Blockchains Go Well With Cocktails

(Bloomberg View) -- Go home, blockchain, you're drunk.

Well here's a press release:

Farmingdale, NY , Dec. 21, 2017 (GLOBE NEWSWIRE) -- Long Island Iced Tea Corp. (NasdaqCM: LTEA) (the “Company”), today announced that the parent company is shifting its primary corporate focus towards the exploration of and investment in opportunities that leverage the benefits of blockchain technology. In connection with the shift in strategic direction, the Company has approved changing its name from “Long Island Iced Tea Corp.” to “Long Blockchain Corp.” and has reserved the web domain www.longblockchain.com. The Company intends to request Nasdaq to change its trading symbol in connection with the name change. The Company will continue to operate Long Island Brand Beverages, LLC as a wholly-owned subsidiary and maintain the focus of this business on the ready-to-drink segment of the beverage industry, specifically, premium, ‘better-for-you’ brands marketed at an affordable price.

Long Whatever had an equity market capitalization of $23.8 million as of yesterday's close, but that was before this morning's press release, which I imagine will send it soaring. (It was up more than 500 percent in pre-market trading at about 9 a.m. today.) What distinguishes Long Quizzical Look from the other juice, sports-bra, e-cigarette, or whatever-else-you've-got companies that have recently pivoted to blockchain and seen their stocks jump? I hope its blockchain is longer? Long Exasperated Sigh "is already in the preliminary stages of evaluating specific opportunities involving blockchain technology," including potentially acquiring "a blockchain software developer building blockchain infrastructure for the financial services industry." Yes! Definitely! It is totally normal and sensible to have a public company whose two lines of business are (1) building critical software infrastructure for regulated financial companies and (2) marketing "Long Island Iced Tea." That is how companies work, 100 percent. Banks are always going around saying "I like the security features of your software system but I just wish you also offered a jokily named beverage, and your blockchains could be a little longer." Finally someone is addressing the problem.

Look, this is a daily stupid occurrence. Everyone gets the joke by now. Presumably zero of the people who bought Long Moan Of Unspeakable Agony in pre-market trading today are like "oh yes I like the look of their blockchain plans." Presumably zero of those pre-market traders are rubes who arrived at the blockchain bazaar a minute ago and piled into the first stock they saw. Presumably all of those people are buying because they expect to find bigger rubes to sell to. The "Silly Company Becomes Silly Blockchain Company" thing has become a self-referential meme; everyone knows that everyone is buying because they expect everyone else to buy. Is it a metaphor for cryptocurrency more broadly? I don't know, but it does not seem like an especially healthy market.

Ugh did you know that Long Nightmare From Which I Am Trying To Awake makes non-alcoholic "Long Island Iced Tea"? I am going back to bed.

Crypto trading.

Tuesday evening, on rather short notice, Coinbase Inc. announced that it would offer trading in Bitcoin Cash on its platforms. Bitcoin Cash is a cryptocurrency created by a fork from the bitcoin blockchain in August; Coinbase had previously announced that it would not support Bitcoin Cash, but then reversed itself and said that anyone who had bitcoins on Coinbase on August 1 would now also have Bitcoin Cash (from the fork) and that trading would be available. 

The price of Bitcoin Cash promptly shot up -- a little too promptly, insofar as it was trading up on other exchanges in the hours before Coinbase's announcement. This led to suspicions of insider trading, and Coinbase Co-Founder and Chief Executive Officer Brian Armstrong announced that Coinbase would be investigating. Meanwhile Tuesday evening's trading of Bitcoin Cash on Coinbase's GDAX exchange was frantic and short-lived: It was halted after two minutes, though it eventually relaunched yesterday. 

Was the price spike in Bitcoin Cash before Coinbase's announcement insider trading? Meh, I have no idea. (There was some public information that Coinbase would soon add Bitcoin Cash support: Back in August it said "we are planning to have support for bitcoin cash by January 1, 2018," and it added API keys for Bitcoin Cash over the weekend so many people guessed it was coming soon.) If in fact people were trading on inside information, then in an even-slightly-more-mature cryptocurrency world that would be clearly illegal. In our current world it is at least a don't-try-this-at home sort of thing. Everything is a little bit wire fraud, though this is not legal advice.

Certainly none of this -- the quickie announcement, the possible information leaks, the random launch of a product one Tuesday evening with no time to build a balanced order book, the almost-immediate halt -- is how you'd run a mature regulated securities exchange, but I am not sure why that would be a surprise in the world of cryptocurrency trading.

But what if there was insider trading? There was a big run-up in Bitcoin Cash prices on other exchanges before the launch of trading on Coinbase, and then it was justified by an even bigger run-up when that trading started. If you insider traded, you did well, and predictably. In some ways this is obvious -- most stocks go up when they do initial public offerings or are added to indexes -- but it is worth considering. When bitcoin futures launched, there was a lot of talk about how they would bring short sellers in and lead to lower prices. To some extent that has even happened. But on the big cryptocurrency exchanges the -- correct -- assumption seems to be that access leads to price increases. If you let people buy a cryptocurrency, they will; knowing that an exchange will offer a product is equivalent to knowing that the product will go up. It is a heady and strange thing.

Meanwhile:

A bitcoin ETF took another step closer to reality after the NYSE filed with the SEC to list two funds tracking bitcoin futures.

The NYSE wants to list the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF, two exchange-traded funds that would allow traders to bet on how the volatile cryptocurrency futures contracts will perform.

Sure, you can short a bitcoin ETF, or you can buy a short bitcoin ETF, but I suspect that this is another case of, if you make it easier for people to buy bitcoin, they will.

Elsewhere:

• "The cryptocurrency market is now doing the same daily volume as the New York Stock Exchange."
• "Big Hedge Funds Want In on Bitcoin."
• Someone bought a million dollars' worth of bitcoin $50,000 call options.
• "Tax-Free Bitcoin-to-Ether Trading in U.S. to End Under GOP Plan."
• "Bitcoin must have a negative yield, either because you need to pay for the miners' energy or because your bitcoins are going to be stolen."
• "Bitcoin Intensifies Pain for Some as Ransom Demands Skyrocket."
• "This dominatrix made men mine $1 million in cryptocurrency for her." Seems reasonable, though it would have been even sexier if she had made them do it by hand using pencil and paper. 

IPO kickbacks.

So if you are paying a guy kickbacks for your illegal conspiracy, I can understand why you would want to pay him in cash and meet him "outside his office or in public places such as bars and restaurants." I can see why you would prefer "not to give him more than $10,000 at one time so that it would fit in an envelope inside his jacket, and to avoid scrutiny at the banks from which the withdrawals were made." But what I don't understand is why you would keep a spreadsheet of your illegal conspiracy and title it "Phantom":

Spera maintained a document that detailed all the offering allocations he received from Hirsch, identified as “Phantom” at the top of the report, and the corresponding trading profits during the course of their arrangement. The “Phantom” report includes 443 separate stocks and a total of 1,541 allocations from January 5, 2012 through November 19, 2015. The report shows a total pre-tax profit of approximately $4.44 million after fees and commissions. During this period, a total of at least $945,000 in wire transfers were made between accounts to initiate the cash payments to Hirsch. Spera wired the money from his trading account to several bank accounts from which the cash was withdrawn, typically in amounts less than the $10,000 threshold that would result in a currency transaction report, and then delivered to Hirsch. 

The cops will never look at the "Phantom" spreadsheet! Calling it "Phantom" makes it practically invisible! So close.

Usually when we talk around here about lapses in tradecraft by people handing each other envelopes of cash, we are talking about insider trading, but the above quotes come from the complaint in a Securities and Exchange Commission case over initial public offering allocations. (To be fair, the SEC points out that Spera also pled guilty to insider trading charges last week, which is maybe how they found the "Phantom" spreadsheet.) Brian Hirsch worked on the "wealth syndicate desk" at two brokerages, where he had the power to allocate shares that the brokerages got in hot IPOs to retail clients. Joseph Spera was a customer of those firms and got allocated shares in those hot IPOs, which he quickly sold for profits that he then diligently noted in his "Phantom" spreadsheet. According to the SEC (and a federal criminal case against Hirsch), Spera would pay Hirsch kickbacks of 24 percent of those trading profits. ("The percentage was determined with the applicable tax rate in mind so as to give Hirsch approximately 50% of Spera’s net post-tax trading profits," which is tidy.) 

You are not supposed to do this. Those shares were the firm's to allocate, not Hirsch's, and taking bribes to give them to his favorite clients was an obvious no-no. It's a little uncomforrtable, though, as the allocation process is notoriously full of conflicts of interest. The SEC complaint cites the brokerage firms' policies that "expressly prohibited certain allocation practices that gave rise to conflicts of interest with the firm or the issuer, including any 'predetermined agreement or quid pro quo arrangement with an investor client in return for an allocation, including the promise to allocate in a future offering of a different issuer.'" But it also cites one brokerage firm's list of factors that could be considered. The main emphasis was "the Issuer's allocation preference (if any)," but the next item on the list is "the investor client's account history and overall business relationship with the firm." You're supposed to give more shares to investors who have paid more money to the brokerage firm. That is a bit of an awkward fact -- it's not a reason for an issuer to want to allocate shares to the investor -- but it's one that everyone grudgingly accepts. On the other hand you can't give more shares to investors who have paid money to the broker. That is pretty obviously bribery.

People are worried about unicorns.

You know there is this popular narrative that public companies are making all this money and not passing it on to workers or customers but just returning it to investors, who have more money than they need anyway. But there is a sort of balancing transaction in private markets, where SoftBank Group Corp. invests $3.1 billion in WeWork Cos. and WeWork spends it on giving new tenants free rent:

Armed with a $3.1 billion commitment of new cash from SoftBank Group Corp.’s investment fund this summer, WeWork has ratcheted up pressure on an array of competitors, offering their tenants lucrative deals—and sometimes even free food—to convince them to defect.

Co-working companies around the globe, from small operators of a single space such as Wolf Bielas in San Diego to midsize competitors like Bond Collective in New York, say that this fall, WeWork embarked on a marketing blitz to lure large numbers of their tenants with a year of free rent with a two-year contract. 

This is like the popular theory of Uber that it is a high-cost taxi service that is massively subsidized by investor money. You could have a Unified Theory of Money Stuff Worries that goes like:

1. Public companies extract money out of consumers in the form of monopolistic pricing encouraged by common shareholders.
2. They give the money to investors in the form of share buybacks.
3. The investors invest the money in private unicorn companies at wild valuations.
4. The private companies give the money to consumers in the form of below-market pricing encouraged by indiscriminate investors.

It is not a good theory. It does not seem especially efficient. And yet it has a certain appeal. The public market is a place of ruthless shareholder-value maximization, which is nice for the shareholders but a little grim and boring; the private market is where the shareholders go to be frivolous and blow off steam.

People are worried about stock buybacks.

My meta-worry right now is that my joke from 2015, that corporate stock buybacks would become a major issue in the 2016 U.S. presidential election, will end up coming true in the 2018 midterm elections. The problem is that Republicans have touted their corporate tax cut as a way to stimulate the economy and boost wages, while Democrats argue that companies will in fact spend their tax savings on buybacks instead. So whereas two years ago people were worried that stock buybacks were a wasteful and destructive way to increase inequality, now people are starting to worry that stock buybacks are a wasteful and destructive way to increase inequality caused by the tax code. Anyway here is David Dayen on a report from the Senate Democrats finding that, while buybacks had been declining earlier in 2017, they have ticked up recently in response to the tax bill: "Since the Senate passed its version of the tax bill on December 2, 29 companies have announced $70.2 billion in stock buybacks."

There are however countervailing considerations: In addition to lowering corporate tax rates and giving most public companies more income to give back to shareholders in the form of stock buybacks, the new tax changes will also reduce the deductibility of interest on corporate debt: "Under the bill, the amount of interest expense companies can deduct from their taxes is limited to 30% of a measure known as earnings before interest, taxes and depreciation and amortization, or Ebitda, through 2021." That could affect buybacks too:

The rule change will change a longtime fixture of corporate finance—that debt is a more attractive way for companies to raise cash than selling stock. Now some companies will be less willing to borrow and may issue stock, which would reduce earnings per share. Companies would be less likely to borrow to fund share buybacks and dividend payments.

Things happen.

Inside Wall Street's Towers, Traders Grouse Over Trump Tax Plan. Tax Cut Expected to Trigger Fannie, Freddie Infusion. (Earlier.) European Banks’ Post-Crisis Litigation Could Cost $100 Billion. Swiss find serious shortcomings at JPMorgan in 1MDB case. Wells Fargo wants to finance metal trade in test of new rule. The Divide Behind Trump’s CFPB Takeover. Subprime Auto Defaults Are Soaring, and PE Firms Have No Way Out. China to Shake Up Global Market With Yuan-Based Oil Futures Contract. Banks Are Worried Tech Systems Could Crash After Introduction of New EU Rules. "A Second Circuit panel on Tuesday upheld a New York federal court’s dismissal citing lack of jurisdiction of a suit brought by an Illinois company that sought hundreds of millions from Peru for bearer bonds originally issued in 1875 to a company that sold nutrient-rich South American bird excrement to U.S. farmers." Silver Snipers. Selfieccino. Misery Doesn’t Seem to Improve the Quality of Art. Man who tore off a pigeon's head and drank its blood in Bryant Park to seek help.

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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.

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

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.

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