Monday, March 19, 2018

Facebook's Regulatory Risk Is Real and It Is Magnificent (FB)

So far this year we have had over thirty posts on TheFacebook, as it was once known, with almost all of them being critical of the company in one way or another.
The risks highlighted can be broken down into four broad areas:
1) The media backlash to having their business models undermined by Facebook and Google.
2) The surveillance capabilities of the platform companies and the privacy/security risks they pose.
3) The deliberate addiction of users brains via neurotransmitter manipulation and psychological engineering.
4) The use of the above characteristics by political operators to achieve their own ends and the various outrages, faux and otherwise, elicited.
Our motivation is pretty straightforward: How can we make a buck or two off what appears to be going on?

Recognizing risk before the computers do is one approach. The dirty little secret of machine learning is that the computers can very quickly categorize what they are witnessing only if they have seen the situation previously. We used one of the funnier examples in the outro from December 2017's:

Artificial Intelligence in Risk Management: Looking for Risk in All the Wrong Places
Opportunity is where you find it, turn your risk manager into a profit center. ...
From naked capitalism, November 15:...
...AI cannot cope well with uncertainty because it is not possible to train an AI engine against unknown data. The machine is really good at processing information about things it has seen. It can handle counterfactuals when these arise in systems with clearly stated rules, like with Google’s AlphaGo Zero (Silver et al. 2017). It cannot reason about the future when it involves outcomes it has not seen....MORE 
"When Google was training its self-driving car on the streets of Mountain View, California, the car rounded a corner and  encountered a woman in a wheelchair, waving a broom, chasing a duck. The car hadn’t encountered this before so it stopped and waited."
This introduction is getting a bit wordy so we'll chop things into a couple more posts tomorrow but that's the premise, look for risks that AI hasn't yet been trained on in an attempt to gain some asymmetric advantage.

If, in the meantime you can convince yourself you are performing some sort of societal good, all the better. Speaking of the meantime here's some good insight until we get around to parts II and maybe III.
From Motherboard:

Cambridge Analytica's Ad Targeting Is the Reason Facebook Exists
Thousands of third party apps were designed solely to obtain and sell your data. It's no surprise that the data ended up being used again on Facebook, one of the biggest advertising platforms on Earth.

This weekend, while Facebook was quibbling about whether the information used by Cambridge Analytica to target voters in the lead up to the 2016 election was obtained in a data “breach” or somehow using fraudulent means, I decided to check my privacy settings.

Since creating a Facebook in 2006, I have associated my account with 100 separate third party apps. Besides common ones like Spotify, Venmo, and Uber, I have given access to my account to apps like “Typing Maniac,” “I bet I can guess your favorite color,” and “Crazy Cabbie,” among others. Many of these apps I remember only as a faint memory. According to these settings, however, lots of these apps still have access to the same information Cambridge Analytica used to target Facebook users with political ads that helped Donald Trump win the 2016 presidential election.

Typing Maniac—a game I vaguely remember from college—has access to my public profile, my friend list, my relationship status, my “relationship interests,” my birthday, my work history, my status updates, my education history, my events, my hometown, my current city, photos I’m tagged in and that I’ve uploaded, my religious and political views, my videos, my website, my personal description, and my “likes.”...MORE 
Related, January 8's '"Facebook Can’t Be Fixed' (FB)":
Facebook’s fundamental problem is not foreign interference, spam bots, trolls, or fame mongers. It’s the company’s core business model, and abandoning it is not an option.  
More to come.

Uber Self-Driving Car Kills Pedestrian In Arizona

Reades may recall that Uber shifted its autonomous vehicle testing to Arizona when California demanded the company get off the roads until they received a permit and began turning over the data that Uber was collecting on accidents and near-misses. More after the jump.

From the New York Times:

Self-Driving Uber Car Kills Arizona Pedestrian
A woman in Tempe, Ariz., has died after being hit by a self-driving car operated by Uber, in what appears to be the first known death of a pedestrian struck by an autonomous vehicle on a public road.
The Uber vehicle was in autonomous mode with a human safety driver at the wheel when it struck the woman, who was crossing the street outside of a crosswalk, the Tempe police said in a statement. The episode happened on Sunday around 10 p.m. The woman was not publicly identified.
Uber said it had suspended testing of its self-driving cars in Tempe, Pittsburgh, San Francisco and Toronto.

“Our hearts go out to the victim’s family. We are fully cooperating with local authorities in their investigation of this incident,” an Uber spokeswoman, Sarah Abboud, said in a statement.
The fatal crash will most likely raise questions about regulations for self-driving cars. Testing of self-driving cars is already underway for vehicles that have a human driver ready to take over if something goes wrong, but states are starting to allow companies to test cars without a person in the driver’s seat. This month, California said that, in April, it would start allowing companies to test autonomous vehicles without anyone behind the wheel.

Arizona already allows self-driving cars to operate without a driver behind the wheel. Since late last year, Waymo, the self-driving car unit from Google’s parent company Alphabet, has been using cars without a human in the driver’s seat to pick up and drop off passengers there. The state has largely taken an accommodating approach, promising that it would help keep the driverless car industry free from regulation. As a result, technology companies have flocked to Arizona to test their self-driving vehicles....MORE
A month of uber-nonsense
Dec. 13, 2016
"Uber to put self-driving cars on the road in SF 'very soon'"
Uber Rolls Out S.F. Self-Driving Cars, California Says Uber Needs A Permit For Autonomous, Uber Says No, It Doesn't, California Says...

Uber Tells California It Won't Be Applying For An Autonomous Driving Permit, California Tells Uber The State's Attorney General Will Be In Touch
Uber Throws Tesla Under the Autonomous Bus

More On "Uber Throws Tesla Under the Autonomous Bus"

As Uber Pulls Autonomous Vehicles Off San Francisco Streets, A Meta-Analysis Of Uber's Bargaining Stance In California

December 29, 2016 
Uber Picked Up Its Toys and Went To Arizona
Arizona’s Uber gain is not necessarily California’s loss 
January 9, 2017 
Contra Uber, "California Welcomes NVIDIA Corporation to the Self-Driving Big Leagues" (NVDA)

"Is Profit-Maximizing Data-Mining Undermining Democracy?" (FB; EVIL)

Tomorrow we'll take on peace in the Middle East.
But right now Charles Hugh Smith at OfTwoMinds:
If targeting political extremes generates the most profit, then that's what these corporations will pursue.
As many of you know, was falsely labeled propaganda by the propaganda operation known as ProporNot back in 2016. The Washington Post saw fit to promote ProporNot's propaganda operation because it aligned with the newspaper's view that any site that wasn't pro-status quo was propaganda; the possibility of reasoned dissent has vanished into a void of warring accusations of propaganda and "fake news" --which is of course propaganda in action.
Now we discover that profit-maximizing data-mining (i.e. Facebook and Google) can--gasp--be used for selling ideologies, narratives and candidates just like dog food and laundry detergent. The more extreme and fixed the views and the closer the groups are in size (i.e. the closer any electoral contest), the more profitable the corporate data-mining becomes.
Meanwhile, back at the ranch, the data-mining gets all the important stuff wrong. As correspondent GFB explains, was identified as "propaganda" by data-mining, which concluded that any site that posted content that wasn't pro-Hillary was automatically propaganda:
At least we now know why your site was flagged as a source of Russian disinformation:
Cambridge Analytica is hired by the Russians to data mine to find the most efficacious targets for their disinformation campaign - and in the course of doing research, they find that a number of individuals who visit your site have shown - in other social media actions - to have anti-Hillary, or anti-powers-that-be tendency. They conclude the number of visitors that have that data profile would suggest that it is likely most, if not all visitors to your site would likely have the same view - and so any visitor to your site gets flagged to be targeted, if possible, by the disinformation campaign./Now look at in reverse - someone who is investigating possible unscrupulous data mining re: the campaign, and through there own data mining notice that visitors to your site get an inordinate amount of targeted disinformation - - - and they conclude (incorrectly) that is likely the source of that targeting.
Setting aside the quasi-monopoly on vast data-mining of users held by Facebook and Google, we have to ask: what sort of "democracy" do we end up with...

The Creator of the iPod and the iPhone Seeks to Dethrone Tech’s Giants

Coming up with the iPhone was pretty cool. I'm not quite as enthusiastic about Nest and the whole Internet of Things thing.
From Surface Magazine:

Tony Fadell Wants to Disrupt Silicon Valley

It’s a crisp January morning in Paris’s 13th Arrondissement, and outside Station F, the former freight terminal that is the epicenter of France’s startup scene, twentysomethings climb out of cars hailed using iPhone apps. They approach the huge, glass-fronted concrete arches, heads bowed over screens, thumbs dancing out social media updates, pristine white earphones poking out from under beanies or from behind shoulder-length hair. The gates are activated by QR code, so they hold out their iPhones to get into work, where they’re probably building iPhone apps themselves, to connect our homes, cars, everything, to the device in our pocket.

This is the world that Tony Fadell helped build. Fadell is known in Silicon Valley as the father of the iPod, which, with its iconic wheel and those classic white earbuds, helped transform Apple’s fortunes from a struggling computer manufacturer to the most valuable public company in history. He played a central role in the creation of the iPhone, helping Steve Jobs and Jony Ive usher in the smartphone age. After leaving Apple, in 2010, Fadell founded the smart-home company Nest, which Google bought in 2014 for $3.2 billion. Few have played bigger roles in shaping today’s technological landscape. No iPod, no iPhone. No iPhone, no Instagram, Snapchat, Uber, or Pokémon Go.

But lately Fadell, like many in Silicon Valley, has been reconsidering the changes he and  his colleagues have brought about. In recent months, several former engineers and executives from Google and Facebook—including the inventor of the “like” button—have spoken out publicly about the dangers of smartphones, in particular the design of apps that are intentionally addictive. In June 2017, Fadell told an audience at London’s Design Museum, “I wake up in cold sweats every so often thinking, What did we bring to the world?” This January, after two of the largest investors in Apple called on the company to take action against smartphone addiction in children, Fadell joined in, publicly urging both his former employers to do more.

When I meet him two weeks later, the subject is still on Fadell’s mind. To be clear: He doesn’t blame Apple—“We can’t say all iPhones are bad”—or even social media companies, although he admits there are “what some people judge as bad actors out there.” Instead, he believes that today’s shocks are a symptom of society reckoning with an unprecedented technological change.

We’re sitting on a bright yellow sofa in Station F, where he has set up his own investment firm, Future Shape. At 48, he is a lean, energetic presence, wearing a teal V-neck, cords, and black zip-up boots. “My first son was born three weeks before the iPhone was released, so my kids have never known a world without them,” Fadell says. He believes Silicon Valley’s current crisis of conscience can be traced back in part to the architects of the mobile age having children and seeing the impact of their creations. “Your worldview changes dramatically when you have your first kid. You change from ‘me, me, me’ to family and community.” Fadell has three children and, although two of them have smartphones, the family imposes time limits, “screen-free Sundays,” and parental controls.

“When I think about digital well-being, I go back to packaged and mass-produced foods,” he says. “We have created a nomenclature around fats, sugars, proteins. What is obesity? What is bulimia?” Like food, Fadell argues, apps should be subject to their own health classifications. But our smartphones, he says, are just refrigerators. “They’re not going to cause you to be an addict or not. But they always stock themselves, and will give you the ability to buy anything you want.”

The first time Fadell tried to create the iPhone, it was 15 years too early. Born in Detroit, Fadell picked up engineering from his grandfather, a lifelong tinkerer who helped Fadell buy his first computer. Fadell showed a prodigious talent for computing; in college, he even sold a new microprocessor design for the Apple II to Apple itself.

After graduation, Fadell joined General Magic, a now-storied Silicon Valley company (alumni include eBay founder Pierre Omidyar and Android creator Andy Rubin) that was working on an early personal communications device. “We had email, we had downloadable games, downloadable apps, we had shopping, we had books,” Fadell recalls—in other words, the key features of today’s smartphones. General Magic built two devices, for Sony and Motorola, but neither took off, and the company folded. “It was too soon,” says Fadell....MUCH MORE
iPod and Nest Creator Tony Fadell Talks About Apple and Google (AAPL; GOOG)
Internet of Things: The Biggest Problem With Smart Homes
The Internet of Things Moves Outside: Sensors In the Garden

BigLaw: "Latham & Watkins Discusses SEC Charges Against BitFunder and the State of Digital Asset Trading"

Seriously big.
I think they are still the top-grossing law firm in the world.

From Columbia Law School's CLS Blue Sky blog, March 19:
The SEC continues to send messages to the nascent cryptocurrency market. The agency has recently brought enforcement actions and issued a public statement that illustrate the agency’s views on how the federal securities laws apply to crypto or digital asset trading platforms. In the latest enforcement action,[1] the SEC in U.S. District Court, Southern District of New York alleging that a bitcoin trading platform functioned as an unregistered exchange, facilitated unregistered offerings and trading of securities, and defrauded investors by failing to disclose a cyberattack on the platform. The SEC’s Divisions of Enforcement and Trading and Markets also issued a joint public statement on digital asset trading platforms.[2] These latest developments provide insight into the SEC’s views on key issues participants in the digital or crypto asset market face, especially those participants currently operating or seeking to operate a crypto asset trading platform or exchange.

The SEC’s Enforcement Action

On February 21, the SEC filed an action against BitFunder and its founder in federal district court alleging violations of the federal securities laws. The SEC’s key allegations are as follows:
  • BitFunder is an unincorporated entity founded by its operator, Jon E. Montroll, in October 2012 and operated out of Montroll’s home in Texas. BitFunder was an online bitcoin fund raiser and trading platform, on which users could create, offer, buy, and sell shares in various virtual currency-related enterprises (referred to as “Assets” and “Asset Shares” on the BitFunder website), using bitcoin as the form of payment.
  • BitFunder required users to register with an Australian virtual currency exchange, WeExchange, and deposit bitcoins into a single digital wallet maintained by WeExchange in order to trade on BitFunder. Users’ bitcoins were commingled in the wallet and Montroll had control over WeExchange and the wallet maintained by WeExchange.
  • Users on BitFunder’s platform could buy and sell Asset Shares in initial and follow-on offerings by listing Asset Shares on the platform. Users also could buy and sell Asset Shares in secondary market trading. In exchange for the trading services it offered, BitFunder charged a transaction-based fee whenever a user sold Asset Shares. Montroll manually calculated how much BitFunder was owed in accrued transaction fees and withdrew those fees from the WeExchange wallet from time to time.
  • Separately, in July 2013, Montroll individually offered and sold certain securities, called Ukyo Notes or Ukyo Loans, on BitFunder’s platform as one of the platform’s listed Assets and represented that he would use the proceeds from the offering for private investment purposes, including Bitcoin related activities and “offline business opportunities,” and promised to pay investors certain daily interest.
  • Shortly after the beginning of the Ukyo Notes offering in July 2013, BitFunder’s platform suffered a cyberattack over the course of five weeks, which resulted in the theft of approximately two-thirds of the bitcoins in the wallet maintained with WeExchange, which had a value of approximately US$775,000 at the time of the theft. As early as the first week of the cyberattack, and during the offering of the Ukyo Notes, Montroll knew of the cyberattack and the bitcoin theft. Yet, Montroll did not restore the wallet to its previous bitcoin balance prior to the theft or inform BitFunder users of the theft. He also did not disclose the cyberattack to Ukyo Notes investors.
  • After the cyber theft of bitcoins, Montroll continued to operate BitFunder and solicit new users and accept their bitcoin deposits, earn transaction fees, and raise funds from Ukyo Notes investors. When BitFunder users had problems withdrawing their bitcoins because of the bitcoin deficit caused by the theft, Montroll claimed that the delays arose from technical issues with BitFunder’s platforms. Montroll also withdrew bitcoins from the WeExchange Wallet and converted them to fiat currency to pay personal expenses. The bitcoin deficit ultimately caused Montroll to shut down BitFunder by November 2013.
The SEC’s charges fall into four categories:
  • Unregistered Exchange: The SEC alleges that BitFunder violated the exchange registration requirement in Section 5 of Securities Exchange Act of 1934 (Exchange Act) for acting as a securities exchange and effecting transactions in securities without being registered as a national securities exchange or exempted from such registration.
  • Securities Fraud: The SEC alleges that, BitFunder and Montroll violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (Securities Act) (with respect to Montroll only), for misrepresenting the use of money raised from the offering of the Ukyo Notes, failing to disclose the cyberattack and the resulting bitcoin theft to Ukyo Notes purchasers and continuing to operate and solicit and accept bitcoin deposits from new users, and defrauding purchasers of the Ukyo Notes and users of BitFunder.
  • Unregistered Securities Offering: The SEC alleges that Montroll violated Section 5 of the Securities Act by offering and selling unregistered securities (Ukyo Notes) without filing a registration statement with the SEC.
  • Control Person Liability: The SEC charged Montroll as a “control person” liable under Section 20(a) of the Exchange Act, alleging that he controlled BitFunder and was a “culpable participant” in BitFunder’s failure to register as a securities exchange.

Public Statement of Divisions of Enforcement and Trading and Markets on Online Trading Platforms
On March 7, 2018, the SEC Divisions of Enforcement and Trading and Markets (Staff) issued a joint public statement on digital asset trading platforms. The Staff pronounced that many of these platforms may be required to register with the SEC as a national securities exchange or be exempt from registration. The Staff alerted investors that the SEC did not review the standards for picking digital assets for trading or the trading protocols used by the trading platforms and that these standards or protocols should not be equated to, or assumed to meet, the standards of an SEC-registered national securities exchange. In addition, although many online digital asset trading platforms appear to perform exchange-like functions, investors using these platforms should not believe that the pricing and execution data offered by the online digital asset trading platforms would have the same integrity as that provided by national securities exchanges.

What the Latest Developments Mean to Crypto Market Participants...

Previously from CLS' Blue Sky blog: 
"Perpetual Dual-Class Stock: The Case Against Corporate Royalty"
The author is a commissioner on the SEC and a recovering academic.
(enough footnotes to make Matt Levine envious)  
Finance:Taking Modigliani-Miller To Court 60 Years On
Columbia Law School: "Risks of Classifying Employees as Independent Contractors"
Governance: The Growing Concentration of ETF (and mutual fund) Voting Power
Something that doesn't come up in casual conversation but may be important. ...

"The Anatomy of a LIBOR Panic: New Wides For LIBOR/OIS"

From Macro Man, March 19:
Welcome back MM readers--apologies for the unscheduled hiatus last week. I spent a few days enjoying the technological miracles of the US healthcare system. Keen readers may notice I almost never make a call on stocks, stock sectors, or egads….single name stocks--but it is tough for a trader to walk away from a couple of days in and around a hospital without thinking that there is a lot of capital and profit sloshing around in that place.

Since I was disconnected from markets much of last week I’m going to circle back to the widening in LIBOR/OIS spreads that has continued unabated since I wrote about it a few weeks ago. I'm sure this has been to the erm...consternation of more than a few traders like our good friend here:...

...Actual footage of a macro trader reacting to the latest LIBOR fixings
JPM published this chart showing that the current 3mo libor/ois spread is at its widest post-crisis level.
That’s amazing, given nobody has really noticed outside of this small sector of the fixed income market. Even the 2016 money market reform move made some headlines in the financial media, even if it didn’t penetrate the white hot din of the US election media coverage....

Sunday, March 18, 2018

"Companies Are Betting on Lab-Grown Meat, but None Know How to Get You to Eat It"

The dream of any right-thinking change agent is to mandate that people use your product.
If that approach is not feasible the fallback is to tax the competition

Here at Totalitarian Marketing Group we supply strategies for the power-mad while making life easier for the top 0.0000001%. TMG, when nudge just isn't fast enough.

From Futurism:
IndieBio wants to feed you dog food. More specifically: they want to feed you dog food made of non-animal protein grown in a lab.

If you’re already grossed out, we don’t blame you.

Nonetheless, IndieBio is part of a growing wave of companies betting that lab-grown protein is the future of food. Meat consumption is both environmentally hazardous and ethically a bit, uh, hard to swallow, so there are more people than ever working to find a solution. So many people, in fact, that a future rife with lab-grown meat feels inevitable.

But there’s a significant factor that these companies seem to not have considered: the “ick factor.” That is, how will companies get people accustomed to this understandably off-putting concept?
“People will get used to clean meat in a hurry if it tastes right, if it smells right,” asserts culinary biochemist Ali Bouzari in a video interview with Wired. “If it doesn’t, it’s gonna be a monumental thing to overcome.”

The Uncanny Valley of Food
Think about the last time you bit into something that was way slimier than you expected. Even if it tasted amazing, your brain probably responded with a wave of nausea that made it impossible for you to keep eating.

That reaction is what Bouzari calls the “uncanny valley” of food (yes, our aversion to almost-lifelike robots isn’t the only uncanny valley in our strange psyches).

“The uncanny valley of meat, and with food in general, is when you get to something that’s a highly sophisticated imitation but not quite there, it forces your brain into a very small window of context,” Bouzari explained to Wired. “Where you say, I’m convinced I’m gonna be eating a chicken nugget, this better behave exactly like a chicken nugget in every way, shape, and form, or I’m going to freak out.”
That’s because evolution has hard-wired our brains to make food seem incredibly repulsive if it might sicken or kill us. As a result, if a food doesn’t fit our expectations of what it’s supposed to feel or taste like, our brains involuntarily reject it....MUCH MORE
Here's an excellent example of the Uncanny Valley effect in virtual reality that we've been using to illustrate the problem:

Seinfeld, Virtual Reality and Mild Revulsion
The Uncanny Valley, Interior-Design Edition

Greg Miller
The "uncanny valley" usually applies to human aesthetics. It describes that vague sense of revulsion you get when you see a fabricated person—a robot, usually—who looks aaaaalmost human … but not quite....
You know what the image is supposed to represent and you know it is not that place.
Soooo close

And previously on the Protein Channel:

The Largest U.S. Protein Processor (chicken, beef, pork) Is Investing in Lab Grown Meat
Dealflow: "New Investors Flock To Food"
"Silicon Valley and the Search for Meatless Meat"
"Where’s The Beef? China Signs $300 Million Deal with Israel to Import ‘Lab Meat’"
Bill Gates Invests In Another Lab-Grown Meat Company
"Bill Gates headlines an all-star list of investors pumping $75 million into meatless burgers"
Mr. Gates also partnered with Li Ka-Shing and Khosla on Hampton Creek which is attempting to pivot from Just Mayo into laboratory-grown 'meat'.*
"Mayo-scandal firm Hampton Creek from San Francisco going whole hog for Frankenmeat: report"
Just Mayo Guy, Hampton Creek's Josh Tetrick, Pivots to Industrial Scale Ingredient Supply Biz
Hampton Creek: Remember All Our Vegetarian Talk? Never Mind    
Questions America Wants Answered: Is Eating Lab Grown Human Flesh Cannibalism?
"People buying meat from strangers on social media is a serious problem"
Seven Startups Creating Lab-Grown Meat
"Can Planet Earth Feed 10 Billion People?"
We might have to go lower down on the protein chain though.
I hear crickets are yummy but haven't yet verified this claim.. 

DARPA and the Pentagon Want Mind-Reading Artificial Intelligence

Don't we all?

From Defense One, March 16: 
The Pentagon Wants AI To Reveal Adversaries’ True Intentions
The U.S. military is looking to enlist game theory and artificial intelligence to fight tomorrow’s unconventional warfare tactics.  
From eastern Europe to southern Iraq, the U.S. military faces a  difficult problem: Adversaries pretending to be something they’re not — think Russia’s “little green men” in Ukraine.  But a new program from the Defense Advanced Research Projects Agency seeks to apply artificial intelligence to detect and understand how adversaries are using sneaky tactics to create chaos, undermine governments, spread foreign influence and sow discord.

This activity, hostile action that falls short of — but often precedes — violence, is sometimes referred to as gray zone warfare, the ‘zone’ being a sort of liminal state in between peace and war. The actors that work in it are difficult to identify and their aims hard to predict, by design.

“We’re looking at the problem from two perspectives: Trying to determine what the adversary is trying to do, his intent; and once we understand that or have a better understanding of it, then identify how he’s going to carry out his plans — what the timing will be, and what actors will be used,” said DARPA program manager Fotis Barlos.

Dubbed COMPASS, the new program will “leverage advanced artificial intelligence technologies, game theory, and modeling and estimation to both identify stimuli that yield the most information about an adversary’s intentions, and provide decision makers high-fidelity intelligence on how to respond–-with positive and negative tradeoffs for each course of action,” according to a DARPA notice posted Wednesday.

Teaching software to understand and interpret human intention — a task sometimes called “plan recognition” — has been a subject of scholarship since at least a 1978 paper by Rutgers University researchers who sought to understand whether computer programs might be able to anticipate human intentions within rule-based environments like chess.

Since then, the science of plan recognition has advanced as quickly as the spread of computers and the internet, because all three are intimately linked....MORE

"Tech bros told they’re no longer allowed to colonize French Polynesia"

A topic of abiding interest. Here's a post from November 2017:

The Financial Times' Izabella Kaminska Examines Seasteading and Is Bemused

More accurately, she comes down on the concept somewhere between bemused and dubious.
We've looked at the idea of islands or ships full of geeks, nerds and billionaire geek/nerds a few times over the years:

Oops that's Brighton Pier by Landscape Photographer of the Year, 2017 finalist Matt Cooper via Geographical.
How embarrassing, the roller coaster should have been a tip-off. 
Here's Izabella. I'll go look for the intended picture.

From FT Alphaville:

On the (non) viability of start-up islands
“Governments just don’t get better,” Mr. Quirk said. “They’re stuck in previous centuries. That’s because land incentivizes a violent monopoly to control it.”
So noted Joe Quirk, president of the Seasteading Institute to the New York Times this week...

Although she doesn't go there I could envision a whole "Lord of the Flies" societal breakdown or at minimum something along the lines of 2015's "The Billionaire Battle in the Bahamas".
Or maybe "Sardinians Want Rome to Sell Them to the Swiss".  

And here's the latest via The Outline, March 15:
Many years ago, tech mogul and future-website-killer Peter Thiel had an idea to develop an independent, libertarian floating city where he and other tech billionaires wouldn’t be beholden to things like laws. Thiel co-founded the Seasteading Institute in 2008 and invested $1.7 million in it before resigning from its board in 2011. But the dream lived on: The Seasteading Institute struck up an informal deal with the government of French Polynesia in 2016. Building a libertarian boat paradise in international waters was too expensive, they reasoned, so finding a host country was their best option.

Now the dream is dead. Business Insider reported on Wednesday that French Polynesia was cutting ties with the seasteaders, with the country’s ruling party announcing that the agreement was non-binding and became void in January 2018....MORE 
Well, there's always 2012's "Why Buy a Yacht When the Same Money Will Get You a Floating Island?":
Okay, maybe not exactly the same money. This 57,000 square foot beauty runs "hundreds of millions of euros to build.”
From GizMag:
Owning one's own yacht must surely be one of man's greatest indulgences. The ability to take your own tailored environment anywhere you want....MORE

Yacht Island Design creates tailored environment like no other. Following on from its "Streets of Monaco" design is the "Tropical Island Paradise", a 90 metre island with a top speed of 15 knots.
The main deck is a beach "cove" of cabanas surrounding a massive ocean view swimming pool, with a waterfall falling nearby from the volcano.
A bar area, outdoor dining, there's a private spa and four VIP suites for friends, all with their own private balcony.
There's also a helicopter landing pad so those friends can drop in....MORE 

Musk's SpaceX Is Making Big Money Moves

As Elon's only profitable entity it is important to groom and care for the rocket company. You never know when you need a friendly buyer for your SolarCity Tesla short-term debt.
From TechCrunch:
Planning a Mars mission, a global telecommunications network for inexpensive internet service and creating an interplanetary hedge against World War Three isn’t cheap, so it’s no wonder that SpaceX is closing on $500 million in new cash through a financing round led by Fidelity, according to multiple sources with knowledge of the round.

Responding to clamoring demand from investors and their own desires to cash out (at least a little bit), existing shareholders in the company are creating several special purpose vehicles to sell shares on the secondary market — with our sources saying those secondary offerings could total an additional $500 million.

Shares for the company are selling for somewhere between $160 and $170, according to our sources.

One big buyer of SpaceX shares is reportedly SpaceX chief executive and founder Elon Musk, who multiple sources have said is investing $100 million to buy up shares.

News of the initial fundraising effort was first reported by CNBC, which pegged the valuation of Musk’s space exploration venture at roughly $21.5 billion.

That’s a huge jump from 15 years ago, when the company’s shares were issued at around 5 cents and Elon Musk said it was struggling to get cash in the door, basically living week-to-week....MORE
HT: Inverse

Previously on Family Affair:
Tesla-Solar City: Cousins Shouldn't Get Married (to each other) TSLA; SCTY--UPDATED

Elon Musk's SpaceX Has Been Buying Up Elon Musk's SolarCity's Bonds (SCTY)
One of the things they teach you in Junior Forensic Analyst school: watch for related party transactions.

One of the things they don't teach you, extrapolating this discovery to the logical question: "How important is cost-of-funds to SolarCity's very survival?" 

Saturday, March 17, 2018

"How Vulture Capitalists Ate Toys 'R' Us"

From The Week:
Just a few years ago, Toys 'R' Us was an iconic American retailer. Six months ago, it filed for bankruptcy. Two days ago, it announced that all 800 of its American stores, and all 100 of its British ones, are closing or being sold. As many as 33,000 workers could lose their jobs.
What happened to America's biggest toy store?

Simply put, vulture capitalists ate it.

Our story begins in 2004. After big success in the 1980s, Toys 'R' Us' performance turned lackluster in the 1990s. Sales were flat and profits shrank. Toys 'R' Us was a public company at the time, and the board of directors decided to put it up for sale. The buyers were a real estate investment firm called Vornado, and two private equity firms named KKR and Bain Capital. (You may remember the latter from 2012 campaign ads: It was co-founded by former Republican presidential candidate Mitt Romney, though he'd moved on well before this.)

The trio put up $6.6 billion to pay off Toys 'R' Us' shareholders. But it was a leveraged buyout: Only 20 percent came out out of the buyers' pockets. The other 80 percent was borrowed. Once Toys 'R' Us was acquired, it became responsible for paying off that massive debt burden, while also paying Bain Capital and the other two firms exorbitant advisory and management fees.

In theory, everyone wins in a leveraged buyout. It's supposed to take an ailing company private and retool it into a leaner and more effective business. Then it's sold back to public shareholders for a profit. The buyers make money; the shareholders get a healthier business; the workers stay employed.
What actually happened was Toys 'R' Us continued to stagnate. The company never really figured out how to respond to the changing market, or the rise of online retail. And it missed out on some opportunities, like licensing the Star Wars and Lego movie brands. Meanwhile, rising inequality and wage stagnation ate away at the broadly distributed middle-class consumer base that Toys 'R' Us and other retailers traditionally relied upon.

Whatever magic Bain, KKR, and Vornado were supposed to work never materialized. From the purchase in 2004 through 2016, the company's sales never rose much above $11 billion. They actually fell from $13.5 billion in 2013 back to $11.5 billion in 2017.

On its own, that shouldn't have been catastrophic. The problem was the massive financial albatross the leveraged buyout left around Toys 'R' Us' neck. Just before the buyout, the company had $2.2 billion in cash and cash-equivalents. By 2017, its stockpile had shriveled to $301 million, even as its debt burden ballooned from $2.3 billion to $5.2 billion. Meanwhile, Toys 'R' Us was paying $425 million to $517 million in interest every year....

For another, larger ($20 billion total debt) example see Thursday's "Largest Radio Station Owner, iHeart Media (finally) Files For Bankruptcy Protection (iHRT)".

And then there's 2011's "The Porn Shop Operators Strike Again: Harry & David files for bankruptcy";
``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting. 
``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''
-Warren Buffett 
On why a business may prefer selling to Berkshire Hathaway rather than a private equity firm.

I know Warren is talking down the bidding pressure that PE firms might put on the price he has to pay for privately held businesses but looking at his comments on PE over the years it's more than that:
He actually loathes private equity and its practitioners....

"Investing In Vice/Sin Is Practically Always A Safe Bet"

That's Forbes' headline, not mine. I'd have gone with something more risky/rewardy appears they caught the error and changed their headline. It had been the above: 
but now we see:
As Ever, Vice Businesses Present Opportunities For Investors
From Forbes:
There’s an old axiom that investing in companies that deal in vice or sin is recession proof. Dan Ahrens agrees, sort of.
Ahrens is the portfolio manager of Vice Exchange-Traded Funds (ETF) at the just-over-one-year-old Advisor Shares. “Maybe not recession proof … at least recession-resistant,” he says, which is why he is hot on alcohol, tobacco and cannabis.

According to Ahrens, alcohol and tobacco companies have historically performed well in all types of markets because “people will continue to drink and smoke no matter what’s going on in the economy or the stock market.”

What’s going on right now is that wine has become a global industry with a good image, with potential health benefits. Although tobacco is a global industry, its known health risks have resulted in smoking bans.

To individual investors, wine looks favorable, and tobacco looks taboo. But Ahrens says that tobacco remains a favorite among institutional investors: “Tobacco has outperformed the S&P 500 by a wide margin over the past 10 years — even during the tech-heavy bull market. According to many metrics, tobacco has the widest profit margins of any industry.”

Despite wine’s ascendance, Ahrens says that tobacco remains “the most profitable consumer product.”

What about the upstart sin, cannabis? Here, matters aren’t as clear and simple as they are with alcohol and tobacco.

No matter what the states do, and no matter how much investment promise both medical and recreational marijuana present, the existing federal ban on cannabis production and distribution puts a damper on individual investing. For one thing, fund managers cannot deal in an industry that cannot hold a proper and legal bank account.

Why, then, are new EFTs seeking to buy into cannabis?

Advisor Shares' cannabis exposure is limited, but Ahrens says there are investment opportunities, mainly in what he calls “indirect companies like Scott’s Miracle Gro, and in biotech and pharmaceutical companies that are doing federally legal work with cannabis.” He’s talking about the U.S....MUCH MORE
The outperformance of vice is an oddly persistent anomaly which we have been touting since  way back in April 2007's post, "Moral Judgment On 'Sin Stocks' Means Higher Returns For Vice-Friendly Investors" where we explained:
...Prof. Hong lists his research interests as: "Asset pricing with less-than-fully-rational investors; differences of opinion, short-sales constraints and asset prices; social interaction and financial markets; career concerns, biased forecasts and security analysts; organization, performance and mutual funds; asset pricing with asymmetric information and other market imperfections."

Hey! Mine too!...

Since then we have revisited the subject thirty or so times with one of the more interesting being:

Lessons From the 2015 Credit Suisse Global Investment Returns Yearbook: Vice Pays 
An area of profound interest to serious investors.
If you don't read the articles you won't know what I'm talking about when I go on a rant.
More importantly you won't know why the head of the Norwegian Pension Fund's strategy council (pictured below, right) recommended the fund not divest of hydrocarbon equities....
Here's one from last October:

Spending on VICE and Retail Sales
We'll be back with more later this month, there are a lot of things to unpack from the data, including a possible demographic revolution in spending on the traditional VICE products as younger people display marked differences in vice preferences vs. their elders who are now dying off, in part from their bad habits....
From November 2013, getting a handle on Christmas spending:

The Gambling, Liquor and Prostitution Index is Forecasting a Subdued Holiday Season
Another one, this time July 2016:

Money Market Funds at the Zero Bound (plus some vice on the side)
I'm treading on FT Alphaville's Izabella Kaminska's turf (see below).

Long time readers may remember one of this article's co-authors, Marcin Kacperczyk, as the co-author of one of our favorite papers "The Price of Sin: The Effects of Social Norms on Markets" which we turned into a virtual cottage industry by periodically checking in on a portfolio of vice-related equities (it outperformed over most time periods)

From VoxEU:....
... Just amazing that an anomaly should be so persistent.
I can't wait til they put the marijuana mavens in there.
And sexbots.
Get the whole country blissed out and the fund goes to infinity.Who needs Soma?
Here are the funds' holdings.

"the warm, the richly coloured, the infinitely friendly world of soma-holiday. 
How kind, how good-looking, how delightfully amusing every one was! "
-Aldous Huxley, Brave New World
And many more. Use the search blog box, keywords Vice or VICEX (symbol of the Vice mutual fund)

Murder on Wall Street: "James Bond and the Killer Bag Lady"

Okay, not exactly "on Wall Street" but rather "around the corner on Broadway, just north of the Charging Bull, across the street from..." 

A bit old (Dec. 2012) but interesting.

From Salon: 

New clues and a powerful Wall St. skeptic challenge the official story of CIA financier Nick Deak's brutal murder

On the morning of Nov. 19, 1985, a wild-eyed and disheveled homeless woman entered the reception room at the legendary Wall Street firm of Deak-Perera. Carrying a backpack with an aluminum baseball bat sticking out of the top, her face partially hidden by shocks of greasy, gray-streaked hair falling out from under a wool cap, she demanded to speak with the firm’s 80-year-old founder and president, Nicholas Deak.

The 44-year-old drifter’s name was Lois Lang. She had arrived at Port Authority that morning, the final stop on a month-long cross-country Greyhound journey that began in Seattle. Deak-Perera’s receptionist, Frances Lauder, told the woman that Deak was out. Lang became agitated and accused Lauder of lying. Trying to defuse the situation, the receptionist led the unkempt woman down the hallway and showed her Deak’s empty office. “I’ll be in touch,” Lang said, and left for a coffee shop around the corner. From her seat by a window, she kept close watch on 29 Broadway, an art deco skyscraper diagonal from the Bowling Green Bull.

Deak-Perera had been headquartered on the building’s 20th and 21st floors since the late 1960s. Nick Deak, known as “the James Bond of money,” founded the company in 1947 with the financial backing of the CIA. For more than three decades the company had functioned as an unofficial arm of the intelligence agency and was a key asset in the execution of U.S. Cold War foreign policy. From humble beginnings as a spook front and flower import business, the firm grew to become the largest currency and precious metals firm in the Western Hemisphere, if not the world. But on this day in November, the offices were half-empty and employees few. Deak-Perera had been decimated the year before by a federal investigation into its ties to organized crime syndicates from Buenos Aires to Manila. Deak’s former CIA associates did nothing to interfere with the public takedown. Deak-Perera declared bankruptcy in December 1984, setting off panicked and sometimes violent runs on its offices in Latin America and Asia.

Lois Lang had been watching 29 Broadway for two hours when a limousine dropped off Deak and his son Leslie at the building’s revolving-door rear entrance. They took the elevator to the 21st floor, where Lauder informed Deak about the odd visitor. Deak merely shrugged and was settling into his office when he heard a commotion in the reception room. Lang had returned. Frances Lauder let out a fearful “Oh—” shortened by two bangs from a .38 revolver. The first bullet missed. The second struck the secretary between the eyes and exited out the back of her skull.

Deak, fit and trim at age 80, bounded out of his office. “What was that?” he shouted. Lang saw him and turned the corner with purpose, aiming the pistol with both arms. When she had Deak in her sights, she froze, transfixed. “It was as if she’d finally found what she was looking for,” a witness later testified. Deak seized the pause to lunge and grab Lang’s throat with both hands, pressing his body into hers. She fired once next to Deak’s ear and missed wide, before pushing him away just enough to bring the gun into his body and land a shot above his heart. The bullet ricocheted off his collarbone and shredded his organs....MORE
HT: Longform

Crime and Punishment: A Stroll In the Vicinity of Wall Street

From Institutional Investor:

Here’s your guide to a serpentine stroll in the vicinity of Wall Street.
To our knowledge, there is no published Baedeker (save for, perhaps, a subtext of Den of Thieves) devoted to introducing residents, visitors, and day laborers to the rich history of Wall Street malfeasance — financial or otherwise. To remedy this, we offer a serpentine stroll from the corner of Broad and Pearl streets up to Wall Street, around a few corners, and ending across from 1 Liberty Plaza. While we admit our crime crawl is somewhat arbitrary and we are totally guilty of omitting numerous boldface firms and scoundrels beyond the immediate vicinity, we present an entertaining way to spend a lunch hour this spring.
54 Pearl Street - Fraunces Tavern
Were there a Yelp back in 1774, founding father John Adams would have given Fraunces Tavern five stars. “The most splendid dinner I ever saw,” said Adams, a member of the First Continental Congress who visited the tavern, according to its website. Back in the day, lodging and postal services were also available. In 1798 the Gardie family, late of France, were in residence. At some point in the middle of the night, Monsieur stabbed Madam to death and then himself. Imagine that — a crime of passion, not profit, in the neighborhood of Wall Street. 

85 Broad Street - Goldman Sachs

The New Yorker’s Adam Gopnik described it as “one of those bland, squint-windowed, stone-fronted 30-story monstrosities.” Goldman Sachs Group lived here from 1983 to 2009. Its golden reputation was besmirched in February 1987 when Robert Freeman, head of arbitrage, was led off the trading floor, the first of a hat trick of arrests orchestrated by the office of U.S. Attorney for the Southern District of New York Rudolph Giuliani. The threesome were part of a tangled web that began to unweave with the 1985 arrest of Dennis Levine, who implicated Ivan Boesky, who dimed out Martin Siegel, who fingered Freeman et al. For Goldman, the bloom was off the rose. 

60 Broad Street - Drexel Burnham Lambert

While golden-boy employee Michael Milken was on the West Coast pioneering the junk-bond market, there was no paucity of hanky-panky at Drexel Burnham Lambert’s home base. Frederick Joseph led the charge to raise Drexel into the pantheon of top-tier investment banks, succeeding for a while. The firm’s demise began in 1986, thanks to the aforementioned Boesky. In 1989, Drexel Burnham Lambert owned up to six felony counts. Milken was indicted on 98 counts of racketeering and securities fraud. In early 1990 the firm filed for bankruptcy. Still standing tall is its former headquarters building, which today boasts a LensCrafters Optique, an Au Bon Pain, and a Pret a Manger on the ground floor. ...MUCH MORE

HT: Barry Ritholtz

Friday, March 16, 2018

"Robinhood, the stock trading app loved by millennial investors and cryptocurrency traders, could soon be a $5.6 billion company"

From Business Insider:
  • Stock-trading app Robinhood could be valued at $5.6 billion when it closes an upcoming fundraising round, according to a Thursday report in The Wall Street Journal.
  • According to The Journal's sources, the funding round is being led by Russian billionaire Yuri Miller's investment firm, DST Global.
  • DST Global led Robinhood's previous funding round in 2017.
Popular zero-fee trading app Robinhood could be valued in excess of $5 billion dollars — a huge increase over its previous $1.3 billion valuation in 2017 — when it closes a fundraising round that's currently in the works, according to The Wall Street Journal.

The five-year-old company is finalizing a new funding round led by DST Global, the firm led by influential Russian billionaire Yuri Miller, The Journal reports, citing anonymous sources. The firm led the company's previous funding round in 2017, which was the first time Robinhood was valued at over $1 billion.

Robinhood gained notoriety early on its for its straightforward design and zero-fee trading, which recently expanded to include cryptocurrencies like bitcoin, ethereum, and litecoin....MORE
We haven't been linking to the notorious BI all that much lately

“U.S. appeals court voids Obama-era ‘fiduciary rule'”

From Reuters:
A federal appeals court on Thursday voided the U.S. Department of Labor’s “fiduciary rule,” an Obama administration measure adopted in 2016 meant to curb conflicts of interest among providers of financial advice to Americans planning for retirement.

The 2-1 decision by the 5th U.S. Circuit Court of Appeals is the second major victory for financial services groups under President Donald Trump’s administration. Last year, Congress killed a Consumer Financial Protection Bureau rule that had restricted financial institutions from forcing clients to sign mandatory arbitration agreements.  ...MUCH MORE
HT: How Appealing

“A Brief History of Attempted Russian Assassinations by Poison”

Is anyone else struck by the fact the spies and/or intelligence assets being killed and injured in England are suffering at the hands of some demented version of Wile E Coyote testing various products from the loony labs at the Acme Corporation?

Via Foreign Policy:
A Brief History of Attempted Russian Assassinations by Poison
  • Skripal by nerve gas
  • Litvinenko by polonium
  • Kara-Murza poisoned not once, but TWICE, by an unknown poison! (now known as Rasputin Jr.)
  • Markov poisoned by ricin and the Bulgarians with “speculated KGB assistance”
  • Khattab by sarin or a sarin-derivative
  • Yushchenko by dioxin
  • Perepilichny by “a rare, toxic flower, gelsemium”
  • Moskalenko by mercury
  • Politkovskaya who was shot, but who once felt “ill after drinking some tea that she believed contained poison


These are some of the most convoluted schemes you could think of. If it wasn't for the fact people are actually dying it would be a cartoon parody of the way things are done in the real world.

Next up, auto-erotic asphyxiation Acme style:

Oh hell, it's been done:
MI6 dirty secrets.. why do sex games appear to feature in so many spy deaths?
Disposing of an enemy and making it look like a perverted fantasy gone wrong is in the training manuals of every spy agency from MI6 to Mossad
Daily Mirror. May 5, 2012

Thursday, March 15, 2018

Buy your own cruise ship for $55M

From Curbed:

A 1985 cruise ship docked in Marseille, France, is currently for sale.
All photos courtesy of QPS Marine Ships

If gallivanting around the world on a boat appeals to you, why not consider a really, really big boat? Bypass all those measly $10 million yachts and head straight to this 728-foot cruise ship, currently asking $55 million on QPS Marine Ships

Docked in Marseille, France, the Holiday cruise ship was built in 1985 by Aalborg Værft in Ålborg, Denmark. It then entered service for Carnival Cruise Lines in the Western Caribbean until 2009. The boat can carry 1,452 of your closest friends—i.e. passengers—and a crew of 660 people over a total of nine decks. 

The aesthetic is exactly what you might expect from a cruise ship originally built in the 1980s: lots of color, patterned carpet, shiny mirrors, and faux-wood paneling. The ship has seen a few renovations over the years, and you can have plenty of fun hosting 725 people in the Americana Lounge theater or pumpin’ the jams in your own personal 400-person dance club. The ship also boasts multiple lounges, a piano bar, library, several restaurants, a spa, pool, and two dining rooms that can seat hundreds of guests at a time. 

Fifty-five million dollars also earns you a piece of cruising history. In 2005 the ship was taken out of service and used as temporary housing for about 8,000 victims of Hurricane Katrina. After six months in service to FEMA, the ship left Mississippi for renovations before resuming its normal route. Then, in 2014, the cruise ship was used as a four-star floating hotel in Port Sochi Imeretinskiy during the Winter Olympics in Sochi, Russia. 

Interested? Check out all the photos, below.


Bank for International Settlements: Digital Money

Speaking of FT Alphavlle (hat tip immediately below), here's Dan McCrum with a complex Venn diagram; all the Union, Intersection and Complement one's heart could desire:
The money flower 
The Bank for International Settlements has published a new report looking at the potential use of digital currencies by central banks.

See the full paper here. There is plenty to read, but most eye-catching is the money flower:
Graph 1 presents a taxonomy of money in the form of a Venn-diagram referred to as the money flower (Bech and Garratt (2017)). The version here focuses on the combinations of four key properties: issuer (central bank or other); form (digital or physical); accessibility (widely or restricted); and technology (token- or account-based).4 Money is typically based on one of two basic technologies: tokens of stored value or accounts (Green (2008) and Mersch (2017a)). Cash and many digital currencies are token-based, whereas balances in reserve accounts and most forms of commercial bank money are account-based.

It looks at possible uses for digital central bank money issued to everyone, rather than just banks. This could make sense, the authors write, but could be superseded if a fast and efficient private network springs up first....MORE
Earlier this week:
"Brace yourselves for more market turmoil warns Bank for International Settlements"

Matt Levine: The Blood Unicorn Theranos Was Just a Fairy Tale (9 footnotes!)

Bloomberg View, March 14:

Founder Elizabeth Holmes spun a beautiful fantasy for investors, not so much for patients. 
It has been pretty obvious for a few years now that Theranos Inc. was a huge fraud. Theranos is a blood-testing startup that developed devices, which it called "TSPUs" and "miniLabs," that were supposed to be able to do a wide range of laboratory tests on a finger-prick blood sample. It seems like Theranos founder Elizabeth Holmes really wanted to build devices that would actually do these things, and thought she could, and tried to. But it didn't work, and Theranos ran out of time: It talked Walgreens into offering Theranos tests at its stores, 1 but "it became clear to Holmes that the miniLab would not be ready" in time for the Walgreens rollout. 
So she went with Plan B: "Theranos never used its miniLab for patient testing in its clinical laboratory," but did a dozen tests on the earlier-generation Theranos TSPU, 50 to 60 more tests on blood-test-analysis devices that it bought from other companies and modified to take finger-prick samples, and "the remaining 100-plus tests it offered" on regular unmodified devices bought from other companies or sent out to third-party laboratories. Meanwhile Theranos and Holmes were going around giving interviews about how revolutionary their technology was, without ever mentioning that it didn't work and they didn't use it. This got them a lot of favorable press and a $9 billion valuation, which went on for a while until the Wall Street Journal's John Carreyrou reported in 2015 that the product didn't work and that Theranos was lying about using it, after which Theranos fairly quickly collapsed. 
But the fact that Theranos was a gigantic fraud doesn't quite mean that it committed fraud. It isn't exactly fraud to go around lying to journalists. 2 People do it all the time! If you decide that you want to be a celebrity, and that the easiest path to fame is by convincing people that you've found a magical new blood test, you can lie about that to your heart's content, and if you fool people then that's their problem, not yours. Undeserved celebrity is a central fact of American life; if it was illegal to lie your way to fame then our politics, for one thing, would be very different. 
It becomes fraud in the legal sense if you use those lies to get money. 3  Theranos, in parallel with being a massive fraud, was also raising a lot of money. I used to refer to it pretty regularly as the Blood Unicorn, Elasmotherium haimatos, because it was a Silicon Valley unicorn with a peak valuation of $9 billion that managed to raise $700 million from investors. If you are going around lying publicly about your technology while also raising hundreds of millions of dollars from investors, that certainly suggests that you were defrauding those investors. But it's not a certainty. Theranos wasn't a public company; it raised all that money in negotiated private fundraising rounds where investors received disclosure documents and had the opportunity to conduct due diligence. Perhaps while it was going around talking up its fake product to the press, it was simultaneously giving investors thorough disclosure documents that made clear exactly where its technology stood and exactly what were the risks to its business. Perhaps the investors knew that the technology wasn't ready yet, but invested in the company anyway because they believed that it would be ready one day, and they were kept sufficiently informed of the actual progress for that to be a reasonable belief. This would be a bit of a strange way to roll -- telling self-flattering lies to the press while giving your investors the unvarnished truth 4 -- but it is not impossible, and it would give Theranos a defense against fraud charges. 
But no, no, that's not what happened at all. Instead the Securities and Exchange Commission today brought fraud charges against Holmes, Theranos and its former president, Sunny Balwani, and its complaint alleges pretty strongly that the investors were just as bamboozled as everybody else. In fact, Theranos made direct use of its positive press to raise money: It "sent investors a binder of background materials," which included "articles and profiles about Theranos, including the 2013 and 2014 articles from The Wall Street Journal, Wired, and Fortune that were written after Holmes provided them with interviews" and that included her misleading claims about the state of Theranos's technology....MORE, so much more.
HT: FT Alphaville's Further Reading post