 2016." For one thing, Trump promised traditional deregulatory Republican policies, and appointed traditional Republican deregulatory regulators, so you'd expect less regulatory enforcement. For another thing, Trump in his previous life was something of a target of enforcement actions -- agreeing to pay $25 million to settle cases over his fake university just last November -- so it would be a little weird if his administration was especially punctilious about fraud.
But also there has just been a 2008-hangover effect in a lot of recent financial enforcement, and as the global financial crisis recedes in memory, fines should get smaller. It would be weird if the correct model of Wall Street was one of monotonically increasing criminality. The financial crisis unearthed a lot of bad stuff, and it led to enforcement actions and $150 billion in fines in the U.S., and you'd expect that to lead to less bad stuff, at least for a while.
Anyway here is a lawyer on the decline in fines from the Financial Industry Regulatory Authority, a self-regulatory agency funded by the financial industry:
“There has been a dialing back,” said Brian Rubin, a partner at law firm Eversheds Sutherland (U.S.) LLP. Finra “has gotten lot of feedback from member firms that there has been a big increase in fines [in recent years] …and that’s something they’re looking at.”
What you want is a regulatory agency that listens sympathetically to its members when they complain that they've been fined too much.
Elsewhere, "Commonwealth Bank of Australia has blamed a software 'coding error' for most of the 50,000 breaches of money laundering and counterterrorism laws alleged by Australia’s financial crime-fighting agency." And Wells Fargo & Co. just can't win:
The bank said in a regulatory filing that its review of potentially unauthorized accounts could reveal a “significant increase” in the number of accounts involved, up from the 2.1 million that it previously estimated. Wells Fargo said it had expanded its investigation to add three years to its review period, which covered accounts opened from 2011 to mid-2015.
But Wells Fargo also indicated that it has a new regulatory issue looming: an investigation by the federal Consumer Financial Protection Bureau into whether customers were harmed by the bank’s practice of freezing, and in some cases closing, bank accounts suspected of being affected by fraudulent activity.
So Wells Fargo has managed to get in trouble both for opening fake accounts and for closing real accounts because it thought they were fake. Really you should try to err in, at most, one direction (ideally zero!); getting it wrong both ways seems a bit careless.
Bonuses.
I used to work in investment banking, back in the good old days when bonuses were usually bigger than base salaries, and I was always keenly aware that the day you earned your bonus was the day that the check appeared in your account. If you quit, or were fired, the day before your bonus was paid -- even if you were fired in February before receiving your bonus for the whole previous year -- then you were out of luck. This is a harsh system that creates some obvious incentives. Bankers tend to lay low from December through February, and then quit in massive waves the day after the bonus checks clear.
Banks, meanwhile, have an obvious incentive to wait until December, or even the next February, before laying people off, getting the maximum possible work out of them before paying them for the year. That incentive is somewhat mitigated by the fact that banks that do too much of that sort of thing will get a bad reputation and have a hard time attracting employees, but I guess if you are packing up and leaving the country entirely, there's no reason to care about reputation:
CLSA, which is owned by state-backed Citic Securities, announced in February that it was pulling out of the US equities market with immediate effect because of challenging conditions. About 90 staff lost their jobs.
And:
In CLSA’s case, US staff were paid three months notice — a legal requirement in New York, where most of them were based. They were not paid their bonuses for 2016, because the job cuts were made days before the bonus cheques were due to be issued.
Of course they are suing over "CLSA's very very poor treatment of us," though I am not sure that very poor treatment of investment bank employees really counts as a legal theory.
People are worried that people aren't worried enough.
Oh here you go:
As volatility declined, investors have had to sell even more of it to sustain sufficient profits. This selling reinforces the trend lower, which produces an illusion that legacy volatility shorts are less risky today than yesterday. Lower volatility thus begets lower volatility. And this also ensures that quantitative models reduce overall portfolio risk estimates, which allows (and in many cases forces) investors to buy more assets at prevailing prices. This in turn reduces volatility, reflexively. Naturally, the reverse is also true. Rising volatility begets rising volatility. And given the unprecedented volatility-selling in this cycle, I can imagine a historic reversal.
And at that point, investor imaginations will run rampant with visions of cataclysms.
People are worried about non-GAAP accounting.
Here is a Gretchen Morgenson column about how PayPal Holdings Inc. uses a non-GAAP earnings number and "has trained investors to focus on this number, rather than on the less pretty GAAP-compliant numbers most companies are judged by" (and that PayPal of course also reports). Morgenson's conclusion is that that is bad, GAAP is real, non-GAAP is fake, etc., and that's all fine, but surely there is something more interesting going on here. How do you train the investors? What else can you train them to do? The central thesis of most worrying about non-GAAP accounting seems to be that companies report real useful GAAP numbers, and also report fake deceptive non-GAAP numbers, and then sort of hypnotize investors into only looking at the fake numbers. But, why? If you can hypnotize investors into only looking at the non-GAAP numbers, could you also hypnotize them into buying the stock without looking at any numbers at all?
People are worried about unicorns.
"Uber’s search for a female CEO has been narrowed down to 3 men" is the unimpeachable headline here, though I still hold out a little hope for an even sillier result: There seems to be a nonzero chance that Uber Technologies Inc.'s search for a chief executive officer who is not Travis Kalanick will end up being narrowed down to Travis Kalanick. At this point we are used to companies that claim they looked for qualified women but couldn't find any who wanted the job; a claim that Uber looked for qualified non-Travis-Kalanicks but couldn't find any would be more novel.
Elsewhere, Snap Inc.'s employees' stock awards are mostly underwater. And: "When Will the Tech Bubble Burst?"
Things happen.
The World’s Most Feared Investor. Buffett Nears a Milestone He Doesn't Want: $100 Billion in Cash. MEPs seek tougher rules on London euro clearing after UK quits EU. Regulatory Incentives and Quarter-End Dynamics in the Repo Market. Sprint, Looking to Get Bigger to Survive, Weighs Deal-Making. Anna Gelpern on Venezuela analogies, part 2. Bankers’ pay closely tied to deregulation. Tesla Planning $1.5 Billion Bond Offering to Support Model 3. Horse clones. British man surrenders so police would take unflattering mugshot off Facebook. "But despite Mr Borg being at a party with about 50 guests, no witnesses have yet come forward publicly to discuss what did or did not happen." Gary "Cohn also petted the faux-fur creatures on House of Fluff’s paddle board that went for $3,050." Matchbox 20 concert delayed by swarm of bees.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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.
For more columns from Bloomberg View, visit https://www.bloomberg.com/view.
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