Tag: Fraud

Your Daily Schadenfreude

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It turns out that the bible museum founded by the Hobby Lobby family and largely populated with looted Iraqi artifact, was taken to the cleaners by someone who sold it phony fragment of the Dead Sea Scrolls.

I am amused.

Have you ever been to the Museum of the Bible in Washington D.C.? The museum is funded by the Green family, the very Christian founders of Hobby Lobby, who wished to dedicate an entire building to the Holy Bible. (Though I’m positive I’ve seen a bunch of pointy ones already serving that purpose). Over the past decade, the family has spent $400 million, money they’ve easily saved up by denying their female employees healthcare, on housing the greatest private collection of holy texts this side of Vatican City.

But like any money spent involving Hobby Lobby, that has mostly been netting them low-quality knockoffs. One of the Museum of the Bible’s most coveted collections has been its fragments of the Dead Sea Scrolls, that draft of the Hebrew Bible so ancient it crumbled into thousands of pieces and is now scattered all over the world like an inappropriate Easter egg hunt. But from 2009 to 2014, the Greens managed to obtain sixteen bits of Dead Sea Scrolls, fragments that experts soon after deigned to be fake as hell. In response, the Greens employed the Art Fraud Insight group to put the nasty rumors to bed and confirm that, yup, those are less likely to be a hallowed scripture of the teachings of God and more likely just a bit of old shoe.

………

Confronted with the idea they’ve spent millions on some ancient Huarache’s with doodling on them, the CEO of the museum decried: “We’re victims of misrepresentation, we’re victims of fraud.” But nobody should ever feel bad for the Greens or their vanity museum. The family has had a long history of deliberately not looking too closely at where their artifacts originate, something that cost the Greens $3 million in fines and most of their collection when the government uncovered that they had been using shell companies to smuggle looted Iraqi artifacts into the U.S., knowing full well they might be indirectly funding ISIS in their holy quest to build a shrine to Christianity’s fiction section.

In a just world, they should probably have gone to jail for their looting, but being sold sandals as holy texts is nice.

Why to Aggressively Prosecute Fraud

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Even if you don’t win, aggressive prosecution deters the creation of a criminogenic ecosystem.

Case in point, Facebook, which has knowingly been defrauding its advertisers for years:

New court documents from the lawsuit, which was filed in Northern California in 2018 by a small-business owner, claim that Facebook personnel knew that its so-called potential reach metric, used to inform advertisers of their potential audience size, was “inflated and misleading”.

The documents go on to name chief operating officer Sheryl Sandberg and David Wehner, Facebook’s financial officer, in the context of internal communications in which they were involved in 2017. Their remarks and actions have largely been redacted from the documents, however, on the grounds that they are commercially sensitive for Facebook.

The lawsuit claims that Facebook represents the potential reach metric as a measure of how many people a given marketer could reach with an advertisement. However, it actually indicates the total number of accounts that the marketer could reach — a figure that could include fake and duplicated accounts, according to the allegations.

In some cases, the number cited for potential audience size in certain US states and demographics was actually larger than the population size as recorded in census figures, it claimed.

………

The new court documents allege that some employees “expressed concerns” about the alleged “inflation” of potential reach but no action has been taken.

One filing alleged that Ms Sandberg made “substantive comments” in a meeting in October 2017 where potential reach was discussed.

Mr Wehner also discussed fake and duplicate accounts in a meeting the same month, but on a later earnings call “did not disclose the direct impact of duplicate and fake accounts . . . on potential reach”, according to the complainants.

Seriously, is there a business in Silicon Valley founded in this millennium which does not have fraud at the core of its business deception.

Actually, we could expand this to pretty much every VC funded business over the past 20 years.

You Know All Those Movies Where Con Men are the Heroes?

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You know, the ones where are ripping off “The Man”, who is corrupt, or violent, or both?

Well it appears that Michael Bloomberg’s staffers have seen those movies too, considering the reports that they were robbing him blind:

Michael Bloomberg ended his presidential campaign on Wednesday after being walloped on Super Tuesday. But, according to nearly a dozen members of his campaign staff, the former New York City mayor’s presidential dreams really died when Elizabeth Warren eviscerated his record on live television during the February 19 debate in Las Vegas.

Not a single Bloomberg staffer that I spoke to was surprised by the campaign’s implosion. Speaking on the condition of anonymity for fear of professional reprisal and because of the campaign’s nondisclosure agreements—which The Nation obtained a leaked copy of in February—campaign employees cited that bruising debate as well as a general lack of enthusiasm for Bloomberg among the staff as main factors ending his presidential run.

………

A third staffer also said that the debate marked a turning point, after which phone calls with voters became more difficult. “The day after [the debate] when we made calls people were like, ‘Oh yeah, I was thinking about him [Bloomberg], but I’m not really sure anymore.’”

Bloomberg’s performance, specifically his handling of Warren’s questions, even alienated the campaign’s volunteers. Of the volunteers that quit, one campaign employee told me, “Just about every one of them said it was because of the debate performance or the NDA scandals.”

………

But despite an almost limitless budget, the Bloomberg campaign would learn that money can’t buy loyalty. Staffers described an almost total lack of belief in Bloomberg himself. “Most people knew this was a grift,” one campaign official explained, describing even leadership as being unwilling to fulfill basic campaign responsibilities. “At our first office meeting, my [director] said, ‘We don’t need to canvass. We can just make calls, right guys?’ And everyone was like, ‘Yeah, that’s sensible.’”

Another employee who specialized in social media explained how their coworkers’ lack of enthusiasm resulted in lackluster engagement with social media audiences, which often led to tweets so perfunctory—many would just copy and paste campaign talking points—that their Twitter accounts would get mistakenly flagged as spam and suspended.

Multiple people described elaborate schemes to undermine the campaign and help their favored candidates. As one staffer explained, “I would actively canvass for Bernie when I was supposed to be canvassing for Mike. I know of at least one team of ‘volunteers’ that was entirely fabricated by the organizers who had to hit their goals. It was easy enough to fudge the data to make it look like real people put in real volunteer work, when in reality Mike was getting nothing out of it.”

Another staffer told me, “In San Diego, the regional organizers also exploited the campaign’s resources, staff, and infrastructure for local races they either were running in or consulting on.”

………

While most Bloomberg campaign employees who spoke to The Nation recalled being critical of Bloomberg from the very beginning, one was more sympathetic, citing Bloomberg’s climate change policies and desire to shrink the Pentagon budget. But he remarked, “The campaign truly made me jaded. I’m never going to sell my soul again.”

If these multi-billionaires are our modern royalty, then there can only be one conclusion from thesese reports.  While the peasants may not yet be revolting, they are going SERIOUSLY passive-aggressive.

Pull Their Not-For-Profit Status

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The greatest danger to the state of Israel in the United States, AIPAC, has been revealed to be offering perks to people who make donations to an anti-Bernie Sanders PAC, which violates a sh%$-load of campaign finance and non-profit regulations.

The degree to which taxpayers are effectively funding fraudulent non-profit activities buggers the mind:

The American Israel Public Affairs Committee is helping to fund a Super PAC launching attack ads against Sen. Bernie Sanders in Nevada on Saturday, according to two sources with knowledge of the arrangement. The ads are being run by a group called Democratic Majority for Israel, founded by longtime AIPAC strategist Mark Mellman.

The Nevada attack ads, which will air in media markets in Reno and Las Vegas, follow a similar spending blitz by DMFI ahead of the Iowa caucuses. Like the ads that aired in Iowa, the Nevada ads will attack Sanders on the idea that he’s not electable, Mediaite reported.

DMFI spent $800,000 on the Iowa ads, while the spending on the Nevada ads remains private. AIPAC is helping bankroll the anti-Sanders project by allowing donations to DMFI to count as contributions to AIPAC, the sources said. As is typical with most big-money giving programs, the more a donor gives to AIPAC, the higher tier they can claim — $100,000 level, $1 million level, and so on — and the more benefits accrue to them. A $100,000 donor gets more access to members of Congress at private functions, for instance, than someone who merely pays AIPAC’s conference fee. A $1 million donor gets still more, which means that it is important to donors to have their contributions tallied. There is also status within social networks attached to one’s tier of giving. The arrangement allows donors to give directly to DMFI, which is required to file disclosures naming its donors, without AIPAC’s fingerprints.

Rachel Rosen, a spokesperson for DMFI, said she was unaware of any AIPAC encouragement to donate to the organization. “As far as we know, what you are suggesting is completely untrue,” she said. “But because we are a separate organization, we can’t know exactly what other organizations are doing. Therefore, we are the wrong address for the the specific questions you ask — they need to [be] directed to AIPAC.”

AIPAC denied the arrangement. “AIPAC is not and has not been involved in the ad campaigns of any political action committee,” spokesperson Marshall Wittmann wrote in an email. “The accusation that AIPAC is providing benefits to members for donating to fund these political ads or this political action committee is completely false and has no basis in fact.”

If you believe AIPAC’s denials, I have some prime swamp land in Tel Hazor to sell you.

I am Unworthy………

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I have been blogging for more than 12 years, and when I posted about the suspicious death of a Canadian cryptocurrency mogul, and subsequent efforts by shorted investors to exhume his body to confirm his death, I missed a most obvious and beautiful pun.

I have always claimed to be the worst writer on the internet, but today especially so, because I was not the one who came up with this:

Putting the Crypt in Crypto Currency

I am clearly unworthy.

Speaking of Rich People Who Should Be in Jail………

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Note that this is Facebook’s case, and so the best possible case.  The reality is probably rather stark.

In news that should surprise no one who, it turns out that Facebook is aggressively promoting fake accounts.

Given that their business is selling ads to all of its accounts, this means that Facebook is actually something akin to a Ponzi scheme:

At first glance, Amy Dowd’s Facebook account appears perfectly normal. There is a smiling profile picture of a young woman surrounded by autumnal leaves and the date that she began a new job at Southeast Missouri State University. But look more closely and things begin to seem strange. Unlike most 29 year olds, Amy has no friends, no interests and no photos. The only thing she has written is a gushing review of a US haulage company. “Fake account,” replied one user. They were right.

 This Amy Dowd does not exist. Her account is a fake bought by the Financial Times as part of an investigation into the millions of bogus accounts littering the social media network in spite of efforts to better verify users.

 The proliferation of phoney identities has reached a record high. That is a problem for a company that trumpets user growth — considered a barometer of health by investors — while receiving criticism for failing to prevent the spread of false information by third parties.

 Facebook’s own estimates suggest duplicate accounts represent approximately 11 per cent of monthly active users while fake versions make up another 5 per cent. Others claim the total is higher. Yet Facebook continues to promote its user base as an incredible 2.45bn per month — close to one-third of the global population.

How about a meaningful investigation of fraud among Silicon Valley firms?

Showing these guys that they are not above the law would produce a noticeable benefit for society.

Yeah, and He’s Mobbed Up Too

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The good folks at ProPublica have looked at Donald Trump’s property tax filings and his statements to banks, and find conclusive evidence of fraud:

Documents obtained by ProPublica show stark differences in how Donald Trump’s businesses reported some expenses, profits and occupancy figures for two Manhattan buildings, giving a lender different figures than they provided to New York City tax authorities. The discrepancies made the buildings appear more profitable to the lender — and less profitable to the officials who set the buildings’ property tax.

For instance, Trump told the lender that he took in twice as much rent from one building as he reported to tax authorities during the same year, 2017. He also gave conflicting occupancy figures for one of his signature skyscrapers, located at 40 Wall Street.

Lenders like to see a rising occupancy level as a sign of what they call “leasing momentum.” Sure enough, the company told a lender that 40 Wall Street had been 58.9% leased on Dec. 31, 2012, and then rose to 95% a few years later. The company told tax officials the building was 81% rented as of Jan. 5, 2013.

A dozen real estate professionals told ProPublica they saw no clear explanation for multiple inconsistencies in the documents. The discrepancies are “versions of fraud,” said Nancy Wallace, a professor of finance and real estate at the Haas School of Business at the University of California-Berkeley. “This kind of stuff is not OK.”

New York City’s property tax forms state that the person signing them “affirms the truth of the statements made” and that “false filings are subject to all applicable civil and criminal penalties.”

The punishments for lying to tax officials, or to lenders, can be significant, ranging from fines to criminal fraud charges. Two former Trump associates, Michael Cohen and Paul Manafort, are serving prison time for offenses that include falsifying tax and bank records, some of them related to real estate.

This is the least surprising thing that I have heard in at least a month.

Even if he weren’t Donald Trump, we would find this going on, because this, and exploiting political connections for profit, is pretty much what all real estate developers do.

In More Enlightened Times, Elon Musk Would Be in the Dock

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Even ignoring his highly inaccurate tweets about Tesla, things like going private and impossible promises about self-driving cars, we have the corrupt self-dealing around Tesla’s purchase of Solar City.

If the SEC or the DoJ were actually interested in pursuing stock fraud, Musk would be in a world of hurt:

Back in 2016, Tesla acquired solar panel manufacturer SolarCity, billing the $2.6 billion deal as an opportunity to create “the world’s only vertically integrated sustainable energy company.” From a SolarCity solar panel to a Tesla battery, the company promised, the in-house supply chain would scale up clean energy for all and provide cost synergies to the businesses and shareholders.

But SolarCity, of which Tesla CEO Elon Musk was chairman, was deeply in debt at the time. Now, newly unsealed documents in an investor lawsuit say the situation was far worse than that. They allege that SolarCity wasn’t just carrying a heavy debt load: it was completely insolvent.

The upshot of reams of law surrounding mergers and acquisitions is that C-suite executives and company boards of directors are supposed to make sure shareholders get the most money possible out of their investment. If they’re going to sell the company, they have to make sure they’re accepting the most valuable reasonable offer. Companies doing the acquiring, meanwhile, are supposed to do their homework to make sure they’re not wasting their resources on a bad deal—and Tesla shareholders say the SolarCity acquisition was exactly that.

………

SolarCity only continued to function because of SpaceX money, the suit alleges:

As SpaceX’s chairman, CEO, CTO, and majority stockholder, Musk caused SpaceX to purchase $90 million in SolarCity bonds in March 2015, $75 million in June 2015, and another $90 million in March 2016. These bond purchases violated SpaceX’s own internal policy, and SolarCity was the only public company in which SpaceX made any investments.

The scenario described is as follows:  Musk owns over 50% of SpaceX, and you used their money to prop up Solar City until Tesla, which is a publicly traded firm, bought the solar panel installer out.

Musk’s cousins founded the company, and Musk was Solar City’s largest shareholder, and they all made made a lot of money as a result, Elon netted about $½ Billion, of what can only be called looting.

This is as corrupt as hell, and in the days before Reagan emasculated the SEC and the white collar crime division of the DoJ, he would be under criminal indictment, and banned from both the securities industry, as well being banned from serving as an executive or a board member of of a publicly traded company.

Of course, after Reagan, and Bush, and Clinton, and Bush, and Obama, it’s, “No harm, no foul.”

Why Defined Contribution Plans Do Not Work

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Because there is extreme information asymmetry in favor of the financial industry, there is an opportunity for fraud, and as I’ve noted before, (today) If fraud can occur, fraud will occur.

Case in point, Fidelity bribing MIT to allow the financial firm overcharge the school’s employees for their retirement plan:

The Massachusetts Institute of Technology, one of the nation’s most prestigious universities, stands accused of hurting workers in the company’s retirement plan by engaging in an improper relationship with the financial firm Fidelity.

 A lawsuit headed to trial in September alleges that MIT ignored the advice of its own consultants and allowed Fidelity to pack the university’s retirement plan with high-fee investment funds that ended up costing employees tens of millions of dollars. In return, the lawsuit said, MIT leveraged millions of dollars in donations from Fidelity.

 MIT and Fidelity say the allegations have no merit.

 The same as any employer that offers workers a retirement plan, MIT is required by law to set up investment options that are in the best interest of its employees and retirees.

………

Twenty years ago, MIT hired Fidelity to help manage its 401(k) plan. But the lawsuit alleges that MIT then let Fidelity include dozens of Fidelity funds with high fees — and that some charged fees more than 100 times higher than other funds that MIT could have chosen. [Plaintiff’s Attorney Jerry] Schlichter said MIT’s own outside consultants recommended shifting to a plan with lower-cost investment options, but “that advice was ignored for years.”

Meanwhile, Schlichter’s lawsuit says, MIT benefited from the excessive fees that the workers’ retirement plan paid Fidelity. Court documents allege: “In return, MIT leveraged Fidelity’s revenue stream from the Plan to secure numerous donations (over $23 million since Fidelity became the recordkeeper).”

In 2015, when the university considered other options, an MIT dean emailed the head of an MIT committee overseeing the plan: “if we’re not switching to Vanguard or TIAA Cref, I am going to expect something big and good coming to MIT,” according to the court records.

Schlichter said that soon after that exchange, “Fidelity donated $5 million to MIT.”

Seriously, we need to cap fees on tax deferred accounts.

While there may be a societal value to retirement savings accounts, there is no such value to reckless seeking alpha, nor is there a societal value to rip off retirees.

It will hit Wall Street in the pocket book, but f%$# Wall Street.

Whatever This Says about Our Society, It’s Profoundly Depressing

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The Committee on Publication Ethics (COPE) has accumulated an exhaustive database of academic citations, and found what appears to be a whole lot of self dealing and corruption:

The world’s most-cited researchers, according to newly released data, are a curiously eclectic bunch. Nobel laureates and eminent polymaths rub shoulders with less familiar names, such as Sundarapandian Vaidyanathan from Chennai in India. What leaps out about Vaidyanathan and hundreds of other researchers is that many of the citations to their work come from their own papers, or from those of their co-authors.

Vaidyanathan, a computer scientist at the Vel Tech R&D Institute of Technology, a privately run institute, is an extreme example: he has received 94% of his citations from himself or his co-authors up to 2017, according to a study in PLoS Biology this month1. He is not alone. The data set, which lists around 100,000 researchers, shows that at least 250 scientists have amassed more than 50% of their citations from themselves or their co-authors, while the median self-citation rate is 12.7%.

The study could help to flag potential extreme self-promoters, and possibly ‘citation farms’, in which clusters of scientists massively cite each other, say the researchers. “I think that self-citation farms are far more common than we believe,” says John Ioannidis, a physician at Stanford University in California who specializes in meta-science — the study of how science is done — and who led the work. “Those with greater than 25% self-citation are not necessarily engaging in unethical behaviour, but closer scrutiny may be needed,” he says.

The data are by far the largest collection of self-citation metrics ever published. And they arrive at a time when funding agencies, journals and others are focusing more on the potential problems caused by excessive self-citation. In July, the Committee on Publication Ethics (COPE), a publisher-advisory body in London, highlighted extreme self-citation as one of the main forms of citation manipulation. This issue fits into broader concerns about an over-reliance on citation metrics for making decisions about hiring, promotions and research funding.

This is not a surprise.

If fraud can occur, fraud will occur.

From the Department of About F%$#ing Time

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This program has been documented since before Google bought them, and only now are they taking action:

YouTube is going after an alleged copyright troll using the Digital Millennium Copyright Act’s (DMCA) provisions, alleging that Christopher Brady used false copyright strikes to extort YouTube creators, harming the company in the process. Now, YouTube is suing Brady, using the DMCA’s provisions against fraudulent takedown claims, seeking compensatory damages and an injunction against future fraudulent claims.

The lawsuit, first spotted by Adweek reporter Shoshana Wodinsky, alleges that Brady sent multiple complaints claiming that a couple of Minecraft gaming YouTubers — “Kenzo” and “ObbyRaidz” — infringed on his copyrighted material in January. (Their legal names were not listed in the lawsuit.) YouTube removed the videos that Brady claimed were infringing on his copyrighted material, as the company does whenever a claim is submitted.

ObbyRaidz was sent a message from Brady, according to the lawsuit, that stated if the YouTuber didn’t pay Brady $150 via PayPal (or $75 in bitcoin), he would issue a third copyright strike. This would essentially terminate ObbyRaidz’ channel and remove all of his videos from the platform. Kenzo was sent a similar message, but Brady requested $300. ObbyRaidz spoke about the situation in a video, noting that he made multiple attempts to get in touch with someone at YouTube but didn’t make any progress.

Of course he couldn’t contact a human being.  That is the primary goal of all Google customer support, which opens up all its platforms to scammers and fraud.

Snark of the Day

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WeWork Officially Files To Be The Last IPO

This S-1 filing is a word quilt made up of every bad idea from every IPO of the past five years.

—Dealbreaker

I am used to IPOs for companies that have no path to profitability, but WeWork’s IPO documents admits that its CEO is literally looting the company.

This is a level of bald faced fraud that is extraordinary even by the standards of Silicon Valley.

The System is Finally Working

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Indian body shops are complaining because H-1B visa applications have been rejected at unprecedented rates.

Good.

The H1B visa system is SUPPOSED to companies’ need for skills that are simply unavailable nationally, but the reality is that it’s used for cheap and marginally skilled labor.

The fact that this law is actually being enforced is an unalloyed good:

Denial of work visas to employees of India’s largest IT services exporters has risen to an all-time high, according to data sourced from a US-based research foundation.

The country’s big four software services exporters — Tata Consultancy Services, Infosys, HCL Technologies and Wipro — have seen around half of their work visa applications rejected in the past year as the Donald Trump administration pushed for more employment and higher wages for American workers.

The visa denial rate for TCS has gone up from 6% in FY15 to 37% during the first quarter of FY19 (October-December 2018), according to a report by the National Foundation for American Policy (NFAP). NFAP sourced data from the US Citizenship and Immigration Services (USCIS) that follows a October-September financial year. 

Justice for the Vampire Squid ……… In Malaysia

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The United States could never bring itself to prosecute Goldman Sachs executives for fraud and other financial crimes, but Malaysia has indicted 17 executives at the brokerage firm:

When it comes to serial and systemic frauds perpetrated by big banks on Wall Street, the U.S. Department of Justice typically punts. It will either not charge the bank itself or it will issue a felony charge along with a non-prosecution agreement that lets the bank settle the charges without a trial. These tactics by the Justice Department are why Wall Street crimes remain serial and systemic in nature.

This morning, the Attorney General in Malaysia stunned Goldman Sachs with an indictment of 17 of its former and current executives. That came on the heels of criminal charges filed last December by Malaysian authorities in the same matter against three Goldman Sachs subsidiaries and two former Goldman employees, Tim Leissner and Roger Ng.

Indictments announced this morning included charges against Richard J. Gnodde, Goldman’s top international banker in London and former Goldman executive J. Michael Evans, who is currently president of Alibaba.

The charges stem from a Malaysia state development fund, 1Malaysia Development Bhd (1MDB) for which Goldman Sachs underwrote $6.5 billion in bonds in 2012 and 2013. Goldman made an outsized $600 million in fees on the deals. According to prosecutors, $4.5 billion in 1MDB funds have gone missing, of which at least $2.7 billion was stolen according to prosecutors.

Malaysia Attorney General Tommy Thomas said jail time and criminal fines will be sought against those indicted given the “severity of the scheme to defraud and fraudulent misappropriation of billions in bond proceeds” and “the lengthy period over which the offences were planned and executed….”

………

Contrast how Malaysia has moved to hold key Goldman Sachs executives accountable versus what the U.S. Department of Justice has done. On November 1 of last year, the Justice Department announced charges against former Goldman employees Tim Leissner and Roger Ng and a financier involved in the dealings, Jho Low. But the Justice Department did not bring charges against any of the three units of Goldman Sachs that were involved and its press release is even too timid to mention the name Goldman Sachs. It refers simply to “U.S. Financial Institution #1,” suggesting it believes Goldman Sachs somehow deserves reputational protection.

It’s important to recall that the Justice Department let Goldman Sachs wiggle out of criminal prosecution with a payment of $550 million in 2010 over its role in facilitating a $1 billion fraud called Abacus. Goldman Sachs allowed the hedge fund, John Paulson & Co., to select mortgage bonds that were likely to fail to put into the deal so that the hedge fund could short the deal and end up making $1 billion. Goldman Sachs pitched the deal to its investors as a sound investment. Those investors ended up losing the same $1 billion that Paulson & Co. made in profits. A lowly Goldman Sachs’ salesman on the deal, Fabrice Tourre, was the only Goldman employee to be charged in the matter. Tourre was found guilty at trial but also got off by paying a fine. (See John Paulson and the Ick Factor at NYU.)

For the love of God, please let these prosecutions proceed to completion.

SOMEONE needs to hold these ratf%$#s accountable.

Mark Madoff Zuckerberg

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Given Facebook’s culture, and Zuckerberg’s complete lack of ethics, I am inclined to believe that this is an accurate characterization of how the social media giant hits its numbers:

Facebook now has a market capitalization approaching $600 billion, making it nominally one of the most valuable companies on earth. It’s a true business miracle: a company that was out of users in 2012 managed to find a wellspring of nearly infinite and sustained growth that has lasted it, so far, half of the way through 2019.

So what is that magical ingredient, that secret sauce, that “genius” trade secret, that turned an over-funded money-losing startup into one of America’s greatest business success stories? It’s one that Bernie Madoff would recognize instantly: fraud, in the form of fake accounts.

Old money goes out, and new money comes in to replace it. That’s how a traditional Ponzi scheme works. Madoff kept his going for decades, managing to attain the rank of Chairman of the NASDAQ while he was at it.

Zuckerberg’s version is slightly different, but only slightly: old users leave after getting bored, disgusted and distrustful, and new users come in to replace them. Except that as Mark’s friend and lieutenant, Sam Lessin told us, the “new users” part of the equation was already getting to be a problem in 2012. On October 26, Lessin, wrote, “we are running out of humans (and have run-out of valuable humans from an advertiser perspective).” At the time, it was far from clear that Facebook even had a viable business model, and according to Frontline, Sheryl Sandberg was panicking due to the company’s poor revenue numbers.

To balance it out and keep “growth” on the rise, all Facebook had to do was turn a blind eye. And did it ever.

In Singer v. Facebook, Inc.—a lawsuit filed in the Northern District of California alleging that Facebook has been telling advertisers that it can “reach” more people than actually exist in basically every major metropolitan area—the plaintiffs quote former Facebook employees, understandably identified only as Confidential Witnesses, as stating that Facebook’s “Potential Reach” statistic was a “made-up PR number” and “fluff.” Also, that “those who were responsible for ensuring the accuracy ‘did not give a shit.’” Another individual, “a former Operations Contractor with Facebook, stated that Facebook was not concerned with stopping duplicate or fake accounts.”

………

Yet signs that Mark’s fake account problem is no different than Madoff’s fake account statement problem are everywhere. Google Trends shows worldwide “Facebook” queries down 80% from their November 2012 peak. (Instagram doesn’t even come close to making up for the loss.) Mobile metrics measuring use of the Facebook mobile app are down.

And the company’s own disclosures about fake accounts stand out mostly for their internal inconsistency—one set of numbers, measured in percentages, is disclosed to the SEC, while another, with absolute figures, appears on its “transparency portal.” While they reveal a problem escalating at an alarming rate and are constantly being revised upward—Facebook claims that false accounts are at 5% and duplicate accounts at 11%, up from 1% and 6% respectively in Q2 2017—they don’t measure quite the same things, and are impossible to reconcile. At the end of 2017, Facebook decided to stop releasing those percentages on a quarterly basis, opting for an annual basis instead. Out of sight, out of mind.

………

What Facebook does say is this: its measurements, the ones subject to “significant judgment,” are taken from an undisclosed “limited sample of accounts.” How limited? That doesn’t matter, because “[w]e believe fake accounts are measured correctly within the limitations to our measurement systems” and “reporting fake accounts…may be a bad way to look at things.”

And how many fake accounts did Facebook report being created in Q2 2019? Only 2.2 billion, with a “B,” which is approximately the same as the number of active users Facebook would like us to believe that it has.

A comprehensive look back at Facebook’s disclosures suggests that of the company’s 12 billion total accounts ever created, about 10 billion are fake. And as many as 1 billion are probably active, if not more. (Facebook says that this estimate is “not based on any facts,” but much like the false statistics it provided to advertisers on video viewership, that too is a lie.)

So, fake accounts may be a bad way to look at things, as Facebook suggests—or they may be the key to the largest corporate fraud in history.

Advertisers pay Facebook on the assumption that the people viewing and clicking their ads are real. But that’s often not the case. Facebook has absolutely no incentive to solve the problem, it’s already in court over it, and its former employees are talking. From Mark’s vantage point, it’s raining free money. All he has to do to get advertisers to spend is convince the world that Facebook is huge and it’s only getting huger.

………

But I’m not wrong. Facebook is a real product, but like Enron, it’s also a scam, now the largest corporate scandal ever. It won’t release its data about the 2016 election, about fake accounts, or about anything material—and because Mark knows it’s a scam, he won’t agree to testify before the British parliament in a way that could require him to actually answer any substantive questions, as I did in June. And because Facebook is also a component of the S&P 500, countless people have an incentive to maintain the status quo.

So should we break up the tech companies and Facebook in particular? It’s already a campaign issue for the next presidential election. Elizabeth Warren says yes. Beto O’Rourke wants “stronger regulations.” Kamala Harris would rather talk about privacy. Everyone else—even Donald Trump—generally agrees that something needs to be done. Yet the unspoken issue at the center of it all remains: Mark is running a Ponzi scheme, but Wall Street, Congress, the Federal Trade Commission, the think tanks, and their associates haven’t figured it out.

………

The biggest problem with treating Facebook as a monopoly, as opposed to the byproduct of what Jesse Eisenger calls “The Chickensh%$ Club,” is that it wrongly affirms Mark’s infallibility and fails to see through him and his scheme, let alone the reality that he’s not even in control anymore because no one is.

Would it have helped to separate Madoff Securities LLC into one company per floor, or split up Enron by division? Probably not, but talking about it is Facebook’s dream come true. Because the question we should really be discussing is “How many years should Mark Zuckerberg and Sheryl Sandberg ultimately serve in prison?”

If this is true, and I do find the argument compelling, I would pay money to watch his being frog marched out of his Menlo Park headquarters in handcuffs.

This is a Feature, Not a Bug

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Elon Musk thinks that he is this.


He is actually this.


And the polling

It turns out that of all the names given to driver assistance technology, Autopilot is the one most likely to cause over-reliance on the tech.

This is not a surprise. Overselling the feature, and generally overselling the features of his car, has been central to the business plan for Tesla Motors.

Does the name “Autopilot” cause people to overestimate the abilities of Tesla’s driver-assistance technology? It’s a question that comes up in the Ars comments almost every time we write about the feature.

Critics warn that some customers will assume something called “Autopilot” is fully self-driving. Tesla’s defenders counter by pointing out that autopilot capabilities in planes aren’t fully autonomous. Pilots still have to monitor their operation and intervene if they have a problem, and Tesla’s Autopilot system is no different.

A new survey from the Insurance Institute for Highway Safety brings some valuable hard data to this debate. The group asked drivers questions about the capabilities of five advanced driver-assistance systems (ADAS). They identified the products only by their brand name—”Autopilot,” “Traffic Jam Assist,” “Super Cruise,” etc. Survey participants were not told which carmaker made each product, and they did not learn the capabilities of the products. There were 2,000 total respondents, but each was asked about only two out of five systems, leading to a few hundred responses for each product.

………

For example, 48 percent of drivers said that it was safe for a driver to take their hands off the wheel when Autopilot is active, compared with around 33 percent for ProPilot Assist and less than 30 percent for the other systems named. Six percent of drivers said it was safe to take a nap in a car with Autopilot, while only three percent said the same for other ADAS systems.

Tesla further compounds this issue by promising that full autonomous driving will be available in a matter of the next few months.

This, and Theranos, is what happens when the Silicon Valley, “Fake it Until You Make It,” is applied to the real world.

Gerald Cotten is Sharing a Condo with Elvis and Andy Kauffman

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If you don’t know who Gerald Cotten is, then you are note a former customer of the Quadriga bitcoin repository.

The official story is that he died in India on December 9, and no one can access the BitCoin stored on the service because only he had the passwords to the service.

Weird, but here is where it gets weirder: Like many BitCoin wallets out there, but much of the deposits is kept offline in something called a “Cold Wallet”, the theory being that if it is offline, no one can hack into it.

The thing is that this means that you have to regularly transfer from a cold to a hot wallet when your customers need it.

A meat-space analogy would be the difference between the teller’s tray and the bank vault.

It appears that the money was never moved, which strongly implies that something hinky was going on with the accounts.

The only two logical conclusions to be reached are either that Mr. Cotton is on the lamb spending his ill-gotten gains, or with exposure of his fraud imminent, he took his own life.

Presented for your consideration:

When Quadriga Fintech Solutions Corp. founder Gerald Cotten died, account holders feared the encrypted access keys needed to recover C$190 million ($143 million) of cryptocurrencies held by the exchange in offline storage could be lost forever.

It looks now like the storage Quadriga is known to have used — dubbed cold wallets — has been empty since April.

………

Ernst & Young identified six cold wallet addresses used by Quadriga to store Bitcoin in the past. Five of those wallets haven’t had any balances since April 2018, and a sixth “appears to have been used to receive Bitcoin from another cryptocurrency exchange account and subsequently transfer Bitcoin to the Quadriga hot wallet” on Dec. 3. The only activity since was an inadvertent transfer of Bitcoin into that sixth wallet last month, which was disclosed earlier.

Crypto investors and exchanges often keep their holdings in cold wallets — typically, physical devices disconnected from the web that can be plugged into a computer when needed since internet-connected hot wallets can be vulnerable to hackers.

A preliminary review of transactions of the six wallets using public blockchain records showed that from April 2014 to approximately April 2018, aggregate Bitcoin month end balances in the identified cold wallets ranged from zero to a peak of 2,776 Bitcoin. The average aggregate month end balance over the four-year period was approximately 124 Bitcoin. Some Bitcoin in the wallets appear to have been transferred to accounts at other crypto exchanges.

………

Another 14 user accounts created outside the normal process were also identified, with deposits artificially created and used for trading. The monitor has reached out to 14 exchanges and received responses so far from four. It didn’t name the exchanges.

It sounds to me like Cotten used BitCoin to play the horses, or, even more disastrously, play the BitCoin markets.

Why Patent Reform is Essential

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 It turns out the scam that was Theranos was heavily supported by what experts would call bullsh%$ patents:

When Patent Office Director Michelle Lee gave that speech, Theranos appeared to be one of the most impressive companies in Silicon Valley. But later that year, the public learned that Holmes hadn’t “proven” anything. Whistleblowers told The Wall Street Journal that Theranos wasn’t even using its own devices for most of its blood testing. Holmes had apparently spent more than a decade building a company based on unrealistic or outright false claims about its revolutionary technology.

For any disaster as large as Theranos, there’s plenty of blame to go around, of course. Both Holmes and former COO Sunny Balwani now face federal fraud charges. Theranos’ star-studded board of directors failed to do adequate oversight. Walgreens ignored warning signs before launching its in-store partnership. Some VCs and journalists were too eager to believe Theranos’ unproven claims.

But the patent system also played an important, and often overlooked, role in the situation. The USPTO gave out patents much too easily, giving Theranos early credibility it didn’t deserve. Theranos then used these patents to attract staff, investors, and business partners. The company would last for 10+ years and burn through half a billion dollars before the truth finally emerged.

………

But Holmes found a more receptive audience at the USPTO. She says she spent five straight days at her computer drafting a patent application. The provisional application, filed in September 2003 when Holmes was just 19 years old, describes “medical devices and methods capable of real-time detection of biological activity and the controlled and localized release of appropriate therapeutic agents.” This provisional application would mature into many issued patents. In fact, there are patent applications still being prosecuted that claim priority back to Holmes’ 2003 submission.

But Holmes’ 2003 application was not a “real” invention in any meaningful sense. We know that Theranos spent years and hundreds of millions of dollars trying to develop working diagnostic devices. The tabletop machines Theranos focused on were much less ambitious than Holmes’ original vision of a patch. Indeed, it’s fair to say that Holmes’ first patent application was little more than aspirational science fiction written by an eager undergraduate.

So how did Holmes’ unrealistic application lead to real patents, like US Patent No. 7,291,497? If you look through that patent’s application history, you can see that the examiner did review it closely. The examiner made two non-final rejections and two final rejections before eventually allowing the claims. (At the USPTO, a “final” rejection is not really final). The rejections were based on prior art and other technical grounds. What the examiner did not do, however, was ask whether Holmes’ “invention” actually worked.

Two legal doctrines are relevant here. The “utility” requirement of patent law requires that the invention work. And the “enablement” requirement means that the application has to describe the invention with enough detail to allow a person in the relevant field to build and use it. If the applicant herself can’t build the invention with nearly unlimited time and money, it does not seem like the enablement requirement could possibly be satisfied.

………

To answer Professor Grimmelmann’s rhetorical question [What could go wrong with patents being handed out on the “honor system”?] —Theranos is what could go wrong. Holmes’ original patent application became a key part of the company’s mythology. For example, an infamous Fortune article from 2014 reverently tells the story of Holmes staying up late to write her application and suggests that Theranos was founded on that original vision. And if you had visited Theranos’ website in 2014, you would have found an “Our Mission” page that said Holmes left Stanford to “build Theranos around her patents and vision for healthcare.”

Yet more than a decade after Holmes’ first patent application, Theranos had still not managed to build a reliable blood-testing device. By then the USPTO had granted it hundreds of patents. Holmes had been constructing a fantasy world from the minute she started writing her first application, and the agency was perfectly happy to play along.

………

Business Insider wrote that if Theranos had come up with a “killer application” for microfluidics, “that may explain its reluctance to show the patented details that make its technology unique.” This sentence shouldn’t make sense, because patents are public by nature. So “patented details” should be public.

The sentence only makes sense when you realize that the patent bargain is utterly broken. The people who work within the patent system realize it. That’s why no one raised red flags when Theranos received hundreds of patents without telling the scientific community how its machines actually worked.

This is important:  With a very few national security exceptions, patents MUST be public, and of sufficient detail to allow a, “Person having ordinary skill in the art,”  to reproduce the invention.

It is SUPPOSED to be a part of the deal when you award an exclusive license, but the US patent office almost never rejects a patent on being incomprehensible bullsh%$, as it should.

We desperately need to raze the USPTO to the ground, and rebuild it from scratch.

There are Stupid Business Plans, Moronic Business Plans, and Then There is ………

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Only $500 a Cup

Setting up a company with a business plan to, “Use reentry heating to roast coffee beans.”

This is f%$#ed up and sh%$.

This is the most transparent scam since ………  I don’t know ……… Maybe Juicero?

A company called Space Roasters says it plans to use the considerable heat of reentry from space through Earth’s atmosphere to roast coffee beans. It will then sell them for the perfect cup of joe.

In an interview with Room magazine, the founders of the company, Hatem Alkhafaji and Anders Cavallini, say space is the place to look for a next-level brew. “Coffee has been roasted the same way for centuries now, and as space science has improved many technologies, we believe it is time to revolutionize coffee roasting using space technology,” the pair told the magazine.

How does it work? The company says it has patented a “space roasting capsule” in which heat from re-entry will be distributed around four cylinders each containing 75kg of coffee beans. Floating in microgravity, the beans will be evenly heated and roasted during the process. The capsule will then be recovered after landing with parachutes. “The entire process will last only 20 minutes but will end with a marvelous aroma as the hatch is opened,” the founders told the magazine.

Although the company says it will offer a “pre-sale” about a month from now, it has not set a price for these coffee beans.

We really need to start prosecuting these “move fast and break things” idiots.

Court Rules against Dressing up as an Indian

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In a unanimous decision, an appellate court has resoundingly rejected the legal claim that sovereign immunity, as argued by a Native American tribe, can act as a shield for a patent review process.

On July 20, the United States Court of Appeals for the Federal Circuit found in a 3-0 decision that the inter partes review (IPR) process is closer to an “agency enforcement action”—like a complaint brought by the Federal Trade Commission or the Federal Communications Commission—than a regular lawsuit.

IPR is a process that allows anyone to challenge a patent’s validity at the United States Patent and Trademark Office—it was used famously in 2017 to reject the “podcasting patent.”

“This win is a victory in our ongoing efforts to stop patent abuses by brand companies and to help drive access to more affordable medicine,” Mylan CEO Heather Bresch said in a statement on July 20.

“Today’s ruling reaffirms that Allergan’s attempt to leverage the Saint Regis Mohawk Tribe for patent protection represents another inappropriate tactic to delay the availability of generic medicines for patients who need them.”
This case, Saint Regis Mohawk Tribe, Allergan Inc. v. Mylan Pharmaceuticals et al, really began in September 2015. That was when Allergan, a pharma company, sued rival Mylan, claiming that Mylan’s generics infringed on Allergan’s dry eye treatment known as Restasis.

………

By 2016, Mylan initiated the IPR. But Allergan, in an attempt to stave it off, struck a strange deal, transferring ownership of the six Restasis-related patents to the Saint Regis Mohawk Tribe, based in Upstate New York, near the Canadian border.

As part of that deal, Allergan paid $13.75 million to the tribe, with a promise of $15 million in annual payments—if the patents were upheld, that is. (According to The New Yorker, Allergan stood to make $1 billion annually for its monopoly product.)

………

The Mohawk Tribe attempted to end the IPR, citing sovereign immunity, which was denied. The tribe struck at least one other similar deal with a firm known as SRC Labs, which sued Amazon and Microsoft.

Due to the July 20 ruling, Mylan’s IPR process will now go forward.

The inter partes review (IPR) process is an administrative review of patents that is faster, cheaper, and far less amenable to lame-ass patents than the federal courts.  (Particularly those federal courts in the Eastern District of Texas.)

This is yet another blow against the business of patent trolling.