(Bloomberg Opinion) -- Crypto pump-and-dumpery.
The word “unregulated” has a sort of strange usage in finance. Hedge funds, for instance, are often referred to as “unregulated,” which their compliance teams must find frustrating. Everything is regulated. Hedge funds are not subject to the same rules as mutual funds, and have more flexibility about what they can own and how they can leverage it and what they can charge and so forth. But they are subject to all sorts of rules. There are rules that govern how they trade and what they disclose and how they raise money and how they interact with their investors, and of course there are the basic background laws applicable to everyone. If you run a hedge fund and you are charged with fraud for lying to investors, and your defense is “what, hedge funds are unregulated,” it will not—not legal advice!—take you very far. If you run a hedge fund and murder a guy and say “what, hedge funds are unregulated,” it won’t even make sense.
Similarly, if your cryptocurrency lawyer tells you to go ahead and murder people as long as it’s on the blockchain, you might want a second opinion. But what about market manipulation?
“Cryptocurrency exchanges are unregulated markets, so the kind of market manipulation banned on, say, the New York Stock Exchange can essentially be carried out with impunity,” said Ben Yates, a cryptocurrency lawyer at London-based RPC.
Impunity, eh? That’s from this Wall Street Journal story about organized cryptocurrency pump-and-dump schemes, which, yes, seem to operate with impunity in the narrow sense that “regulators have yet to bring a case” against any of them. But—and this is certainly not legal advice! consult your cryptocurrency lawyer! and maybe another lawyer!—but I am not so sure that that means that regulators can’t, or won’t, eventually get around to bringing these cases. Lying about a security is mostly securities fraud, and most crypto-tokens seem to be securities, and in any case lying about anything else using a computer is mostly wire fraud. If you use the internet to scam people out of money, the specific regulatory status of the exchange on which you do it is not going to be the main obstacle to getting you in trouble.
That said, the crypto pump-and-dumps are a strange sort of scam in that it’s not clear that anyone is deceived. They are based in anonymous chat rooms with “names that don’t hide their purpose, such as Orion Pump, MEGA Pump and A+ Signals”; if you follow a crypto pump-and-dump you know you are following a crypto pump-and-dump. The operators pick some relatively thinly traded coin to pump, and then they tell all their followers to buy it, and the followers buy it, and the price goes up, and people sell, and the followers who sell early make money, and the followers who sell too late lose money, and they all know it. The victims are clamoring to be victimized. They are not so much deceived as they are risk-loving and dumb:
For the traders, “it’s a gambling thing, and they’re addicted to it,” said Dave Jevans, the CEO of cryptocurrency analytics firm CipherTrace. All of them buy in the frenzy with the intention of taking a profit and selling before the dump, sort of like a game of crypto chicken: the longer they wait for prices to peak the more money they can make, but the risk of losing everything is heightened by the inevitable crash.
Traditionally pump-and-dump schemes are considered fraudulent because they are “manipulative devices”; they move the price of a stock artificially so that it doesn’t reflect real supply and demand, and deceive innocent bystanders into buying it based on deceptive price signals (and, often, deceptive press releases). But with some random twelfth-tier cryptocurrency it’s hard to see how the price ever could reflect “real” supply and demand—it’s not like there are industrial end-users for these things—and it’s not clear that there even are any innocent bystanders trading them. What if all the action is among members of the pump-and-dump group? What if no price signals leak out from the pump-and-dump to any real-world users or innocent bystanders, and the only people who make or lose money are knowingly gambling on their reaction time?
Now, you can’t be sure that’s the case. These coins trade publicly, and nothing stops random innocents from buying them without participating in pump-and-dump chatrooms. Surely at least one non-member bought at least one of these coins during one of the pumps. (It was probably an FBI agent!) So if you run the pump schemes, you can’t be confident that your “everyone was in on it” defense is accurate.
But that is just a mistake in the architecture. Why pump real(ish) coins that trade on open exchanges? Why not set up a specifically pump-focused exchange, and exclusively list coins there for pump-and-dump purposes? Why not exclude all investors who don’t want to be victimized? I should launch PumpCoin, a coin that you can only use if you acknowledge that its price depends entirely on pump-and-dump action and that you are willing to be ripped off. (Obviously there are multiple PumpCoins already, of unclear seriousness.) Would that be legal? I have no idea. Consult your cryptocurrency lawyer I suppose.
Anyway here’s this guy:
It “incentivizes the poor followers to keep buying until the [target] price is reached, which it often never does,” said Taylor Caudle, who participated in a January operation at Big Pump after following the group’s earlier efforts. “I instantly lost $5,000 in about 30 seconds.”
In less than a minute after placing a buy order on DigixDAO—a coin offered by a startup that claims to back its tokens with gold and listed on crypto exchange Binance since November—the price dropped steeply and never recovered, said the 27-year-old Mr. Caudle, who lives in San Diego.
Mr. Caudle maxed out a credit card to participate.
“Needless to say I felt extremely angry, and voiced my findings” on Discord, he said in an email, “which were of course met with nothing but ‘Too slow bro,’ and ‘Lol sucks 2 b u’ comments.”
Look, regardless of the legal nuances, I want to emphasize that it shouldn’t be illegal to take that guy’s money. It should be illegal not to take his money. He should not be allowed to have money. The real criminals here are the credit-card company that let this guy borrow $5,000 to do this dumb thing. I hope when they send him his statement it just says “lol sucks 2 b u.”
Kids these days.
Here is a fun class project: Triton Funds LLC is considering a bid for Helios and Matheson Analytics Inc., the company that runs MoviePass.
Triton is not a typical venture fund. It is run by University of California at San Diego finance students, with an advisory board that includes alumni and faculty. The $25 million fund’s slogan is “Millennial Touch.”
Helios and Matheson was mismanaged as a publicly traded company, fund co-founders Nathan Yee, Sam Yaffa and Yash Thukral told MarketWatch. The Triton partners believe that the company should be taken private and that there needs to be a management shakeup in order to capitalize on the company’s most valuable assets — the movie subscription model it popularized and the data it has collected from its subscribers, which now number over 3 million. …
Now, the fund is planning to “take a page out of Carl Icahn’s book,” said Yaffa. “We are deciding on our final valuation, and then we will reach out to the shareholders of HMNY,” he said, referring to Helios and Matheson by its ticker symbol.
What if they decide the final valuation is negative $200 million? Incredibly Helios and Matheson’s market cap as of Friday’s close was under half a million dollars, so it is approaching the point at which buying MoviePass will be cheaper than paying college tuition.
I have no huge objection to any of this, but also the straightforward model of MoviePass is that it is a wildly money-losing proposition that, if you pump enough money into it for long enough, miiiiiiiiiiiiiight turn into a cash cow due to network effects, market power etc. The trick is to find a deep-pocketed mega-cap backer, or a series of increasingly deep-pocketed and optimistic venture-capital backers, to keep floating it for a while. Or … or! … hear me out here … or just a bunch of college students could take it over? There is a certain late-capitalist poetry to the idea of a group of college kids teaming up to buy free movie tickets for everyone in America as part of their finance studies, some essential element of finance that they have perhaps misunderstood but only because their elders misunderstood it too. They could throw one last blowout party and charge admission and have some kegs and use the proceeds to save MoviePass? I feel like I have seen that movie before, though I paid for my ticket.
Meanwhile MoviePass is still doing things:
Short on cash, battered by investors and pronounced dead by critics recently, MoviePass will soon begin limiting customers to three movies a month, a major change from its current allowance of one a day. … As of June, MoviePass’s monthly cash deficit was $45 million, parent company Helios & Matheson Analytics Inc. said in regulatory filings.
Agency costs, etc.
Here is “Do Shareholders Prefer Political Connectedness or Corporate Social Responsibility?: Evidence from Letting Trump Be Trump,” by Kelly Carter, who examined corporate reactions to President Donald Trump’s praise for a white supremacist rally in Charlottesville, and found that companies that resigned from Trump’s corporate panels in protest underperformed those that didn’t:
I find evidence that shareholders prefer political connectedness to corporate social responsibility (CSR). Choosing political connectedness with President Trump over CSR causes shareholder value to increase by $345 million per firm, on average. However, choosing CSR over political connectedness with Trump causes shareholders to lose $570 million on average, and as much as $1.8 billion, per firm. These results reveal an asymmetric response to the choice between political connectedness and CSR and support the view that CSR is an agency problem.
That is just one somewhat ambiguous event, so don’t take the results too seriously, but I quote it mostly for that last line, about “the view that CSR is an agency problem.” The idea is that if a chief executive officer acts on her beliefs and the stock price goes down, then that is evidence of an agency problem: She is the shareholders’ agent, and the shareholders want a higher stock price, so if she does stuff that causes a lower stock price she is in some sense defrauding them. She is appropriating a personal benefit—here, the very modest warm glow of distancing herself from white supremacy—at the expense of the shareholders’ financial interests.
After CEOs started resigning from Trump’s councils in the wake of his Charlottesville comments, there were articles claiming that those resignations might in fact be good for shareholder value. Carter’s point is that, empirically, those claims were wrong. I wrote at the time:
I have to confess that it seems odd to me to denounce Nazism out of fealty to shareholder value. You can just denounce Nazism because you're not a Nazi! This is a financial newsletter, but I have never assumed that the operations of capital are autonomous and self-executing, or that executives are robots who are programmed to maximize shareholder value to the exclusion of all other considerations. Corporations exist in society, and are not above society's concerns. Businesses operate through human beings, who remain human even in their roles as CEOs.
That was not a strictly orthodox analysis. In the orthodox view, there are only two sorts of actions by corporate managers:
- Those reasonably calculated to increase the company’s stock price, and
- Agency costs.
It is a rather thin view of the corporations’ embedding in the world, though it has some obvious advantages. If you know what the CEO is supposed to do, you can measure and monitor her efforts to do it. If her obligations are uncertain and conflicting, if she is required to figure out what it means to be a good human and good corporate citizen in a complex world and then to do that as best she can, then her efforts can be hard to distinguish from shirking. The world is complicated, and shareholder value is complicated, but the stock price is just a number, and it is pretty simple to see if it went up or down.
Elsewhere here is Mary Childs on private prisons:
There is a difference between doing bad, and doing badly. Lawsuits and reporting allege that contractors and officers have sexually assaulted detainees, including children. Zero tolerance resulted in children being torn from their parents, and kept in chain-link cages. ...
Even if you want stronger borders, and don’t object to treating migrants harshly, a prison committing human-rights abuses is conducting the business of imprisoning poorly. The job of these companies is handling and processing humans, and they are damaging and breaking their products. Companies should be held to account for quality control.
And the Securities and Exchange Commission has “dropped an investigation into whether Exxon Mobil Corp. misled investors about its accounting practices and the risks that climate change and greenhouse-gas regulations posed to its business.” We have talked about this investigation (well, about a parallel New York state investigation) before, and I have in other contexts expressed the view that it’s kind of weird that so much of our politics is expressed through securities law. No one is investigating whether Exxon Mobil is causing climate change; they were investigating how it accounted for climate change. Surely the former is more important than the latter.
But investigating Exxon for causing climate change involves difficult political decisions and novel legal theories; investigating its accounting is easy. And so I have also said that this system in which every sort of substantive misbehavior is also securities fraud is “convenient for the generic governmental purposes of Punishing People Who Do Bad Things, even if not quite punishing them for the bad things they did.” Just: Be careful! It’s not necessarily convenient for the purposes of Punishing People Who Do Things You Think Are Bad; it’s mostly convenient for the purposes of Punishing People Who Do Things the Government Currently Thinks Are Bad. When the government changes, the list of Things That Are Bad might change too, but the tool of securities enforcement will be just as useful.
Congrats Wells Fargo!
When I worked at Goldman Sachs Group Inc., and when the MegaMillions jackpot got big enough, some of my colleagues and I would occasionally buy tickets together, and I would spend the time before the drawing mostly imagining how embarrassing the headlines would be if a group of Goldman employees won a giant lottery jackpot. We never won, but these guys did:
Workers at a Wells Fargo & Co. branch in California just hit the jackpot.
A group of employees in San Jose won the $543 million Mega Millions jackpot late last month, according to a person with knowledge of the matter, who asked not to be named because the winners haven’t identified their employer publicly.
They should put some of the money into the fake customer accounts Wells Fargo created. Meanwhile:
Hundreds of people had their homes foreclosed on after software used by Wells Fargo incorrectly denied them mortgage modifications.
The embattled bank revealed the issue in a regulatory filing this week and said it has set aside $8 million to compensate customers affected by the glitch.
I don’t know much about art, but I steal what I like.
A while back we talked about a Bloomberg article titled “The Pros and Cons of Stealing Fine Art,” from which I learned that the main con is that it’s hard to sell it without getting caught, but the main pro is that if you’re not planning to sell your stolen art then you can probably get away with it. This is not, of course, legal advice, but here’s a story about a couple in a small town in New Mexico who may or may not have stolen a Willem de Kooning painting from an art museum in 1985: They kind of look like the people who stole it, and when they died (three decades later) it was found in their bedroom. Just to look at, I suppose. That’s how you do art thieving!
Things happen.
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To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matt Levine is a Bloomberg Opinion columnist covering finance. 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 3rd Circuit.
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