MyPayroll
There is a lot of intermediation in the U.S. financial system, a lot of middlemen who briefly touch every transaction. So the way that people often get paid involves a company called a “payroll processor” that sends money from the company’s bank account to all the employees’ bank accounts. People rarely give very much thought to the payroll processors except when one week they just up and steal everyone’s paychecks, whoops:

Federal prosecutors have charged the owner of a payroll processor with a $70 million bank fraud in the latest twist in a scheme that temporarily left thousands of employees of small businesses with missing paychecks.

In a criminal complaint filed in U.S. District Court in Albany on Friday, the Justice Department said that Michael Mann, the owner of MyPayrollHR, admitted that he fraudulently obtained about $70 million from banks and other financial institutions in a scheme that dated back to 2010 or 2011.

About $30 million destined for paychecks and related tax payments went missing on Sept. 4 because of problems tied to the Clifton Park, N.Y. payroll firm. Roughly 8,000 employees at nearly 400 companies across the country were affected, according to Nacha, the organization that oversees the ACH Network, which allows money to move securely between bank accounts. Nacha on Monday reported that funds have been returned to roughly 97% of those affected as of late last week.

You might think that “(1) set up a payroll processor (2) steal $30 million of paychecks” would be a perfectly sufficient fraud, but in fact that is not at all what was going on here, according to prosecutors. The FBI explains that Mann came in to confess, and told this story:

Starting in 2010 or 2011, according to Mann, he began borrowing large sums of money from banks and financing companies under false pretenses. While stating that MyPayroll was legitimate, he admitted to creating other companies that had no purpose other than to be used in the fraud; fraudulently representing to banks and financing companies that his fake businesses had certain receivables that they did not have; and obtaining lines of credit by borrowing against these non-existent receivables.

Mann estimated that he fraudulently obtained about $70 million that he has not paid back. He claimed that he committed the fraud in response to business and financial pressures, and that he used almost all of the fraudulently obtained funds to sustain certain businesses, and purchase and start new ones. He also admitted to kiting checks between Bank of America and Pioneer, as part of the fraudulent scheme.

Pioneer was Mann’s largest creditor, according to Mann. In sum and substance, Mann stated that the payroll issue … was precipitated by his decision to route MyPayroll’s client’s payroll payments to an account of Pioneer instead of directly to Cachet.

(Cachet is Cachet Financial Services, “MyPayroll’s ACH intermediary, routing payments from MyPayroll’s clients to those clients’ employees pursuant to instructions provided by MyPayroll.” So many intermediaries!)

It is such a poignant fraud. He was doing so much work. “In response to business and financial pressures” he allegedly decided to steal a bunch of money from banks, which he did by creating fake companies and fake receivables for those companies, and then borrowing against those fake receivables. He used “almost all” of the money to fund other (real? fake?) businesses. Basically it sounds like he had all of the work and stress of running a complex legitimate business, plus all the disadvantages of it being a fraud.

And eventually the fraud became too big to sustain, and he sat down to figure out what to do about it, and he thought to himself, well, every two weeks I push a button and send $30 million of other people’s money to a list of bank accounts that I write down, what if I wrote down a different list of bank accounts and used the button to get myself out of the problem? 1  And so instead of sending the $30 million to a bunch of employees, he sent it to … not himself, to buy a one-way ticket to Belize, but to one of the banks that was funding his other scheme, to tide that bank over, somehow. Of course that instead led to the quite immediate unravelling of the scheme, because people really do notice when thousands of paychecks disappear.

But … he … had … that … button? Like, I don’t want to give you advice on how to do fraud, but it seems to me that if you have the ability to send $30 million of other people’s money to a bank account of your choosing, just choosing your own bank account is a simpler fraud than the whole fake-receivables thing. It is more irrevocable, sure; you can’t show up at the local diner after stealing $30 million of paychecks, the way you can when you’re in the middle of a complicated receivables scam. Once you steal everyone’s paychecks you have to get out of town immediately. I am willing to believe that nine years of complicated concealed fraud followed by a $30 million exit and a flight to Belize is a better plan than going straight for the $30 million. I can even believe that nine years of complicated concealed fraud followed by a full confession is better, for your conscience at least. But nine years of complicated fraud, followed by stealing everyone’s paychecks to sustain the fraud for like a week, followed by a full confession, really does seem like the worst of all worlds.

This, by the way, is absolutely normal; this is how all the frauds go. The guy with a button that says “Steal $30 Million of Paychecks” doesn’t press it the first chance he gets. That would be stealing! He is a moral human being, he has standards, he stays well away from that button even if he is also simultaneously running a bunch of complicated frauds. You can look yourself in the eye when you’re running a complicated fraud; those fake receivables are just to bootstrap your real business idea and who’s to say what is “fake” and anyway the banks had it coming, you know how it is, it is complicated morally as well as financially. If you just press the steal-paychecks button you know you’re a thief. When you press that button things have gotten really desperate; pressing that button is not so much the final step in your cunning caper as it is a cry for help that is quickly followed by a confession.

WeKeepGoingWithThisHuh
I recently read “Super Pumped,” Mike Isaac’s gripping account of the chaos at Uber Technologies Inc., culminating in the downfall of former chief executive officer Travis Kalanick. One interesting aspect of the book is that, at its climax, Isaac becomes a character: Kalanick’s opponents use the threat of leaking to the New York Times (i.e. Isaac) as leverage to force him out, and Isaac becomes an inadvertent tool of the boardroom coup.

I thought a little about that story yesterday as I read my tenth story about the We Co.’s upcoming board meeting to maybe fire its CEO and co-founder Adam Neumann. That’s a pretty well telegraphed board meeting! Neumann is going to walk into that board meeting and be like “hey guys, what’s up, how was your weekend,” but he will not mean it. I assume that the leaks about the board’s plans did not come from Neumann or his allies, because how would he know and what would he have to gain from leaking? But then I am not sure that SoftBank Group Corp., WeWork’s biggest outside investor, whose founder Masayoshi Son “is among those pushing for Neumann to resign, as the startup seeks to salvage its initial public offering,” has all that much to gain either. It’s not like a long public drama about firing Neumann makes SoftBank look great, or will be that helpful in getting people to buy the IPO.

Maybe the leaks are a sort of commitment strategy from SoftBank executives who want Neumann gone: As long as Son is quietly contemplating firing Neumann, he could easily change his mind, but once it’s in every newspaper it is tougher to walk away. Like if WeWork comes back to the public markets in a month with Neumann as CEO, people will have questions, questions like “wait you all wanted to fire him but you couldn’t get it done, does that mean that the governance problems are as bad as we thought when we passed on the IPO last month?” Or if WeWork doesn’t come back to the public markets in a month, and SoftBank’s Vision Fund instead pumps in a lot more money at a $47 billion valuation, the questions from the Vision Fund’s investors—and potential investors in Vision Fund 2—will be even more pointed. So if you’re a SoftBank executive who wants Neumann gone, persuading Son to fire him is good, but telling reporters that you’ve persuaded Son to fire him is even better.

Or I guess maybe the IPO bankers leaked it because they want Neumann gone, to make the IPO easier, and want to commit Son to it by leaking. Or because they love messy drama maybe? It’s not their company.

Speaking of those banks:

According to pitch books reviewed by the Financial Times and interviews with people briefed on the process, IPO bankers dangled potential valuations even higher than the $47bn price tag Mr Son’s last investment put on the company.

JPMorgan told WeWork executives the company could be worth between $46bn and $63bn in the listing. Goldman pegged the equity at between $61bn and $96bn. Morgan Stanley estimated WeWork’s valuation at between $43bn and $104bn in a presentation in 2018, though a pitch for the IPO set it at a more modest $18bn-$52bn. Michael Grimes, Morgan Stanley’s top tech banker, made an impassioned pitch to Mr Neumann, but the investment bank ultimately declined to work on the offering when it lost out on the lead role.

Notice that the two banks who said the highest numbers in their IPO pitches are leading the IPO, while Morgan Stanley, which said lower numbers, is not. At this point even $18 billion looks optimistic (WeWork “in recent weeks had mulled the drastic step of slashing its IPO valuation to as low as $10 billion”), but it is not like WeWork has fired JPMorgan and Goldman and gone crawling back to Morgan Stanley to say “you were right, we should have been more conservative, save us.” It does not work that way. I am not saying that IPO banking is quite as stupid and simple as this, but I does seem like if you are pitching an IPO you should say higher numbers rather than lower numbers.

By the way, the Financial Times reported that Masayoshi Son met with JPMorgan Chase & Co. CEO Jamie Dimon on Sunday to talk about next steps for WeWork. Business Insider reported that Neumann also met with Dimon on Sunday “to talk about how to get the coworking company’s initial public offering back on track.” Busy Sunday for Dimon! I hope the meetings were back to back and in adjacent conference rooms. I hope Neumann and Son ran into each other in the bathroom and carefully pretended not to see each other. There’ll be plenty of time for confrontation at the board meeting. 2

Elsewhere in payroll
Carlos Ghosn, the former chief executive officer of Nissan, was arrested in Japan last year on charges of fraudulently concealing his compensation. The basic idea is that Japanese companies have to disclose how much they pay their executives, and Ghosn (1) had complete control (delegated by Nissan’s board) over how much he got paid, (2) wanted to get paid a lot, and (3) did not want to disclose how much he was paid because that might lead to controversy and embarrassment. So he decided to pay himself a smaller number, disclose that smaller number, but make it up to himself by deferring a lot of undisclosed pay until after he retired.

This always struck me, and a lot of people, as kind of a strange charge. These are matters of interpretation and nuance: If you get paid $2 million in cash this year, then you clearly got paid $2 million, but if you also have some informal understanding that you will get a cushy $5 million consulting arrangement after you retire, it is far less cut-and-dried that you got paid that $5 million this year. You didn’t actually get the $5 million, and arguably when you do get it it will be for some work you do later. In a perfect world you'd disclose the informal understanding that you’ll get it later, but that is a complicated matter of accounting judgment and—wait, no, never mind, the U.S. Securities and Exchange Commission brought its own fraud case against Nissan and Ghosn yesterday and it was not in fact an informal understanding at all:

In April 2011, Ghosn and certain Nissan subordinates considered the possibility of paying his undisclosed compensation through post-retirement consulting fees.

In April 2011, Ghosn and Nissan Employee 1 signed a letter agreement memorializing a plan to pay and postpone portions of Ghosn’s fiscal years 2009 and 2010 compensation (the “2011 Letter Agreement”). The letter agreement was backdated to March 24, 2011, so that it predated the end of Nissan’s 2010 fiscal year.

The 2011 Letter Agreement stated that “the remuneration amount of each fiscal year has been determined and paid,” and “[p]ayment of a part of the determined remuneration of [fiscal year] 2009 and [fiscal year] 2010 has been postponed.”

The letter agreement included a chart that stated Ghosn’s “Fixed Remuneration” for fiscal years 2009 and 2010, as well as the “Paid Remuneration” and “Postponed Remuneration” portions of his compensation. These values tied directly to the amounts maintained in Secretariat’s Office records by Nissan Employee 1.

Yeah look no don’t sign a letter agreement that includes a chart listing your fraudulent and non-fraudulent compensation. Don’t keep a spreadsheet of it. Come on. Ghosn has been fighting the charges in Japan, but he settled with the SEC without admitting or denying the charges.

One thing I’ll say is that, as the SEC puts it, “the $140 million in undisclosed compensation and retirement benefits was never paid out to Ghosn.” Because he got caught, but still. The best argument against reporting informal contingent understandings about deferred pay, or even really explicit consulting arrangements, is that you might not actually get it. And Ghosn didn’t! He did not, strictly speaking, under-report his pay: It turns out, he only got paid the amounts he reported. He’s innocent!

Did D.E. Shaw & Co. seek revenge against a former executive who quit by trying to get him kicked out of his golf club?
I don’t know! It’s a live question! This Financial Times article lays out both sides! Finance is amazing!

The legal war between one of the world’s biggest and most secretive hedge funds and one of its former star money managers saw an unlikely new front open up this year: the exclusive Hudson National Golf Club in Westchester.

Daniel Michalow’s membership was initially terminated last year for what he describes as a series of minor infractions spread over a decade. These included one occasion when his golf partner Larry Summers, the former US Treasury secretary, answered an email on a green from then president Barack Obama. …

In a letter to the golf club in May, Mr Michalow claimed that “DE Shaw has gone to great lengths to impede me from continuing my career” and that he believed one of its executives contacted the club “attempting to interfere with my membership.” … A person close to the fund said it is “entirely false” that DE Shaw had anything to do with Mr Michalow leaving the club, and said he had resigned from Hudson National.

Letters seen by the Financial Times show that the club accused Mr Michalow of several instances of “conduct unbecoming” to a member, which also included dress code violations. Mr Summers said that he has “no idea whether I was the person in question with respect to Hudson [golf club] or if I was, who I was talking to.”

Don’t you want this to be true? We talked yesterday about a prominent Credit Suisse employee who, after he quit, was trailed by detectives to make sure he wasn’t trying to poach any of his ex-colleagues; that is enjoyable cloak-and-dagger stuff but also has an obvious business purpose. This would just be pure petty revenge, and a message to D.E. Shaw employees that, if they try to take their talents elsewhere, they’ll have to watch their back every time they walk onto a golf course. That is exactly the message that big hedge funds should be sending to their employees, I love it, more of this please.

Facebook
“Facebook to Buy Startup for Controlling Computers With Your Mind,” it says here. Of course Facebook is a startup for controlling your mind with computers, so this makes perfect sense.

The closely held four-year-old startup, which has dozens of employees and has raised tens of millions in venture capital, uses a bracelet to measure neuron activity in a subject’s arm to determine movement that person is thinking about, even if they aren’t physically moving. That neuron activity is then translated into movement on a digital screen.

Honestly one possible interpretation of, uh, recent events is that social media companies are conducting a vast and disturbing experiment on the workings of humanity’s subconscious mind. Now also Facebook will build new ways for our minds to directly manifest physical consequences in the world. What could possibly etc. There is a ton of talk in the tech world about the singularity, about reality as a simulation, about the risk that powerful artificial intelligence could escape from its human creators and take over the world. Perhaps one should read those ideas as metaphors. Perhaps the evil superintelligent robots were us all along.

Elsewhere, “Snap Detailed Facebook’s Aggressive Tactics in ‘Project Voldemort’ Dossier.” If you work for Snapchat and a stranger gives you a nice bracelet, don’t put it on! That’s how Facebook will know what you’re thinking.

Things happen
Alliance of Bondholders and Fire Victims Unsettles PG&E Bankruptcy. In the Decade Since Madoff, Ponzi Schemers Try New Tactics. Bitcoin Falls as Futures Exchange Makes Its Trading Debut. Deutsche Bank Qatar Investors Start Own Search for Chairman. HSBC’s Gamble Pays Off as $37 Million Euribor Fine Scrapped. A fifty-year history of Facebook's Libra. Inside Travis Kalanick’s ‘Bigger Than Uber’ Next Act. Bond king Bill Gross in postage stamp feud with rocker son. Lloyd’s reveals 500 witnesses to sexual harassment. Hedge Fund’s Red Hot Vaping Bet Runs Into Trump’s Surprise Ban. Tekashi 6ix9ine’s photo op with Mr. Met cut short by gang warfare: testimony.

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Here is a Krebs on Security post on how the button actually worked, and how MyPayroll was able to route money from Cachet to Pioneer. To give you a sense of it, one section heading is “A $26 Million Text File.” It’s a very simplebutton.

Ugh fine technically Son is not on WeWork’s board;SoftBank Vice Chairman Ron Fisher is.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net