Thievery Corporation

A Book Review of The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street (2021)

"Many shall be restored that now are fallen, and many shall fall that now are in honor." - Horace—Ars Poetica.

Thug (noun): "a violent, aggressive person, especially one who is a criminal." - Merriam-Webster Dictionary

Around 2009, I was a junior staff member at a major global investment bank and earned a big early promotion. After the promotion, I was invited to attend a special meeting. The firm's executive leaders met once a year in person at headquarters in New York for an all-day strategy session. It was basically a multi-hour debate about the future of the firm. I was to take notes.

On the top floor of a Manhattan skyscraper, the executives sat around the perimeter of a large, square conference table with its center cut out, allowing attendees to face each other across the open middle. From my perch at a side table next to the group, it was riveting to be a fly on the wall as the bank’s leaders plotted a way forward after the Global Financial Crisis. Most executives in the room that day, already at the pinnacle of Wall Street, have since moved on to lead other firms. One moment from that day stuck in my mind.

The group was discussing what to do about Goldman Sachs. Goldman was its rival in all things, and at the time, skated through the meltdown on Wall Street without as much trouble as competitors and with a lot of additional wealth.

In the room that day with me, one of the executives — a quietly intense, cerebral man with a sphinxlike demeanor not known for showing even an ounce of emotion — summed up his perspective on Goldman in a few unexpected words: "They are thugs. They are shrewd thugs, but make no mistake, they are thugs." 

He then turned to me with a cold stare — the first time I'd even been glanced at all day — and said, "Don't write that down." Everyone else laughed. He did not.

I've thought about that moment often since then. The principal competitor to Goldman, who was no slouch at extracting wealth from markets, said what The New York Times, The Wall Street Journal, the Financial Times, and others wouldn't say so plainly. In a few years, the broader world would embrace that thuggish view of Goldman. And you can read about it in brilliant detail in books like Billion Dollar Whale (2018) (affiliate link) or in recent stories about its embattled CEO. Since then, Goldman's luster and stock market valuation have somewhat faded, sparked by ill-conceived and ill-executed strategic choices.

Reading between the lines in the business press daily then, I was less surprised with his opinion of Goldman than that he, a man almost immune to hyperbole and glib speech, said it so matter of factly. Perhaps it's helpful to remember the history and original meaning of the word "thug," i.e., before it was warmly used in rap songs as a sign of endearment or coldly repurposed as a racist figure of speech toward Black Americans. The term "thug" traces its origins to the Hindi word "ṭhag," which signifies a "swindler" or "deceiver." Historically linked to the Thuggee cult in India, known for their heinous acts of robbery and murder, the word was later adopted into the English language, evolving to its contemporary meaning of a violent or aggressive individual.

The way the word "thug" was used that day was the traditional dictionary meaning based on this historical context. However, the violence suggested was not physical but financial. He was not encouraging the firm to become thugs like their rival but to be wary of them.

I share this reflection not because the book in question is about Goldman. But because it's about another Wall Street firm that in the same period of American history looked like it could not lose, yet also found sharp rebukes in boardrooms and courtrooms and a partial comeuppance afterward: Apollo Global Management.

It seems you would have to be a poor reader, ignorant, or maybe an avowed thief to finish The Caesars Palace Coup (affiliate link) and not conclude that Apollo was a thievish organization. The book’s authors are the well-regarded journalists Max Frumes and Sujeet Indap. It is about how Apollo, a private equity firm, used a gargantuan amount of debt to overpay massively for the Las Vegas-based Caesar casino and entertainment complex on the brink of the Financial Crisis. Then, while facing default, tried to rob their creditors of their rights to take possession of the property. Some of those creditors fought back. The creditors’ lawyers summed up their perspective on Apollo in a 200-page legal filing from which Frumes and Indap quote and then spend the rest of the book essentially confirming. In that filing, Apollo is described as having perpetuated "unimaginably brazen looting and corporate abuse" that "devised a scheme to cheat creditors of their rightful recoveries." Moreover, "the fox has not only been put in charge of the hen house; it has barricaded the door and has even paid itself a salary."

Yikes. But also, excellent writing for a 200-page legal filing. More importantly, yikes.

Was Apollo shrewd? Not really. They come across as aggressive and relentlessly conniving but not that smart. Nor do their advisors. The book is essentially about ethically shifty wealthy businessmen trying to intimidate other wealthy businessmen through highly paid lawyers and advisors but finding out the quality of lawyers and advisors is often divorced from the size of their paychecks. Take this scene for example: There's one part about three-quarters of the way through the book where we learn a top executive at Houlihan Lokey, a preeminent firm in the field of corporate restructuring, under oath admitted he had no idea what the term "intrinsic value" meant and had never heard of Benjamin Graham and David Dodd or the book Security Analysis (affiliate link). If you don't know what I'm talking about, that's totally okay. You probably are one of my many non-finance friends or never worked on Wall Street and will still get a holiday card from me. But if you did work on Wall Street and rose to become the head of a powerful restructuring firm and don't know this — yikes. 

If a book on this topic sparks your curiosity, I'd also recommend The Code of Capital: How the Law Creates Wealth and Inequality (2019) by Katharina Pistor (affiliate link). She provides helpful historical and analytical lenses about how private interests and public legal systems enable the creation and preservation of power. The philosophical treatise of her book aligns well with the anecdotes, interviews, and evidence that propel the narrative in Frumes and Indap’s story.

What is permissible in the world and passes as power and the law isn’t handed down from Olympus. It often isn’t even created by humanity’s wisest souls. It’s typically hacked together behind closed doors by people, too often men, using iterative relationship games, F.O.M.O., questionable interpretations of fine print, and social proof to intimidate other people into joining — or at least not interrupting — their schemes. Every now and then, however, we see the rare counter-power of fearless, truly great thinkers make hay of those shenanigans. This book tells such a story.


Godfrey M. Bakuli is the Founder of Pioneer Strategy Group (PSG), which offers expert strategic advice and actionable execution plans to R&D and marketing leaders looking to identify, de-risk, and launch innovative business ventures. He is also the Founder and Managing Partner of The Mutoro Group, an investment firm employing a patient, disciplined, and rational approach to fundamental value investing. If you’d like to learn more about Pioneer Strategy Group, please email us at info@pioneerstrategy.co or through the link below.



Make It Till You Make It: A Zeitgeist Review

From a 1986 interview on 60 Minutes:

Mike Wallace: “So this show that’s just getting under way nationally.” 
Oprah Winfrey: “It’s going to do well.”
Mike Wallace: “And if it doesn’t?” 
Oprah Winfrey: “And if it doesn’t, I will still do well. I will do well because I’m not defined by a show. I think we are defined by the way we treat ourselves and the way we treat other people. I would be wonderful to be acclaimed as this talk show host who’s made it. That would be wonderful. But if that doesn’t happen, there are other important things in my life.”

From a 2010 interview on CNBC:

Warren Buffett: "They want the deal. And I’ve seen it so many times. If you really want the deal, you’ll have all the people that work for you telling you to do it. It’s team spirit. It’s winning. It really isn’t a win. Whenever a company makes a deal, I go to the store and I buy a congratulations card and I buy a sympathy card. And then five years later I decide which one to send.”

This month, Erin Griffith, writing for The New York Times, dived into recent headlines out of Silicon Valley:

Faking it is over. That’s the feeling in Silicon Valley, along with some schadenfreude and a pinch of paranoia.

Not only has funding dried up for cash-burning start-ups over the last year, but now, fraud is also in the air, as investors scrutinize start-up claims more closely and a tech downturn reveals who has been taking the industry’s “fake it till you make it” ethos too far.

Take what happened in the past two weeks: Charlie Javice, the founder of the financial aid start-up Frank, was arrested, accused of falsifying customer data. A jury found Rishi Shah, a co-founder of the advertising software start-up Outcome Health, guilty of defrauding customers and investors. And a judge ordered Elizabeth Holmes, the founder who defrauded investors at her blood testing start-up Theranos, to begin an 11-year prison sentence on April 27.

The article leads with an image of Javice, the 31-year-old founder of Frank. Javice founded Frank in 2016 and sold the company to JPMorgan for $175 million in 2021. JPMorgan has sued Javice for fraud, and the Justice Department and FDIC recently unveiled a criminal complaint. From the complaint:

In or about 2021, JAVICE began to pursue the sale of Frank to a larger financial institution. Two major banks, one of which was [JPMorgan], expressed interest and began acquisition processes with Frank. JAVICE represented repeatedly to those banks that Frank had 4.25 million customers or “users.” […] In fact, Frank had less than 300,000 users.

When [JPMorgan] sought to verify the number of Frank’s users and the amount of data collected about them — information that was critical to [JPMorgan’s] decision to move forward with the acquisition process — JAVICE fabricated a data set. To do this, JAVICE […] first asked Frank’s director of engineering to create an artificially generated data set (a so-called synthetic data set). The director of engineering raised concerns about the legality of the request, to which JAVICE responded, in substance and in part, “We don’t want to end up in orange jumpsuits.” The director of engineering declined the request.

JAVICE then approached an outside data scientist and hired him to create the synthetic data set. […] In reliance on JAVICE’s fraudulent representations about Frank’s users, [JPMorgan] agreed to purchase Frank for $175 million. As part of the deal, [JPMorgan] hired JAVICE and other Frank employees. JAVICE received over $21 million for selling her equity stake in Frank and, per the terms of the deal, was to be paid another $20 million as a retention bonus.

Unbeknownst to [JPMorgan], at or about the same time that JAVICE was creating the fabricated data set, JAVICE […] sought to purchase, on the open market, real data for over 4.25 million college students to cover up their misrepresentations. JAVICE […] succeeded in purchasing a data set of 4.5 million students for $105,000, but it did not contain all the data fields that JAVICE had represented to [JPMorgan] were maintained by Frank. JAVICE then purchased an additional set of data on the open market in order to augment the data set of 4.5 million users. After [JPMorgan] acquired Frank, [JPMorgan] employees asked JAVICE […] to provide data relating to Frank’s users so that [JPMorgan] could begin a marketing campaign to those users. In response, JAVICE provided what was supposedly Frank’s user data. In fact, JAVICE fraudulently provided the data she […] had purchased on the open market at a small fraction of the price that [JPMorgan] paid to acquire Frank and its purported users.  

I reflected on Griffith’s article and the Javice case this weekend as I finished investor and writer Andrew Chen’s The Cold Start Problem (2021) (paid link). The book focuses on the challenges of launching and scaling products or platforms with network effects. These products or platforms often become more valuable as user numbers increase. The main obstacle is establishing an initial self-sustaining network that can attract users and maintain engagement. But even then, new obstacles emerge and growth challenges persist. I’ve seen this as a founder, investor, and advisor. Consider Facebook. A 3-billion-person behemoth today, it was once stuck at 100 million users years ago before it focused resources to break its plateau. Through examples like this, the book provides a helpful summary of Silicon Valley successes and failures over the last 30 years, from the demise of Usenet in the early 1990s to more recent companies like Slack and Uber.

Aware of recent news, Chapter 15 had my interest. It focuses on "Flintstoning," a method used to help “bootstrap content or to handhold new users initially." As Chen defines it:

In the classic 1960s animated sitcom The Flintstones, we see a prehistoric family sitcom set in the city of Bedrock. The show follows Fred and Wilma Flintstone and their loving family, complete with a pet dinosaur, a cave house, and a job that requires Fred to wear a tie. Memorably, there’s a car made of stone, furs, and timber—started up by a flurry of Fred’s legs—which rolls the family to their destination. Yabba dabba doo!

‘Flintstoning’ is a metaphor for this car, except in software, where missing product functionality is replaced with manual human effort. Early product releases often go into beta while lacking simple features like account deletion, content moderation tools, referral features, and many others. In lieu of these features, the product might simply offer way to contact the developers who will handle it manually for you, using tools they have in the back end. Once they get enough inquiries, eventually the feature gets built out and users can do it themselves. In the meantime, a Flintstoned product launch lets the developers get the app out into the market and get feedback from customers.

The focus of Chapter 15 is on Reddit, of which Chen’s firm, a16z, is an investor. Chen recounts a conversation with Reddit co-founder Steve Huffman, reflecting on the early days of solving their cold start problem:

No one wants to live in a ghost town. No one wants to join an empty community. In the early days, it was our job each day to make sure there was good content on the front page. We’d post it ourselves, using dozens of dummy accounts. Otherwise the community might dry up.

All of these dummy accounts looked and acted like real users, but it was Steve and [co-founder] Alexis [Ohanian] controlling them. And while in the early days it might require a lot of manual searching and posting of content, the two became more clever over time. They began to build software to help them scale this activity—which Steve describes:

I wrote some code that would scrape news websites and post them with made-up usernames. That way, it looked like there was an active community. Problem was, it still needed my attention—about a month after launch in July of that year, I went camping with my family and didn’t submit any links. When I checked Reddit, the homepage was blank! Whoops.

On one hand, the automation to scale their Flintstoning worked—Steve’s code helped find and submit interesting content from a number of different websites. But on the other hand, it was still dependent on him being involved and checking in. Nevertheless, it tided the Reddit network over until it was able to have enough organic content creators for Steve to lay off the dummy scripts entirely.

The above passage sparks some useful questions.

When do a founder’s actions go from Flintstoning to fraud? Are some founders just lucky not to get caught? When does “clever” become “criminal”?

The short, practical answer is that if you aren't sure you're doing the right thing, don't do it. We can come to a more helpful answer, though, comparing Frank and Reddit. Frank’s tactics seemingly differ from Reddit’s because – while opaque to users and misleading – Reddit's founders used those methods to start the operation, not sustain it. (As the company prepares for a possible IPO this year, one hopes management no longer puffs its user ranks with bots.) Moreover, Reddit’s backers seem to have been aware of their strategies. It's hard to imagine from the allegations about Javice that Frank's investors were equally supportive.

Fraud in start-ups isn't new and tends to increase when money flows abundantly, as it has over the last few years. Start-up mythology often leads founders to rationalize questionable decisions. At the same time, stakeholders may overlook misrepresentations due to venture capital's economic and social incentives. This culture can push founders to cross ethical boundaries and focus on traction and momentum instead of business model soundness.

Using crude math, if Frank’s actual user base was 300,000 instead of 4.25 million – and the sale price to JPMorgan reflected that – then the company might have sold for about $12 million instead of $175 million. While that might seem a great outcome, with $20 million in funds raised, one can see how having venture capital backing may have disincentivized that.

How can would-be strategic partners, investors, or employees identify whether they are working with a company that could be fraudulent or deceptive?

A recent episode of the excellent podcast The Journal explored one way. It focused on JPMorgan’s debacle with Frank. Here’s an excerpt from the conversation between co-host Kate Linebaugh and reporter Melissa Korn:

Melissa Korn: I spent many hours getting a better sense of what Frank was, what they promised to offer, what they actually offered. There were reviews on Frank's website years ago, in its early days, raving about the service and thanking Frank for all the great work they had done for these supposed customers. So this one, Kimberly Roberts of Wisconsin University, gushes that she sends "hundreds of my students and their families a year to Frank for guidance with the financial aid process." First of all, Wisconsin University doesn't exist, and I could find no trace of this person, Kimberly Roberts. There were a few like that.

Kate Linebaugh: And did you find anything else?

Melissa Korn: Yes, there were partnerships that didn't exist. In a TechCrunch feature on Frank in 2018, the piece said that in addition to working with students, the company partnered with New York, Pennsylvania, and Texas to manage their state aid programs. I reached out to the state aid programs in those three states, and none of them had any record of such partnerships. […] What also interests me is just how JPMorgan didn't notice what I see as some pretty significant red flags. Things that I found, just, I don't know, doing a search, looking at archived websites. I came across things that made me scratch my head a little bit.

Rather than solely blaming Frank for a deal gone bad, JPMorgan might want to look inward. During a very acquisitive 2021 for the bank, I would bet the unit within JPMorgan that made the acquisition felt some pressure to close a deal that, with hindsight, made no sense.

Several years ago, the investor Jim Chanos shared an insight that I believe also applies to dealing with private companies suspected of wrongdoing: “The biggest mistake people make is to be co-opted by management. The CFO will always have an answer for you as to why a certain number that looks odd really is normal, and why some development that looks negative is actually positive.”

The key exists in being continuously discerning when evaluating potential partnerships through ongoing due diligence. At its most basic level, this involves a relentless curiosity and implies checking multiple sources and asking questions, even uncomfortable and direct ones. By practicing rigorous due diligence and emphasizing transparency and long-term relationship building, stakeholders can make more informed decisions, mitigate risks, and raise the odds of favorable long-term deals.

To founders, I propose embracing the principle of “make it till you make it.” Create a solid foundation for your company and commit to building it up through genuine effort and perseverance rather than deception. You may fail, but that’s an opportunity to learn and improve in future endeavors.

Godfrey M. Bakuli is the Founder of Pioneer Strategy Group (PSG), which offers expert strategic advice and actionable execution plans to R&D and marketing leaders looking to identify, de-risk, and launch innovative business ventures. He is also the Founder and Managing Partner of The Mutoro Group, an investment firm employing a patient, disciplined, and rational approach to fundamental value investing. If you’d like to learn more about Pioneer Strategy Group, please email us at info@pioneerstrategy.co or through the link below.