Mishaps, Blue Aprons and Greenshoes

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(Bloomberg View) -- Martin Shkreli!

This seems bad:

Sarah Hassan, 27, who gave Shkreli $300,000 to invest, said she got an email at 8:13 p.m. on Sept. 9, 2012, saying she was up $135,000, a return of 45 percent. At 8:44 p.m., Shkreli sent out a second email notifying Hassan and other investors he was shutting the fund down.

"We went through operational mishaps," Shkreli said in the email. "There is no longer any cash in the funds."

What kind of operational mishaps can a hedge fund go through between 8:13 p.m. and 8:44 p.m.? U.S. markets are closed; things are usually pretty quiet. The obvious operational mishap is that the hedge fund manager -- "Pharma Bro" Martin Shkreli -- could have stolen the money, and he is indeed on trial for fraud in federal criminal court. But even if that was the explanation, to go from up 45 percent to down 100 percent in the course of 31 minutes one evening, and get an email about it, is pretty unusual. Fraudsters don't normally email you promptly when their fraud is complete.

But here is the critical follow-up to Sarah Hassan's tale of woe: Like Shkreli's other investors, she complained about the disappearing money, and Shkreli compensated her with shares of Retrophin Inc., the pharmaceutical company he had founded.

Hassan said she felt “betrayed” when she learned the fund was closing and the money was gone, even though she ultimately made a $2.7 million profit after selling all her Retrophin holdings. It took a year for her to get cash and a portion of the Retrophin shares from Shkreli, though.

So she got back 10 times her investment! When Shkreli was first arrested, I wrote about it with the headline "Martin Shkreli Accused of Being Surprisingly Good at Fraud." Not a lot of securities frauds end with everyone better off. The prosecutors' theory in the Shkreli case, in a nutshell, is that Shkreli started a hedge fund, lost all the money, lied about it, started another hedge fund (the one Hassan invested in), lost all the money, lied about it, started a pharmaceutical company (Retrophin), had enormous and sustained success (it is currently worth about $740 million), and took money from Retrophin under false pretenses to pay off the hedge-fund investors he had ripped off. There are a lot of victims there -- the hedge-fund investors were allegedly deceived, and Retrophin, a public company, was allegedly looted -- but one fact that unites those victims is that Shkreli has made them all much richer than they would have been. It is not precisely an airtight legal defense to fraud charges, but you can kind of see where he's coming from.

Blue Apron. 

Yesterday, like an idiot, I predicted that Blue Apron Holdings Inc.'s stock would probably move a lot when it opened on its first day of trading: Blue Apron launched its initial public offering at a price range of $15-$17 per share, cut the range to $10-$11, and ended up pricing on Wednesday at $10, suggesting that there's a lot of uncertainty about its value. So you'd think -- I thought -- that its first day of market trading would be a bit wild.

But, no, it closed at $10.00 exactly. (It got as high as $11.00 in the morning, and even that is not much of an IPO pop.) I must say it is kind of amazing that Blue Apron's underwriters were waaaaaaaaaay off on their first attempt to price the company ($15-$17), but then got it exactly right -- down to the penny -- on their second effort. The system works!

I mean, heh, no. For one thing, IPOs really are supposed to go up: If Blue Apron closed yesterday at $17, the company would probably be annoyed about cutting the price, but an $11 or $12 close would be nice, a good sign of investor enthusiasm for the stock and a modest reward for the investors who took a chance by buying in the IPO.

For another thing, that $10.00 price is probably not a coincidence: Blue Apron traded between $10.00 and $10.05 for the last 20 minutes of trading yesterday, which suggests that its underwriters were eating through some of the greenshoe in order to support the price. (Remember: When Blue Apron went public, it sold 30 million shares to the underwriters, but the underwriters sold 34.5 million shares to investors, leaving them short 4.5 million shares. They also got an option from Blue Apron to buy those 4.5 million shares at the offering price. The deal is that if the price drops to or below $10, the underwriters will buy in some of their short in the market to support the price; if it stays above $10, they will exercise the "greenshoe" option and buy the extra 4.5 million shares directly from the company.) Without that stabilization by the underwriters, the stock might well have closed below the IPO price. (And in fact the stock "traded as low as $9.95 in late trading in New York.")

This is particularly awkward because Blue Apron is going to need more money:

Blue Apron believes its cash and borrowing capacity will be sufficient for at least a year, it said in its revised deal prospectus after lowering its IPO price range. The company added that its liquidity assumptions may prove to be incorrect, and it may increase the borrowing capacity under its revolving credit facility or raise additional funds through equity or debt financing arrangements.

If you are going to come back to the equity markets a year after your IPO, it does help if your IPO investors have made some money.

Citi spoofers.

We have talked before about Treasury-futures spoofing at Citigroup Global Markets Inc., for which Citi agreed to pay a $25 million fine to the Commodity Futures Trading Commission on the basis of some pretty silly anecdotes about how Citi's New York traders trained its junior traders in Tokyo in how to spoof, but did not do a very good job. Well yesterday the CFTC announced non-prosecution agreements with three of those traders, and provided some more silly anecdotes about Citi's lackadaisical spoofing training program:

On January 31, 2012, one of Liao’s spoofing orders traded before he could cancel it and resulted in a $60,000 loss. Shortly thereafter, Liao called members of Citigroup’s U.S. Treasury desk to report the loss and the circumstances around it. Specifically, Liao told the head trader on the desk that he had “offered 4,000 contracts in [ten-year futures] hoping I’d get hit in some [ten-year cash Treasuries].” The head trader responded, in part, “cool, sounds like it didn’t cost too much, so that’s cool.” At this point, another senior trader got on the phone and asked about what happened. The head trader responded, “He offered [ten-year futures] in the screens and got lifted,” to which the senior trader responded, “Oh! You were [screwing] around and got jacked.” In a subsequent call, the senior trader told Liao not to stress about the incident and reminded Liao that because he is in Tokyo, “when you do that, people know what you are doing. There’s no liquidity anyway, you’re on the offer for like umpteenth size, clearly, clearly guys know you want to buy [ ]. Yeah, don’t pick up bad habits from us.”

I love that, on Citi's Treasuries desk, getting "jacked" on a failed spoofing attempt was a rite of passage. "Hey, Bob, hop on my line, Dan in Tokyo got lifted on a spoof order!" "Hahahahaha welcome to the club Danny boy!" You know how bond traders will romanticize the shady behavior of the "Liar's Poker" era forever? (The way stock traders have romanticized the shady behavior of the Jesse Livermore era forever?) I feel like we are already, in 2017, in a place of nostalgia for 2012, back when dinosaurs roamed the Treasury markets, spoofing with impunity. Well, not impunity, but that's what they thought anyway.

Home Capital.

Home Capital Group Inc. was a struggling Canadian mortgage lender, but then Warren Buffett agreed to give it a C$2 billion credit line and buy up to C$400 million of stock at a big discount, and now everything is fine: "The stock has since soared to C$17, more than triple its May lows when the company faced a run on cash following allegations it misled investors about fraud on some mortgage applications." And so Home Capital shareholders are having second thoughts about actually giving Buffett the stock at a discount: Buffett has already bought 19.99 percent of the company at C$9.55 per share, but the second tranche of his planned purchase -- another 18.4 percent at $10.30 per share -- requires shareholder approval, and the shareholders are getting restless. 

“The benefit from having Warren Buffett invest in Home Capital has already been demonstrated,” shareholder David Meyers said in an interview. Meyers holds more than 4,000 shares of the mortgage lender with his wife. “I don’t see the benefit of the second tranche being there given the kind of huge discount that he would receive for the second amount. It’s ridiculous.”

It's like the Jerry Seinfeld joke about getting the check at the end of a meal at a restaurant: "We're not hungry now, why are we buying all this food?" The benefit from having Warren Buffett invest in Home Capital, for Home Capital, comes from announcing that Warren Buffett has bought a bunch of shares. But once you have that benefit, why give him the shares? As at a restaurant, this reasoning is not bulletproof: The reason Buffett was willing to come to Home Capital's rescue in the first place was that they promised him a bunch of discounted shares. But, for shareholder-voting-requirement reasons, they could only really promise him the first 19.99 percent, and the investment wasn't contingent on the second tranche going through. So the shareholders are not wrong: If you don't need to give Buffett a huge chunk of discounted shares to get the benefit of his rescue, why do it?

Elsewhere in Buffett rescues: "Buffett to Swap $5 Billion BofA Stake for $17 Billion of Stock." Berkshire Hathaway Inc. bought $5 billion of Bank of America Corp. preferred stock in 2011, which came with warrants to swap the preferred into common at $7.14 per share. The stock closed yesterday at $24.32 per share. Bank of America shareholders don't get to vote on whether they'd like to change their minds.

Avocado toast.

An unfortunate fact of financial life in 2017 is that there is an inextricable link between housing finance and avocado toast. This started last month with an "Australian millionaire and real estate mogul" who had "advice for millennials struggling to purchase a home: stop buying avocado toast," and since then has become such a meme that now, ugh, this is happening:

Obviously, buying a home doesn't mean you have to chuck avocado toast out of the picture. In fact, buying a home now comes with avocado toast.

What we mean by that is, for the month of July 2017 only, anyone who takes out a SoFi mortgage to purchase a home will receive a month's worth of avocado toast delivered to their door. Buy a home using a SoFi mortgage, and you'll receive an email asking whether you want regular or gluten-free bread. Avocados and bread will then arrive in a series of three shipments—though you'll still need to toast the bread yourself to get the full experience.

"Instagram filter optional," Social Finance Inc. adds; I recommend Reyes to really bring out the wan disappointment of receiving a loaf of bread and a bag of avocados. That is not avocado toast. It is just a dim gesture at a never-all-that-interesting meme. Concepts like "millennials," "homes" and "avocado toast" burble lazily in some marketer's mind, and so they lazily hand you a loaf of bread, a bunch of avocados and a mortgage. I hope you like it! "SoFi is so cool that they'll mail you an egregious misunderstanding of avocado toast for the low, low price of buying a home," tweets Bloomberg's Annie Massa

Meanwhile! In London

To revive flagging apartment sales, London real-estate developers are using trendy street art, cafes serving avocado toast, and bike-repair stations to lure young professionals and fashionable millennials.

Meanwhile! At Square Inc.! Square is advising millennials to make money by selling avocado toast, perhaps so they can buy homes? There is an obvious levered avocado-fintech play here: Borrow money from SoFi, get free avocados and bread, toast the bread, put the avocados on it, sell the avocado toast at $7 a piece, take payments via Square, and use the proceeds for a down payment. "You'll still need to toast the bread yourself," but perhaps if you open an account at a traditional bank they will give you a toaster.

Blockchain blockchain blockchain.

"Pay your Ferrari with Bitcoin," says the press release in my inbox, and why not.

People are worried that people aren't worried enough.

You know, this section is usually about people complaining that the VIX is too low, but the general worry that people aren't worried enough is a core feature of financial markets and financial life and life in general, really. So here is "All-Clear for Big Banks Raises Fears of a Return to Risk": People are worried that, since all the banks passed the Federal Reserve's stress tests and will be allowed to return capital to shareholders, the banks will become too risky. People are worried, that is, that people aren't worried enough about the banks: Because the stress tests found that the banks are safe, the banks will become risky. But of course if banks had failed the stress tests then that would mean that they were already risky. There is no way to win. You can't make fun of this thinking too much, because it is probably right: When things are risky, they are risky, and when things are not risky, then people are becoming complacent and allowing risks to build up in the system. It is a Minskyan inevitability; there really is no way to win. The only consolation is that markets keep going up over the long term.

People are worried about unicorns.

Here is a brief story about how Uber Technologies Inc. "has held multiple meetings with the SEC about how it can provide equity to its drivers, who are contractors rather than employees." The issue is that if you give securities to enough people, particularly if those people are not employees, then you might have to register with the Securities and Exchange Commission and go public without meaning to. One trick that some private companies use is to give employees some sort of phantom equity in the form of profit-sharing, but this is difficult for Uber because, you know, no profits. Another trick would be to make the drivers employees, but Uber seems to have a philosophical aversion to that.

What's left? I don't know, initial coin offerings seem to be all the rage in the world of blockchain. The idea of an ICO is that a platform company sets up an electronic token to serve as a unit of currency on its platform, and then sells some of those tokens to the public to establish their value and let people speculate on the future of the platform. So for instance if you had to pay for Uber rides with Ubercoins, then there would be a market for Ubercoins. And Uber drivers would be paid in Ubercoins, which they could then convert into cash -- or which they could keep, if they think that the value of the Uber platform (and the Ubercoins) will go up. It is another form of shadow equity, but it is also at least arguably not a security.

Even leaving aside that Uber is not going to introduce its own currency, this scheme does not seem especially practical. Speculators who wanted to bet on Uber's future growth would push up the price of Ubercoins, which would make drivers richer but would also make Uber rides more expensive, reducing Uber's future growth. Plus I feel like if Uber explained this scheme to the SEC, they might not agree that the Ubercoins are not securities.

Me yesterday.

Yesterday's Money Stuff argued that "a useful way to think about the U.S. tax system is that it is designed for the entertainment of tax lawyers," and Rob Terrin reminded me of a passage from David Graeber's "Utopia of Rules":

Studies of children's play, for example, inevitably discover that children playing imaginary games spend at least as much time arguing about the rules than they do actually playing them. Such arguments become a form of play in themselves.

The children who are especially good at that form of play grow up to be tax lawyers. Also, yesterday I referred to a maximum on a graph as an "inflection point," which is a horrible error of usage, and I apologize.

Things happen.

Traders Who Left Banks for Hedge Funds Heading Back to Banks. SEC Said to Scrutinize Hedge Funds’ Handling of Hot IPO Shares. Sycamore Plans to Split Staples Into Three. U.S. Seeks to Keep Closer Tabs on Chinese Money in America. It’s Whac-A-Mole for Chinese Regulators Trying to Clamp Down on Speculation. Mozambique Bondholders Push for Loan Repudiation. Baffled by Brexit: With So Much Unknown, London Bankers Struggle to Plan. Frugal banking interns save money, stay with parents. Matt Klein on Harberger taxation. (Earlier.) Short Seller Carson Block Fires Back at NYSE's ‘Un-American’ Jab. Pine River Capital Management Plans to Spin Off Nearly $2 Billion Hedge Fund. Cool French startup incubator. All the “wellness” products Americans love to buy are sold on both Infowars and Goop. Pasta heir mansion. Man skirts are happening again. Snake hangs from pole for ride on New York subway

Programming note: Money Stuff will be off Monday and Tuesday for the holiday, back next Wednesday. Happy Fourth!

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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 http://www.bloomberg.com/view.

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