December 11, 2017

Isnt
The Where
Test You
Think
Lab It Is
For p54

Fake
News
 December 11, 2017

9
MASON CUMMINGS

14  The Valley of the Gods, a part of the Bears Ears National Monument that will no longer be protected
 CONTENTS Bloomberg Businessweek December 11, 2017

 IN BRIEF
14 Xiaomis IPO could set records Trumps travel ban lives (for now) Lamborghini names its rst SUVafter a cow

 REMARKS
16 Imagining Berkshire Hathaway without Warren Buffett

BUSINESS TECHNOLOGY FINANCE

1 2
21 CVS wants to be 27 A helping hand for 32 Where are the
much more than the neo-Nazis and whales taking
corner drugstore other underdogs bitcoin?
22 Air France makes a 28 The British health service 33 At hedge funds, women
play for budget-conscious gave Google data without say they lean in only to be
jeunes voyageurs the patients permission edged out

10
23 An artisanal mocktail 29 At Silicon Valley office parties, 35 Capital One customers
generates some theyre still chatting up the might want to double-check
no-buzz buzz model at the punch bowl whats in their wallet

25 An Indian maker of 30 Felix, the AI winemaker, knew 36 As the stock market soars,
generic drugs plots to just what to do when res investors prefer bonds
upend the HIV market ripped through Napa Valley

ECONOMICS POLITICS FOCUS/

SMALL BUSINESS

38 In Venezuela, when 44 Mueller takes out 50 Running a small

the going gets tough, insurance against business is hard.
the tough play games a Saturday night Imagine doing it on
massacre a bankrupt island
40 Stymied in New Delhi,
Modi will try to reform India
devastated by a
46 How Reza Zarrab helped Iran
one province at a time
circumvent sanctions
hurricane
41 Have we been looking at 52 Womens wear, the way
48 Playing favorites at the
the U.S. oil and gas boom we wear it now
Energy Department
through shale-colored
glasses?
53 Getting a start in the
49 Senate and House
sensory deprivation biz
conferees prepare to
wrap up the tax bill
 CONTENTS Bloomberg Businessweek December 11, 2017

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 IN BRIEF

Americas Europe
The Trump administration slashed the size of two national monuments Apple agreed to pay
in Utah, breaking up what remains into five smaller monuments. Ireland
Together, the Bears Ears and Grand Staircase-Escalante areas will
lose about 2 million acres to potential development.
$15.4b
in taxes after the European
Grand Staircase-Escalante Bears Ears

41% 85% Union determined it had
Utah gotten too sweet a deal. The
money will go into an escrow


account while Apple appeals
the ruling.
Previous boundaries


New boundaries


New monuments
Grand Staircase
Kaiparowits

Escalante Canyons
Shsh Jaa
Indian Creek 30 miles

Canada Representative John Venezuela said U.K.-based Cineworld

Conyers Jr., Democrat solidified a deal to buy
scrapped a plan of Michigan, resigned on it would launch a fellow theater chain Regal
to buy 18 Boeing Dec. 5 after several former digital currency Entertainment for
employees accused him
ghter jets, backed by oil
$3.6b
14
of sexual harassment. The
according to next day, attention shifted reserves, gold,
to Senator Al Franken,
reports. Democrat of Minnesota, and diamonds to after a horrific summer
after Democratic senators, circumvent U.S. for U.S. movie ticket sales.
led by Kirsten Gillibrand of Cineworld shares dipped
New York, called on him to sanctions.  38 on the news.
resign over allegations of
harassment and groping.
LAMBORGHINI: COURTESY LAMBORGHINI. SALEH: MOHAMMED HUWAIS/GETTY IMAGES. FIRE: NOAH BERGER/AP IMAGES.

The decision escalates a long-running

trade dispute with the company. The
country will buy older Boeing planes
from Australia instead.

In contrast to CVS Health agreed to buy Nestl said

Aetna for
SKELETON BOBSLEDDER: AL BELLO/GETTY IMAGES. MAP DATA: U.S. DEPT. OF THE INTERIOR

poor performance it would pay

among retailers
generally, Home
$67.5b
combining the largest
$2.3 billion
for Atrium
Depot announced drugstore chain in the U.S. Innovations, a
with the countrys third-
it would buy back biggest health insurer.  21 Canadian maker
Wildfires in the Los $15 billion in of nutritional
Angeles area quickly covered
tens of thousands of acres, shares and supplements,
destroying thousands of raised its annual furthering its
structures by the morning of
Dec. 6. sales target to push into health
$120 billion. products.
By Kyle Stock
Volkswagens
Lamborghini brand
unveiled its long-
anticipated SUV,
named the Urus,
after an ancestor
of the cow. Prices
start at $200,000.
The International
Olympic Committee barred
Russia from this winters
games over alleged state-
sponsored doping during the
2014 competitions in Sochi.
Individual athletes will still be
allowed to compete, but not
under the Russian flag.
Bloomberg Businessweek December 11, 2017
Asia
Lebanese Prime Minister Houthi rebels killed former Donald Trump
Saad Hariri officially Yemeni President
rescinded his resignation Ali Abdullah Saleh said the U.S.
on Dec. 5, after his cabinet on Dec. 4. Three would recognize
affirmed the countrys days earlier, he seemed
commitment to regional to end an alliance with the Jerusalem as
neutrality. The reversal rebels in their fight against Israels capital, a
intensified suspicion that a Saudi Arabia-led military
Saudi Arabia was exerting intervention. drastic change in
influence over Lebanons policy that risks
politics.
destabilizing the
region.
The United Nations
So theres only political affairs chief, Jeffrey
Feltman, flew to North
Korea on Dec. 5 to try to
one thing left to do. temper the countrys nuclear
provocations. Hes the most
15
senior UN official to visit the
Ryan Patrick Bolger, country in five years.
will you marry me?
Australian lawmaker Tim Wilson, proposing to his longtime partner during
debate on the countrys same-sex marriage bill, which is expected to pass
easily. Bolger said yes.
Xiaomi began Africa
shopping for
an investment
Nigerias police chief The U.S. Supreme Court
bank to handle launched an investigation allowed the Trump
what may be of its Special Anti-Robbery administrations travel ban to
Squad after videos of alleged take effect while its being
the largest tech brutality surfaced. Twitter challenged in court. The ban
IPO on record. was flush with tales of will restrict visitors from
mistreatment shared under Chad, Libya, and Somalia, as
The Chinese the hashtag #ENDSARS. well as Iran, North Korea,
smartphone maker Syria, Venezuela, and Yemen.
was last valued at
$46 billion.
 REMARKS
16
Who will replace Warren Buffett?
After years of mystery, theres only one
heir apparent left
By Noah Buhayar
If I die tonight, I think the stock would go up tomorrow.
That was Warren Buffett, addressing an arena full of
shareholders at Berkshire Hathaway Inc.s annual meeting
in Omaha in May. For more than half a century, hes made the
company his investing canvas, designing an unlikely conglom-
erate. It owns Geico, BNSF Railway, Fruit of the Loom, Dairy
Queen, Duracell, and dozens of other companies, as well as
billions of dollars of stock in blue chips such as Apple Inc.
and Coca-Cola Co.
The glue is Buffett, whos argued persuasively for decades
that this hodgepodge makes sense. His market-beating returns
have helped: $100 invested in Berkshire in 1964, when he began
aggressively buying shares to take control, would be worth
more than $2 million today. Thered be speculation about
breakups, Buffett went on at the meeting, and the shares would
trade higher because some investors would assume that the
parts are worth more than the whole. Finally, the guy stand-
ing in the way would be gone, he said, adding dryly, It would
be a good Wall Street story.
Nothing of the sort is likely to happen while Buffett is there.
Hes still the controlling shareholder, Berkshire is his lifes
work, and he doesnt want it torn apart by investment bankers
or activist investors. To slow that process, Buffett assembled a
board that backs his approach, and after his death hell leave
his remaining shares to charities run by family and friends who
know his wishes. But the pressure to dismantle his creation
will mounteventually.
The bulwark against that impulse will be Buffetts succes-
sor as chief executive officer, whose identity is one of the
business worlds best-kept secrets. In all his years of giving
interviews and taking questions at the companys marathon
annual meeting, Buffett has acknowledged that the board has
picked his replacement, but hes never disclosed the name.
Maybe thats because doing so would take the spotlight
off Buffett, who, at 87, still loves the attention. At the annual
meeting, his likeness has adorned Coke cans and sneakers,
rubber duckies and underwear. Its a celebration of capital-
ismbut also of Buffett. When he walks through the hall where
Berkshires businesses display their wares, fans throng around
him, snapping selfies.
Keeping the successors identity a secret also gives the board
more flexibility. Circumstances can change, after all, and prob-
ably have during the long period Berkshires board has been
weighing its options. These days, however, most arrows are
pointing toward one man.
People have tried for decades to guess Buffetts heir, but its
always been an academic exercise: He never hints at retirement,
his health seems to be remarkable, and his grip on the company
is firm. In the meantime, contenders have come and gone. In
2000 the Wall Street Journal put Richard Santulli, the head of
Berkshires NetJets business, on its short list of candidates. He
  REMARKS Bloomberg Businessweek
quit to pursue other ventures in 2009. In 2008, Barrons pre-
dicted in a cover story that David Sokol, head of Berkshires
energy business, would take over. He resigned three years later.
Buffett, at least, has talked about the qualifications for the
position. In a 2015 letter to shareholders, he said the board
wants his successor to be drawn from the companys ranks and
relatively young, so he or she can have a long run in the job.
He suggested future Berkshire CEOs should hold the post for
more than a decade and that they should be rational, calm,
and decisive. And, he noted, they should have upstanding
character, be unmotivated by ego or a big paycheck, and be
all-in at Berkshire.
Nowhere in all this is there a mention of stockpicking skills.
To help the next CEO, Buffett hired two former hedge fund
managers, Todd Combs and Ted Weschler, in recent years.
Theyre responsible for about $20 billion of Berkshires massive
stock portfolio and preparing to oversee all of it when hes
gone. Theyll also help evaluate deals. Nor will the successor
likely serve as chairman. Thats a role earmarked for Buffetts
eldest son, Howard, whos on the board. His main job will be
to guard the companys cultureand force out any future CEO
who messes with it.
At the same time this was laid out, Berkshire released a sep-
arate letter from Vice Chairman Charles Munger. In it, Munger
called two executivesAjit Jain and Greg Abelexamples of
the companys world-leading managers who are in some shareholders long past typical retirement age. Even so, Jain has
ways better than their boss. While Buffett later denied that any
executives were in a horse race to succeed him, the logical
inference from Mungers letter was that the board had already
HBO
settled on one of these twoand probably wasnt as seriously
December 11, 2017
17
considering other internal candidates such as BNSF Executive
Chairman Matt Rose or Tony Nicely, the CEO of Geico. Abel
declined to comment, and Jain and Buffett didnt respond to
requests for comment.
Jain and Abel each fit many aspects of Buffetts care-
fully tailored job description. Theyre deeply committed to
Berkshires culture, which prizes efficiency and long-term
thinking. Neither has outward character flaws that would
immediately be disqualifying. And each has built large
businesses for Buffett.
Jain runs the companys namesake reinsurance opera-
tion, which for decades has provided Berkshire with billions
of premium dollars for investments and acquisitions. Buffett
has repeatedly said that Jain has probably made more money
for shareholders than he has. In 2011 he said the board would
make Jain CEO if he wanted the job.
Abel has steadily expanded a utility holding company in
Iowa into a colossus in the energy industry. It runs several
power companies throughout North America and the U.K.,
interstate natural gas pipelines, and giant wind and solar
farms. Its a big part of Berkshire that stands to get only
bigger, Buffett said in May, adding that its hard to imagine
a better-run operation.
A key distinction between the two executives is age: Jain
is 66, Abel is 55. Buffett is proof that the CEO can do well by
been facing some health challenges that could eventually make
working more difficult, according to people whove recently
spent time with him. Analysts and some longtime investors
dont think he wants the job. Hes also spent his career in
  REMARKS
insurance, a business less essential to Berkshire
than it once was.
All this has many Berkshire investors and others
close to the company homing in on Abel. When
Sarah DeWitt, an analyst with JPMorgan Chase &
Co., initiated coverage of Berkshire in September,
she noted the energy executive was the most
likely successor. While Jain was also a possibility,
she wrote, his age may preclude him.
Berkshires success has created a massive challenge:
its size. This years U.S. stock rally has helped push
the company toward a market value of almost half
a trillion dollars. A conglomerate that big simply
cant grow as fast as a smaller business.
Not only will returns most likely be lower under
the next CEO but the job itself will be more difficult.
In May, Buffett estimated that over the next decade,
the company will have to figure out what to do with
some $400 billionmore than hed deployed over
the previous five decades. You need a very sensi-
ble capital allocator in the job, Buffett said of his
successor. Capital allocation might even be their
main talent.
Thats a skill Abel has spent years honing. An
accountant by training, he joined the business he
now runs in 1992 when it was a small geothermal
power producer in California. Its head at the time
18
was Sokol, who spotted talent in the young execu-
tive and promoted him to bigger roles. In 2000, as
investors chased the latest dot-com stocks, Berkshire
bought a majority stake in the business.
Being part of Buffetts empire created an oppor-
tunity. Abels company, then called MidAmerican
Energy Holdings, was able to retain its earnings, a
rarity in the utility industry, where the norm is to
pay generous dividends. That extra cash meant he
and Sokol had to find opportunities to reinvest the
money. They snapped up more power companies
and pipelines. They also expanded aggressively into
renewable energy. The companys Iowa utility now
generates about half its electricity from wind.
In 2008, Abel became CEO of MidAmerican. Sokol
took on a broader position at Berkshire at that time
but resigned three years later after trading in the
stock of a company he suggested Buffett buy. A
board committee found that hed broken the com-
panys insider-trading rules. Regulators declined
to take action.
Stepping out from Sokols shadow over the past
decade has increased Abels prominence at the
conglomerate. In 2014 his business was renamed
Berkshire Hathaway Energy, indentifying it more
closely with Buffett.
From outward appearances, Abel is the antith-
esis of a Wall Street master of the universe. He
grew up in Edmonton, studied commerce at the
University of Alberta, and runs his business from
Des Moines. Like Buffett, hes no hayseed and can
easily keep pace with Harvard-trained elite. Hes
Bloomberg Businessweek December 11, 2017
negotiated many tough deals. For a time, he ran a
utility in the U.K. People whove worked for him
say hes steeped in the details of his operations. He
often visits his far-flung utilities in person. Hes
made big bets, says Jeff Matthews, an investor
whos written three books about Berkshire. Hes
as smart as they come.
In a way, Abel has structured his empire to
mirror the way Buffett runs the whole conglom-
erate. Berkshire Hathaway Energy employs more
than 20,000 people across all its businesses. But the
head office has about two dozen staff. That keeps
the overhead small and leaves most decisions to the
presidents of the companys utilities.
Abel has also been getting exposure to other
industries. Hes a director of Kraft Heinz Co., the
food giant that Berkshire controls with buyout firm
3G Capital Inc. Hes also served on the boards of an
Iowa convenience-store chain and two insurance Abel
companies. In addition, he oversees Berkshires large
residential real estate brokerage business and an
investment in Chinese electric car maker BYD Co.
Like many Berkshire executives, Abel is already
very wealthy. Hes collected tens of millions of
dollars in salary and bonuses over the years. He
also has a 1 percent stake in the business he runs.
According to regulatory filings, that holding can be
converted into more than $400 million worth of
Berkshire stock, a move that would directly align
his interests with shareholders if he became CEO. Jain
I would certainly applaud that, says David Rolfe,
chief investment officer of Wedgewood Partners
Inc., a money manager that owns stock in Berkshire.
That would not be an unnoticed throwaway line
in the press release on succession.
Abel doesnt seem like hes gunning for Buffetts
job, and he could even turn it down if asked. He
doesnt exude Buffetts charisma and rarely does
interviews. But that doesnt matter. Spending hours
on cable TV and hobnobbing with celebrities such as
LeBron James and Arnold Schwarzenegger is fun, but
its not what made Buffett so successful. The next
CEO will not have the same PR requirements, says
Richard Cook, a longtime Berkshire shareholder and
fund manager in Birmingham, Ala. Being as good as
Buffett is on CNBC is not a way to judge the results.
Buffett is singular. There are shelves of books
about him. Legions of investors have been inspired
by his way of thinking about business and money.
At stake in succession is whether his lifes work will
live onas he says it willor whether it only makes
sense with him at the top.
His successor will have to protect that legacy
while running one of the worlds biggest and most
unusual conglomerates. Hell have to allocate bil-
lions of dollars, manage the occasional scandal that
could tarnish the companys reputation, and keep
the dozens of CEOs who run Berkshires businesses
AP PHOTO (2)
motivated and happy. Perhaps most important, hell
have to keep outsiders from tearing it all apart. 
 LOOK AHEAD 3M reviews its 2018 outlook with Warehouse club operator Costco Citigroup, Capital One, and
analysts on Dec. 12 Wholesale releases its quarterly JPMorgan Chase report credit card
earnings on Dec. 14 delinquency rates

CVS Brings One-Stop B

Shopping to Health Care
Its $67.5 billion deal for an agreement in January to acquire the outpatient
U
S
surgery chain Surgical Care Affiliates Inc.
Aetna could transform the way Even before the DaVita deal, about 30,000
America goes to the doctor doctors were affiliated with OptumCare. They
treat UnitedHealths members, as well as custom-

I
ers of rival health insurers. The company doesnt
own drugstores, but its pharmacy benefit manager
serves 65 million peoplecompared with 90 million
Most companies pursuing an acquisition have pre- members at CVSs PBM. UnitedHealths profits and
dictable goals in mindboosting market share,
perhaps, or diversifying earnings. But drugstore
operator CVS Health Corp. has somewhat grander
ambitions for its $67.5 billion purchase of health
share performance have outpaced those of many
other big health companies in recent years.
The path here has been led by UNH/Optum,
Matthew Borsch, an analyst at BMO Capital Markets,
N
insurer Aetna Inc.: changing the way Americans go
to the doctor. The deal would create a behemoth that
would try to shift some of Aetna customers care away
from doctors and hospitals and into thousands of CVS
said in a research note about the CVS-Aetna plan.
We see a bold strategy to match (and possibly leap-
frog) the health-care/PBM integration strategy.
The integration is part of a wide-ranging effort
E
stores. Think of these stores as a hub of a new way
of accessing health-care services across America,
says CVS Chief Executive Officer Larry Merlo. Were
bringing health care to where people live and work.
by health insurance companies and the federal

S 21

S
The buyout would combine the largest U.S. drug-
store chain with the third-biggest health insurer.
CVS also manages drug benefits plans for thou-
sands of employers and insurers, a business that
could help steer some of Aetnas 22 million custom-
ers to CVS pharmacy counters when they fill a pre-
scription. Already, CVS has 1,100 MinuteClinics in
its pharmacies, where nurse practitioners and phy-
sician assistants provide routine care such as flu
shots or wrapping sprained ankles. Its also trying
out hearing and vision centers in a handful of loca-
tions. If the merger goes through, CVS plans to build
mini-health centers in many more of its 9,700 stores, December 11, 2017
turning them into places where Aetna members
Edited by
and customers of rival insurersget convenient low- James E. Ellis
level care for ailments and chronic diseases. And
PHOTOGRAPH BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK

having a closer tie to where customers are treated Busines m

could help Aetna better manage their ailments
earlier, more efficientlyand less expensively.
Although some on Wall Street say CVSs interest in
bulking up is a defensive move driven by persistent
rumors that Amazon.com Inc. may enter the
pharmacy business, the company seems to have
a different rival in mind: UnitedHealth Group Inc.
The biggest U.S. health insurer, UnitedHealth has
been expanding its OptumCare arm, which owns
clinics and surgery centers, as it seeks to gain more
control over how care is delivered to its customers.
UnitedHealth agreed on Dec. 6 to acquire about
300 doctor practices from DaVita Inc. after striking
  BUSINESS
government to shift care away from paying for
each service and toward paying doctors and hos-
pitals for taking better care of patients and keeping
them healthier. The approach, known as val-
ue-based care, challenges the industrys traditional
reimbursement models.
Putting different aspects of care under the same
roof also can remove perverse incentives from the
system. For example, some critics have said that
PBMs contribute to drug price hikes because they
profit from back-end rebates and fees extracted
from pharma companies. Making them part of the
same company that delivers care and offers health
insurance can ensure it doesnt happen, says Craig
Garthwaite, a professor of strategy at Northwesterns
Kellogg School of Management. When different parts
of the system combine, everyones profit motives
are aligned at providing care that leads to good
outcomes, he says.
CVS and Aetna say theyll be able to reduce costs
by directing some patients to lower-cost sites of care
in CVS stores, keeping them out of emergency rooms
and hospitals. About 70 percent of the U.S. popula-
tion lives within 3 miles of a CVS location, accord-
ing to David Larsen, an analyst at Leerink Partners.
This is going to be appealing to a huge number
of people, says Ingrid Lindberg, president of Kobie
Marketing
k Inc. and
d a former chief
h customer experi-
22
ence officer at health insurer Cigna Corp. Theres
a large majority of people who are truly driven by
ease and convenience when it comes to their care.
Ateev Mehrotra, a professor at Harvard Medical
School, says his research has found that retail clinics,
by making care more convenient and accessible,
actually raise health-care costs because people go
to them more often. Thats bad news if youre also
an insurer. The majority of visits we see at retail
clinics represent new utilization, he says. Because
of that, in contrast to the people who have said retail
clinics would reduce health-care spending, weve
seen it increase health-care spending.
Debating such outcomes could remain an aca-
demic exercise if the CVS transaction doesnt gain
government approval. Courts and regulators tend
to go easy on vertical mergers, such as CVS-
Aetna, which combine companies at different
levels in the supply chain, such as manufacturers
with retailers. The logic is that the combbination can
Bloomberg Businessweek December 11, 2017
improve efficiency and lower prices for consumers.
Authorities tend to worry more about horizontal
mergers, which combine companies at the same
stage of production. In January a federal court
blocked Aetnas proposed horizontal merger with
Humana Inc., a fellow health insurer.
In weighing the CVS-Aetna deal, the Department
of Justice or the Federal Trade Commission could
try to determine whether there is a long-term eco-
nomic benefit to a strategy that harms rivals even if it
Merlo
means a short-term hit to profits, says Jennifer Rie,
a senior analyst at Bloomberg Intelligence.
CVS wont get a free pass. In November the Justice
Department sued to stop the merger of AT&T Inc. and
Time Warner Inc., also a vertical integration. The Change in share
price at months end
CVS-Aetna dealmakers are making the case that their since Dec. 31, 2014
combination would bring new services to the market, UnitedHealth
such as the planned pharmacy clinics. That could Cigna
persuade regulators to give the proposal a chance. In Aetna
contrast to AT&T-Time Warner, says Jonathan Rubin, Anthem
an antitrust attorney and partner at MoginRubin LLP,
its a more believable story that the vertical merger 120%
is related to innovation.
The buyout rests on an untested strategy, however,
and some on Wall Street question whether the com-
panies can persuade enough consumers to switch to 60
their in-house services. Says John Schroer, a health
portfolio manager at Allianz Global Investors: Health
care is a very complicated business, and its not so
easy to say its a new world and just do it this way. 0
Zachary Tracer, with Robert Langreth and Peter Coy 12/2014 11/2017
THE BOTTOM LINE CVS operates 9,700 drugstores. By buying
Aetna, it wants to funnel more of the insurers customers into
health centers at its retail locations.
DATA: AIRLINE WEBSITES. AIR FRANCE FARE FOR MARCH 18 FLIGHT, ITS LAST SUNDAY ON THAT ROUTE; JOON AND EASYJET FOR MARCH 25.
Air France Goes for
(Not Too) Cheap Chic
Its starting Joon, a discount line for
millennials wholl pay extra for the cool
What corporate France lacks in its ability to cut
costs, it makes up for in style. That appears to
be the recipe at Joon, a buzz-driven offshoot of
Air France-KLM that started operating on Dec. 1.
The marketing pitch goes like this: Tech-savvy and
fashion-conscious flight attendants serve baobab
MERLO: STUART RAMSON/AP IMAGES
juice and organic quinoa salad as video-streaming
millennials jet from Paris to Barcelona and Brazil,
all at discount prices.
The reality is slightly less glamorous. Despite all
the hipster hype, Joona riff on jeune, French for
youngis based on a decidedly old-school strat-
egy designed to boost earnings by cutting costs more
 BUSINESS
steeply than fares. At stake is Air Frances ability to
defend European routes against further incursions
from no-frills specialists led by Ryanair Holdings Plc,
while also combating an emerging discount chal-
lenge from the likes of Norwegian Air Shuttle ASA
in lucrative long-haul markets.
Air France, Europes largest airline, has been
flying high amid a business resurgence this year, as
the number of visitors to France recovered after a
spate of terrorist attacks. Operating profit jumped
44 percent in the first nine months from the year-
earlier period, and the share price doubled. But ana-
lysts say the airline must use the business rebound
as an opportunity to better manage its high costs.
Air France needs to improve its cost perfor-
mance relative to competitors in order to thrive in
an environment that may not be as benign as the
one we have today, says Andrew Lobbenberg, an
aviation analyst at HSBC Holdings Plc in London.
Thats what Joon is about.
The unitthe companys fourth brand alongside
the mainline Air France, short-to-medium-haul,
low-cost unit Transavia, and regional arm Hop!is
based at Paris Charles de Gaulle Airport. It will ini-
tially serve Barcelona, Berlin, Lisbon, and Porto,
Portugal, before next year adding more far-flung
destinations including the Seychelles and Fortaleza
in Brazil. Routes will also include Cairo, Cape Town,
Istanbul, Oslo, and Rome. Its applied for flights to
the U.S., too. Current union agreements would limit
the fleet to 28 aircraft.
Joon was born out of a compromise by Jean-Marc
Janaillac, chief executive officer of Air France-KLM,
who chose to develop it while backing away from the
more overtly cut-price Transavia. Union opposition
to that units much lower wages contributed to the
departure of former CEO Alexandre de Juniac in 2016.
Transavias business plan called for significant con-
cessions from pilots, but Joon will pay them as much
as Air France does. The new carrier instead will get
savings of 40 percent on the cost of its cabin crews,
vs. those at Air Frances mainline brand, by using
fewer, lower-paid attendants wholl also help tidy the
planes between flights, speeding turnarounds. That
will reduce overall expenses by as much as 18 percent.
Ticket prices wont be the lowest, with a
one-way trip to Lisbon on Jan. 8 priced from 50
($59), according to Joons website. Thats cheaper
than previously charged by Air France, which will
vacate routes that Joon takes up, but still 8.74
more than the same journey with EasyJet Plc,
Europes second-biggest discount carrier and a
major force in the French market. Its also 11
higher than a flight by Transavia, which will con-
tinue servicing some of the same routes.
Hence the focus on cool, as Joon seeks to woo
travelers who are somewhat price-sensitive but who
alsoit hopesput a high value on technology and
lifestyle perks. The cabin crew will wear electric-blue
polo shirts and white sneakers that resemble
Bloomberg Businessweek December 11, 2017
Adidas AGs popular Stan Smiths. Passengers will
be able to stream movies and shows on their own
devices, a strategy to appeal to the always-connected
crowd while saving the airline the expense of fancy
seatback screens. All seats will feature USB ports for
charging and, starting next year, free Wi-Fi. Other
perks will come at a price, among them checked
luggage, programs from the Viceland and Red Bull
TV channels viewed via virtual-reality headsets, and
the baobab juice.
Franck Terner, CEO of the Air France mainline Joons Paris-to-Rome
fare for March 2018
unit, describes Joon as a laboratory for experiments beats Air Frances but
in marketing and pricing, comparing its launch to that not those of leading
of Richard Bransons mold-breaking Virgin Atlantic discounters
Airways Ltd. in the 1980s. Yet an ad campaign that
likens Joon to a trendy rooftop bar and fashion 108
Air France
designerbefore adding that its also an airline
has drawn criticism that its patronizing to younger
travelers and misinterprets their needs. 96
Joon
What we care about are the same things that old
people care about: cheap, reliable flights that have got
no hidden costs, humorist Paul Taylor said on Whats 76
EasyJet
Up France?, his Canal Plus TV show. Maybe instead
of trying to create a new condescending airline, try
to fix the ones you already got. Ania Nussbaum
THE BOTTOM LINE Air Frances operating profit rose 44 percent
in the first nine months of 2017 from a year earlier. Its using its
improved finances to start a discount line to lower long-term costs.
23
Bartender, Ill Have
A G&T. Hold the Gin
Diageo is backing a startup that makes faux
spirits for $55 a bottle
As hipsters rediscover classic cocktails like the
Sidecar, their teetotaling friends are stuck with cola,
water, or such treacly confections as the Shirley
Temple. After one too many mocktails at pubs, Ben
Branson decided to create a nonalcoholic alternative
to booze that didnt taste like it was made for children.
Turning to The Art of Distillation, a spirits-making
guide first published in 1651, the former branding
consultant began experimenting in his kitchen in a
cottage near London. The result: Seedlip, a ginlike
drink that aims to deliver the depth of flavor and
mouthfeel of a high-end spiritbut with no alcohol.
Introduced two years ago, Seedlip is riding the
wave of interest in more healthful artisanal food
and drink thats boosting sales of everything from
quinoa to craft beer to premium tonic. Bransons
brand, which comes with the pretensions of the
  BUSINESS Bloomberg Businessweek December 11, 2017

trendiest small-batch spiritsand the premium

price, $55 in the U.S.is stocked in more than 100
Michelin-starred restaurants. It sells online for more
than four times the price of Ginsin, which markets
itself as a nonalcoholic gin made with botanicals
including hibiscus and lavender. Last year, Spirits
giant Diageo Plc took a minority stake in Seedlip. We
know we should be exercising, we know we should
probably be drinking less midweek, says Branson,
who gave up alcohol about seven years ago. I wanted
to do something about it and solve this dilemma of
What do you drink when youre not drinking?
Nonalcoholic beerscontaining less than
0.5 percent alcoholsuch as ODouls in the U.S. and
Germanys Clausthaler have been around for years.
But recent entrants like Nirvana Brewery in London
are trying to infuse the category with some craft cool,
with such brews as Kosmic Stout and Karma Pale Ale.
And Danish brewer Carlsberg A/S says European sales
of low-alcohol beers such as its 0.5 percent-alcohol
Nordic Pilsner rose 13 percent in the first half of 2017
vs. the year-earlier period. Dutch rival Heineken NV is
banking on the nonalcoholic Heineken 0.0 its intro-
duced in 14 countries since last summer. You know,
25 years ago everyone was drinking alcohol at lunch,
and thats quasi-disappeared today, Jean-Franois
van Boxmeer, Heinekens chief executive officer, told
investors at a conference in November. Why not
24
drink a 0.0 beer instead of water?
If the day of peak alcohol has gone, Seedlip is
among the early winners of the morning after.
Industry tracker IWSR estimates that global alcohol
consumption fell 1.3 percent last year amid growing
concern about the effects of excessive drinking.
While low- or nonalcohol faux spirits, wine, and beer
remain a tiny niche, sales grew almost 5 percent in
2016, researcher Euromonitor International says. At
Selfridges, the tony London department store that

was the first to stock the drink Branson was bottling
by hand in 2015, the initial batch of 1,000 bottles sold
out in the store in three weeks, the second in three
days, and the third in three minutes online.
It takes six weeks to make Seedlip, named after
the baskets that farmers in Bransons home region of
Lincolnshire used to sow their grain fields a century
ago. The company makes two versionsGarden 108,
with hints of spearmint, and Spice 94, redolent of
cardamom. The botanicals, from citrus peel to bark,
are macerated before being distilled in copper pots
much like any liquor. That concoction is boiled down
to burn off the small amounts of alcohol used in the
process, leaving a concentrated distillate with no
potential for getting you drunk. Its blended and
mixed with water to create an aromatic liquid akin
to gin, which goes down smoothly but still manages
to taste and feel something like a stiff drink. Seedlip
will release a second alcohol-free drink next spring.
To build interest in the brand, Branson has lined
up support from the likes of Joe Hodrien, supervisor
at the American Bar at Londons Savoy Hotel, which
PHOTOGRAPH BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK. ILLUSTRATION BY OSCAR BOLTON GREEN
topped the Worlds 50 Best Bars list earlier this year.  Seedlip NOgroni
Nonalcoholic drinks have always had a stigma, espe-
1 oz. Seedlip
cially with groups of guys, Hodrien says. Seedlips Spice 94
seen as more serious. In March the bar revamped 0.8 oz. NA bitter aperitif
its menu with five Seedlip-based cocktails made with 0.8 oz. NA sweet
ingredients such as kefir, coffee cordial, and goose- vermouth
berry jam. About 1 in 5 tables orders a drink made Combine in an Old
with the stuff, he says. In the U.S., New Yorks Dean Fashioned glass, giving
a short stir. Garnish
& DeLuca grocery and Dead Rabbit Grocery and with an orange twist.
Grog bar and San Franciscos Atelier Crenn restau-
rant stock the brand. Berry Bros. & Rudd, Londons
most august wine merchant, says Seedlip has seen
strong sales since it was added to the lineup last
year. And Stuart Elkington, who last year founded
a website called DryDrinker.com, says its among
his top-selling products. Theres been a dramatic
increase in demand, Elkington says. The growth
is phenomenal. Thomas Buckley
THE BOTTOM LINE Tapping into the trend of artisanal, small-
batch spirits, Seedlip is in the vanguard of a growing cadre of
companies offering ersatz booze.
 BUSINESS
An Indian HIV Drugmaker
Takes On Big Pharma
Laurus, a maker of HIV drug ingredients in poor countries, aims to sell in the U.S.
While HIV treatment in rich countries is dominated
by brand-name medicines from huge Western
pharmaceutical companies, in the developing
world copycat versions have long been allowed to
combat the epidemics spread. And supplying the
raw ingredients for this bulk market has long been a
core business for Indias Laurus Labs Ltd. Now the
Hyderabad-based company is preparing its mammoth
plantthe size of 35 football fieldsamong the coconut
plantations and beaches of South India to flood the
U.S. market with low-cost copycat HIV medicines.
U.S. patents on key components for some import-
ant HIV therapies are poised to expire, and Laurus
is gearing up to cash in. Its one of the worlds
biggest suppliers of ingredients used in antiretro-
virals, thanks to cheaper production costs than
competitors. Chief Executive Officer Satyanarayana
Chava wants to use that edge to sell his own finished
drugs in the U.S. and Europe. He predicts some
generics Laurus produces will eventually sell for
90 percent less than branded HIV drugs in the U.S.,
slashing expenditures for a disease thats among the
costliest for many insurers. The savings for U.S.
payers will be so huge when these generic combi-
nation drugs are available in the U.S., Chava says.
Payers will save billions of dollars.
The parade of patent expirations begins in
December, when Bristol-Myers Squibb Co.s Sustiva
loses protection. Gilead Sciences Inc.s Viread
follows in January. Neither company responded to
requests for comment.
With 1.1 million people infected with HIV in
the U.S., and many of them living longer thanks to
treatment, HIV drugs have become an $18.8 billion
business for the pharmaceutical industry there,
according to data provider IQVIA. A years worth of
a combination of Viread, Sustiva, and a third drug
sold in pill form under the brand name of Atripla
has an average wholesale price of almost $37,000 per
person, according to U.S. Department of Health and
Human Services data. In the developing world, the
same combination can cost as little as $100 per person
annually, according to Doctors Without Borders.
Although Laurus doesnt yet make the pills, its
become a dominant supplier of their key ingredients.
The best way to fight HIV is with a combination
of drugs. Since Viread and Sustiva form key parts
Bloomberg Businessweek December 11, 2017
of some of the most effective combinations, includ-
ing generic versions of these chemicals could bring
down the cost of the whole treatment. One analy-
sis cited by Health and Human Services found that
replacing a three-medicine, branded combination
with multiple pills including generic Sustiva could cut
spending in the U.S. by $900 million in its first year.
In the U.S., Laurus will be going up against much-
larger rivals such as Israels Teva Pharmaceutical
Industries Ltd., the worlds biggest generic drug
company, which will beat it to market on generic
Viread. Other generics makersmany of which are
customers of Laurusare expected to enter the
market, too.
Meanwhile, the companies that hold the original
25
patents, such as Gilead, have been successful at
switching patients to newer therapies to limit the
impact of generic competition on the old ones,
according to Bloomberg Intelligence analyst Asthika
Goonewardene. He forecasts that generic competi-
tion wont make a big dent in the $2.6 billion a year
Gilead gets from HIV drugs.
Lower prices alone may not guarantee success in
the U.S. Between government programs providing
treatment for the uninsured and drug company-
funded ones helping the insured with their copays,
HIV patients in the U.S. are often sheltered from the
full cost of their medicines. So they may have little
incentive to switch to cheaper alternatives, says
Tim Horn, deputy executive director of Treatment
Action Group, an AIDS policy think tank. Still,
Horn says private and public insurers, which pay The savings
the greater part of the full sticker price and then for U.S. payers
spread those costs through the system in the form
will be so
of higher premiums and charges, are likely to push
for generics. huge when
Chava says hell eventually be able to under- these generic
cut bigger rivals such as Teva on price, and the combination
savings offered to insurers from generics will prove
drugs are
irresistible as more components of the older drug
combinations go off patent in the next three years. available
We believe well be able to bring cost-effective
generic alternatives to the U.S. market, he says.
We have the scale. Ari Altstedter
THE BOTTOM LINE HIV drugs have become an $18.8 billion
business in the U.S. for Big Pharma. Indias Laurus Labs aims to
make generics of key medicines to win some of that business.
LOOK AHEAD Adobe earnings will show whether
the companys strong two-year run Qualcomms entire board, making its
of new subscribers is slowing takeover bid decidedly more hostile
Hatreon says its been
relaying $25,000 a month,
mostly to avowed white
supremacists
Neo-Nazis are cowards. The occasional rally aside,
most of the white supremacists whove been embold-
ened in the Trump era arent brazen enough to
wave their flags publicly. Instead, they keep to
online forums, where its a lot easier to talk tough
beneath the blanket of anonymity. But while Twitter
and Facebook rarely ban haters, crowdfunding and
payment services including Kickstarter, Patreon,
PayPal, and Stripe have taken a harder line, prevent-
ing avowed racists from using their services to give or
collect money. Thats where Cody Wilson comes in.
Wilson is a rare kind of troll, one who senses
market opportunities. The 29-year-old first gained
notoriety in 2013, when he published an open source
design for a plastic gun that passes unnoticed through
metal detectors and can be made with an entry-
level 3D printer. Now hes trying to arm stated white
supremacists with donations from fansand taking
a 5 percent cut for himself. In October, Wilson for-
mally launched Hatreon, an unabashed Patreon for
hate groups, after a couple of quiet months of oper-
ation. Im renting this infrastructure to these unde-
sirables of the internet, he says, and its working.
So far, Hatreon is a one-man operation in Austin.
Wilson says he collects $25,000 in monthly dona-
tions from a few thousand people. But the number
of recipients is even smaller, so that can translate
into real money. The big winners are white suprem-
acists. Andrew Anglin, the creator of prominent
neo-Nazi website the Daily Stormer, receives almost
$4,000 a month from more than 220 Hatreon donors,
down from a peak of about $8,000. White suprem-
acist leader Richard Spencer collects about $1,000
from more than 70 donors. Wilson says his own slim
Broadcom is pushing to replace AIM, the long-running AOL
messaging service, bids a nal
Goodbye!
T
E
C
profits5 percent of $25,000 is $1,250have been dou-
H
bling from month to month.
Credit for truth in advertising, says Ben Wizner,
an attorney at the American Civil Liberties Union
who specializes in technology cases. People are well
N
within their rights to raise money on Hatreon as long
as they arent threatening or inciting violence, he
says. Other services have banned several of Wilsons
users for doing precisely those things.
O
A law school dropout and self-styled anarchist
fond of quoting Thomas Paine, Wilson doesnt iden-
tify with the alt-right, but he says he doesnt see the
term as a slur, either. Freedom of speech is his prior-
L 27
O
ity, he says, and right-wing women, people of color,
and transgender people use Hatreon, too. Above all
else, though, Hatreon is very important to the finan-
cial functioning of the white supremacist movement,
says Heidi Beirich, director of the Southern Poverty
Law Centers Intelligence Project, which publishes
the blog Hatewatch. Hatreon is keeping a lot of these
folks alive. Its keeping them paid.
G
Y
The plastic guns helped Wilson define himself as
an online provocateur catering to the extreme right.
Hes loved in this movement, Beirich says. Wilsons
small nonprofit, Defense Distributed, founded in
2012, has been embroiled in years of federal suits,
countersuits, and appeals for posting its gun designs
online and for selling a milling machine called Ghost
Gunner that can be used to make untraceable metal
handguns and assault rifles. Most of the money left
over from Defense Distributeds $3 million-plus in
sales has gone toward Wilsons legal battles.
In the crowdfunding business, Wilsons advantage
has been his web-hosting and financing acumen, plus
a willingness to run his business like a porn site. While
a right-wing Kickstarter clone was recently booted
off its hosting platform, dodgy overseas hosting com-
panies keep Wilsons sites online. Similarly, layers
of shell companies disguise Hatreons identity from December 11, 2017
partner banks. Theres a lot of great market ways to
get financing on the internet, Wilson says. Edited by
Jeff Muskus
Hatreon is experiencing a hiccup of its own. Just
before Thanksgiving, Wilson stopped sending Businessweek.com
  TECHNOLOGY
revenue to users and taking new donation pledges
because some of his banks unraveled the nest of shell
companies and dropped him. Hannah Shearer, staff
attorney at the Giffords Law Center to Prevent Gun
Violence, which has lobbied to shut down Defense
Distributed, says shes convinced Wilson knows
Hatreon is being used to break the law and his banks
probably do, too. Wilson says Hatreons own terms
of service forbid illegal activity and that hes kicked
people off the site for violating them, though he
wouldnt name any.
The ACLUs Wizner says Hatreons limbo, though
it may be short-lived, is evidence of Wilsons vaunted
market forces at work. After Charlottesville, its
much more difficult for people in this country to
deny the existence and threat of white supremacy,
he says. You saw the CEOs of major corporations
distancing themselves from Trump, and a week after
Charlottesville in Boston, 40,000 came to counter-
protest 30 or 40 white supremacists. I think that
speaks for itself. Adam Popescu
THE BOTTOM LINE Hatreons predominant use by white
supremacist leaders and supporters belies its founders claims
that its a stand for all forms of free speech.
28
How Much
Privacy Would
You Trade for
Better Health?
Alphabets AI division is working
with hospitalsand raising
condentiality concerns
DeepMind Technologies Ltd., a leading artificial
intelligence company owned by Googles parent,
Alphabet Inc., wants to use AI to solve well, every-
thing. Last year its software taught itself to trounce
humans playing the strategy game Go. For its next
trick, DeepMind is trying to figure out how its digital
brains can save lives.
The companys Go team may be years away from
practical applications of its work, but a fast-growing
health division of 100 is already keeping an eye on,
and learning from, patients of the U.K.s National
Health Service. At the Royal Free Hospital in London,
a DeepMind app called Streams gives doctors and
nurses instant access to patient records and alerts
Bloomberg Businessweek December 11, 2017
them to changes in condition. The app doesnt use
AI just yet, but in separate projects, the engineers
are trying to teach their software to analyze medical
imagery at the level of an experienced doctor. One
problem with the app: Nobody asked the patients.
DeepMind has revised its information-sharing
agreement with the Royal Free and is taking other
steps to allay public concerns after U.K. regulators
ruled in July that the hospital wasnt within its rights
to give the AI company 1.6 million patient records
going back five years. Although no punitive action
was taken, DeepMind acknowledges making mis-
takes. In our determination to achieve quick impact
when this work started in 2015, we underestimated
the complexity of the NHS and of the rules around
patient data, co-founder Mustafa Suleyman and top
clinician Dominic King said in a statement.
At a moment when tech companies are flooding
into health care, DeepMinds missteps have impli-
cations far beyond a hospital or two. International
Business Machines Corp. claims its Watson AI soft-
ware can help doctors find the best treatments
for cancer. Genome pioneer Craig Venters latest
startup, Human Longevity Inc., wants to custom-
ize treatments based on a patients DNA. Alphabets
other health projects include Verily Life Sciences
LLC, which creates medical device software, and
Calico, which is trying to stretch human life spans.
The U.K.s health system has been counting on
technology to cope with an aging population and
shrinking budgets. But tech companies dont seem
as trustworthy as they did even just last year, when
U.K. regulators began their Royal Free investiga-
tion, and the industrys move-fast-and-break-things
ethos may have real consequences when the things
ILLUSTRATION BY KURT WOERPEL
are people. Patients have been paying with their
privacy, and its almost always the companies that
define the terms of the deal, says Phil Booth, the
coordinator of privacy watchdog MedConfidential.
After Google bought DeepMind in 2014 for a
reported 400 million ($541 million), Suleyman
 TECHNOLOGY
drove the AI companys push into health care.
Theres no other area where we invest so much
money in technology and get so little back, says
Suleyman, whose mother was a nurse. So far hes
been focused on monitoring specific conditions,
rather than trying to make a software version of
Hugh Lauries Dr. House. Acute kidney injury (AKI)
was one of the first things DeepMind designed the
Streams app to alert doctors to.
The value of the apps targeted pragmatism is front
and center at the Royal Free one night this summer.
Soon after a patient on the ninth floor gets a liver
transplant, her kidneys start struggling. When a lab
pathologist enters the patients blood test results
into a computer database, the Streams system com-
pares them to previous results and sounds an alert
on nurse Sarah Stanleys phone to warn her of poten-
tial AKI. She opens the app, reviews the indicators
from the tests, and messages a colleague to check on
the patient. We have just triaged that patient in less
than 30 seconds, she says. In the past, the process
would have taken as long as four hours, a critical
amount of time for someone with AKI.
At Londons Moorfields Eye Hospital, ophthal-
mologist Pearse Keane is trying to help DeepMind
train a computer to read retinal scans as well as he
can. Keane, a clinical researcher, uses optical coher-
ence tomography to get an image of tiny details of
patients eyes. It allows us to see things like bleeding
and leakage into your retina and diagnose the most
common causes of blindness, he says. DeepMind
is working with two London universities on similar
projects for head and neck scans and mammograms.
To assuage privacy advocates, it has set up and
funded a panel of outside investigators to conduct
annual public reviews of its work with hospitals,
published its contracts (with a few redactions), and
announced plans for an audit trail of patient data
access similar to the blockchain technology that
underpins the cryptocurrency bitcoin.
The companys detractors remain unassuaged.
Julia Powles, a law professor at the University of
Cambridge whos written critically of DeepMinds
initial agreement with the Royal Free, says the revised
contract doesnt explicitly prevent it from transfer-
ring patient data to sister company Google. DeepMind
says it will never give any data to Google. If they cant
put that in writing, I find it hard to believe them, she
says. While DeepMind is giving Streams away for now,
Powles adds, once hospitals are locked into the tech-
nology, the company would be free to charge what-
ever it likes. DeepMind says a commercial product is
a long way off. It earned only 40 million in revenue
in 2016none of it from health workand reported a
loss of 94 million, according to accounts filed with
U.K. business registry Companies House.
The NHS should be thinking now about what com-
mercialization will mean, according to John Bell,
a doctor who chairs the U.K.s Office for Strategic
Coordination of Health Research. He recently
Bloomberg Businessweek December 11, 2017
recommended that the NHS retain an economic inter- Patients have
est in any AI developed using its data. Our proj-
been paying
ects so far have assumed the right way to give value
back to the public is through initially providing our with their
resources and technologies to our NHS partners for privacy, and its
free, DeepMind said in an emailed response, adding almost always
that it was open to discussion of other ways of valuing
the companies
its services. The Royal Free said in a statement that it
was happy with the terms of the agreement. that dene the
For now, DeepMind is signing agreements to terms
put the Streams app in more NHS hospitals, and
Suleyman says the company has received interest
from U.S. doctors, too. But some administrators have
become more leery of pairing their patient data with
tech projects, especially those involving systems they
dont quite understand. Taunton & Somerset NHS
Foundation Trust, one of the hospitals now using
Streams, says its ruled out doing anything with AI.
Suleyman can afford to be patient. Health care is
incredibly valuable and incredibly broken, he says.
There is a massive opportunity to transform it with
AI at some point in the future. At this point, though,
the industrys challenges have made beating the
worlds best Go players look easy. Jeremy Kahn
THE BOTTOM LINE DeepMinds work with U.K. medical records
is just one of the ways tech companies taking aim at health-care
problems are seeking access to sensitive patient data.
29
If Anyone Asks,
Youre Steves Friend
Ambiance and atmosphere models
are in high demand for Silicon Valleys
corporate parties this holiday season
Along with a seemingly endless string of harass-
ment and discrimination scandals, Silicon Valleys
homogeneity has a more trivial side effect: boring
holiday parties. A fete meant to retain all your tal-
ented engineers is almost certain to wind up with a
rather same-y crowd, made up mostly of guys. At this
years holiday parties, however, therell be a surpris-
ing influx of attractive women, and a few pretty men,
mingling with the engineers. Theyre being paid to.
Local modeling agencies, which work with
Facebook- and Google-size companies as well as
much smaller businesses and the occasional wealthy
individual, say a record number of tech compa-
nies are quietly paying $50 to $200 an hour for
each model hired solely to chat up attendees. For
a typical party, scheduled for the weekend of Dec. 8,
Cre8 Agency LLC is sending 25 women and 5 men,
all good-looking, to hang out with pretty much all
men who work for a large gaming company in San
  TECHNOLOGY
Francisco, says Cre8 President Farnaz Kermaani.
The company, which she wouldnt name, has hand-
picked the models based on photos, made them sign
nondisclosure agreements, and given them names of
employees to pretend theyre friends with, in case
anyone asks why hes never seen them around the
foosball table.
The companies dont want their staff to be talking
to someone and think, Oh, this person was hired to
socialize with me, says Kermaani, whos sending
models to seven tech parties in the same weekend.
While this sounds crazy after a year packed with
harrowing stories of sexual harassment, abuse,
and discriminationa tidal wave that started in San
Francisco, with Uber Technologies Inc.its part of an
older trend. Tech companies have long used models
to run their booths at trade shows such as CES in
Las Vegas, hype up crowds at product launches,
and direct foot traffic at conferences. That said, this
years record-setting requests for the minglers, known
as ambiance and atmosphere models, are a step
beyond what the industry has seen before, says Chris
Hanna, whos run TSM Agency since 2004 and counts
among his clients one of the largest search engines
in the world.
Traditionally, if I go back, say, over the last five
years, if people requested these types of models, it
was more for specific responsibilities, Hanna says.
30
Be a hostess. Show them the elevator. Now theyre
trending more toward the fun, the atmosphere. That
includes costume parties, he says. So far this year, his
models have been asked to dress up in outfits based
on The Price Is Right and like Elizabethan nobles or
forest nymphs to accommodate a slightly confused
medieval theme.
The agencies say clothing stipulations help
them screen for ulterior motives. Olya Ishchukova,
chief executive officer of Models in Tech, says she
frequently rejects company requests for cleavage
and short-shorts. When a client recently asked for
Pink Panther-themed latex bodysuits, I pretty much
explained to him that this is not what we doand that
could actually hurt his business if the public found
out, she says. She turned down the gig.
Ishchukova says she prefers not to send models on
atmosphere jobs without specific tasks such as check-
ing coats or serving food. Such tasks help remind
everyone theyre there for work, and nothing
extra is going to happen, she says. Hannas agency
is among those with a zero-drinks rule for models
on the job. Most models contracts say they wont
exchange contact information with party guests, and
that gets tougher to handle with grace when theyre
legally bound to pretend theyre guests, too.
The guests, of course, are generally less restrained.
Holiday parties have featured prominently in several
harassment stories in recent months. As Bloomberg
reported in November, prominent venture capitalist
Shervin Pishevar allegedly slipped his hand up the leg
of Austin Geidt, Ubers then-head of global expansion,
Bloomberg Businessweek December 11, 2017
at the companys 2014 holiday party. (Hes denied
the allegations, and Geidt didnt comment on them.)
Vox Media Inc. is limiting employees to two drinks
apiece at its Dec. 12 holiday party to curb unpro-
fessional behavior, but so far its the exception.
Cre8s Kermaani visits the startups herself to get a
read on the environment and her models safety. If
somebody is creepy toward me, and Im the owner
of the company, I can guarantee theyll be creepy to
the models, she says. Silicon Valley doesnt have
the best reputation. Sarah Frier
THE BOTTOM LINE Valley modeling agencies are seeing record
numbers of requests for beautiful guests at tech holiday parties,
in case you were wondering if anyone had learned his lesson.
Software to
Fireproof Wine
A Napa vineyards custom AI system
was able to tweak winery controls to
account for a fast-approaching wildre
 Most of Palmazs
unpicked grapes wound
up tasting like ash after
the October fire, making
them a loss
As helicopters rescued people and their pets off
Atlas Peak in Napa, Calif., one night amid Octobers
fires, Christian Palmaz was nearby battling his
own flames. His task: to save his familys winery,
Palmaz Vineyards.
Alone, he walked past the doomed acres of
unpicked grapes to the winery, a series of caves dug
18 levels down into the side of Mount George, where
90 percent of his wine, more than $10 million worth,
was fermenting in tanks. It typically requires con-
stant human monitoring to maintain precise tem-
peratures for the wine, among other things. Palmaz
confirmed the backup generators were running and
able to keep things cool, but as the tech guy without
the savvy of his head winemaker, who was stuck on
the other side of the fires, he had every reason to fear
the wine could be ruined. By the time he checked the
 generators, the guest house was on fire. He hosed
down embers as they flew off the frame.
Yet the winery survived the worst disaster in
the history of Californias wine country unscathed,
because Palmaz wasnt alone, exactly. He had artifi-
cial intelligence on his side.
Felix is the nickname for the Fermentation
Intelligence Logic Control System (Filcs), software
Palmaz engineered to analyze and, eventually, help
micromanage the vineyards 36 winemaking tanks.
Using technology developed by the petroleum indus-
try, Felix gathers data 10 times a second from tem-
perature and density sensors in the tanks and uses
an extensively tested algorithm to adjust settings to
maintain equilibrium. The web-based system had
been online since 2014, its Amazon-hosted data-
base growing by gigabytes a day, but it was always a
backup, a curiosity. The head winemaker had always
been there, so it had never run solo.
Palmaz bumped up the systems aggressiveness,
giving it more leeway to add glycol or warm water
as needed, just as the missing cellar crew might do.
Felix also watches hundreds of valves to quickly spot
any blockages and predict and test possible problems
with fermentation. The system managed the tanks
seamlessly with zero human input. It was never
designed to do that, he says. It saved the wine.
Palmaz, whose dad invented a type of coronary
stent, has a techier background than the average
wine seller. A business management major at Trinity
University in San Antonio, he also studied computer
COURTESY PALMAZ VINEYARDS
and earth science, learning about remote sensing
and regression modeling. In 2007, when he joined
the family business bought by his parents a decade
earlier, he tried to bring that technical expertise to
bear. The staff spent much of their time babysitting
the fermentation process, testing the tanks aromas,
tastes, and textures firsthand. To free them up from  The Filcs system,
constantly monitoring temperature and density, nicknamed Felix, tracks
and analyzes minute
Palmaz developed a way to visualize those charac- changes in the wine
teristics. He spent the next two years tinkering with tanks and adjusts
liquids and algorithms in his garage. settings to maintain
equilibrium 31
Temperature, an indicator of yeast health, and
density, which shows how much alcohol has been
converted from sugar, became his measurements
of choice. He hired Emerson Electric Co., a con-
sultant on gas pipelines and refineries, to make a
custom two-pronged density meter for the tanks.
We told Chris it would be a challenge, because of
the grape skins and stems, and that we hadnt done
it before, says Dave Schratz, senior sales engineer at
Emerson. Palmaz had them make the sensors anyway
for $12,000 to $14,000 apiece, then made his own
sieves to keep the skins and stems out. That was At risk was
the riskiest thing I did. They were crazy expensive, 90 percent of Palmaz
Vineyards wine,
he says, though hes fuzzy on the exact numbers. worth more than
All told, the setup cost the Palmaz family
millionsa huge investment for the boutique winery, $10m
which produces fewer than 10,000 cases a year.
Felixs success under pressure has silenced its doubt-
ers. Dozens of companies have come by to check out
the operation, and E. & J. Gallo Winery, which has
thousands of fermentation tanks, has begun testing
Emersons meters. Palmaz isnt focused on profit-
ing from his innovation, saying it should be open
source and its data available to anyone. Felix should
become a teaching tool, he says, one that can help
explain the reasons for wines subtle variations. I
want to get as much information out of it as possi-
ble, and the best way to do that is to open it up to
the world. Larissa Zimberoff
THE BOTTOM LINE Palmaz says his homegrown temperature-
tweaking AI at his familys vineyard saved at least $10 million
worth of wine during Octobers Napa Valley fire.
 LOOK AHEAD Dec. 15 is a quadruple witching
day, when four kinds of futures executive chairman of Cisco Systems.
3 and option contracts expire
F
I
N
A
N
C
32
E Thinking About Bitcoin?
Beware the Whales
A handful of big investors
are able to rock the market with
a shrug
On Nov. 12, someone moved almost 25,000 bit-
coins, worth about $159 million at the time, to an
online exchange. The news soon rippled through
online forums, with bitcoin traders arguing about
whether it meant the owner was about to sell the
digital currency.
Holders of large amounts of bitcoin are often
known as whales. And theyre becoming a worry
for investors. They can send prices plummeting by
selling even a portion of their holdings. And those
sales are more probable now that the cryptocurrency
is up nearly twelvefold from the beginning of the year.
About 40 percent of bitcoin is held by perhaps
December 11, 2017 1,000 users; at current prices, each may want to
sell about half of his or her holdings, says Aaron
Edited by Brown, former managing director and head of finan-
Pat Regnier
cial markets research at AQR Capital Management.
Businessweek.com (Brown is a contributor to the Bloomberg Prophets
John Chambers steps down as Money still hasnt slept, pal.
Dec. 11 marks 30 years since the
CEO Chuck Robbins becomes chairman release of Wall Street in theaters
online column.) Whats more, the whales can coor-
dinate their moves or preview them to a select few.
Many of the large owners have known one another
for years and stuck by bitcoin through the early days
when it was derided, and they can potentially band
together to tank or prop up the market.
I think there are a few hundred guys, says Kyle
Samani, managing partner at Multicoin Capital. They
all probably can call each other, and they probably
have. One reason to think so: At least some kinds of
information sharing is legal, says Gary Ross, a secu-
rities lawyer at Ross & Shulga. Because bitcoin is a
digital currency and not a security, he says, theres no
prohibition against a trade in which a group agrees
to buy enough to push the price up and then cashes
out in minutes.
Regulators have been slow to catch up with crypto-
currency trading, so many of the rules are still murky.
ILLUSTRATION BY PATRIK MOLLWING
If traders not only pushed the price up but also went
online to spread rumors, that might count as fraud.
Bittrex, a digital currency exchange, recently wrote
to its users warning that their accounts could be sus-
pended if they banded together into pump groups
aimed at manipulating prices. The law might also be
different for other digital coins. Depending on the
 FINANCE
details of how they are structured and how inves-
tors expect to make money from them, some may
count as currencies, according to the U.S. Securities
and Exchange Commission.
Asked about whether large holders could move in
concert, Roger Ver, a well-known early bitcoin inves-
tor, said in an email: I suspect that is likely true, and
people should be able to do whatever they want with
their own money. Ive personally never had time for
things like that though.
As in any asset class, large individual holders
and large institutional holders can and do collude
to manipulate price, Ari Paul, co-founder of
BlockTower Capital and a former portfolio manager
of the University of Chicago endowment, wrote in an
electronic message. In cryptocurrency, such manip-
ulation is extreme because of the youth of these
markets and the speculative nature of the assets.
The recent rise in its price is difficult to explain
because bitcoin has no intrinsic value. Launched in
2009 with a white paper written under a pseudonym,
its a form of digital payment maintained by an inde-
pendent network of computers on the internet using
cryptography to verify transactions. Its most fervent
believers say it could displace banks and even tradi-
tional money, but its only worth what someone will
trade for it, making it prey to big shifts in sentiment.
Like most hedge fund managers specializing in
cryptocurrencies, Samani constantly tracks trading
activity of addresses known to belong to the biggest
investors in the coins he holds. (Although bitcoin
transactions are designed to be anonymous, each one
is associated with a coded address that can be seen
by anyone.) When he sees activity, Samani immedi-
ately calls the likely sellers and can often get infor-
mation on motivations behind their sales and their
trading plans, he says. Some funds end up buying
one anothers holdings directly, without going into
the open market, to avoid affecting the currencys
price. Investors are generally more forthcoming with
other investors, Samani says. We all kind of know
who one another are, and we all help each other out
and share notes. We all just want to make money.
Ross says gathering intelligence is legal.
Ordinary investors, of course, dont have the
cachet required to get a multimillionaire to take
their call. While they can track addresses with large
holdings online and start heated discussions of
market moves on Reddit forums, theyre ultimately in
the dark on the whales plans and motives. Theres
no transparency to speak of in this market, says
Martin Mushkin, a lawyer who focuses on bitcoin.
In the securities business, everything thats material
has to be disclosed. In the virtual currency world, its
very difficult to figure out whats going on.
Ordinary investors are at an even greater disadvan-
tage in smaller digital currencies and tokens. Among
the coins people invest in, bitcoin has the least con-
centrated ownership, says Spencer Bogart, managing
director and head of research at Blockchain Capital.
Bloomberg Businessweek December 11, 2017
The top 100 bitcoin addresses control 17.3 percent of
all the issued currency, according to Alex Sunnarborg,
co-founder of crypto hedge fund Tetras Capital. With
ether, a rival to bitcoin, the top 100 addresses control
40 percent of the supply, and with coins such as About 40 percent of
bitcoin is held by
Gnosis, Qtum, and Storj, top holders control more
than 90 percent. Many large owners are part of the
teams running these projects.
1,000
users
Some argue this is no different than what happens
in more established markets. A good comparison
is to early stage equity, BlockTowers Paul wrote.
Similar to those equity deals, often the founders
and a handful of investors will own the majority
of the asset. Other investors say the whales wont
dump their holdings, because they have faith in the
long-term potential of the coins. I believe that its
common sense that these whales that own so much
bitcoin and bitcoin cash, they dont want to destroy
either one, says Sebastian Kinsman, who lives in
Prague and trades coins. But as prices go through the
roof, that calculation might change. Olga Kharif
THE BOTTOM LINE Its not necessarily illegal for big holders of
some cryptocurrencies to discuss trading with one another. That
puts small buyers at a disadvantage.
They Gave Her a $3.8 Million 33
Bonusand Then the Boot
In the richly paid, secretive world of hedge funds,
few women reach the top
Christine Rohrbeck, a rising star at hedge fund
Baupost Group, remembered the advice from her
yearend performance review: Lean in. A male
senior partner was echoing Facebook Inc.s Sheryl
Sandberg, who advises women to strive for top jobs
and resist assuming that family commitments must
derail their careers. Still in her 30s, Rohrbeck would
earn a $3.75 million bonus for that year, 2014. She The nance
heard it was the most of anyone in a similar role industry,
at Baupost, one of the largest and most success- including
ful hedge funds. Yet the next year, after almost a
hedge funds...
decade at the Boston fund, the Harvard MBA was
out of a job. Rohrbeck blamed gender discrimina- has a lot of
tion and an illness. Baupost at the time employed work to do
only two women out of 50 investment profession-
als, according to her previously undisclosed state
discrimination complaint.
Citing a confidentiality agreement, Baupost
declined to discuss the case.Spokeswoman Diana
DeSocio says of Rohrbeck: We wish her well, but the
allegations have no merit. Seth Klarman, Bauposts
chief executive officer, who was not personally
accused of discrimination, says the fund had been
  FINANCE
working hard to recruit and promote women but
suffered from an industrywide shortage of female
applicants for investment positions. We do every-
thing we can to place women in leadership roles,
Klarman says. Were not where we want to be, and
the industry isnt where it should be, but its not for
lack of trying at Baupost.
The Baupost grievance, filed with the
Massachusetts Commission Against Discrimination
in 2016, opens a window into the experience of the
relative handful of women who manage money
at often secretive hedge funds. These investment
vehicles, which oversee more than $3 trillion, rank
among the most lucrative redoubts on Wall Street
because managers typically keep a 20 percent cut of
profits. The year of Rohrbecks big bonus, Klarman
was paid $200 million, according to Forbes.
In her complaint, which was settled this year on
undisclosed terms, Rohrbeck questioned Bauposts
record of retaining women, especially after child-
birth. She said her boss made a crude joke to her
about a colleagues masturbation and that she heard
secondhand that he liked to rate women by appear-
ance. Her case, however, involved more than alle-
gations of sexist behavior. She said she lost her job
after asking for accommodations because she had
been diagnosed with celiac disease.
At the anti-discrimination agency, Rohrbeck
34
was the only woman over the past decade to allege
gender discrimination at Massachusetts largest
hedge funds, records show. Employment lawyers
say the funds tend to settle such disputes privately
and require women to keep settlements secret.
Rohrbeck and her attorney declined to comment.
In Boston, at least two of Bauposts neighbors
are confronting complaints about their treatment
of women. Fidelity Investments recently fired two
prominent money managers over sexual harass-
ment claims. In a lawsuit, still pending, a Fidelity
real estate analyst claimed she was fired for com-
plaining about conditions for women and then black-
balled from the industry. The company denies the
allegations. Rohrbeck said Baupost also made it hard
for her to find another job. In October, financial-
services company State Street Corp. agreed to pay
$5 million to settle federal allegations that it paid 300
female executives less than their male colleagues.
State Street disputed the findings.
Women hold only 11 percent of senior roles at
hedge funds, 21 percent of midlevel positions, and
26 percent of junior ones, according to money-
management data firm Preqin Ltd. They are under-
represented in investment jobs at hedge funds but
overrepresented in support roles, such as market-
ing, according to Dariely Rodriguez, Economic Justice
Project director at the Lawyers Committee for Civil
Rights Under Law. While almost half of Baupost
employees are female, only 8 percent of its invest-
ment professionals are women, and none of them are
in senior roles. When it comes to recruiting, retaining,
Bloomberg Businessweek December 11, 2017
and promoting women, Rodriguez says, the finance Female employees at
hedge fund companies
industry, including hedge funds and investment firms, as a share of total
has a lot of work to do. At alternative asset man- employees, by role
agers in North America, such as hedge funds and
venture capital firms, 81 percent of women said they Investor Relations/
find it more difficult for them to succeed than for Marketing
men, according to a 2016 KPMG survey. Forty-four
percent said they were stereotyped as more commit- 26%
ted to their personal lives than to work.
At Baupost, 2 of 11 partners are women, and they
hold leading roles: Chief Financial Officer Barbara
OConnor and Chief Operating Officer Elaine Mann,
who oversees areas such as finance, technology,
human resources, and investor relations. Mann,
who has worked for 20 years at Baupost and was Finance/
Accountancy
promoted to COO in 2014, says she supervises 176
of Bauposts 250 employees. Among her reports,
17%
more than half the department heads are women.
She says the company offers 17 weeks of paid mater-
nity leave and has ended valuable relationships with
outside business partners when female employees
felt they were being mistreated. Since only 5 percent
of investing applicants are women, Klarman says,
Baupost is sponsoring conferences and an intern-
Operations
ship aimed at recruiting women. We are proud of
our record, he says. I want Elaines story to be
14%
every womans story.
Rohrbeck, who has a bachelors degree from
Harvard as well as the MBA, joined Baupost in 2006
as an analyst. She specialized in real estate investing.
After five years, she was promoted to principal, one
rung below managing director, which is then followed
by partner. She consistently won bonuses based on
Investment Team/
her results, she said in her state filing. Portfolio Management
In 2014, Rohrbeck was diagnosed with celiac
disease, which causes severe stomach pain and
6%
other distress. She asked her boss, George Rizk,
another Baupost partner, if she could limit travel for
a few months. He agreed. That fall, in her review,
partner Thomas Blumenthal made his suggestion:
I should lean in, she says he instructed her. After
her review, Rohrbeck read Sandbergs book, Lean
In.I became increasingly concerned that Mr.
Blumenthals remark possibly reflected a misconcep-
tion at Baupost that my gender might interfere with
my ability to perform my job, she said in her com-
plaint. Baupost said Blumenthal had no comment.
After Thanksgiving, she confronted Blumenthal,
noting a trend of women on the investment team
leaving shortly after having their first child. At
EXCLUDES FUNDS OF HEDGE FUNDS; DATA: PREQIN LTD.
Blumenthals suggestion, she met with COO Mann.
In January 2015, when Baupost paid out Rohrbecks
$3.75 million bonus, Klarman congratulated her on a
strong year, according to her filing. But she contin-
ued to struggle with her illness. At a business meeting
in Panama, she had to excuse herself because she
felt sick and took a cab to the hotel to rest. She told
her boss what happened, and he asked her to talk
again with him and Manna step Rohrbeck thought
was unnecessary. He insisted. You were a woman
 FINANCE
alone sick in a taxi, she recalled Rizk saying.
In May, criticizing her performance, Rizk put
her on a development plan, she said. As her
bosss scrutiny intensified, Rohrbeck said male col-
leagues told her Rizk was more comfortable with
men in the group because he enjoyed sexist banter.
Rizk, she was told, would initiate a game of Hot?
Not? Or past her prime? to judge women in the
real estate industry, according to her complaint.
Rohrbeck said she too had seen this side of Rizk at a
company dinner in early 2015. He brought up a male
co-worker who had been fired for masturbating at
his desk, then asked Rohrbeck if she had been the
The Case of the Look-
Alike Credit Cards
Credit One is taking on Capital One
to win subprime borrowers
First National Bank of Marin was a small Las Vegas
lender with an image problem. Federal investiga-
tors accused it of issuing credit cards to strapped
consumers, then piling on so many fees and obli-
gations that some new clients couldnt buy a sand-
wich without hitting their credit limit.But by 2006,
it had settled the claimsand was ready to expand. It
changed its name to Credit One Bank and adopted a
new logo, placing the companys signature swoosh
above its name, arcing leftward from the letter O.
(See right.) In 2008, credit card titan Capital One
Financial Corp. unveiled an almost identical insig-
nia, adding a swoosh near the O.
To outsiders, it looked like a classic branding
trick: an underdog trying to mimic the look of
an established company, hoping new customers
wouldnt notice. ExceptCredit One had adopted
the logo first. We had already invested heavily in
the rebranding, and then their thing popped up,
says Sam Dommer, Credit Ones longtime chief mar-
keting officer. It would have been easier for them
to change, but I think they were far down the road
with their investment. A Capital One spokesman
declined to comment.
As the twin logos first emerged, lawyers on both
sides bristled, according to people with knowledge
of the situation. The companies let it be. In the
years that followed, Capital One poured more than
$13 billion into marketing, flooding televisions with
its quirky Whats in Your Wallet? commercials. Its or any kind of marketing initiative, were not cross-
business soared. And so did Credit Ones.
Today, if you tarnish your FICO score and need an
all-purpose credit card, chances are good that youll
sign up with one of those two companies. By the
Bloomberg Businessweek December 11, 2017
object of his affection, according to her account to
the state. Baupost said Rizk declined to comment.
In October 2015, Rohrbeck said, Baupost told her
that shed be terminated. Rizk, she was informed, had
concluded her performance did not meet the stan-
dards of a tenured principal. Even then, she left with
a bonus. In her view, it was evidence of her mistreat-
ment because it was such a comedown from the year
before. It showed how lucrative the hedge fund world
could be. The sum: $1 million. Sabrina Willmer
THE BOTTOM LINE A former money manager at Baupost,
one of the worlds most successful hedge funds, alleges gender
discrimation at the firm.
end of last year, Capital One had issued more than
32 million cards to consumers with FICO scores below
660, according to data from the NilsonReport, an
industry publication, and Capital One filings. Credit
One, which largely caters to subprime borrowers,
has issued 9.7 million, according to Nilson. This
year,J.D. Power & Associatesdecided the company
is big enough to include in a customer-satisfaction
ranking for the industry. It came in last.
Credit One attributes its growth to a data-driven
approach to identifying and luring new customers.
It also helped that many banks pulled back from
35
subprime lending after the 2008 financial crisis. So
how important was a mere logo? Marketing con-
sultants say the Vegas company hit the jackpot.
Capital One has spent years building up a very pow-
erful brand image behind that identity, says Allen
Adamson, founder of Brand Simple Consulting. I
suspect a majority of their customers are unclear
that theyre not one and the same company. The
similar looks sometimes befuddle consumers, who
ventonlineabout mix-ups. I called Capital One and
they told me I didnt have an account with them and
to look at the card, one person wrote on consumer-
affairs.com, a consumer complaint website.
Credit One is taking some steps to differentiate
Credit One had the
itself. Last year, it unveiled the Credit One Nascar swoosh first
credit card. In November, it became the main
sponsor for driver Kyle Larson, one of the sports
rising young stars. This month, its opening a new
152,000-square-foot headquarters, which also will
house the companys data center, one of the largest
in the Southwest.Credit One says it pores over infor-
mation on its cardholders and their transactions to
identify new groups of people likely to respond to
its ads and pay their bills.It applies those models to
Experian Plc s database of 220 million U.S. consum-
ers, scoring potential customers. Then the mailers
go out. When we engage in a direct-mail campaign
ing our fingers, hoping it works,Dommer says. All
these are based on statistical certainties.
Last year, Credit Ones outstanding credit card
loans jumped 29 percent to $4.8 billion, making it
  FINANCE

The Year In Funds and ETFs

the fastest-growing card provider among the nations
15 largest, according to the Nilson Report. Credit
One is owned by Sherman Financial Group, which
also runs one of the largest consumer-debt buyers
in the country. When Credit One borrowers dont
pay their balances, the company sells those obliga-
tions atdiscounted prices to Sherman and other
debt collectors.
The companyhas a history of gettinginto trouble
overfees. In 2001, to settle an investigation by the
U.S. Office of the Comptroller of the Currency,it
promised to set aside $4 million to repay customers
who canceled their cards after realizing fees and a
security deposit would leave them with little or no
The U.S. stock market keeps setting records, with the S&P 500
up 17.4 percent in 2017 through Dec. 6. But investors in mutual
funds and ETFs have poured even more new money into bond
funds. One reason may be that investors are rebalancing their
portfolios after equity gains, says Alina Lamy, a senior analyst at
Morningstar Inc.
Cumulative net flows into mutual funds and exchange-traded funds, weekly
Bond $300b
200
Stock
100

credit to make purchases. In 2004 it agreed to set Commodity 0

aside $10 million for allegedly encouraging people
Hybrid -100
to charge security deposits to new cards, leaving
some with less than $3 in available credit. In both 1/4/17 11/15/17

cases, the bank didnt admit wrongdoing.

Consumers still hate the lenders fees, often citing
them in forums. Others grumble about waiting on ETFs Mutual Funds
hold, only to reach customer-service agents who
arent prepared to help resolve issues. While fees can It looks like this will be Traditional mutual funds have
vary among cards, one of the companys Platinum another record year for brought in new money for the
Visa cards comes with an annual membership fee of ows into exchange- rst time since 2014. Thats
$75 for the first year, billed upfront, even on cards traded funds, most of which largely due to the popularity
that come with credit limits of a couple hundred passively track indexes. New of bonds, where many
dollars. On some cards, the company offers no grace purchases outpaced sales by investors still prefer active
36
period, meaning that as soon as a purchase posts to $382 billion through Oct. 31. management to indexing,
a cardholders account, it begins accruing interest. says Lamy.
Jim Miller, senior director of the banking prac-
tice at J.D. Power, says Credit Ones poor showing
Cumulative net ETF issuance in Cumulative net cash flow into
in this years survey wasnt a surprise, given that it each of the past three years mutual funds in each year
works with people at the bottom of the credit spec-
trum. He sayslenders in that marketcharge heftier
fees and rates to offsetpotential losses.Customers $400b $100b

are less satisfied when they pay interest and dont 2015 2016 2017
accrue much in rewards, no matter who the issuer
is,Miller says. So if you have more of those custom- 0
ers in your portfolio, you would tend to have lower
satisfaction.The fees and rates that Credit One 200

charges arent really unusual in the subprime cat-

-100
egory for an unsecured card, says Beverly Harzog, a
consumer advocate whos written a book on paying
off credit card balances. 2015 2016 2017
Dommer says Credit Ones own surveys show 0 -200

it has above-average scores on a measure of how 1/2015 10/2017 1/2015 9/2017

willing clients are to recommend its products. The

companyalso points to reviews of its mobile app,
which are better than those for the app of American Where in the World the Money Went
Express Co., the leader of this years J.D. Power
rankings. Credit One is dedicated to improving,
Money owed out of Equity ETF net issuance
DATA: INVESTMENT COMPANY INSTITUTE

Dommersays.Whenever clients point out a problem,

stock mutual funds  U.S.  Rest of the world
managers take note, meet, and figure out how to $300b
prevent it from happening again.Your cardmember while equity ETFs
relationship is everything, he says. And if we screw grew, with the money 150
that up, then were in big trouble. Jenny Surane split about evenly
between U.S. and 0
THE BOTTOM LINE Credit One has come out of nowhere to international markets. 1/2017 10/2017
become a big player in subprime credit card lending. A lucky
coincidence in logos may have helped.
 LOOK AHEAD A two-day conclave of the Feds EU leaders meeting on Dec. 14-15 African National Congress
rate setters concludes on Dec. 13 must decide whether Brexit talks delegates gather on Dec. 16 to
with a probable hike can move to the next stage choose their next leader

E Games and Gold in

C Virtual currencies from games
such as RuneScape are prized
other players for real money or cryptocurrencies
such as bitcoin. The practice, which has previ-
ously cropped up in other basket-case economies

O in a country whose real money such as North Koreas, has become so popular with
Venezuelans that theyre now spreading inflation
is worthless inside the virtual worlds.
Weve never made this much before, says

N
They start arriving even before the security shut-
ters at the west Caracas storefront roll up at about
8:30 a.m. For 11 hours a day, theyll hunch over
Efrain Pea, 29, who plays seven days a week
at the Mona Pizza cybercafe to support his wife
and child. Most Venezuelan gold farmers make
the equivalent of a couple of dollars a day, but in

O old-fashioned cathode-ray tube monitors and

bang on greasy keyboards in a dim space with a
boarded-up window and a blanket of dust. They
pause just long enough to smoke cigarettes in the
many ways theyre better off than salaried workers,
because their earnings are indexed to Venezuelas
black-market dollar exchange rate. What job can
match what were making now? says the onetime

M stairwell. And if someone lingers too long, another

eager person claims his seat and starts hunting
make-believe monsters.
Crisis-wracked Venezuela has become fertile
graphic designer.
Inflation has spiraled into quadruple digits. The
bolvar has shed almost all of its value against the
dollar this year and was trading at 116,359on the

38
I ground for whats known as gold farming. People
spend hours a day playing dated online games
such as Tibia and RuneScape to acquire virtual
gold, game points or spoils that they can sell to
black market on Dec.6. Its shameful. I never
thought game currency would be worth more than
that of our country, says Enegebe Sencin, 30, an
out-of-work computer programmer who for the past

C
S

Efrain Pea plays

Tibia at a Caracas
cybercafe 
WIL RIERA/BLOOMBERG

December 11, 2017

Edited by
Cristina Lindblad

Businessweek.com
 ECONOMICS
Desperate Venezuela
five months has played Tibia to support his family.
The socialist regime in Caracas has maintained
strict currency controls for more than a decade,
and the threat of a bust or a ban has made many
gold farmers reluctant to share too many details
about the mechanics of the business. Online enter-
prises with such names as PapusGold, SoliderGold,
and Tibia Venezuela Coins have sprung up, paying
farmers in bolivares for their virtual gold via bank
transfers. The online marketplace Mercadolibre is
flooded with listings of virtual treasures.
Hamstrung by shaky internet connections and
outdated hardware, Venezuelas gold farmers
have gravitated to old-school games that have low
system requirements and established communi-
ties of players. Willian Natera, 23, took to quest-
ing full time in his favorite childhood title, Tibia,
seven months ago. Before that hed been struggling
to make ends meet as a bricklayer in a government
housing program. It was the work of a donkey, and
it barely paid for breakfast, says Natera, recalling
how he had to haul sacks of cement up slum stair-
wells. Now he spends his days leading a band of
heroes through a medieval world, smiting poorly
rendered monsters.
Newer game titles often sell virtual currency
directly to players, but millions remain hooked on
classics where virtual gold must be earned. Old
games dont die. We just stop paying attention to
them, says Edward Castronova, a professor at
Indiana University who researched the economics
of massively multiplayer online games. There is
always going to be plenty of space for gold farmers.
Released in 1997, Tibia still has more than 500,000
players, according to its website. RuneScape, dating
to 1999, boasts some 1.6million active monthly
players, according to SuperData Research.
Jos Luis Fragoza, 22, tried gold farming for a
few months this year after leaving active military
service, but quit playing for money when his inter-
net service got bogged down. He says it was menial
labor, but it kept food on the table. Hunt, kill, click,
repeat, he says as his paladin hacks and slashes
minotaurs, just playing for fun. But if youd give
me a 10-megabyte connection or a job, Ill stay home
with the internet.
Venezuelas internet connection speeds are
among the slowest in the worldthe country scored
worse thanwar-torn Syria in a 2017 ranking of
159countries. So many gold farmers work night
shifts to avoid heavy traffic. Peas wife, Ruth
Villegas, 37, who was whiling away some time at
Mona Pizza with their 6-year-old daughter, says she
Bloomberg Businessweek December 11, 2017
used to regard her husbands nocturnal gaming as
a nuisance because it kept her up at night. Wed
get into ugly fights, and he would tell me: Ill leave
you before I give up Tibia, she recalls. But I cant
argue with what hes making.
There are often times when the means of pro-
duction disappears altogether. A rash of copper-wire
thefts in Caracas took down the internet in some
neighborhoods and prevented Samuel Navas, a
28-year-old sometime-insurance salesman, from
logging onto Tibia for the past two months. That
cost him almost two-thirds of his income and turned
his wife into the family breadwinner. As man of the
house I should be paying the bills, he says, but
suddenly everything goes beyond your control.
The gold farmers are scorned by many first-world
players and the developers of the games, who say
the practice is unsporting and distorts the value
of digital currencies. Publishers of the games also
say it breaks their terms of service and encourages
illegal activities such as account hijacking and credit
39
card fraud. Mathew Kemp, a senior project manager
at Jagex in Cambridge, England, the developer of
RuneScape, said in an email that the company bans
about 10,000 accounts a day. If we were to allow
gold farming it would destroy the game, he said.
Romer Manuel Peas team of gold farmers
has been banned several times from RuneScape,
forcing them to start over and spend weeks nurtur-
ing new characters before generating income. The
27-year-old, who used to work as an oil engineer
Wed get
in Venezuelas central plains, contends his team
members are simply trying to get by, and Jagex into ugly
should support them. Shouldnt they be proud that ghts, and
entire families are being fed by their game? he says. he would tell
But anger at the influx of farmers in games
such as RuneScape is such that one user of a
me: Ill leave
Reddit online forum posted a guide to Killing you before I
Venezuelans (since removed) that offered tips give up Tibia
on eliminating their characters.
Venezuelan gold farmers biggest enemy may
prove not to be xenophobic gamers, but them-
selves. Thats because as more players flock to the
online worlds to make a living, they ultimately drive
down the price of digital gold. Theyre printing
money, says Vili Lehdonvirta, an economic sociol-
ogist at Oxford University who studies digital
marketplaces. Essentially what results is hyper-
inflation, as there is lots more currency coming
into the system. Andrew Rosati
THE BOTTOM LINE Game players can sell their virtual gold to
other players for real money or cryptocurrencies. But the market
is getting crowded, and hyperinflation is a threat.
 ECONOMICS Bloomberg Businessweek December 11, 2017

city of Neemrana, was established just for Japanese Indian states with the
Modi Takes A Local manufacturers and now hosts Toyota Motor Corp.
and Daikin Industries Ltd. The policy is designed to
largest economies*
Controlled by the

Road To Reform tackle what has become one of the main obstacles to
direct investment in India: A study released last year
BJP or its political
allies

by the Rights and Resources Initiative, a global coali-

States controlled by the ruling party are tion of nonprofit organizations, and Tata Institute of Maharashtra

rewriting archaic regulations to attract investment Social Sciences identified $179 billion worth of proj- $274b

ects that had stalled because of land disputes. Many Tamil Nadu

involve farmers and villagers who claim they were 167

Indias Bharatiya Janata Party now controls 18 of dispossessed by corrupt local officials. Uttar Pradesh

29 states, collectively representing about 60 percent Under Chief Minister Vasundhara Raje, Rajasthan 160

of the nations gross domestic product. Its a record is also a testing ground for labor reforms. Changes Karnataka

for Prime Minister Narendra Modis party and may introduced in 2014 allow companies to lay off as 141

help put an end to decades of fighting between the many as 300 workers without government permis- Gujarat

central government and provincial chief ministers. It sion; the previous threshold was 100 employees. 138

also could be a boon for business if erratic local pol- Under the new rules, trade union representation West Bengal

icies (and officials) dont get in the way. can be introduced only with the support of at 122

While Modis lack of a majority in the upper least 30 percent of a companys workers, up from Rajasthan

house of Parliament hinders his ability to imple- 15 percent. Similarly, the Factories Act, a document 94

ment change at the federal level, the BJPs state- dating from 1948 that governs everything from work Andhra Pradesh

level victories give him the chance to speed up hours to minimum age requirements, was amended 81

structural reforms geared at creating a more even to apply to sites that employ 20 or more workers, up Kerala

playing field across Indiaa country that, to the frus- from 10. Trade unions opposed the measures, but 81

tration of many investors, is a crazy quilt of local there is a consensus that Indias arcane labor rules Telangana

laws and regulations. On July 1, Modis government discourage businesses from scaling up. Whether 80

introduced a national goods and services tax that its a BJP state or a Congress state or a whatever
replaced myriad provincial levies. Its also consid-
40
ering changes to laws governing land purchases and
the labor code, though these will likely have to wait Spreading Inuence
until after national elections scheduled for 2019. The BJP rules 18 of Indias 29 states
The BJPs conquest of the states and its policies Bharatiya Janata Party and allies Indian National Congress Other
to unify regulations could usher in a new kind of
competition among states for investment, with tax

*FIGURES ARE FOR THE 2014-15 FISCAL YEAR, THE LAST FULL YEAR AVAILABLE; DATA: NATIONAL INSTITUTE FOR TRANSFORMING INDIA
breaks and corruption playing a diminishing role and
factors such as swifter permit approvals and better
Line of control
infrastructure becoming more important. Over the
past few years, we have seen a concerted effort by
the central government to drive competitive federal-
ism among states, says Abhishek Gupta, a Mumbai-
based analyst with Bloomberg Economics. New Delhi
Modi is fueling the rivalry by sending state gov-
ernments a bigger share of federal tax revenue
42 percent, up from 32 percent previously. If his
strategy works and more of the country sees an eco-
nomic boost, it could cement the BJPs position in
Kolkata
power and set him up for reelection in 2019.
Rajasthan, a poor state on the border with
Pakistan where the BJP assumed power in 2013, has
become a laboratory for the sort of business-friendly Mumbai
policies needed to support Make in India, a Modi
program that aims to turn the country into a global
manufacturing hub. Rajasthan is almost always
Bay of Bengal
among the leaders in terms of the highest number
of positive regulatory changes, says Richard Rossow
at the Center for Strategic and International Studies
in Washington, D.C.
To lure businesses to the state, the Rajasthan gov-
ernment has been purchasing land directly from
farmers to set up industrial parks. One, near the
 ECONOMICS
state, its leadership that delivers results, says Salil
Singhal, whose agrochemicals business has oper-
ations in Gujarat and Rajasthan. There is now a
competition among the states to say, Things are
better here than elsewhere, so come and invest
in my state.
The BJP has spread across India at a remark-
able rate. The party won elections in March in
Uttar Pradesh, Indias most populous state, with
200 million people, as well as in the smaller states
of Goa and Manipur. Polls suggest that in December
elections its poised to retain power in Gujarat, Modis
home state, and could also wrest control of Himachal
Pradesh from the opposition Congress party. The
BJPs electoral gains may be starting to peter out,
however. What are left are the more difficult states
West Bengal, Kerala, Tamil Naduwhere our presence
has been negligible at best, says Yashwant Sinha, a
senior party leader who was minister of finance in a
previous BJP government.
Not all BJP-led state governments have been good
for business, however. In Uttar Pradesh, the firebrand
Hindu monk the party appointed as chief minis-
ter in March immediately channeled the religions
worship of cows into a campaign against so-called
illegal slaughterhouses. Ostensibly, the goal was to
Questioning the Strength
Of the Shale Boom
MIT researchers say optimistic government forecasts rest on a faulty assumption
Turns out, Americas decade-long shale boom might
be a little too good to last.
Theres no denying that fracking has turned the
U.S. into a force in the global oil and gas markets,
which has quite a few peoplenot least President
Donald Trumpabuzz about the prospect of energy
independence. But researchers at MIT have uncov-
ered one potentially game-changing detail: a flaw
in the Department of Energys official forecast,
which may vastly overstate U.S. oil and gas pro-
duction in the years to come.
The culprit, they say, is the U.S. Energy
Information Administrations premise that better
technology has been driving nearly all the recent
output gains and will continue to boost production
for the foreseeable future. Instead, the research sug-
gests, increases have been largely the result of some-
thing more mundane: low energy prices. These led
Bloomberg Businessweek December 11, 2017
ferret out facilities that flouted regulations, but in
practice the crackdown targeted businesses owned
by Muslims and was meant to appeal to hard-line
Hindu voters. Executives at legitimate meat export-
ers complained of official harassment and a steep
drop in business.
In Haryana, the three-year-old BJP government has
come under fire for its handling of a series of riots
in August sparked by the arrest of a religious leader,
including one that killed more than 30 people. The
violence mirrored a week of angry protests in 2016
that prompted Maruti Suzuki India Ltd. to tempo-
rarily halt production at two factories in the state.
Chief Minister Manohar Lal Khattar has defended the
police response during the unrest, but Congress party
members have called for his resignation.
Milan Vaishnav, a senior fellow at the Carnegie
Endowment for International Peace, says that while
these incidents have complex causes, they also under-
cut Modis pledge to bring a dose of good governance
to Indias states. Says Vaishnav: This raises concerns
not only for wary investors but also for residents of
the state. Iain Marlow and Bibhudatta Pradhan
THE BOTTOM LINE Indian states ruled by the Bharatiya Janata
Party are becoming laboratories for labor and land rights reforms
that Modi cant enact at the federal level.
41
drillers to focus on what the industry calls sweet
spots, areas where oil and gas are easiest to extract.
The EIA is assuming that productivity of individual
wells will continue to rise as a result of improvements Its really hard
in technology, says Justin Montgomery, a researcher to bet against
at MIT and one of the studys authors. This com- the ability of
pounds year after year, like interest, so the further
out in the future the wells are drilled, the more that the industry to
they are being overestimated. improve and
Extrapolating from field studies Montgomery and get more out of
his colleague Francis OSullivan conducted in North the rock
Dakotas Bakken Shale deposit, the research suggests
that total U.S. oil and natural gas production from
new wells could undershoot the EIA estimate by more
than 10percent in 2020. Things would get progres-
sively worse each year after that as wells in various
sweet spots are exhausted and technology fails to
close the gap. The same forecasting methods
  ECONOMICS
are used in other plays in the U.S., and the same
dynamic is likely to be present, Montgomery says.
Margaret Coleman, the EIAs leader of oil and
gas exploration and production analysis, said in an
interview that the study raises valid points about
the importance of sweet spotting, which we account
for in our models, and the agency is looking at
ways to reduce the uncertainty of its projections.
She added that many shale fields lack the detailed
well data that informed the MIT study, which means
EIA forecasters have to use known geologic informa-
tion and assumptions about prices and technology
to come up with estimates more than 25 years out.
MITs results may be skewed because the 42-month
study didnt include enough wells drilled after oil
prices collapsed in 2014, she said.
Theres little doubt the technologies and tech-
niques used to extract oil and natural gas trapped
within rock formations thousands of feet below
the Earths surface have gotten better. And intui-
tively, it makes a lot of sense that better methods
have boosted U.S. shale output and helped lead to
finds. Its really hard to bet against the ability of the
industry to improve and get more out of the rock,
says Manuj Nikhanj, co-chief executive officer of RS
Energy Group, a provider of energy data and analysis.
Just last month, International Energy Agency
Executive Director Fatih Birol said shale produc-
42
tion will make the U.S. the undisputed leader of
global oil and gas markets for decades to come. (Its
worth noting that the U.S. hasnt been No. 1 for all
that long: It edged Russia out of the top spot in 2012
and has remained there since.)
If the MIT researchers are right, the implications
could be significant. In the past three years, oil prices
have been stuck around $50 a barrel partly because
of rising shale output in the U.S., while natural gas
has been selling for an average of less than $3 per
million British thermal units. As recently as 2014,
prices for both were twice as high.
A slowdown in production could mean not only
higher energy prices but also the end of the U.S.
shale industrys role as the one producer able to
counter OPECs might. The shale boom has repeat-
edly frustrated the Saudi-led cartels attempts to
control oil prices.
As recently as 2015, the Organization of the
Petroleum Exporting Countries tried to pump its
U.S. rivals out of business, only to retreat after shale
drillers adapted by paring costs. At the conclusion
of its latest meeting in Vienna on Nov. 30, the orga-
nization and its allies agreed to maintain oil output
cuts through 2018, extending a campaign to wrest
back the global market.
The MIT researchers arent the first to question
the projected growth of U.S. shale. Analysts have long
debated varying methods used to predict output.
And unsurprisingly, the Saudis have cast doubt on
how long Americas shale boom can last. Even billion-
aire oilman Harold Hamm recently slammed what he
Bloomberg Businessweek December 11, 2017
considered the EIAs exaggerated forecasts, saying
theyre depressing U.S. oil prices.
Yet MITs findings stand out by providing some
evidence that backs those assertions. The problem
with the EIAs numbers, the researchers say, is that
they give drillers too much credit for coming up with
ways to improve fracking.
While the EIAs model assumes that technical
advancessuch as longer wells and more effective
use of water and sand used in frackingincrease
output at new wells by roughly 10percent each
year, MIT findings from the Bakken region put MIT estimate of
the increase at closer to 6.5percent, according to how much technical
advances increase
Montgomery. Boosting the productivity of each new
output at new wells, vs.
well matters because its the only way to increase the EIAs 10 percent
output. Typically, production drops precipitously
soon after a well is tapped. The EIA recently esti- 6.5%
mated about half of U.S. oil output came from wells
two or fewer years old.
So even though output in the Bakken more than
tripled from 2012 to mid-2015 on a per-well basis,
MITs research suggests the main reason for the
increase is that shale companies abandoned iffier
fields to drill in the best acreage following the slump
in energy prices. The trend is evident in local North
Dakota statistics. Output in booming McKenzie
County has held steady, while neighboring Williams
and Mountrail counties have experienced declines.
There certainly could be some validity to getting
a rosier forecast because right now the industry
is working sweet spots, says Dave Yoxtheimer, a
hydrogeologist at Pennsylvania State Universitys
Marcellus Center for Outreach and Research.
When thats all played out, theyre going to have
to go to the tier-two acreage, which isnt going to
be as productive.
Indeed, signs of a slowdown have started to
appear. Gas output in the Marcellus basin has fallen
10percent on a per-rig basis since reaching a high
in September2016. In the Permian Basin, per-rig
oil production has decreased almost 20percent
over a similar span.
Richard Bereschik knows firsthand that shale
isnt a sure thing. The superintendent of schools
in Wellsville, Ohioa small Rust Belt community
along the western bank of the Ohio Riverrecalls
the rush he and other townsfolk experienced when
Chesapeake Energy Corp. came through some six
years ago, leasing out huge tracts for development.
Wellsville sits atop the Marcellus and Utica shale
formations and is only 20 miles from a concentra-
tion of sweet spots, but Bereschik says Chesapeake
stopped renewing leases after the bottom fell out
in prices. Everyone thought wed found a goose
that laid the golden egg, he says. But ultimately,
its not the boom we all expected. Jim Polson
and Tim Loh, with Ryan Collins
THE BOTTOM LINE MIT research suggests U.S. oil and natural
gas production from new wells could undershoot the EIA estimate
by more than 10 percent in 2020.
 LOOK AHEAD Alabamas Dec. 12 Senate special The FCC will vote on a proposed Hamas marks its 30th anniversary
election pits Republican Roy Moore draft plan to roll back net neutrality on Dec. 14, raising concern in Israel

5 against Democrat Doug Jones rules for the internet over the potential for violence

P
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December 11, 2017

Robert Mueller may have just made sure that
Edited by
Matthew Philips
even if he gets red, his investigation will live on
Businessweek.com
  POLITICS
The Dec. 1 plea deal struck with President Trumps
former national security adviser, Michael Flynn,
marked a big step forward in Robert Muellers
Russia investigation. It may also have provided some
protection for Mueller against being fired by the
presidentand helped ensure that his probe will
continue, even if one day hes not leading it.
Flynn pleaded guilty to one count of lying to
federal agents about his communications with the
Russian ambassador last December. Given the other
potential crimes that Flynn may have committed,
including his failure to disclose that he was being
paid millions of dollars by a Turkish company while
serving as a top official in the White House, the rel-
atively light charge signaled to many that Flynn had
something significant worth sharing.
As Muellers probe has gotten closer to Trumps
inner orbit, speculation has risen over whether
Trump might find a way to shut it down. The Flynn
deal may make that harder. For one thing, it shows
that Mueller is making progress. Any rational pros-
ecutor would realize that in this political environ-
ment, laying down a few markers would be a good
way of fending off criticism that the prosecutors are
burning through money and not accomplishing any-
thing, says Samuel Buell, a former federal prosecu-
tor now at Duke Law School.
The Flynn plea also makes it difficult for Trump to
fire Mueller without inviting accusations of a cover-up
and sparking a constitutional crisis, says Michael
Weinstein, a former Department of Justice prosecu-
tor now at the law firm Cole Schotz. There would
be a groundswell, it would look so objectionable, like
the Saturday Night Massacre with Nixon, Weinstein
says, referring to President Richard Nixons attempt
to derail the Watergate investigation in 1973 by firing
special prosecutor Archibald Cox.
Even if Mueller goes, his team is providing tools
that other prosecutors or investigators can use to
continue inquiries. Flynns deal requires him to
cooperate with state and local officials as well as
with federal investigators. That includes submit-
ting to a polygraph test and taking part in covert
law enforcement activities. Mueller also has
provided a road map to state prosecutors inter-
ested in pursuing money laundering charges against
Trumps former campaign chairman, Paul Manafort.
Muellers case against Manafort lays out a series
of irregular wire transfers made from Manaforts
PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (2)
bank accounts in Cyprus to a variety of compa-
nies in the U.S. The sums that Manafort transferred
suggest the possibility that some of the money was
diverted for other purposes. Mueller stopped short
of filing charges related to where the money went.
But by including the details in his indictment, he
left open the possibility of bringing charges in a
follow-up indictment and perhaps left breadcrumbs
for state authorities to pursue.
The president can pardon people convicted of
federal crimes; only governors can pardon those
Bloomberg Businessweek December 11, 2017
convicted under state law. For prosecutors in New
York, the Manafort case is like a legal Chia Pet, says
Weinstein. Just add water, and it grows. Manhattan
District Attorney Cyrus Vance Jr. is investigating the
circumstances surrounding unusual real estate loans
to Manafort from a bank run by Steve Calk, who
served as an adviser to the Trump campaign. New
York Attorney General Eric Schneiderman is con-
ducting his own Trump-related probe.
Trumps reaction to Flynns plea raised fresh ques-
tions about whether the president had obstructed
justice. The day after Flynn appeared in court, Trump
tweeted that he fired Flynn because hed lied to the
FBI, which some lawyers say provided a new piece
of evidence of what the president knew and when he
knew it. Legal experts say Muellers ability to bring
an obstruction case against Trump could hinge on
whether the president was aware of Flynns illegal
activities when he fired FBI Director James Comey.
Prosecuting an obstruction case without an under-
lying crime is problematic. Critics could demand to Any rational
know what crime Trump or his campaign officials
prosecutor
committed to justify the charge. Many have already
argued that collusion itself isnt a crime. And within would realize
days of the Flynn agreement, Trumps personal that in this
lawyer, John Dowd, began pushing back against the political
notion that a sitting president can even be charged
environment,
with obstruction.
laying down a 45
Mueller is also looking at conduct before the
election, when Trump was a private citizen and few markers
not covered by the executive protections afforded would be a
by the Oval Office. If Mueller uncovers evidence that
good way of
the campaign accepted Russian help, that opens
up the possibility of charging people in the Trump fending off
campaign with conspiracy related to the solicitation criticism
of in-kind foreign donations. Muellers team would
be on stronger ground if it uncovered evidence
of any quid pro quo deals struck during the cam-
paign, either in changes to the GOP platform favor-
ing Russia or promises made to entice Moscows
help against Hillary Clinton.
Flynn alone may not be enough to advance an
obstruction or collusion case. Prosecutors would
likely need evidence against other high-ranking
Trump associates, including perhaps Jared Kushner.
Unless youve got them on tape, youre going to need
a lot better witnesses than Flynn, says Raymond
Banoun, a former federal prosecutor.
Some experts believe that Muellers probe is now
almost certain to reach a step beyond that. Before
this is wrapped up, Muellers going to request an inter-
view with the president, and he may even request
it under oath, says Amy Sabrin, a Washington
lawyer who worked for Bill Clinton on the Paula Jones
sexual harassment case. And then what is Trump
going to do? Greg Farrell, Tom Schoenberg, and
Neil Weinberg
THE BOTTOM LINE Flynns plea deal marks a big step forward
for Muellers Russia probe and also helps him ensure it continues
should Trump fire him.
  POLITICS Bloomberg Businessweek December 11, 2017

Irans Sanction-
Buster in Istanbul
A gold trader turned FBI star witness details a massive money laundering scheme to help Tehran get
around a nancial embargo. The testimony may undermine relations between the U.S. and Turkey

Looking nervous and somber, the FBIs star witness
entered from the lockup and shuffled across the New
York federal courtroom in a beige prison smock. The
Turkish-Iranian gold trader took a seat at the witness
stand for the hearing on Nov. 29, the second day of
testimony in a money laundering and sanctions-
evasion case brought by the U.S. government. Asked
to state his name, he said he was Reza Zarrab.
Not long ago, Zarrabs life might have fit
the description of a James Bond villainshe
glided around Istanbul with his pop-star wife in
46
Aston Martins and Range Rovers, flew on private
planes, and sported around the Aegean with his own
jetpack and submarine. He liked to carry a gold-plated
pistol and kept an office at Trump Towers Istanbul.
That all came to an end in March 2016, when Zarrab
was arrested by FBI agents as he arrived in Miami for
a vacation at Disney World. Over the next 18 months,
Zarrab, 34, was the chief defendant in a prosecution
accusing him and others of a conspiracy to launder
almost $1 billion through banks in the U.S. to help Iran
evade sanctions over its nuclear program.
Zarrab hired a team of 16 lawyers from some of
the most elite U.S. law firms. After the 2016 pres-
idential election, he enlisted two Donald Trump
confidants, former New York Mayor Rudy Giuliani
and ex-U.S. Attorney General Michael Mukasey,
who tried to cut a deal for his release, including
a prisoner swap. But those efforts failed. Then in
September, Zarrab vanished.
For weeks, his whereabouts were a mystery.
The prison registry said hed been released. Court
papers indicated he was no longer participating in
the defense of the case. It wasnt until he appeared Zarrab testified that
he moved enough gold
in court on Nov. 29 that the full story surfaced. The to generate a personal
FBI had removed him from jail to protect him from profit of up to
threats, keeping him under guard at an undisclosed
location. By then, Zarrab had secretly pleaded guilty $150m
to all the charges against him and agreed to help
the U.S. government. As part of his deal, prosecu-
tors offered him and his family witness protection.
Over more than a week on the witness stand,
Zarrab spun a stunning tale of corruption and
double-dealing that reached the highest levels of
the Turkish government, all the way up to President
Recep Tayyip Erdogan. The case has further soured
Washington and Ankaras already strained relation-
ship, revealing how Americas longtime ally may have
helped Iran undermine sanctions even as Turkey
received millions of dollars in U.S. aid. Nine people

How to Launder $1 billion of Sanctioned Iranian Oil Money Out of Turkey

In his testimony, Reza Zarrab gave prosecutors a step-by-step diagram of one of his schemes

Iran sells oil to Turkey.
But Iran cant take Turkeys
money because of
international sanctions.
Turkey deposits the
money into an account
owned by the National
Iranian Oil Co.
(NIOC) at the Turkish
bank Halkbank.
Zarrabs role begins when Halkbank transfers the Zarrab uses the money to
the money is transferred money from Sarmayehs buy gold in Turkey. He loads
from NIOCS Halkbank account into one owned by a suitcase with it and gives
account into another at one of Zarrabs companies. it to a courier, who takes it
Halkbank owned by the onto a plane.
Iranian bank Sarmayeh.

POLITICS
have been charged, including Turkeys former
economy minister and past chief executive officer
of Halkbank, a major Turkish bank owned by the
government. Of them, only onea senior Halkbank
executive named Mehmet Hakan Atilla, Zarrabs
former co-defendantis on trial. The others have
all avoided U.S. arrest.
In court, Zarrab laid out how he paid tens of mil-
lions of dollars in bribes to Turkish government
officials and banking executives to win their assis-
tanceand coverfor the money laundering opera-
tion. He dropped a bombshell on his second day of
testimony, when he implicated Erdogan as part of the
scheme, saying he was told Turkeys president gave
orders that two Turkish banks be included in the plot.
The son of a wealthy Iranian steel magnate, Zarrab
moved to Turkey as a toddler and started various
enterprises in his teens. His main business became
money transfers, currency exchange, and gold
trading. In 2005, Zarrab became a Turkish citizen.
Meanwhile, his father was part of a team assem-
bled by Irans newly elected president, Mahmoud
Ahmadinejad, to help work around U.S. sanctions,
which had ratcheted up in response to Ahmadinejads
aggressive pursuit of a nuclear program. Iran claimed
the program was for peaceful purposes, but in 2011,
the International Atomic Energy Agency said it could
not rule out a military intent.
That led the U.S., along with the United Nations,
to impose even tougher sanctions in 2012 to cut off
Irans banks from the global financial system and
OZAN KOSE/AFP/GETTY IMAGES; ILLUSTRATIONS BY TOMI UM
block its access to revenue from oil and gas sales.
Irans economy fell into recession; inflation spiked
into the double digits. Although Iran continued to sell
oil, the proceeds began piling up in banks beyond its
reach. By 2012, Iran had billions of dollars and euros
sitting in banks in Turkey, China, India, Italy, and
Japan. As sanctions tightened, Zarrab testified that
hed learned that Irans central bank and national oil
company were looking for ways to get at their money.
According to prosecutors, beginning in 2012,
Zarrab devised an intricate scheme to move Irans
On customs forms, the Zarrab takes custody
gold is marked as bound of the gold through an
for Iran, but the courier office in Dubai.
gets off in Dubai.
money in Turkey to his own company accounts there  Zarrab
and then export it in the form of physical gold to
Dubai. From there, it was diverted into the interna-
tional financial system and used to make payments
to entities designated by Iran, sometimes through
accounts at banks in New York. He then developed
similar schemes to gain access to Irans money in
other countries, with varying degrees of success.
At the peak of his operation, Zarrab claims he was
using as many as 15 couriers a day to move more than
1,000 pounds of gold at a time. Later, when a new
round of sanctions cut off gold as an option, Zarrab
developed a system portraying the flows as human-
itarian food shipmentsthough no food was sent.
Zarrab said that over four years, he was able to
get almost all of Irans billions out of Turkey and
more out of India, China, and Italy. He testified that
he charged $4 to $5 per $1,000 he moved, generating
what he claimed was up to $150 million for himself,
47
some of which, he said, went to bribes and bank
fees. Officials at the U.S. Department of the Treasury
grew suspicious of some of Zarrabs transactions
and in 2012 and 2014 went to Halkbank in Turkey
to warn it against doing Irans business.
While the scheme worked for the most part, it
already had begun to unravel. On a foggy New Years
Eve in 2012, a plane carrying a Zarrab shipment was
unexpectedly forced to land in Istanbul for refueling.
Customs officers found more than a ton of undeclared
gold in the cargo hold. The subsequent probe pro-
duced reams of wiretapped audio recordings, records
of text messages, and other materials. Authorities
raided the home of Halkbanks CEO, Suleyman
He sells it in Dubai Zarrab turns the funds Rostamani uses the
for cash in the local over to a money-transfer money to make payments on
currency, dirhams. company in Dubai, Irans behalf, running dollar-
Rostamani Exchange, along denominated transactions
with payment instructions through accounts at banks
designated by Iran. in the U.S.
  POLITICS
Aslan, and found $4.5 million in cash stuffed into
shoe boxes. Turkish police arrested Zarrab in 2013.
But Erdogan soon shut the case down, firing and
even jailing police officers and prosecutors han-
dling it. Zarrab was freed, and the scheme resumed,
though his role as Irans banker to the world had by
now drawn the attention of the FBI, which began
its own probe. By 2015 federal agents had enough
evidence to secure a secret grand jury indictment
against Zarrab in New York.
Prosecutors have cited repeated instances in
which Zarrab invoked Erdogans name in further-
ance of the laundering scheme, including recorded
conversations in which he told people hed laid out
the entire plan to Erdogan. In one 2013 conversation,
Zarrab said: Even if we do two billion, that is import-
ant. Do you understand? It is important for me, in
the eye of the prime minister, since I will go straight
to him. (Erdogan was prime minister from 2003
to 2014.) Prosecutors have cited donations Zarrab
directed to charities associated with Erdogans family.
Despite Zarrabs efforts, the sanctions had their
intended effect. Iran soon came to the negotiating
table to discuss modifying its nuclear program. The
country struck a deal in July 2015, with the sanc-
tions lifted beginning in January 2016. By then,
the course of Zarrabs odyssey had already been
set. On his second day on the witness stand, the
48
Erdogan administration moved to seize his assets
in Turkey. And in a speech on Nov. 30, after Zarrab
implicated him, Erdogan said: We have not broken
an embargo. Christian Berthelsen
THE BOTTOM LINE The testimony of Reza Zarrab has revealed
a vast scheme that Iran used to get around sanctions aimed at
punishing the country for its nuclear program.
Perrys Coal Plan
Unites Energy
Lobbyists
A bid to subsidize coal and nuclear
plants draws ire from oil and renewables
In his 20 years of promoting renewable energy in
Washington, Gregory Wetstone has made common
cause with a range of special interest groups
environmentalists, power utilities, even a handful
of natural gas producers. President Donald Trumps
efforts to bail out the coal industry led Wetstone, the
head of the American Council on Renewable Energy,
to find a new partner: Big Oil.
On Sept. 29, Energy Secretary Rick Perry released
a plan to overhaul the countrys power markets by
Bloomberg Businessweek December 11, 2017
Stranger Things
Spending on lobbying from groups for and against the Trump administration
plan to subsidize coal and nuclear power*
$96.3m opposing $17.2m supporting
$93.4m
Oil and gas industry
$1.0m
Solar Energy
Industries Association $10.3m
$0.7m Mining industry
Natural Resources $3.6m
Defense Council Exelon
$0.6m $1.7m
American Wind Energy Association FirstEnergy
$0.4m $1.4m
Sierra Club Nuclear Energy Institute
$0.3m $0.3m
Industrial Energy Consumers of America Murray Energy
*YEAR-TO-DATE LOBBYING TOTALS ARE GENERAL AND NOT SPECIFICALLY TIED TO EFFORTS SUPPORTING OR OPPOSING THE RULE.
DATA: CENTER FOR RESPONSIVE POLITICS
subsidizing coal and nuclear plants. Within hours
of the plans release, Wetstone was busy pulling
together a team of unlikely allies, including solar
installers, oil refineries, and natural gas drillers, all
worried that the plan would raise electricity costs
and undercut their fuel source in the power markets.
By the end of October, Wetstones renewable
energy council had joined the American Petroleum
Institute and 19 other energy lobby groups in opposi-
tion to the plan. Its not often that our interests align,
but I think everyone recognizes the importance of
standing up together, Wetstone says. Its a reflection
of how disruptive the policy put forward would be.
On Dec. 11 the Federal Energy Regulatory
Commission (FERC), which oversees the nations
electricity markets, votes on whether to approve
Perrys plan. If approved, it could help achieve
Trumps goal of putting U.S. coal miners back to
work by giving unprofitable coal power plants an
edge against more economical ones that run off
cheap wind, solar, and natural gas.
When he proposed his grid overhaul in
September, Perry relied on an obscure statute to
argue that regulators should reward coal and nuclear
plants because their ability to keep enough fuel on
hand to operate for months at a time makes them
more reliable sources of power. Perry has asked
FERC to allow power plants with 90 days of fuel
on site to charge customers more money. No ones
really sure how much that would raise Americans
power bills. Estimates range from a few hundred
million dollars to more than $200 billion a year.
Perrys proposal caught energy lobbyists across
Washington off guard. One oil company executive
described frantic emails and phone calls trying to
suss out details on it the night before it was released.
 POLITICS

Taxes Endgame
Energy lobbyists scrambled to prepare executives,
including at least two chief executive officers, for In reconciling their tax bills, the House and
phone calls and face-to-face meetings with top
Department of Energy and FERC officials. Ben van Senate may favor the Senates version
Beurden, CEO of Royal Dutch Shell Plc, pressed the since the effort will fail if just three GOP
issue with Perry when the two crossed paths at a
recent energy event in Paris. I havent seen the senators vote no. Here are four of the
U.S. gas or power industry this concerned in a long most important points of disagreement.
time, says Orlando Alvarez, the head of BP Energy
Co.s natural gas and power marketing and trading Peter Coy and Sahil Kapur
business. Its getting attention of senior executives
at many energy companies we deal with.
The solar and wind energy associations faced a Individual income tax cuts
flurry of questions from anxious executives, alarmed
by what the plan would mean for their business
models. It was everybody panicking together, says No expiration Expire in 2026
Christopher Mansour, vice president of the Solar
Energy Industries Association.
Tensions have also erupted among longtime The Senate made its individual cuts temporary to comply with decit limits. Republicans
have taken to arguing that future Congresses wont let the individual tax breaks expire.
allies. After Trump officials heralded a newly
updated U.S. Chamber of Commerce-backed study
that justified Perrys proposal by concluding that
closing coal-fired power plants would raise elec-
Individual tax rates
tricity costs and lead to the loss of 1 million jobs, oil
and gas members of the business group revolted. Top rate Top rate
Not only were those results at odds with the Energy
Departments own staff analysis, but oil and gas com- of 39.6% of 38.5%
panies were outraged that a study from a group they
49
paid dues to was being used against them.
Lawmakers could raise money for other priorities by adopting the Houses higher
During a conference call on Nov. 15, represen- top rate. Both versions highest rates kick in at $500,000 for a single ler.
tatives of a handful of oil and gas companies took
turns bashing Karen Harbert, the head of the U.S.
Chambers Global Energy Institute, for promot- Alternative minimum tax
ing the study and providing a supportive quote in
a news release accompanying the report, say two
participants in the call. These groups had lined up Repeals both Keeps both
behind Harbert as she fought against the Obama
administrations Clean Power Plan; now they
the individual and AMTs, but raises
wanted the Chamber to publicly rescind its per- corporate AMTs exemption for indi-
ceived support for Perrys plan.
On Nov. 30, the Heritage Foundation hosted an
viduals until 2026
energy and climate forum that featured coal-magnate
Robert Murray, CEO of Murray Energy Corp. He called Republicans are trying to nd ways to end the corporate AMT, which, set at 20 percent,
Perrys coal plan the most important thing thats been could suppress business spending on research and development.
done for the power grid in 60 years. I met privately
with President Trump on that three times, he said.
We must stop these closings of these power plants. Pass-through businesses
A few hours before Murray spoke, Heritage held
a separate public event meant to highlight skepti-
cism of Perrys grid plan, complete with a critic
Top rate of 25% 23% of busi-
from the free-market Institute for Energy Research. for business income ness income can
The actual subsidy structure of the proposed rule
is simply unacceptable, Kenny Stein, a policy direc-
reported on per- be deducted from
tor at the institute, said at the event. Ultimately, sonal returns taxable income, but
the answer to government distortions cant be to
introduce new distortions that just favor different
no special rate
companies. Ari Natter and Jennifer A. Dlouhy
THE BOTTOM LINE Energy Secretary Perry wants regulators The bills use incompatible approaches to lower taxes on pass-through businesses.
to approve a plan that would allow coal and nuclear plants to Lawmakers will have to pick which one to go with.
charge customers more for the power they produce.
 +

F
O Small
C Business
U
S
This falls hurricane season has been rough on
Jess Vzquezs family business outside San
Juan. Their 35-year-old ice factory and adjacent

Struggling laundromat hasnt had power since Hurricane

Irma, which hit Puerto Rico on Sept. 6, two
weeks before Hurricane Maria devastated the
50
To Keep the island. And the familys rental property business
is losing roughly $35,000 a month, because its
not charging rent to tenants who lack power, lost

Lights On their jobs, or cant reopen their own businesses.

Vzquez says hes spending three times as
much on diesel generators as he did on electric-
ity from the islands bankrupt power utility, the
Puerto Rico Electric Power Authority (Prepa).
Most of his clients are smallconvenience stores,
restaurants, barsand many havent reopened.
The ideal word to describe the overall situation

PHOTOGRAPHS BY ERIKA P. RODRIGUEZ FOR BLOOMBERG BUSINESSWEEK; ILLUSTRATION BY KHYLIN WOODROW

Slow hurricane recovery is catastrophic, he says. More than two months
poses a long-term threat to since Maria, you realize things are not improv-
ing, particularly for small businesses.
Puerto Ricos small businesses Delays in restoring and running power
consistentlyPrepas generation capacity is
only around 68 percentare undermining Puerto
Ricos entrepreneurs. Business conditions have
been bad for years, a result of a decade-long
recession, which spurred signicant migration
away from the island. As many as 470,000 Puerto
Ricans may move to the mainland through 2019,
according to a report by the Center for Puerto
Rican Studies at Hunter College in New York,
because of Marias destruction. In early December
a federal judge canceled plans to bring Puerto
Ricos $74 billion bankruptcy case back to the
December 11, 2017
island because of hotel closures.
Edited by Nelson Ramrez, president of the Centro Unido
Dimitra Kessenides de Detallistas (CUD), a small-business advocacy
and Jillian Goodman
group in San Juan, estimates two-thirds of the
Businessweek.com
 FOCUS / SMALL BUSINESS
islands roughly 45,000 small and midsize businesses have
closed temporarily. Our conservative estimate was 5,000
businesses wouldnt ever reopen, Ramrez says. But it
could easily reach 10,000. Permanent closures could hit
40 percent, says Arnaldo Cruz, director of research and
analytics at the nonprot Foundation for Puerto Rico. The
Puerto Rico government has very bad economic data, even
before Maria, so we wont get accurate official reports for
a while, he says.
Small and midsize businesses represent 90 percent of
private companies on the island and about one-third of the
workforce, according to data released last year by the com-
monwealth governments Puerto Rico Trade and Export Co.
The fallout from this years hurricanes is already apparent:
U.S. Department of Labor gures show employers cut pay-
rolls the most in 21 years in October and unemployment
claims surged to an 11-year high in November.
Business owners say the situation is dire, says Ramrez.
When they close and lay off their workers, it becomes a
vicious cycle, because those people dont buy things, the
economy weakens, and people leave the island.
Carla Lpez de Aza, who rents spaces to artisans
and restaurateurs in her 8,000-square-foot market in San
Juans Santurce area, is committed to the islands recovery,
even though half her tenants left after the power failed and
economic indicators turned grim. Supermarket prices, for
example, have skyrocketed, she says. I know people who
dont know what they are going to feed their kids.
Since her power returned in late November, shes been
trying to lure back tenants who shut their businesses. Puerto
Ricos economic difficulty isnt new, Lpez de Aza says.
Many of her renters lost their jobs during the most recent
recession and reinvented themselves as entrepreneurs. After
Maria, some left for the U.S. mainland. Its important for them
to know they can come back and make a living, she says.
Restoring, then improving, the power grid is priority No.1
for the islands recovery. Infrastructure has to work, says
Cruz of the Foundation for Puerto Rico, noting that a lot of
the island still has no consistent power. Once businesses
are back on the grid, you will see economic recovery really,
really accelerate, says Rob Glenn, the Federal Emergency
Customers wait
in line for ice at the
factory, which is
still without power
Vzquez at his
family-run ice
factory in Ro
Piedras, San Juan
Management Agencys private-sector division director.
The Small Business Administration is offering low-interest
business loans of up to $2 million to owners in Puerto Rico
affected by Maria. Of the 3,533 applications received as
of Dec. 5, the agency has approved only 50 loans totaling
$6.2 million. This is the early phase of the small business
recovery, agency spokeswoman Carol Chastang wrote in
an email. Loan approvals will increase in the coming days.
51
She notes the deadline has been extended to March 20.
Cruz says many Puerto Rican entrepreneurs wont apply
for the loans if theyre not sure theyll have enough clients
to keep their businesses running.
Some, like Ignacio Pino, who runs biotech startup CDI
Laboratories Inc. in an industrial park in Mayaguez, are cau-
tiously optimistic. Even though CDI has lost about $400,000
since Maria, the business is in a better position than most
because it doesnt depend on local customers. It ships its
proteins to hospital research labs and other clients on the
mainland. Its going to be hell, but I think well make it,
Pino says. As a Plan B, his team is scouting locations in
the states that lure biotech companies with incentives. Hes
trying to raise expansion capital but worries investors wont
want to risk their money on a small company in Puerto Rico.
Betting a small cash infusion can help, the Foundation for
Puerto Rico has raised almost $600,000 to give in $5,000
allotments to entrepreneurs in commercial districts its
trying to revive, says Cruz. The Puerto Rico Trade and
Export Co. in mid-November started a $200,000 program
awarding grants of up to $1,000 to businesses affected
by the hurricanes. Executive Director Ricardo Llerandi
acknowledges the donations available arent nearly enough.
Many businesses wont survive, but a year from now, he
predicts, new entrepreneurs will have cropped up in their
place. Says Llerandi: Theres a spirit of, Ill create my own
job instead of asking someone for a job. Nick Leiber
THE BOTTOM LINE Roughly two-thirds of Puerto Ricos 45,000 small and
midsize businesses have closed temporarily following Maria, according to
one estimate. As many as 10,000 of those arent likely to reopen.
  FOCUS / SMALL BUSINESS
The Right
Outt at the
Right Price
Selling mostly online, Argent
wants to make it easier for
women to dress for success
When Christel Clevenger attended
a conference last year for execu-
tive women in Silicon Valley, the last
thing she expected to do was shop
for clothes. But between presenta-
tions, while strolling through the exhi-
bition area, she noticed a beautifully
tailored, navy check blazer hanging
52
from a rack in one booth. It was made
by Argent, a brand shed never heard
of. She began trying on some items
and quickly purchased a blazer, a
shirt, and a pair of pants.
They remain some of my go-to
pieces, says Clevenger, whos in her
40s and a senior program manager at
a large software maker. She continues
to shop at the mostly online retailer
of womens workwear. Their clothes
break away from the boring profes-
sional clothing found in department
stores, she says. Plus, theyre well-
made and travel easily.
Argent is among more startups pro-
viding affordable, contemporary cloth-
ing for women of all ages and sizes.
Theres been much more of a push
of casual leisure than career clothing
by retailers, so theres a shortage of
options for professional women, says
Simeon Siegel, executive director at
Nomura/Instinet Equity Research, who
follows the retail industry. And while
behemoths like Amazon are growing,
he says, theres room for small busi-
nesses as midsize companies such
as Talbots Inc. and Ann Taylor parent
Ascena Retail Group are closing stores.
Argent is all about combining
Bloomberg Businessweek
style and function. Its founders
Sali Christeson, 31, a former cloud
services manager at Cisco Systems
Inc., and Eleanor Turner, also 31 and
a former designer for Tory Burch and
J.Crewstarted the brand in 2016
after concluding most womens
workwear was dowdy and outdated.
Before producing their initial collec-
tion, they analyzed how they typically
spent time at their offices, moving
from meeting to meeting and car-
rying handbags weighed down by
cellphones, cosmetics, and other
items. We decided to engineer what
women today need right into each
piece of clothing, says Turner, the
chief creative officer.
The brands Crossover blazer,
which retails for $325, has a media
pocket for a phone and additional
pockets for items such as pens or lip-
stick. Blazers are designed so women
can thread their earbuds through the
sleeves. Most of the brands trousers,
which sell for $198 to $248, have a
loop on the belt line where a corpo-
rate ID can be attached and a hidden
back pocket for credit and metro
cards. Some pants and blazers are
reversible, giving women two outts
for the price of one. Most items can
be worn year-round.
Theres hardly anything compel-
ling in fashion right now, Bill Dreher,
a retailing analyst at Susquehanna
Financial Group LLP, says of the
$41 billion market for womens
apparel. But if you offer convenience
and value, and combine that with
high-tech fabrics and other high-tech
elements, the product sells itself.
Argent has raised $1.5 million
December 11, 2017
from angel investors. Christeson, the
chief executive officer, wont reveal
sales gures. Argent sells online and
at about one womens conference a
month and at networking events. It has
set up pop-up stores in San Francisco
and Washington. Most clothing is man-
ufactured in New York, near Argents
showroom, so the company can quickly
make samples and oversee production.
One hurdle is getting inventory
right. Argent often runs out of styles
in certain sizes. While common among
small apparel makers, its a problem
for a brand premised on making
shopping easier for the time-starved.
Customers who dont nd the item
they want in their size may be reluc-
tant to come back. We cant always
keep up with demand, Turner says.
Other rapidly growing startups
include MM.LaFleur Inc., which expects
sales this year of $70 million. The
company started in 2013 with seven
dresses. It offers more conservative
fashions and plus sizes for women
whove had few workwear choices.
Even globally, startups founded by
women are addressing the gap in the
market for womens office attire. In
Delhi a former McKinsey & Co. con-
sultant last year launched FableStreet,
which has raised angel funding to
expand in India. In London, the Fold
is an e-commerce luxury apparel line
started by a former nance executive.
Women in their 20s, 30s, and
40s climbing the ladder need to look
polished and put-together to keep
advancing, but they cant spend $1,000
on a luxury suit, and they dont want to
spend their precious spare time shop-
ping, says Carol Hochman, former
CEO of Danskin and a former execu-
tive group president at Liz Claiborne.
These startups ll a big hole in work-
wear at this price point.
Talia Kennedy, a millennial manager
at a tech company near San Francisco,
has been wearing Argents clothing
every day for the past year. Argent
offers a fresh take on what a woman at
ILLUSTRATIONS BY KHYLIN WOODROW
work should look like, she says. The
brand has soul. Carol Hymowitz
THE BOTTOM LINE Argent is one of several
e-retailers filling a hole in the market for womens
attire with stylish workwear.
 FOCUS / SMALL BUSINESS Bloomberg Businessweek
Relaxation Tanks Are
Stressful Business
With corrosive salt water and spaced-out patrons, what could go wrong?
Jennie Herb and Tracy Pafel are not relaxed. Their new
business, Blue Lotus Float Co., is more than 12 months
behind schedule, slowed by a series of ummoxed land-
lords and contractors who dont understand what the heck
a oat company is.
Were their business up and running, however, the cure
for their stress would be within easy reach. Floating is a
kind of recreational physical therapy in which customers
spend 90 minutes suspended in a tank of salt water heated
to skin temperature, housed in a room with no lights and
no noisein other words, no stimulation.
Initially, Herb, 36, and Pafel, 42, thought opening their
own tank center would be similar to starting any other small
business. Herb rattles off the many complications theyve
faced since then: Customers must shower before and after
oating (which is done in the nude), so they need a shower
in every room. Theres the waterproong and soundproof-
ingwere basically building rooms within a room, she says.
Plus all the salt-proong, so we cant use normal wall or
oor products. And we need higher ceilings, because no
one wants to feel like theyre oating in a coffin. Build-outs
can cost as much as $320,000 for a three-tank facilitynot
including the tanks, which run $20,000 to $55,000 each.
Despite the challenges, oating is a growing industry.
Informal tallies suggest there are more than 300 oat
centers in the U.S., up from 50 in 2010with no industry-
specic regulatory organization keeping track, its tough
to get an accurate count. A spate of recent studies have
found oating helpful for ailments ranging from depression
and post-traumatic stress disorder to chronic pain and
Lyme disease.
In August, Herb and Pafel traveled from their home in
the Baltimore area to join 300 other oat entrepreneurs
at the annual Float Conference in Portland, Ore., followed
by a three-day apprenticeship class. They attended the
course free of charge, thanks to a prize theyd won in a
contest for best oat center business plan. (Another prize
was 2,200 pounds of Epsom salt.)
At the conference, Ashkahn Jahromi, one of the events
founders, led a group session on sanitation and operations.
Surfaces should be white or speckled white, he said, to cam-
ouage salt. Keep an extra set of pumps and parts, partic-
ularly the breakable ones. Collect money upfront, because
post-oat, people feel, um, oaty and tend to wander out.
Realize that repairs should happen only when the center
is closed. (You run a sensory deprivation business. You
December 11, 2017
cant be banging on walls.) Expect blame for all manner
of health ailments. Two days later, if someone gets a rash,
theyll call you because the oat tank was the weirdest
thing theyve done recently, he said.
Seven years ago, Jahromi and Float Conference
co-founder Graham Talley, along with a third partner,
opened their own center in PortlandFloat Onwhich they
thought would be the rst in a nationwide chain. Once they
realized how difficult it is to get just one up and running,
however, they changed course. Honestly, Talley says,
the amount of people that are getting into oating from
the centers we helped open is much more than we could
have introduced by expanding our own business. In addi-
tion to the Float Conference, they sell software designed
to help entrepreneurs manage the unique demands of the
53
business, and operate Float Tank Solutions, a consulting
company that sells a $4,400, 180-page book of construc-
tion specications and a $2,170 business plan for getting
a oat center off the ground.
Herb and Pafel left Portland calmed, bolstered by fresh
research on the benets of oating to athletes: The space
theyd recently secured is near a Baltimore Ravens training
center in Owings Mills, Md. The months since have brought
more surprises, mostly positive. Their landlord directed
them to another potential space a mile away with existing
bathrooms, ceilings, and sprinklers, but after two months
of drawing up plans, the landlord realized that converting
their rst space would be less expensive. We just negoti-
ated a lease proposal and are now waiting for the designer
to nish the drawings, Pafel says. But with all the months
of work we did on the last space, it should be fairly easy to
transfer all of our design details to the new space. Theyve
occupied the downtime by working on their website, which
was launched this month.
One of the last wrinkles is from Baltimore Countys
health department, which asked Blue Lotus to follow reg-
ulations geared toward pools and spas. Well be strat-
egizing to try and educate officials in hopes of overcoming
regulations we cant possibly comply withlike having
continuous ltration, which would disturb the necessary
sensory nothingness, Pafel says. We arent running a
Jacuzzi business. Arianne Cohen
THE BOTTOM LINE Float centers are becoming popular, but their
precise requirements and expensive equipment necessitate extensive
upfront logistics and labor.
 Bloomberg Businessweek

In the Philippines,
Facebook
Is a Weapon.

54
Shes th

Maria Ressa, co-founder

of the countrys leading
online news site
 December 11, 2017

e Target 55

Social media in the age of

patriotic trolling

By Lauren Etter
Photograph by Kevin Kunishi
 Bloomberg Businessweek
Rodrigo Duterte walked down the aisle of a packed auditorium
at De La Salle University in downtown Manila, shaking hands
and waving to nearly 2,000 college students snapping photos
of the rising political star. At the front of the hall, waiting for
him in a sharp red jacket, was Maria Ressa, co-founder of the
Philippines largest online news site, Rappler.
Ressa, something of a journalistic legend in her country,
had invited five candidates for the 2016 Philippine presiden-
tial election to a Rappler forum called #TheLeaderIWant.
Only Duterte showed on this January afternoon. So, after the
crowd stood for the national anthem, Ressa introduced the
lone candidate and his running mate. The stage is yours,
she said to applause.
For the next two hours, Duterte, under bright lights, sat in
a white leather chair as Ressa lobbed questions that had been
crowdsourced on Facebook, the co-sponsor of the forum. This
was a peak moment for both interviewer and subject. While
the event elevated Ressa and her four-year-old company, it also
gave the then-mayor of Davao City, known as the Punisher for
his brutal response to crime in the southern Philippine city, an
exceptional opportunity to showcase his views. It was broad-
cast on 200 television and radio stations, and viewing parties
on more than 40 college campuses across the Philippines tuned
in as the event was livestreamed.
The Philippines is prime Facebook countrysmartphones
outnumber people, and 97 percent of Filipinos who are online
have Facebook accounts. Ressas forum introduced Duterte to
Filipino millennials on the platform where they live. Duterte,
56
a quick social media study despite being 71 at the time of the
election, took it from there. He hired strategists who helped
him transform his modest online presence, creating an army of
Facebook personalities and bloggers worldwide. His large base
of followersenthusiastic and often viciouswas sometimes
called the Duterte Die-Hard Supporters, or simply DDS. No one
missed the reference to another DDS: Dutertes infamous Davao
Death Squad, widely thought to have killed hundreds of people.
At the beginning I actually loved it, because I felt like this
was untapped potential, Ressa says. Dutertes campaign on
social media was groundbreaking.
Until it became crushing. Since being elected in May 2016,
Duterte has turned Facebook into a weapon. The same Facebook
personalities who fought dirty to see Duterte win were brought
inside the Malacaang Palace. From there they are methodically
taking down opponents, including a prominent senator and
human-rights activist who became the target of vicious online
attacks and was ultimately jailed on a drug charge.
And then, as Ressa began probing the governments use of
social media and writing stories critical of the new president,
the force of Facebook was turned against her.
To get to the offices of Rapplerthe word is a portmanteau
of rap and rippleyou wind through the hilly streets of
Manila, swept along by a tide of motorcycles, small cars, and
vibrantly decorated jeepneys. Perched at the top of a hill is an
up-and-coming neighborhood just north of the Pasig River, where
Rappler sits on the third floor of a nondescript tower nestled
between the Coffee Bean & Tea Leaf and a Tim Hortons. The ele-
vator doors open to a large concrete hall, with orange (Rapplers
signature color) balloons floating on the ground in front of a
glass-enclosed office. Inside, about 100 editors, reporters,
videographers, and other staff churn out
various types of contentbreaking news, life-
style stories, edgy video features in the style
of Vice News. On the day I visited in October,
a video team was editing a virtual-reality doc-
umentary about the city of Marawi, which for
nearly six months had been embroiled in a
war between the Philippine government and
Islamic militants.
Rapplers varied content is a reflection
of Ressa, a woman who has so many ideas that she often
shifts topics midsentence and will occasionally run from desk
to desk for meetings. She spent almost two decades on-air
with CNN, then led the news division of the largest broad-
caster in the Philippines, ABS-CBN Corp. Born in Manila
and raised in New Jersey, she broke major stories after the
Sept. 11 terrorist attacks, connecting the masterminds of the
plot to terror cells in the Philippines. She wrote two books
on Southeast Asian jihadi networks, and in 2008 personally
negotiated the release of three members of her news staff
whod been kidnapped by Abu Sayyaf, an al-Qaeda affiliate
in the southern Philippines.
So it may be surprising to learn that the interview that
launched Rappler six years ago was a Facebook video filmed
in Ressas apartment with Alodia Gosiengfiao, a young cosplay
(as in costume play) model. She was best known for dressing up
as pigtailed anime characters and buxom video game heroines.
With nearly 1 million Facebook followers, she helped Rappler
position itself outside the old strictures of traditional news.
Rappler demonstrated its seriousness, however, by domi-
nating the 2012 coverage of the impeachment trial of the chief
justice of the supreme court. The next year the company put
together a public debate forum for Senate candidates that was
livestreamed on Facebook. As each candidate answered ques-
tions, audience members clicked on what Rappler called a mood
meter, and a line gauging their reactions popped up on a screen
next to the candidate. It was a breakout moment for Rappler,
even if the candidates vowed never to participate in that setting
againthey described the experience as nerve-wracking. (Ressa
says that reaction partly explains why Duterte was the only
candidate to accept her invitation for her presidential forum.)
Rappler was given another boost in March 2015 when it
entered into a partnership with Internet.org, a free service estab-
lished by Facebook Inc. aimed at giving the worlds then nearly
5 billion unconnected people access to the internetand, of
course, to Facebook. The program was meant to highlight the
companys expansive vision of itself. Facebook wasnt just about
connecting friends anymore. It was becoming a basic neces-
sity, a powerful tool for poor and sometimes isolated people in
Colombia, India, Ghana, Kenya, Tanzania, Zambiaand now
the Philippines.
To advertise the global rollout of Internet.org, Facebook
Chief Executive Officer Mark Zuckerberg posted a picture on
his page of a young Filipino looking at a phone while sitting
in the cab of a colorful motorized tricycle of the sort that
is ubiquitous in the Philippines. Heres a photo of Jaime,
a driver in Manila who uses Facebook and the internet to
stay in touch, Zuckerberg wrote. Were one step closer to
connecting the world.... Now everyone in the country can
have free access to internet services. Rappler would be one
 Ressa interviews
President Duterte in late
2016, shortly before their
relationship soured
of the free networks featured sites.
As the campaign for the 2016 Philippine
presidential election got under way,
Facebook began receiving inquiries from
candidates on how they could best use the
platform. In January the company flew in
three employees who spent a week holding
training sessions with candidates. When it
was Dutertes turn, the Facebook team gath-
ered with the campaign inside the Peninsula
Manila Hotel. The campaign staff was trained in everything from
the basics of setting up a campaign page and getting it authenti-
cated with the trademark blue check mark to how to use content
to attract followers. As an example of the use of unscripted
video, the Duterte campaign was shown a live Facebook video
of Barack Obama preparing for his State of the Union speech in
2016. The clip garnered more views than a video of the actual
address to Congress.
Armed with new knowledge, Dutertes people constructed a
social media apparatus unlike that of any other candidate in the
race. The strategy relied on hundreds of volunteers organized
into four groupsthree in the Philippines, based on geography,
and one comprising overseas Filipino workers, a crucial constit-
uencyto distribute messages created by the campaign. Every
day the campaign would tee up the messages for the following
day, and the volunteers would distribute them across networks
Either theyre negligent or...
that included real and fake Facebook accounts, some with hun-
dreds of thousands of followers.
Facebook initially started receiving complaints about inau-
thentic pages. It seemed harmless enoughthey supported a
range of candidates, and most of them appeared to originate
from zealous fans. Soon, however, there were complaints about
Dutertes Facebook army circulating aggressive messages, insults,
and threats of violence. Then the campaign itself began circulat-
ing false information. In March one of the campaigns Facebook
pages posted a fake endorsement by Pope Francis, with the
words Even the Pope Admires Duterte beneath the popes She titled it Propaganda War: Weaponizing the Internet.
image. The Catholic Bishops Conference of the Philippines
posted a statement saying, May we inform the public that this
statement from the Pope IS NOT TRUE. ... We beg everyone to
please stop spreading this.
Duterte ended up dominating the political conversation so
thoroughly that in April, a month before the vote, a Facebook
report called him the undisputed king of Facebook conver-
sations. He was the subject of 64 percent of all Philippine
election-related conversations on the site.
After Duterte won, Facebook did what it does for govern-
ments all over the worldit began deepening its partnership
with the new administration, offering white-glove services to
help it maximize the platforms potential and use best prac-
BETH FRONDOSO/RAPPLER
tices. Even as Duterte banned the independent press from cov-
ering his inauguration live from inside Rizal Ceremonial Hall, the
new administration arranged for the event to be streamed on
Facebook, giving Filipinos around the world insider access to pre-
and post-ceremonial events as they met their new strongman.
December 11, 2017
Internet.org was just one part of a decade-long campaign
of global expansion for Facebook. In countries such as the
Philippines, the efforts have been so successful that the
company is able to tout to its advertisers that its network is,
for many people, the only version of the internet they know.
Repressive governments originally treated Facebook, and all
social media, with suspicionthey saw how it could serve as a
locus for dissidents, as it had during the Arab Spring in 2011.
But authoritarian regimes are now embracing social media,
shaping the platforms into a tool to wage war against a wide
range of opponentsopposition parties, human-rights activ-
ists, minority populations, journalists.
The phenomenon, sometimes referred to as patriotic
trolling, involves the use of targeted harassment and propa-
ganda meant to go viral and to give the impression that there
is a groundswell of organic support for the government. Much
of the trolling is carried out by true believers, but there is
evidence that some governments, including Dutertes, pay
people to execute attacks against opponents. Trolls use all
the social media platformsincluding Twitter, Instagram, and
YouTube, in addition to the comments sections of news sites.
But in the Philippines, Facebook is dominant.
Ressa exposed herself to this in September 2016, a little more
than three months after the election. On a Friday night, a bomb
ripped through a night market in Davao City, Dutertes home-
town, killing 14 and injuring dozens more. Within hours, Duterte
57
implemented a nationwide state of emergency. That weekend,
the most-read story on Rappler was an archived item about the
arrest of a man caught planting an improvised explosive device,
also in Davao City. The article had been written six months
earlier, and the incident had no connection to the night market
bombingbut it was circulating on the same Facebook pages that
promoted Dutertes presidency, and people were commenting
on it as if to justify the state of emergency.
This, and another earlier incident, became the basis of the
article that altered Ressas relationship with her government.
Within hours of publication, she and Rappler were being
attacked through Facebook. She began receiving rapid-fire
hate messages. Leave our country!!!! WHORE!!!!!! read one.
The messages became increasingly violent: I want Maria
Ressa to be raped repeatedly to death. When she later
reported that she was getting as many as 90 such messages
per hour, including rape threats, the tidal wave began again.
The onslaught became so disturbing that Ressa sent her social
media team to counseling. She installed an armed guard in
front of her office. By November an #UnfollowRappler cam-
paign led to Rappler losing 52,000 of its Facebook followers,
or about 1 percent.
Manila was changing. The economy had boomed under the
previous administration, but much of the wealth gains went
to the top, and some Filipinos had taken to calling the capital
Imperial Manila. Duterte, who was born in one of the nations
poorest regions, positioned himself as a champion for regular
people. He told Filipinos the nation was being ruined by drug
 Bloomberg Businessweek
abuse and related crime, and promised to bring to the capital
the merciless strategy hed employed in Davao. Soon, Dutertes
death squads prowled the streets at night in search of drug
dealers and other criminals. Images of blood-smeared bodies
slumped over on sidewalks, women cradling dead husbands,
and corpses in satin-lined caskets went viral. As the bodies piled
upmore than 7,000 people have been killed as part of Dutertes
war on drugsthe social media war escalated.
Ressa had already watched Dutertes supporters undo his
opponents. Senator Leila de Lima, whod led an investigation
into Dutertes extrajudicial killings in Davao City, was tar-
geted by viral Facebook articles with headlines like Leila
de Lima is an idiot and Leila de Lima is the patron saint
of drug lords. An #ArrestLeilaDeLima campaign beganthe
origins are unclearand in February she was arrested, on
drug charges that she disputes. (De Lima is listed by Amnesty
International as one of the worlds Human Rights Defenders
Under Threat.) Duterte also targeted the Philippine Daily
Inquirer, one of the nations most prominent newspapers, in
part because it maintained what it called a kill lista record
of drug war victims. In public remarks, Duterte called the
owners of the newspaper sons of bitches who went too far
in their nonsense and warned that someday, karma will
come. In July, the family that owned the paper announced it
was selling it to a wealthy businessman who is a close friend
of Dutertes.
58
...theyre complicit in state-sp
Ressa grew more alarmed after the powerful campaign blog-
gers were brought even closerin one case, into the adminis-
tration itself. Mocha Uson, an actress and DDS blogger with
more than 5 million followers, was named assistant communica-
tions secretary. R.J. Nieto, who runs the influential pro-Duterte
site Thinking Pinoy, which has frequently taken aim at Ressa,
was hired as a consultant to the Department of Foreign Affairs.
(Pinoy is slang for Filipino.)
The Rappler data team had spent months keeping track of
the Facebook accounts that were going after critics of Duterte.
Now Ressa found herself following the trail of her own critics
as well. She identified 26 accounts that were particularly viru-
lent. They were all fake (one account used a photo of a young
woman who was actually a Korean pop star), and all followed
one another. The 26 accounts were posting almost the exact
same content, which was also appearing on faux-news sites
such as Global Friends of Rody Duterte and Pinoy Viral News.
The messages being posted consistently linked back to
pro-Duterte pages. Ressa and her team put all these accounts
into a database, which grew rapidly as they began automating
the collection of information, scraping Facebook pages and
other public sites. They took to calling their database the Shark
Tank. Today it contains more than 12 million accounts that have
created or distributed pro-Duterte messages or fake news. Ressa
isnt sure how many of these accounts are fake.
Even in the U.S., where Facebook has been hauled before
Congress to explain its role in a Russian disinformation cam-
paign designed to influence the U.S. presidential election, the
company doesnt have a clear answer for how it will stem abuse.
It says it will add 10,000 workers worldwide to handle security
issues, increase its use of third-party fact-checkers to identify
fake news, and coordinate more closely with governments to
find sources of misinformation and abuse. But the most chal-
lenging questionssuch as what happens when the govern-
ment itself is a bad actor and where to draw the line between
free speech and a credible threat of violenceare beyond the
scope of these fixes. What stays and what goes from the site
is still decided subjectively, often by third-party contractors
many of them stationed, as it happens, in the Philippines, a
long-standing outsourcing hub.
Facebook is inherently conflicted. It promises advertis-
ers it will deliver interested and engaged usersand often
what is interesting and engaging is salacious, aggressive, or
simply false. I dont think you can underestimate how much
of a role they play in societal discourse, says Carly Nyst, a
London-based consultant on technology and human rights
whos studied patriotic trolling around the world. This is a
real moment that they have to take some responsibility. These
tools theyve promised as tools of communication and con-
nection are being abused.
Facebooks executives say the company isnt interested in
being an arbiter of truth, in part because it doesnt want to
assume the role of censor or be seen as having an editorial
opinion that may alienate users. Nonetheless, its been under
increasing pressure to act. In the Philippines, it began conduct-
ing safety workshops in 2016 to educate journalists and non-
governmental organization workers. These cover the basics:
an overview of the companys community standards policies,
how to block a harasser, how to report abusive content, how to
spot fake accounts and other sources of misinformation. The
company has increased the number of Tagalog speakers on its
global Community Operations team in an effort to better root
out local slurs and other abusive language.
Still, Facebook maintains that an aspect of the problem in the
Philippines is simply that the country has come online fast and
hasnt yet learned the emergent rules of the internet. In October
the company offered a Think Before You Share workshop for
Filipino students, which focused on teaching them digital lit-
eracy skills, including critical thinking, empowerment, kind-
ness, and empathy.
Nyst says this amounts to suggesting that digital literacy
should also encapsulate the ability to distinguish between state-
sponsored harassment and fake news and genuine content.
The company, she says, is taking the position that it is individ-
uals who are at fault for being manipulated by the content that
appears on Facebooks platform.
In Europe, that isnt good enough: The U.K., Germany, and
France have threatened fines and increased regulation if the
company doesnt take more steps to prevent fake news and
extremist propaganda. Ten days before the French elections
in April, Facebook announced it would suspend 30,000 fake
accounts. Ressa wondered why the company was willing to
act in France but in the Philippines said people needed to
bone up on online etiquette. We are going through much

worse than any of the Western nations, and our institutions
are far weaker, she says. It made me really realize that I
needed to speak up.
In April, Ressa met with Zuckerberg at the F8 conference in
San Jose, an annual event for Facebook developers. After a
keynote by Zuckerberg, Ressa joined a group of other entrepre-
neurs for a meeting with the Facebook founder. When it was
her turn to talk, she described how critical Facebook was to
Filipinos, that it was essentially the countrys most important
public space. Politely, she also expressed dismay at how it had
become a tool to spread what she called government propa-
ganda. She then invited Zuckerberg to come to the Philippines.
A few days later she sent an email to a New York-based
Facebook manager in charge of journalism projects saying
that the issues shed raised in earlier emails to the companys
Asia-Pacific division had not been addressed. She attached
some of the underlying data from the Shark Tank and outlined
the scope of the harassment she was enduring. In May she
wrote again, this time to two additional U.S.-based Facebook
managers. Please take a closer look at the Philippines, she
wrote. While youve taken action in Europe, the danger is
far worse for us, and Facebook is the platform they use to
intimidate, harass, and attack. It is dangerous. I fear where
this may lead. Best, Maria. In yet another email, she sug-
gested the company consider changing its algorithm to take
onsored hate
into account the difference between credible news, harass-
ment, and government propaganda.
In a response to questions from Bloomberg Businessweek, Mia
Garlick, Facebooks director of Asia-Pacific safety programs, said,
We are committed to helping ensure that journalists around
the world feel safe on Facebook as they connect their audiences
with meaningful stories. We permit open and critical discussion
of people who are featured in the news or have a large public
audience based on their profession or chosen activities, but will
remove any threats or hate speech directed at journalists, even
those who are public figures, when reported to us.
The pressure on Ressa increased in May after Rappler pub-
lished a transcript of a call between Duterte and U.S. President
Donald Trump, in which Duterte called the leader of North
Korea a madman. Nieto, the government consultant, posted
a video on Facebook calling Ressa a traitor who had made
the Philippines a target of North Korea. The video got 83,000
views and drew comments like Declare Rappler & Maria Ressa
as enemies of the Filipinos and #ArrestMariaRessa. In July, in
his annual state of the nation address, Duterte stood at a podium
before the Philippine Congress and for nearly two hours ham-
mered against illegal drugs, corruption, and pollution. Then he
began a tirade against news organizations, saying that by law
theyre supposed to be entirely owned by Filipinos. Thats when
he singled out Ressas company: Rappler, try to pierce the iden-
tity, and you will end up with American ownership, he said.
In August the Philippines Securities and Exchange
Commission established a special panel to investigate Rappler.
In the complaint, a copy of which was obtained by Bloomberg
December 11, 2017
Businessweek, the panel ordered Rappler to produce evidence
that the company wasnt in violation of a constitutional provi-
sion limiting ownership of media companies to Philippine cit-
izens. Rappler has overseas investors, including North Base
Media Ltd., a Cayman Islands-based venture capital firm with
investors from around the world, and Omidyar Network, a
venture capital firm started by EBay Inc. founder Pierre
Omidyar. Rapplers response to the special panel was that the
investments were made legally through a common financial
instrument called a Philippine Depositary Receipt, which, unlike
traditional shares, does not confer ownership or control. It isnt
clear whether this explanation will suffice. The SEC has broad
powers to refer cases to the Philippines Department of Justice
for criminal charges.
Rappler was born on Facebook and lives there stillits the
predominant source of Rapplers traffic. So Ressa finds herself in
an awkward spot. She has avoided rocking the boat, because she
worries that one of the most powerful companies in the world
could essentially crush her. What if Facebook tweaked the algo-
rithm for the Rappler page, causing traffic to plummet? What if
it selectively removed monetization features critical to the sites
success? Theres absolutely no way we can tell what theyre
doing, and they certainly do not like being criticized, she says.
But after more than a year of polite dialogue with Facebook, she
grew impatient and frustrated.
In a trip to Washington in early November, she met with
several lawmakers, telling them that she believes Facebook is
being used by autocrats and repressive regimes to manipulate
59
public opinion and that the platform has become a tool for online
hooliganism. She did the same in a speech at a dinner hosted
by the National Democratic Institute, where Rappler was pre-
sented with an award for being on the front lines of fighting the
global challenge of disinformation and false news.
As she accepted her award, Ressa recalled that she started
as a journalist in the Philippines in 1986, the year of the People
Power Revolution, an uprising that ultimately led to the depar-
ture of Ferdinand Marcos and the move from authoritarian rule
to democracy. Now shes worried that the pendulum is swinging
back and that Facebook is hastening the trend. They havent
done anything to deal with the fundamental problem, which
is theyre allowing lies to be treated the same way as truth and
spreading it, she says. Either theyre negligent or theyre com-
plicit in state-sponsored hate.
In November, Facebook announced a new partnership with
the Duterte government. As part of its efforts to lay undersea
cables around the world, Facebook agreed to team up with
the government to work on completing a stretch bypassing the
notoriously challenging Luzon Strait, where submarine cables
in the past have been damaged by typhoons and earthquakes.
Facebook will fund the underwater links to the Philippines
and provide a set amount of bandwidth to the government.
The government will build cable landing stations and other
necessary infrastructure.
Thats the sort of big project Facebookembraces. Its also
testing a solar-powered drone that will beam the internet to
sub-Saharan Africa and has a team of engineers working on
a brain implant to allow users to type with their minds. To
Ressa, Facebook looks like a company that will take on any-
thing, except protecting people like her.  With Sarah Frier
and Michael Riley
 Bloomberg Businessweek

BY
ZEKE FAUX

l
60

iV i
H A S S L E D O V E R A L O A N T H AT D I D N T E X I S T, O N E M A N D E C I D E D T O G E T
 December 11, 2017

nate
61

P AY B A C K A N D D I S C O V E R E D A C O N S P I R A C Y T H A T A F F E C T S M I L L I O N S
 Bloomberg Businessweek
O
n the morning a debt collector threatened to
rape his wife, Andrew Therrien was working
from home, in a house with green shutters on
a cul-de-sac in a small Rhode Island town. Tall
and stocky, with a buzz cut and a square, friendly
face, Therrien was a salesman for a promotions
company. Hed always had an easy rapport
with people over the phone, and on that day,
in February 2015, he was calling food vendors
to talk about grocery store giveaways.
Therrien was interrupted midpitch by a call
from his wife. Shed gotten a voicemail from an authoritative-
sounding man saying Therrien was in some kind of trouble. I
need to verify an address to present you with your formal claim,
the man had said. Andrew Therrien, you are officially notified.
A few minutes later, Therriens phone buzzed. It was the
same guy. He gave his name as Charles Cartwright and said
Therrien owed $700 on a payday loan. But Therrien knew
he didnt owe anyone anything. Suspecting a scam, he told
Cartwright just what he thought of his scare tactics.
Cartwright hung up, then called back, mad. He said he
wanted to meet face-to-face to teach Therrien a lesson.
Come on by, asshole, Therrien says he replied.
I will, Cartwright said, and I hope your wife is at home. answered and said she worked for Lakefront Processing Solutions
Thats when he made the rape threat.
Therrien got so angry he couldnt think clearly. He wasnt
going to just let someone menace and disrespect his wife like
that. He had to know who this Cartwright guy was, and his
62
employer, too. Therrien wanted to make them pay.
At the same time, he worried that the call might not be
a swindle. What if some misinformed loan shark really was
coming for them? But Therrien didnt have any real informa-
tion he could take to the police.
Then he remembered Cartwright had left a number with
his wife.
He dialed.
Somewhereat the top of a ladder of dirty debt collectors that
Therrien would spend the next two years relentlessly climbinga
man named Joel Tucker had no idea what was coming.
EARLIER THIS YEAR, I met Therrien, 33, at a Panera Bread restau-
rant in central Providence. He had reluctantly agreed to be
interviewed, on the condition that I not reveal his hometown
or his wifes name.
Therrien had been caught up in a fraud known as phantom
debt, where millions of Americans are hassled to pay back
money they dont owe. The concept is centuries old: Inmates
of a New York debtors prison joked about it as early as 1800, in
a newspaper they published called Forlorn Hope. But system-
atic schemes to collect on fake debts started only about five
years ago. It begins when someone scoops up troves of personal
information that are available cheaply onlineold loan appli-
cations, long-expired obligations, data from hacked accounts
and reformats it to look like a list of debts. Then they make
deals with unscrupulous collectors who will demand repayment
of the fictitious bills. Their targets are often poor and likely to
already be getting confusing calls about other loans. The harass-
ment usually doesnt work, but some marks are convinced that
because the collectors know so much, the debt must be real.
The problem is as simple as it is intractable. In 2012 a
December 11, 2017
call center in India was busted for making 8 million calls in
eight months to collect made-up bills. The Federal Trade
Commission has since broken up at least 13 similar scams. In
most cases, regulators werent able to identify the original
perpetrators because the data files had been sold and repack-
aged so many times. Victims have essentially no recourse to
do anything but take the abuse.
Most victims, that is. When the scammers started to hound
Therrien, he hounded them right back. Obsessed with payback,
he spent hundreds of hours investigating the dirty side of debt.
By day he was still promoting ice cream brands and hiring models
for liquor store tastings. But in his spare time, he was living out
a revenge fantasy. He befriended loan sharks and blackmailed
crooked collectors, getting them to divulge their suppliers, and
then their suppliers above them. In method, Therrien was like
a prosecutor flipping gangster underlings to get to lieutenants
and then the boss. In spirit, he was a bit like Liam Neesons vigi-
lante character in the movie Takenusing unflagging aggression
to obtain scraps of information and reverse-engineer a criminal
syndicate. Therrien didnt punch anyone in the head, of course.
He was simply unstoppable over the phone.
WHEN THERRIEN DIALED the number Cartwright had left, a woman
in Buffalo. Shed never heard of Charles Cartwright, though, and
implied he must be some kind of freelancer or bounty hunter.
Regardless, she said, Therrien could clear everything up by
making a payment. Her records indicated that he owed a payday
lender called Vista.
Therrien had indeed once taken out a loan, but he didnt
think it was from Vista. Hed been selling copiers at the time, and
when his boss stiffed him on a $20,000 commission, he turned
to an online lender to make a car payment. Therrien says he
paid back the debt promptly. He was offended by the Lakefront
womans suggestion that he was a deadbeat. Im a person who
believes in personal friggin responsibility, Therrien says. I
signed an agreement. And I fulfilled my obligation.
On his laptop, Therrien started digging. He found a securi-
ties filing saying Vista had merged with a company called That
Marketing Solution Inc. After paying a few dollars to an online
people-search service, he got its president on the line. You sold
my personal information to a bunch of thugs, Therrien recalls
telling the man. I want to know why, and I want to know what
youre going to do about it. Within hours, the company provided
a letter saying that Therrien had never borrowed from Vista.
Armed with proof the debt was invalid, Therrien turned back
to Lakefront. More searches yielded a corporate parent, owned
by two Buffalo men. Therrien called them, then their lawyer.
When the lawyer stalled, Therrien bombarded him with more
calls, at home and on his cellenough to put Lakefront off him
for good. (The parties eventually reached a confidential settle-
ment, and Lakefrontwhose name I found in a public record
declined to comment.)
By the morning after Cartwrights call, Therriens fears of a
psycho collector had been assuagedno one had showed up at
his house. But swatting down Lakefront turned out to be just
the first round in a game of whack-a-mole. More collection agen-
cies contacted him, his wife, his brother, even his grandparents.
The calls made it clear to Therrien that an overarching force
was at play. His name had to be getting on these lists somehow.
Bloomberg Businessweek
Each night, after his wife went to sleep, he cracked open his
laptop to comb lawsuits, unearth filings, and uproot the owners
of the agencies calling him. When he got names, hed phone
them, often surprising them at home, and make clear that he
wouldnt go away until theyd revealed who supplied their debt
portfolios. Heres the deal, hed say. I dont really care about responsible person than his parentspaying his bills on time,
you. Theres a million guys like you out there. Youll never get
your money back. You might as well get blood out of it. Tell me
what I need to know to put these guys in jail.
Sometimes, Therrien would make a small payment on the
fake debt, then check bank records to see where it went. He
found people with convictions for counterfeiting, stock fraud,
drug dealing, and child molestation. He started a spreadsheet,
Scums.xlsx, to keep track. On weekends hed harangue them
from his couch while watching New England Patriots games.
He used persuasion techniques hed learned selling copiers,
some drawn from a book called Getting Into Your Customers
Head. On the phone, Therrien is a savant. He has an instinct for
when to be a friendone gruff payday lender tells me, sheep-
ishly, that he simply doesnt know why he speaks with Therrien
so frequentlyand when to be a bully.
Therrien would threaten to report the collectors to regula-
tors unless they helped him figure out what was going on. You
are either with me in this, or you are against me, he wrote to
one man. Others he tried to shame. If my intentions are right,
Ill have God on my side, Therrien emailed one source. You
may not love poor people, but He does.
The targets were shocked by Therriens doggedness. In
their world, complaints are common, but most victims give up
after being promised they wont be called again. One shady-
debt player tells me he suspected Therrien was an undercover
federal investigator because hed gathered so much informa-
tion on his business. Its an obsession, its unbelievable, an
outright vigilante crusade, another says. It doesnt seem to
equal the harm that was done to him.
Therrien knew his fixation seemed odd. He didnt tell his
friends and family much about his nighttime activity. But the
collectors threats brought back feelings of rage and fear that
hed struggled to suppress since childhood. He grew up in
working-class Connecticut, where his father was a factory man
and his mother had a series of part-time jobs. Therrien says they
mistreated him and his brother, and he moved out at 16 after
an incident he wont discuss. He told me he regrets not doing
of it
YOULL NEVER GET
out
YOUR MONEY BACK.
od
YOU MIGHT AS WELL GET
blo
December 11, 2017
more to protect his brother. (Therriens father is dead, and his
mother denies she did anything wrong.)
In college, Therrien worked at a J.Crew store, where a cus-
tomer spotted his talent for sales and offered him a job. Therrien
makes a good living now, and he takes pride in being a more
going to church on Sunday, and taking care of those close to him.
If its just about me, I dont particularly give a f---, he tells me,
with an incongruous laugh. You call my wife, and you call my
grandparents? You just opened up a door that got really f---ing
ugly, and now Im going to make sure that I just ruin your life.
AS MORE COLLECTORS yielded to Therriens persistence and
talked, he dropped his pursuit of Charles Cartwright, concluding
that it was an untraceable alias, and focused on understanding
their business. Phantom debt, he learned, is blended with real
debt in ways that are almost impossible to untangle.
Americans are currently late on more than $600 billion in
bills, according to Federal Reserve research, and almost one
person in 10 has a debt in collectors hands. The agencies
recoup what they can and sell the rest down-market, so that
iffier and iffier debt is bought by shadier and shadier individu-
als. Deception is common. Scammers often sell the same port-
folios of debt, called paper, to several collection agencies at
once, so a legitimate IOU gains illegitimate clones. Some inflate
balances, a practice known as overbiffing. Others create redo
listspeople whove settled their debt, but will be harassed again
anyway. These rosters are actually more valuable, because the
63
targets have proved willing to part with money over the phone.
And then there are those who invent debts out of whole cloth.
Portfolios are combined and doctored until they contain thou-
sands of entries. One collector told Therrien that hed paid cash
at a diner for a thumb drive with a database containing Therriens
name. Some collectors told him they thought the files were par-
tially legitimate; others knew their paper was completely falsi-
fied. Yet they continued to trade it, referring to the people they
pursued as deadbeats and losers. The more Therrien learned,
the more disgusted he grew with everyone involved.
His search for the ur-source rarely traveled in a straight line.
For a time, Therrien focused on Buffalo, one of the poorest cities
in the U.S. and a hub for the collections industryhome to agen-
cies that work the oldest, cheapest paper. Debt collector is a
more common job there than bartender or construction
 Bloomberg Businessweek
worker, according to the Bureau of Labor Statistics. As
Therrien wore down as many Buffalo collectors as he could,
one name kept surfacing: Joel Tucker, a former payday-loan
mogul from Kansas City, Mo. By the summer of 2015, Therrien
was convinced hed found his guy.
THERRIEN NEEDED AN ALLY inside the Kansas City racket. He
found one in Frampton Ted Rowland III, a middle-aged insur-
ance-broker-turned-predatory-lender whose company was listed
as the original creditor for one of Therriens supposed loans.
When Therrien called, Rowland said he was sorryand kept
talking. His life was falling apart. Hed been sued by the FTC over
his lending practices, hed lost all his money, and his wife was
leaving him. Therrien sympathized. He sensed Rowland was a
good man whod made a bad choice out of a desire to provide
for his family. They started to speak regularly, and Rowland told
Therrien he blamed Tucker for everything.
Tucker had created the local industry with his two brothers.
Scott, the oldest, was the brains. Hed served time in prison for
a scam in which hed pretended to work for JPMorgan Chase
& Co. The middle son, Blaine, was popular and a talented
musician. Joel, tall and handsome, was a natural salesman.
But when he was 21, he was selling furniture and working at
a mini-mart, so hard up that he got arrested for bouncing a
$12 check. (The case was dismissed.)
In the mid-1990s, Scott opened a payday-loan store and
gave his brothers jobs. Lending money to people who dont
have any is surprisingly profitable. In states where such
64
stores are legal, such as Missouri, theyre more common
than McDonalds franchises. But in the 15 states where such
stores are against the law, there are millions of desperate
people willing to pay for fast cash and no one to give it to
them. Scott pioneered what he thought was a clever legal loop-
hole that would give him access to that market: He created
websites that were owned on paper by an American Indian
tribe, which could claim sovereign immunity from regulators.
Those sites charged as much as $150 interest on a two-week,
$500 loanan annualized interest rate of about 700 percent.
The loophole was ridiculously lucrative. Scotts operation
generated $2 billion in revenue from 2003 to 2012. He bought
a private jet and spent more than $60 million to start his own
professional Ferrari racing team. Around 2005, Joel split to start
a company that would allow anyone to get into online payday
lendingsupplying software to process applications and loans
and offering access to a steady stream of customers. All the
clients had to bring was money and a willingness to bypass state
law. Word spread around Kansas Citys country clubs and private
schools that if you wanted to get rich, Joel Tucker was your man.
With Tuckers help, one property management executive
and his son, a general contractor, started a lender that saw
$161 million in revenue over eight years. An investor presenta-
tion from that period shows that Tucker was personally clear-
ing tens of millions of dollars in profit per year.
One of his clients was Rowland, until the gravy train crashed
in 2013. Under pressure from regulators, banks stopped doing
business with the sketchiest payday lenders, making it hard for
them to issue loans and collect payments. In 2014 federal author-
ities raided Rowlands office, and the FBI began investigating
the Tucker brothers. Blaine committed suicide by jumping off
a parking garage in 2014; Scott was charged two years later with
December 11, 2017
WHO ARE YOU?
too
A P E R S O N T H AT
YOU F---ED WITH
racketeering, and prosecutors called his tribal arrangement a
sham. (He declined to comment.)
By the time Therrien came looking for Joel Tucker in the
fall of 2015, hed become a hard man to find. Twice divorced,
he was moving from place to place, ducking his creditors. A
booking photo from the time when he was briefly imprisoned
for failing to show up for court in an unrelated lawsuit shows
him with bristly gray hair and dark circles under deep-set
blue eyes. Therrien couldnt find a working phone number
for himnot even when he reached his 81-year-old mother,
Norma. She claimed not to know where he was.
Therriens tactics grew more intense, mirroring those of the
debt collectors he loathed. As he had in Buffalo, he developed
a network of sources in Kansas City, figuring out who hated
whom and playing them off each other. He got a burner app
that provided disposable numbers for his smartphone, with
any area code he wanted. He called wives, widows, business
partners, even a waitress whod once worked at a restaurant
the Tuckers owned. Hed have his sources drive by places
where he thought Tucker might be living, to look for his car.
He told one brokers mother-in-law that she should investi-
gate who her daughter was married to. Therrien acknowl-
edges that sometimes he went too far.
By November 2015 he developed a simple theory. Tuckers
business had given him access to a huge database of people
whod applied for loansincluding, just maybe, the one
Therrien had taken out in his copier-selling days. What if,
when Tucker was broke and needed money, hed taken appli-
cants personal information, invented loan balances, and sold
the list as a portfolio of delinquent debt?
Therrien took his hypothesis to the FBI and FTC. His
emails were breathless and confusing, but the authorities
were patient, taking his calls and talking to him at length. It
was clear they knew about Tucker, but Therrien got frustrated
by what he saw as inaction. There are millions of people out
there being threatened daily by these actions and Im doing
my part to try and stop it, he wrote to an FTC investigator in
early 2016, begging him to hold Tucker accountable.
JANUARY 2016 SAW a breakthrough: A former employee of
Tuckers agreed to arrange a call between him and Therrien
to clear the air. Therrien couldnt believe his unseen antago-
nist was willing to talk. So anxious he couldnt sit down, he
set up a recording device in his home office, put his phone
on speaker, and called.
Tucker seemed hyper and defensive, telling Therrien that if
 mes
Bloomberg Businessweek
man ti
any of the portfolios hed sold now contained phantom debt,
they must have been doctored after leaving his hands. F---ing
shame on them, he said. Wasnt me. It had to have been them.
Therrien was trying to hold back his anger, but his voice
wavered. He wanted to impress Tucker, mentioning tidbits
he knew about his business. Tucker didnt understand why
Therrien, this guy hed never met, was so extravagantly invested.
Ill tell you why I care, Therrien said calmly. Ill tell you
why I care. I believe, and Im just telling you what I believe,
you sold my personal information 21 separate times. Ive gotten
close to 100 f---ing calls, and because Ive gotten those 100 calls
from scumbag collectors that you facilitated, Im going to make
sure that that kind of shit ends now.
Tucker was incredulous: You think this is my fault?
You got desperate because you spent two dollars for every
dollar you had, Therrien said.
What are you talking about? Are you trying to micromanage
my life? You dont know jack shit about me.
I know what happened. You f---ing stole money from
people, Therrien said. Im giving you the opportunity to
come clean.
I dont know who you are, Andrew, Tucker said. Who
are you?
A person that you f---ed with too many times.
When Therrien played the tape for me, I was amazed at how
fluently he channeled emotionhis own and Tuckersto get
what he wanted. Incredibly, by the end of the half-hour call,
Tucker was offering to help Therrien collect evidence about
crimes committed by other people in the payday-loan busi-
ness. We need to get this stuff resolved, Tucker said on the
tape, with a sigh. Cause thisits not healthy for anybody.
The two men started talking and texting a few times a week.
I think he has a mental illness that allows him to think he did
nothing wrong, Therrien told me. (Tucker didnt respond to
most of my emailed questions and kept putting off interview
requests. Lies are not stories, he wrote in one email. He said
that any debt hed sold was legitimate.)
Tuckers denials made Therrien hate him more, but Therrien
masked his feelings to keep the conversation going. The one-
year anniversary of his quest was approaching, and he wanted
real evidence of wrongdoingsomething Tucker couldnt deny
and officials couldnt ignore.
Therrien soon obtained two crucial sets of documents to
that end. In March 2016 he flew to California to meet a debt
broker, who handed over some contracts Tucker had signed.
Separately, Therrien received an email from the manager of
December 11, 2017
a collection agency, to whose conscience hed spent weeks
appealing. The email, whose subject line read Have faith in
the good in heart, included actual phantom-debt files, with
names and Social Security numbers. The metadata yielded
a new name: Rob Harsh, Tuckers IT guy. (The author of the
email died of a drug overdose a few months later.)
In May 2016, Therrien emailed his discoveries to the FTC.
A lawyer replied right away: Andrew, we need to talk about
this. Therrien also gave his intel to some private lawyers who
were going after Tucker in Texas. They contacted Harsh, and
in August 2016 he submitted an affidavit to the court. Harsh,
who declined to comment for this story, testified that Tucker
had asked him to manipulate a database of almost 8 million
payday-loan applications, writing in a made-up lender and
adding an amount owed of $300 for each person.
Therrien had been right all along.
VINDICATION DIDNT MAKE Therrien happy, not even when the
FTC suit against Rowlands company took a karmic swerve
that drew in Tucker, directing him to return $30 million hed
received in ill-gotten profits from the business. Tucker told the
court he was broke.
Meanwhile, Rowland was spiraling. He confided in Therrien
that he was considering suicide, and one day that summer he
called Therrien to say goodbye. Dont do anything stupid,
Therrien texted him afterward. I may be callous with you lately
but I still care and dont want anything bad to happen. Therrien
told me hed informed the police of Rowlands plan and that they
65
had intervened. But that October, Rowland shot himself. His
death added to Therriens outrage at Tucker and other predatory
lenders like him who hadnt faced any real legal consequences.
Finally, in December 2016, the FTC sued Tucker for selling
phantom debt. According to the regulator, everything had hap-
pened pretty much as Therrien imagined: Tucker had invented
more than 7.7 million fake debts and sold them to a series of
middlemen for $4.2 million. This September, a judge ruled for
the agency, ordering Tucker to pay back that money on top of
the $30 million he already owed.
The FTC has never credited Therrien, and Michael Tankersley,
an agency lawyer, declined to discuss their interactions. But
Tankersley told me that Harsh and the California broker were two
key sources of information establishing Tuckers wrongdoing.
Therrien, as usual, was unsatisfied. He was still getting calls
from collectors, for one thing. And he felt that if hed done
a better job investigating, Tucker would be facing criminal
chargesnot a civil fine hed never end up paying. Therrien
has stayed in touch with the FBIs Kansas City office. An FBI
spokeswoman declines to say whether Tucker is being investi-
gated, but three of his associates told me that agents had con-
tacted them about his debt sales.
After the ruling against Tucker, Therrien heard from him for
the first time in months, and they started talking again. Amid
their conversations, which were recorded, Tuckers brother,
Scott, was convicted on all 14 charges he faced. Without directly
asking Therrien to drop his vendetta, Tucker seemed to be plead-
ing for mercy. Ive f---ing had enough harm done, he said. Ive
lost a brother. Got a brother going to prison. Put it this way,
Andrew. Im tired, buddy. Im f---ing tired.
Im tired too, Therrien replied, because Im still getting
harassed by these motherf---ers. 
Bloomberg Businessweek

YOUD FIGURE
THE SUPERSTAR
LAWYER WOULD
BE PANICKED,
GIVEN HIS TIES
TO TWO OF THE
BIGGEST NAMES
IN THE SEXUAL
HARASSMENT
CRISIS, HARVEY
WEINSTEIN AND
CHARLIE ROSE.
YOUD BE WRONG
BOIES CLUB
David Boies knows what youre think-
ing. In the closing weeks of 2017, with
nonstop investigations showing how
powerful men got away with mistreat-
ing women around them for so long, it
looks like the fixers, agents, gossip col-
umnists, and attorneys who enabled their
behavior will be next in line to fall.
But Boies, one of the worlds most
powerful attorneys, whose own role has
come under fire, is projecting calm and
confidence. He and his firm, he says in a
phone interview, will be fine. I do think
that many clients perspectives are dif-
ferent and more sophisticated than the
public narratives, he says. They under-
stand what lawyers do.
Boiess legend as a brilliant court-
room tactician and champion of demo-
PHOTOS: BOIES: JEFF BROWN. WEINSTEIN: GETTY IMAGES
cratic ideals, which he details in his 2004
memoir, Courting Justice, has grown in
step with his big-ticket cases. During the
governments antitrust battle against
Microsoft Corp. in the 1990s, Boies
tangled with Bill Gates. After the con-
tested 2000 presidential vote, he fought
for Al Goreand then teamed up with
George W. Bushs former attorney to push
for gay marriage equality. His admirers
have seen Boies as a folk hero who just
happens to charge $1,000-plus an hour.
That reputation is now being
reappraised. Since October dozens
of women have alleged that Harvey
WeinsteinBoiess longtime client,
business associate, and friendsexually
assaulted or harassed them over the
course of decades. (Weinstein, whos
being investigated for sexual assault
in New York and London, has denied
accusations of nonconsensual sex.) In
November the New Yorker reported
that, prior to the Weinstein news, Boies
signed a contract with a secretive enter-
prise run by former Israeli intelligence
officers to protect Weinstein by trying to
stop a New York Times investigation into
his history with women. The newspa-
peralso a Boies clientcalled his behav-
ior a betrayal of trust and fired his firm,
Boies Schiller Flexner LLP. The internet
exploded with disgust. From hero to
BY FELIX GILLETTE,
MAX ABELSON, CASEY SULLIVAN,
AND REBECCA GREENFIELD
PHOTO ILLUSTRATION BY ERIK CARTER
zero, wrote Cyd Zeigler, a sportswriter
and gay advocate. Rose McGowan, an
actor whose allegations helped trigger
Weinsteins downfall, tweeted that Boies
was a scumbag.
For decades, Boies has been clean-
ing up his wealthy clienteles messes.
More quietly, hes been cleaning up his
own. Interviews with more than a dozen
people whove worked with him show
that this isnt the first time his loyalty to
a friend or client has tested the bounds
of propriety and called his judgment into
question. I probably do tend to stay with
friends and clients more than some other
people would, he says. Sometimes that
can subject me to criticism.
Boies survived those episodes with
his aura intact. Inside the firms offices,
he and his lieutenants expect nothing
different this time around. Theyre sure
December 11, 2017
theyll outlast the current wave of moral
outrageand even imagine themselves on
the right side of history. Im old enough
to remember when nobody ever wanted
to defend anybody who was accused
of being a communist, whether they
were a communist or not, Boies says.
Today, its really dangerous to defend
anyone who is accused of being a ter-
rorist, again, whether they are or not. I
think that the issue of sexual assault and
sexual harassment falls into that category
a little bit today. That is not necessarily
a bad thing.
Boiess relationship with Weinstein
began over lunch in Manhattan in 2001,
a few years after hed ditched his perch
at Wall Street heavyweight Cravath,
Swaine & Moore LLP to start his own
firm. The movie mogul thought Boiess
rise from teen slacker and card shark
into omnipotent litigator and fervent
craps player would make a great memoir
for Miramax Books, Weinsteins publish-
ing imprint. Boies agreed, and while
working on Courting Justice, he began
representing Weinstein and his brother,
67
Bob. In 2005, Boies navigated their exit
from Walt Disney Co., then provided
counsel after they formed Weinstein Co.
Weinstein and Boies were seen
together on Manhattans fundraising
circuit. They co-hosted a private screen-
ing of Michael Moores Fahrenheit 9/11 at
the Ziegfeld Theater. Boies and Weinstein
couldnt be a more incongruous pair: The
lawyer is lanky and cerebral, the pro-
ducer paunchy and volcanic. Boies, born
in Sycamore, Ill., looks like a disheveled
professor. Weinstein, from Queens, N.Y.,
comes across as a bull shark.
In 2012, Boies started a movie
company. It was an unusual move for
a power lawyer, but his daughter, Mary
Regency, was interested in acting and
filmmaking; she landed one of her first
major acting credits in Weinstein Co.s
Silver Linings Playbook that year. Boies
partner Jonathan Schillers son Zack was
 Bloomberg Businessweek
also building up a rsum in entertain-
ment, and Boies partnered with him to
run the Boies/Schiller Film Group. They
took a shot on a Western called Jane Got a
Gun. Boies was executive producing, and
his daughter produced. The Weinsteins
acquired the U.S. rights with Relativity
Media LLC, but things werent going well:
The director walked away on the first day
of production, Jude Law dropped out,
Relativity filed for bankruptcy, and the
movie went on hiatus.
Weinstein Co. was facing a crisis of its
own. In 2015, Ambra Battilana Gutierrez,
an Italian model, told police in New
York that Weinstein fondled her during
a work meeting. No charges were filed.
However, the police investigation and
media coverage came at a tricky moment
for Weinstein. That same year, his con-
tract as co-chairman was up for renewal.
Two board members, Lance Maerov and
Tarak Ben Ammar, wanted to look more
closely into Weinsteins behavior.
There was no reckoningBoies won
Weinstein his extension. He was fired
only after the October expos by the
Times, at which point Maerov publicly
68
blamed Boies for the companys failure
to deal with Weinsteins alleged abusive-
ness. The lawyers shielded him, Maerov
told the Financial Times. They shielded
him from the indignity of being asked
questions by the board. Boies responded
that the directors were trying to rewrite
history. (Maerov declined to comment
for this story. Ben Ammar didnt respond
to interview requests.)
Around the time that Boies was
trying to extend Weinsteins contract,
the producer was working to get Jane
Got a Gun into theaters. In January 2016,
Weinstein Co. distributed the movie in
the U.S. Bob and Harvey were all very
helpful, Boies told Newsday when it pre-
miered last year. I think it was partly
due to the fact of my relationship with
them. The Western flopped, but the
men stayed in business together. Boies
invested $5 million in Gold, a 2016
Weinstein Co. adventure flick starring
Matthew McConaughey, and another
$5 million in The Upside, a Nicole Kidman
comedy slated for next year.
In early November, Boies announced
in a memo to colleagues that he no longer
represented Weinstein. Diane Karpman,
a legal ethics expert in Los Angeles,
told Bloomberg that Boies could have
avoided some of the backlash if hed
FROM TOP: BOIES DURING THE
MICROSOFT TRIAL, 1998; BOIES, HIS WIFE,
MARY, AND WEINSTEIN, 2011
dropped Weinstein earlier. Lawyers are
duty bound to believe people like Harvey
Weinstein, but at some point common
sense does tip the scale, she said. If Boies
had dropped Weinstein in 2015, however,
he would have lost a major connection to
Hollywood and an opportunity to make
millions of dollars. Even though Boies
wont comment on Weinstein, he says
theres a part of his personality that enjoys
making calculated bets: Sometimes if
youre not prepared to risk greatly, you
cant accomplish greatly.
Weinstein isnt the only power player in
the Boies orbit who became a client and
friend. Boies appeared on Charlie Roses
show for the first time in 1999, and the two
shared an apartment together in Paris,
according to Karen Donovans 2005 book
v. Goliath: The Trials of David Boies. A few
years later, when Radar named Rose a
toxic bachelor, reporting a womans
claim that he groped her, Boies sent a
letter demanding a retraction. The mag-
azine declined. Last month, a Washington
Post investigation revealed Roses alleged
history of sexual harassment. (He declined
to comment for this story.)
At Cravath, Boies represented pro
bono a Florida woman named Amy Habie,
who was in a vicious custody battle with a
Guatemalan textile baron. Boiess family
also had a stake in a landscaping business
December 11, 2017
Habie acquired in Palm Beach. The rela-
tionship puzzled the firms lawyers.
We represent plenty of people pro
bonoin discrimination cases and death
penalty cases, for examplebut wives
of Guatemalan tycoons are not exactly
what we have in mind, Samuel Butler,
Cravaths presiding partner, told the Wall
Street Journal in 1997. (Butler hung up the
phone when reached for comment.)
After Boies started his own firm, Habie
became chief financial officer. A fight
between her lawn-care company and
its previous owner had more plot twists
and florid characters than a John Grisham
thriller. Before it was over, a judge fined
Habie for violating court orders and gave
her 90 days in county jail. The sanc-
tions were suspended. She remains at
Boies Schiller Flexner and says the firm
approved work done on her behalf.
One of the names that came up in that
case was William Duker, who worked
under Boies at Cravath before start-
ing his own firm around 1986. A decade
later, he admitted to inflating legal bills
by $1.4 million. After leaving prison, he
became an entrepreneur and played a role
in the sale of Habies company. David
has never shied away from people that
hes known who have had difficult times,
Duker says. Hes incredibly loyal. Duker
adds: There are lawyers who represent
ax murderers out there. It doesnt make
them an ax murderer. It makes them what
they arewhich is a lawyer.
One of Dukers companies was a docu-
ment management business called Amici
LLC in Albany, N.Y., that served law firms.
For a time, Boies Schiller Flexner had
clients use Amici without disclosing that
several of Boiess family members, as well
as relatives of his firms general counsel,
Nick Gravante Jr., owned indirect stakes
in the company. When Boies Schiller
Flexners ties to Amici were revealed in
court during a clients bankruptcy case,
it touched off a stir. That client, Adelphia
Communications Corp., asked the law
firm to resign as its counsel. Amid the bad
press, Boies told the Wall Street Journal
that he should have disclosed the ties,
though Gravante says the episode was
overblown and that fees were reasonable.
The saga ended well for Amici. In 2006,
Xerox Corp. announced it was acquiring
the company for $174 million.
After the Ne w Yorker expos on
Weinsteins clandestine efforts to
 Bloomberg Businessweek
undermine potential accusers, Boies
responded to the cascading criticism. I
would never knowingly participate in an
effort to intimidate or silence women, he
wrote in the same memo announcing that
he was no longer representing Weinstein.
That is not who I am.
When Avery Gilbert read that state-
ment, she was beside herself. Gilbert had
been an attorney at Boies Schiller Flexner,
and before leaving in 2010, shed believed
the firm had stifled her complaints to
management about a document man-
agement vendor called Boalt Discovery
Inc. While working on a multibillion-dollar
private equity lawsuit, shed become sus-
picious about Boalt. Not only did she think
its work was bad and expensive, she sus-
pected that Gravante had a family connec-
tion to the business. She complained and
was later fired. Reading Boiess assurance
to colleagues about his character, she was
so infuriated that she emailed him asking
to talk. She wanted an apology but didnt
get one. (This account is from an interview
with Gilberts husband, Zachary Bendiner,
who worked at the firm as a parale-
THERE ARE LAWYERS WHO REPRESENT
AX MURDERERS OUT THERE.
IT DOESNT MAKE THEM AN AX
MURDERER. IT MAKES THEM WHAT THEY
AREWHICH IS A LAWYER
LEFT FROM TOP: JUSTIN LANE/GETTY IMAGES; LARRY BUSACCA/GETTY IMAGES; J. SCOTT APPLEWHITE/AP PHOTO
gal; he says she signed a nondisclosure
agreement and he didnt.) Boies Schiller
Flexner colleagues say neither Gravante
nor his family had an interest in Boalt and
that Gilbert was let go for other reasons,
which the firm declines to discuss.
In 2002, Rachel Baird, a former Boies
Schiller Flexner attorney, along with a col-
league, sued the firm for gender discrim-
ination. In one incident, Baird describes
Boies telling her, the only female attor-
ney in the room, to go downstairs and pay
for his cab. At the time, the firm said the
claims were without merit; eventually, the
women settled for $37,500 each.
Marguerite Hogan, an associate who
left the same year as Gilbert, says: There
werent a lot of women for me to look up
to. When youre in that situation and there
is nobody else around you thats like you,
it can feel a little isolating. Today, lawyers
at the firm say it has no shortage of female
talent and takes on cases aimed at the
public good. In February, Boies filed suit
against Backpage.com, a web platform for
classified ads, which he says profited from
child sex trafficking. (Backpage declined
to comment.) I talk about him having a
beautiful mind and a beautiful heart, says
Sigrid McCawley, a Boies Schiller Flexner
partner in Fort Lauderdale. Ive seen it
throughout my career.
There have been awkward moments,
though. Every year, Boies takes his troops
on a winter retreat. Three attendees recall
that around 2005, during a weekend in
Jamaicas Montego Bay, lawyers were
greeted at an evening reception by a
woman splayed out on a buffet table
with her body covered in chocolate.
Boiess wife, Mary, a lawyer who works
at the firm with one of his two ex-wives,
wasnt amused. Mary right away directed
that the woman get off the table, says
Gravante, the general counsel, who
blames the hotel. But its hardly indic-
ative, he adds. Its Jamaica.
This year the retreat will be on a
barrier island in Florida. Gravante is confi-
dent about the firms prospects and mildly
annoyed that anyone would suggest
trouble ahead. He puts the chances of a
major client leaving the firm or refusing
it business because of the Weinstein alle-
gations at zero percent.
Jonathan Hughes, an adviser to
DraftKings Inc., says the Weinstein alle-
gations wont stop the fantasy sports
site from working with Boies Schiller
Flexner. Even if the firm and David are
suffering a little bit, he says, theres
a breadth and a depth to the firm
that is fabulous. Gravante also wont
suffer questions about Boies resigning.
Stepping down? No. Why? No. Why
would he step down? he says. People
recognize that we are still, in my view,
December 11, 2017
the best litigation firm in this country.
It could also be one of the most scru-
tinized. When novelist Emma Cline and
an ex-boyfriend named Chaz Reetz-Laiolo
sued one another in November, news cov-
erage focused on the work Boies and his
firm have done on the exs behalf, includ-
ing delving into her sexual history.
Like guard dog Hollywood attor-
ney Martin Singer or big-time comedy
agent Dave Becky, the former manager
for Louis C.K., Boies is going to have to
adjust to a harsher spotlight. Even as it
grows stronger, he seems certain that any
examination will show his firms work
remains a force for good. Youve got to
have a belief that what you do as part of
the justice system, in terms of represent-
ing clients, has an overall value to society
that is independent of who the particu-
lar client is, he says.
Things were different not so long ago.
Inside the Wynn Las Vegas last year, Boies
was throwing a bash for his 75th birth-
day, and his pals were lapping up the law-
yers largesse. Tom Brokaw gave a gushing
toast, according to an attendee; Rose and
69
Theranos Inc. founder Elizabeth Holmes
mingled, and Weinstein was on the invite
list. Ray Kelly, New Yorks former top cop,
rapped a tribute.
As the weekend wound down, Duker,
the disbarred lawyer, spoke. In his toast to
Boies, he said: He is able to read minds.
He knows what judges and juries, clients
and adversaries, journalists and waiters
are thinking. Thats why he is the best
lawyer in the world.
On Dec. 6, the morning after the New
York Times reported that Boies worked
on a settlement with former Weinstein
Co. employee Lauren OConnor after
she wrote a 2015 memo accusing the pro-
ducer of sexual harassment, Duker sent
Bloomberg Businessweek a poem. It goes
like this:
Relics of a time that had been left behind
Unearthed by scavengers hoping to find
Fortune and fame that they were
deprived
No matter how often they had connived
There was nothing new for them to report
So they mixed all the relics as if old bones
could contort
They dressed up the corpse in the lasted
fashion
And added their own self-righteous
passion 
 The Good Stu P
Butter is better than ever, and in France theres a U
R
run on the stu. Still, are we really ready to pay $50 a pound?
By Emily Saladino Photographs by Mitchell Feinberg

S
U
I
T
S

74
A Cape Town
art safari

76
A worldly trend
in watches

78
Ending the Aerons
office dominance

79
Elan Ripstick 96 skis

80
The master of the
Minions

Bloomberg
Businessweek

December 11, 2017

Animal Farm butter, Edited by

made in Orwell, Vt. Chris Rovzar
 FOOD Bloomberg Pursuits December 11, 2017

I
n October, news of a French butter shortage shook
the food world to its croissant-shaped core. Prices 1 2
tripled in France as consumers nervously hoarded
caches. In some areas, as much as 46 percent of
demand went unmet, according to Nielsen Holding Plc.
Considering how basic the ingredients arebutter
is nothing more than milk cream churned into semi-
solid, spreadable fatthe shortage seemed implausi-
ble. But various economic forces around the world
converged to shrink supplies: In 2015 the European
Union ceased milk quotas, leading to a brief glut
of dairy products that ended up with farmers on
the Continent decreasing output by 3 percent. The
U.S., meanwhile, had to reduce its exports to meet
domestic demand. And a drought in New Zealand,
the worlds top dairy exporter, hurt that countrys
production. By this fall, butter supplies in France
were woefully short, and shelves were stripped of
even the top-quality stuff.
The problem of finding high-grade products is
hardly unique to the French, however. Butter, like
meat and even leafy greens, is an increasingly strat-
ified staple. In the U.S., as consumers have become
more culinarily savvy, the competition among gourmet
retailers has grown intense. Butters of varying quality
are available, with chefs paying as much as $50 a pound
for the crme de la crme. A certain amount of exper-
tise is needed to expend ones butter budget wisely.
72
The market is divided into two tiers: mass retail
products made with milk from a variety of reputable
dairy farms, and single-origin spreads available almost
exclusively by private order. (In France, many are offi-
cially classified by their region of origin, or AOP.)
Butterfat content, or the percentage of pure natural
fat by volume, is the simplest way to measure quality,
particularly in the mass market.
Supermarket standbys such as Horizon Organics
contain 80 percent butterfat, the minimum set
by the U.S. Department of Agriculture. At the top
end of the range, craft labels such as Straus Family
Creamery, a California-based operation supported by
5
Alice Waters, and Frances AOP Echir make butters 6
with 84 percent to 86 percent butterfat. (They make
it richer by adding less salt during processing and 1. Delitia Butter of Parma 3. Plugra
Adhering to the same guidelines and using This American brand provides an
removing more of the watery whey.) the same milk as Parmigiano-Reggiano accessible entree to traditionally made
In the second camp lie single-origin butter DOP cheese, this Italian spread contains butter. Available nationwide, and starting
producers such as Diane St. Clair, a dairy farmer in 84 percent butterfat, yielding sweet, almost at $10 a pound, Plugra has one especially
grassy notes and a very smooth texture for discerning fan: Famed baker Franois
Orwell, Vt., who has a cultlike following. St. Clair about $7 a pound. Payard says it produces pastry creams and
ships her Animal Farm butter to James Beard crusts comparable to those of Lescure,
Foundation Award-winning chefs including Bostons 2. Animal Farm an AOP French label. Its more milky than
St. Clairs label is the table butter of choice conventional American supermarket butters,
Barbara Lynch, Patrick OConnell of the Inn at Little for chefs Keller and Lynch. St. Clair raises a but it arguably lacks the richness and
Washington in Virginia, and Thomas Keller. Diane small coterie of Jersey cattle on grass and nuanced flavors of a single-origin product.
makes butter from animals born, raised, and cared separates their 87 percent-butterfat cream
by hand. She ferments it for 24 hours in the 4. Double Devon Cream Butter
for on the same location, using techniques that keep cows own buttermilk, then churns it into Scone enthusiasts will appreciate this rich,
the ingredients as close to their natural state as possi- a dandelion-yellow spread. Animal Farm is eggshell-hued contender from the south of
ble, says Keller, who features Animal Farm butter in publicly available for one week a year at $50 England. Lightly salted and churned from the
per pound from Saxelby Cheesemongers. same milk as Devon cream, 8-ounce logs of
bread courses at the French Laundry in Napa Valley Double Devon Cream can be purchased for
and Per Se in Manhattan. The result is butter with $7.50 from Amazon.com.
terroirone shaped by the soil, weather, animals, and
plants of her land.
FOOD
3 4
7 8
5. Echir Beurre de Baratte
Made with milk from cows raised within
32 miles of the dairy in western France, this
butter from the AOP cooperative contains
84 percent butterfat and is hand-churned
in wooden barrels that date to 1894. It has a
silky, easily spreadable consistency and an
almost yogurtlike tang. Most Echir products
remain in France, but Amazon and Zabars
distribute them internationally. Expect to pay
$18 to $20 a pound, plus a hefty delivery fee.
6. Straus Family Creamery
This family-run farm in California began
making organic, traditionally churned butter
at the behest of Alice Waters in 1992. Also
favored by Atelier Crenn and Meadowood
and made with milk from sustainable regional
farms, Straus butters are sold at select
stores, including Whole Foods Markets in the
western U.S. It has the sort of full, warm flavor
a sommelier might describe as round. From
Bloomberg Pursuits
7. Delitia Buffalo Milk Butter
A sister spread to Delitia Butter of Parma, this
one uses water buffalo milk akin to the Italian
regions mozzarella di bufala. Its available via
online retailers for $15 a pound.
8. Ampersand
Chef Grant Harrington, whos worked for
Gordon Ramsay and at Swedish destination
restaurant Faviken, matures his cultured
Jersey milk for up to two weeks, then adds
pink Himalayan salt and hand-churns it to
order for Michelin-starred establishments
across the U.K. Half-pound wheels can be
preordered at butterculture.bigcartel.com for
pickup at Londons Maltby Street Market. From
4.50 ($6.06) for 200 grams.
December 11, 2017
One week a year, Animal Farm is available through
Saxelby Cheesemongers to connoisseurs who dont
possess their own Michelin stars. Saxelby has an
agreement with St. Clair to sell her annual excess
product to consumers. Last year, Saxelbys supply
of Animal Farm butter retailed for $50 a pound; it
sold out in 10 minutes.
How butter is made can help determine how dear it
is. Commercial producers separate cream from milk in
batches of several gallons each, pasteurize the cream,
then machine-churn it into a semisolid spread recog-
nizable to anyone whos ever eaten a dinner roll. Craft
makers, on the other hand, ferment the milk after
pasteurization, maturing their product for anywhere
from one hour to two weeks.
Liz Thorpe, author of The Book of Cheese and a
former vice president of Murrays Cheese in New York,
likens the impact of fermentation to that of aging wine
in oak barrels. Fermented butter has a far more
complex flavor, with warm, hazelnutty notes, she
says. Its like eating a soft ripened cheese on bread
instead of just a schmear of something fatty.
Knowing the terminology is key: Almost all
European butter is fermented, but American prod-
ucts that have undergone the process are typically
marketed as cultured butter.
As with any craft product, you pay for its scarcity.
In addition to the hands-on attention and expertise
73
required by small-batch separation and fermentation,
luxury butter requires milk from expensively bred
cattle. Straus Family Creamery and Echir source milk
from regional cooperatives that meet special standards.
And while most commercial dairies in the U.S.
breed black-and-white Holstein Friesian cattle, Animal
Farm and a similar U.K. label, Ampersand, raise tawny
Jersey cows. Grass-fed Jerseys process the carotene in
grass differently than their brethren do, resulting in
cream higher in butterfat even before craft process-
ing. Jerseys also produce less milk, raising the cost
of labor by volume.
In addition to its richer taste and creamier
texture, high-butterfat butter contains less moisture
and thus reacts better to cooking heat. Its less likely
to separate over high temperatures on the stove-
top and imparts a delicate crumb to baked goods.
Swapping out conventional butter for a luxury label
doesnt require altering a recipe, but it will abso-
lutely improve the flavor.
As for limited-edition spreads including Animal
Farm or even a more accessible option such as the
American-made $5-per-half-pound Plugra, cook
(and bake) at your own financial risk. Just as you
wouldnt pour a 1959 Chteau Lafite Rothschild into
a pot of beef bourguignon, single-origin butters are
best savored in the raw. Spread them on radishes or
high-quality bread.
None of the restaurants I sell to cook with my
butter, says St. Clair, the dairy farmer. Im sure
it would be delicious.But its sort of a waste of the
$16 a pound. nuance to melt it down and hide it in other things. 
 TRAVEL Bloomberg Pursuits December 11, 2017

Go Here Now: Cape Town

The South African city has added top-tier art and avant-garde
design to its alluring list of attractions. By Sarah Khan

No stranger to tourists, Cape Town has

typically staked its reputation on being an
adventure capital more than an arts center.
The citys natural beauty draws even
the laziest of travelers on hikes up Table
Mountain, to penguin-packed beaches shel-
tered by rocky coves, and across the rolling
hills of 200 nearby vineyards.
But change is afoot in the Mother City.
I was living here in 2014, when it was dubbed
a World Design Capital, and I witnessed the
emergence of a local cultural scene. The
Central Business District and once-gritty
Woodstock area were then morphing into
art hubs brimming with studios and world-
class galleries such as Stevenson, Gallery
74
Momo, and Whatiftheworld. Even outside the
city, vineyards like Leeu Estates, Le Quartier
Franais, and Delaire Graff Estate are now
showcasing homegrown artistic talents.
This long-simmering creativity came to a
boil in September when philanthropist and
ex-Puma Chief Executive Officer Jochen Zeitz
opened the 500 million-rand ($36 million)
Zeitz Museum of Contemporary Art Africa
(Mocaa). The German businessman has been
a passionate collector of art from the African
continent and diaspora for a decade, pains-
takingly amassing a collectionrumored
to include more than 1,000 worksthat

The Zeitz Museum of Contemporary Art Africa
PHOTOGRAPHS COURTESY IWAN BAAN/ZEITZ MOCAA; THE ROYAL PORTFOLIO; LEEU ESTATES
ranges from Zimbabwean political com-
mentary and African American pop art to
Tunisian photography.
Previously, the only way to see part of his
collection was to pay upwards of $1,800 per
night to sleep among a handful of special
pieces at his Segera Retreat safari camp in
Kenya. The 100,000-square-foot museum
does more than bring the collection to the
masses; it gives the city its own version
of Londons Tate or New Yorks Whitney
Museum and cements Cape Town as a bona
fide global art capital. On a continent loaded
with imagination and talent, the vanguard
is right here.
The building itself is a marvel. Thomas
Heatherwickthe British architect behind
Googles headquarters in Mountain View,
TRAVEL
A room at the Silo hotel, with its signature geodesic windows
Calif., and Kings Cross in Londonhas
transformed an abandoned 1920s-era grain
silo into a concrete cathedral to creativity.
Inside is an airy, almost diaphanous atrium
that Heatherwick carved out of the facto-
rys 42 hulking cylinders. Suspended from
the ceiling is Nicholas Hlobos haunting
Iimpundulu Zonke Ziyandilandela (All the
Lightning Birds Are After Me), a dragon
made from rubber inner tubing that refer-
ences South African Xhosa mythology.
A wander through the 80 galleries that
circle the buildings light-filled atrium will
reveal nebulous cowhide sculptures by
Swaziland-born Nandipha Mntambo, portraits
featuring intricate spectacles fashioned from
trash that Kenyan artist Cyrus Kabiru collects
on the streets of Nairobi, and textured can-
vases layered with sari fabrics by Madagascan
Jol Andrianomearisoa.
The neighborhood around the museum,
rechristened the Silo precinct, is changing
more than its name. Until recently it was
nothing more than a barren stretch adjacent to
the Victoria & Albert Waterfronta glossy-but-
bland shopping plaza that draws more tour-
ists than the Egyptian pyramids. Now tenants
include edgy accessories designer Kirsten
Goss; Kat van Duinen, who makes extraordi-
nary ostrich bags and python clutches; and
Guild, a showcase for South African furniture.
Meanwhile, the Yard and other restaurants are
bringing locals to an area they once avoided
the way New Yorkers bypass Times Square.
Conveniently perched above the museum
Bloomberg Pursuits
is Cape Towns best new place to stay. The Silo
hotel is anchored by geodesic windows that
bulge out of the 28 rooms and look onto Table
Mountain. (Guests are currently being asked to
avoid soaking in its decadent baths, because
of a local water shortage.) Surveying the land-
scape from my suite, I thought about how easy
it would be to assume that this progress all
resulted from the Zeitz Mocaa, but the oppo-
site is true: The museum is merely a reflection
of the citys momentum. 
Leeu Estates in Franschhoek
December 11, 2017
WALK THIS BLOCK:
BREE STREET
At the heart of Cape Towns revitalized
Central Business District, Bree Street has
become a magnet for stylish shoppers
in addition to its long-standing coterie of
culinary pilgrims.
Missibaba
A stern, charcoal-colored facade belies
what youll find inside: leather handbags
in a kaleidoscope of hues and shapes.
229 Bree St.; missibaba.com
Convoy
This boutique brings several local labels
under one petite roof, with leather
brogues from Aya Goods, laser-cut
dresses by Isabel de Villiers, and
Black Bettys citrine and quartz rings.
233 Bree St.; facebook.com/convoyshop
Hzz
The first city outpost of this award-
winning Stellenbosch coffee roaster, its
one of Cape Towns best pick-me-ups.
221 Bree St.; hazz.co.za
Alexandra Hjer Atelier
Find minimalist fashionlong denim
coats and plaid shirtdressesat
Swedish transplant Hjers rocknroll-
inspired boutique, set in a former stable.
156 Bree St.; alexandrahojer.com
Robert Sherwood Design
The interiors maven has spiced
75
up homes and hotels across South
Africa, Zanzibar, and the UAE; his
eclectic showroom stocks fantasy-
style photography by Athi-Patra
Ruga and sculptural clay vessels
by Louise Gelderblom. 173 Bree St.;
robertsherwooddesign.com
SeaBreeze Fish & Shell
Famished? Skip the seafood on
the Waterfront and come here for
Knysna oysters and kingklip with
braaied corn salsa. 211-213 Bree St.;
seabreezecapetown.co.za
THE DAY TRIP:
FRANSCHHOEK
Less than an hour away from Cape Town
is the Winelands hamlet of Franschhoek,
with its gabled Cape Dutch-style
buildings, stuck-in-time churches, and
now, one of the worlds best tasting
rooms. There, you can swirl and sip funky
syrahs and chenin blancs by Andrea
Mullineaux, named Wine Enthusiasts
2016 Winemaker of the Year. Her familys
bottles are the focus of the tobacco-
toned studio at Leeu Estates, a year-old,
17-room hotel and spa. (Try the Passant
Stellenbosch chardonnay; its popular for
its balanced peach and pear notes.) For
dinner, a new destination restaurant has
cropped up on nearby Huguenot Street:
La Petite Colombe, a spinoff of a similarly
named fine-dining stalwart in Cape Town,
offers unexpected flavor combinations
such as linefish with smoked parsnip,
pancetta, and buckwheat.
 STYLE
A wave of handsome world time watches is
washing into stores. By Troy Patterson
World time as we know it began in
1884, when the International Meridian
Conference convened in Washington,
D.C. Leaders there accepted a proposal
by Sandford Fleming, a Scottish civil
engineer whod helped build Canadas
transcontinental railroads, to slice
the globe longitudinally into 24 time
zonesstandardizing the hours to
comply with the demands of the Second
Industrial Revolution.
The first watches with a world time
complication arrived about 50 years
later, when the Swiss craftsman Louis
Cottier devised a pocket watch for
Vacheron Constantin and then a wrist-
76
watch for Patek Philippe SA. Each house
issued a design with a rotating exterior
ring (or bezel) around the perimeter that
listed the names of locations to represent
each time zone. Moving the bezel made
it simple to compute the hour anywhere
in the world.
The power of such a watch is plain
to see on its face, now typically featur-
ing a Gods-eye view of the Northern
Hemisphere, with the North Pole at
the center of the dial. Its a look that
conjures the international glamour of
a worldwide network of connections
business dinners in Dubai, old friends
in the Azores, urgent appointments
in Mexico, Moscow, and the Midway
Islands. Glancing at the map, a captain
of industry feels like hes at the wheel
of a ship charting a circumnavigatory
courseor maybe, in a naughtier fantasy,
like a supervillain plotting global domi-
nation from his wrist.
For most of these timepieces, the
hours are calculated by moving a bezel
with a number of cities or countries
listed on it. You line up your location
at the 12 oclock position, usually using
the crown on the side of the watch. As
the day goes on, a smaller interior bezel
marked with hours 1 through 24 slowly
rotates. By looking at where a city falls
Bloomberg Pursuits
In the Zone
against the ring of hours, you know
what time it is therewhile the hours
and minutes in your own time zone are
marked by the standard watch hands.
Oddly enough, in an era when a
phone can instantly tell the time any-
where you wish, worldtimer watches
have become distinctly on-trend. Call
it a symptom of an increasingly global
society that yearns for a bit of tradi-
tion. More companies have adopted
worldtimer watches in some shape or
form. Theyre more available, observes
Ruediger Albers, the U.S. president of
high-end watch retailer Wempe, who
wears a Patek worldtimer himself. The
buyers who come into his Fifth Avenue
location are often businesspeople who
are making deals in faraway lands. They
dont need a mechanical watch, but
everything else is plastic, he says. It
doesnt go with your nice suit.
The Earths current revolution around
the sun has spun forth a number of beau-
tiful versions from brands that have made
these watches for years. The most exclu-
sive option just might be the Ulysse Nardin
Executive Moonstruck Worldtimer, avail-
able in two limited 100-piece editions,
one platinum, the other rose gold. Not
content to combine the pleasures of
horology and cartography, this one also
throws astronomy and oceanography into
the mix. The 46-millimeter model depicts
the motion of the moon and sun in rela-
tion to the Earthas well as the phases
of the moon and the ebb and flow of
the tides. And push-buttons at 8 oclock
and 10 oclock allow even the groggiest
globe-trotter to adjust the hour forward
or backward with ease.
This year, Patek Philippe, the house
where worldtimers began, has rendered
its 7130G Ladies World Time in a new
color, meaning a woman can enjoy
this 36mm masterpiece in white gold,
with a delicately etched dial of radiant
blue. Granted, shes not an everyday
December
Month 00
11, 2017
womanthere are 62 diamonds on the
bezel of her timepiece and 27 more on
the buckle of its peacock-blue alliga-
tor strap. Rather, you should imagine
Carmen Sandiego buying herself a
treat after an especially successful
international heist.
The most theatrical of these releases
is the Jaeger-LeCoultre Geophysic
Tourbillon Universal Time, which is
fitted with a flying tourbillona complex,
ever-moving gadget that protects the
watchs timekeeping from the effects of
gravity. The tourbillon window, poised
at the 4 oclock position, cuts dramati-
cally into the dials carved oceans and
satin-brushed continents as it rotates
through its 24-hour journey.
Less showy but no less stately, the
Frederique Constant Classic Manufacture
Worldtimer offers a dashing view of the
Earth, with chocolate-brown oceans
lapping at the shores of rose-gold land-
masses. As with the Jaeger-LeCoultre, the
hour and minute hands come with lumi-
nescent strips so theyre easier to read
against the busy background. Those clear
sightlines do not, however, extend to the
continent of Antarctica, which is blotted
out on the dials map by a date subdial.
But who cares? The context down there
calls for a field watch, and penguins
dont even have wrists to wear its attrac-
tive brown-leather strap anyway. 
PHOTOGRAPH BY JANELLE JONES; PROP STYLIST: GOZDE EKER
From left to right:
Jaeger-LeCoultre Geophysic
Tourbillon Universal Time, price upon
request; jaeger-lecoultre.com
Frederique Constant Classic
Manufacture Worldtimer, $4,195;
frederiqueconstant.com
Ulysse Nardin Executive Moonstruck
Worldtimer in platinum, $75,000;
ulysse-nardin.com
Patek Philippe 7130G Ladies World Time,
$45,700; patek.com
 CRITIC Bloomberg Pursuits
Oce Posturing
Silicon Valleys newest it chair shows how much has changed since
the Aeron was introduced 20 years ago. By Cli Kuang
If you know one office chair by name,
its probably the Aeron. Released in
1994, its radical, high-tech exoskeleton
design was a sensation, and the chair
went on to become that rare piece o
furniture to emerge as a pop-culture
signifier. In 1995 it appeared as the lone
piece of set decoration in a Levi Strauss
& Co. Super Bowl commercial; later, it
served as a plot point in an episode of
Will & Grace.
Nathan Myhrvold, then the chief
technology officer of Microsoft Corp.,
argued in a 1998 issue of Vanity Fair
that owning an Aeron chair wasnt so
different from owning a private jet:
They were both about investing in
78
your own comfort. The Aeron was
a symbolic way to attract talent and
people during the dot-com era, says
Primo Orpilla, co-founder of Studio
O+A, which has designed offices for Uber Technologies, Yelp,
and Microsoft. Companies said, Youve got an Aeron chair, we
care about your health.
The Pacific, a task chair from Swiss furniture giant Vitra
that hits the market this winter, illustrates how ideas about
work have changed since then. For one, it shuns Aerons stan-
dardized look. Instead, youre expected to customize the
sleek, minimal Pacific before you place an order. It comes in
three backrest heights and a plastic or aluminum finish; it can
be upholstered with four fabrics in dozens of hues, ranging
from pale pink to sandy beige. There are also two types of
leatherincluding one in a smooth cowhide with a flat grain
and fine top sheenin an additional 22 colors. The base price
is $1,185, but a high-backed, premium caramel leather version
runs closer to $3,500.
More telling, however, is the skirt extending the backrest
down past the seat to hide the ergonomic controls that adjust
height and set the amount of tension you want in
the recline. Unlike the Aeron, which proudly empha-
sizes its machinelike performance with visible levers,
a monolithic graphite finish, and a texture meant
to evoke industrial parts, the Pacifics functionality
y wasnt finding any chairs he liked for Apples new
is tucked away. It looks like a chair that could be in
your living room.
Its also not quite as comfortable. The Aerons
mesh fabric, a breathable material called pellicle,
was a manufacturing breakthrough that required a
patent. Built to provide support for coders at their
December 11, 2017
desk for hours at a time, it flattered
Silicon Valleys myth of the jacked-in
programmer reinventing the world
from a keyboard. Whereas the Aeron
viewed sitting at a desk as the key
to productivity, the Pacific assumes
your best work isnt done in front of
a screen.
Office furniture has always been
designed to look like an extension of
what your boss expects you to do,
says Jay Osgerby, co-founder of Barber
& Osgerby, the London studio behind
the Pacific. In 2012, when Vitra put out
a call for a chair that would anticipate
the office of the future, Osgerby and
his design partner, Edward Barber,
were intrigued by the way hotels such
as the Ace had turned their lobbies
into magnets for young peoplenot
for their DJs and mixed drinks, but as
work spaces. We wanted something that wasnt screaming
work, Barber says. Their chairs soft lines and proportions
are based on a Samoan adz, a tool with a curved blade, that
Barber found in a New Zealand antique shop.
Its quiet good looks jibe with the prevailing philosophy that
happenstance and freedom beget innovation. Todays office
designers are more apt to tout ad hoc conference areas and
nooks where workers can find their rhythm. For the new gen-
eration, the blurring of work and life is at an all-time high,
says Orpilla, the office designer. If the Aeron was a destination
of optimized comfort in a sea of cubicles, the Pacific is meant
to be a pit stop during your workday. It has far to go to dupli-
cate the Aerons success1,500 of the latter are sold every day,
making it 7 million since 1994. A new one pops off the assem-
bly line every 17 seconds.
But the Pacific has already racked up what might be the
highest honor any design can receive in 2017: Its first customer
ILLUSTRATION BY TSJISSE TALSMA; CHAIR COURTESY VITRA
was Jony Ive, Apple Inc.s chief design officer. Ive is
friends with Barber and Osgerby; during a social visit
soon after they landed the Vitra commission, they
sketched their early idea for him. Ive, as it happened,
12,000-person headquarters designed by architect
Norman Foster. He looked, raised an eyebrow, and
said, Thats interesting, Osgerby recalls. Ive even-
tually ordered one for every office desk on campus,
each fitted with a custom-made fabric in a serene,
deep-sea blue. 
THE ONE Bloomberg Pursuits December 11, 2017

79

Elan THE COMPETITION

All-mountain skis, meant to perform under a wide

Ripstick
variety of conditions, are the largest category on
the market. The $799 Nordica Enforcer 100s have a
more traditional metal construction, which yields a

96
dampened feel. At $650, the narrow Blizzard Brahmas
are adept at making tight turns on groomed trails or
between trees. Retailing for $1,150, the handmade,

Skis
burly Kastle BMX 105 HPs charge hard in open terrain.
The Ripstick 96s, with paulownia, poplar, and birch
wood cores, fall near the middle of the price range.

THE CHARACTERISTICS
Elan d.o.o., the only major ski manufacturer in Slovenia, was founded
A powerful in 1945. In 1988 it famously introduced the first pair of hourglass-
all-mountain shaped parabolic skis, which make it easier to turn at low speeds. In
2015 the company reaffirmed its position as an industry innovator
option for any by designing the off-piste-friendly, all-mountain Ripsticks with
type of snow a designated left and right ski. The inside turning edges of the
$800 skis are built with traditional camber construction, providing
Photograph by ample grip on ice, and the tips of the outside edges are bent upward
Janelle Jones like a rocker for an easier glide through variable snow.
THE CASE
On the slopes, the skis are light, easy to maneuver,
and extremely forgiving. Even if youre caught
off-balance and in a potentially perilous situation,
the carbon tubing along the edges makes it easy to
muscle around and regain your line. That said, the
Ripsticks have plenty of power. On groomed trails in
Utahs Deer Valley they made clean, racelike arcs; on
moguls at nearby Snowbasin they provided plenty of
pop in and out of turns; and in Wyomings Jackson
Hole they were wide enough to float in about a foot
of powder. That kind of range gives the skis great
value, whether youre an intermediate or expert.
Elan Ripstick 96 skis, $800; ripstick.elanskis.com
 Bloomberg Pursuits December 11, 2017

GAME CHANGER

Chris Meledandri
The man behind the Minions has Disney in his sights
By Christopher Palmeri and Anousha Sakoui

80
SHORTLY AFTER COMCAST and insanely hysterically
Corp.s Universal Pictures funny characters, he says.
acquired DreamWorks After graduating from
Animation SKG Inc. for Dartmouth, Meledandri
$3.8 billion last year, the worked for producer Daniel
media giants executives Melnick and Paramount
offered Chris Meledandri, Pictures chief Dawn Steel
the head of Illumination before moving to 20th Century
Entertainment Inc., which pro- Fox, where he delivered the 2002
duced the Despicable Me movies, an hit Ice Age, a quasi road movie about
opportunity to also oversee the Shrek prehistoric animals. He built interest
and Kung Fu Panda franchises. for it by releasing a dialogue-free excerpt
For many studio chiefs, it wouldve been a that detailed Scrats attempts to store acorns.
dream job, the kind of dual-management role that The full-length movie went on to earn $383 million
John Lasseter once played at both Pixar Animation Studios worldwide and has become a durable franchise. Meledandri
and Walt Disney Animation Studios. (Lasseter is now on a took the lesson to heart, and today 100 people at Illumination
six-month sabbatical after allegations of improper behav- work solely on extra promotional content.
ior.) Meledandri declined, taking a senior advisory role at When he left Fox to start his own studio in 2007, Meledandri
DreamWorks but continuing to spend the bulk of his time at was told by movie industry colleagues that hed never build a
the animation studio he founded 10 years ago. long-term business in the Disney-dominated field. Many are
His mission, Meledandri says, is to make you feel good in a still surprised, he says, to find out that his 2015 film Minions
world where so many things dont. Illuminations eight films is the second-highest-grossing animated picture of all-time,
have grossed $5.7 billion worldwide; two of themMinions and at about $1.2 billion, behind only Disneys Frozen. Despicable
Despicable Me 2are the most profitable movies in Me 3, meanwhile, has taken in $1 billion worldwide
Universals 105-year history. and is the top-grossing animated movie of 2017
DreamWorks co-founder Jeffrey Katzenberg is a b. 1959, New York more than twice the haul of Pixars Cars 3, though
fan, citing characters such as Despicable Mes Minions - both came out in June. The shadow of Disney is
ILLUSTRATION BY SAM KERR

As a young studio gofer,

and Scrat, the saber-toothed squirrel from Ice Age,
which Meledandri also executive produced, as exam-
ples of his profitable creativity. Chris is one the great
storytellers of our time, but what puts him in a class
all by himself is his genius for creating memorable
met Billy Wilder and so large and looms so powerful that its shocking
Samuel Goldwyn Jr. when we go head-to-head with them and we beat
- them, Meledandri says. He says hes working on
His most epic bomb
was Titan A.E., which Minions 2 and has a strong idea for Despicable Me 4.
lost $100 million Were not running out of steam so far.