● Kraft Heinz must feed again 15 ● Nafta’s five sticking points 32 ● Tom Steyer, Mr.

Impeachment 58

April 30, 2018

YouTube

YouTube’s Cleanup Plan

46
 From rocket blastoff
blastoffss to legislative backlash.

The first
first and only
global news network
built for Twitter.

24/7 news. Streaming LIVE on

@TicToc Watch now
Over 2,700 Bloomberg
journalists and analysts
in over 120 countries,
providing objective
reporting you can trust.

Curated comments
that provide insight
from across Twitter’s
millions of users.

Founding partners
Paper creates a
roadmap to success.
Collaboration. Ideation. Innovation. Paper is at the center
of it all, encouraging fresh ideas, motivating decisions and
helping teams work toward one shared goal. From concept
to completion, paper propels productivity.
Learn more at howlifeunfolds.com/productivity.

© 2018, TM & ® Paper and Packaging Board. From the Makers of Paper and Packaging
 April 30, 2018

◀ Steyer’s impeachment
ads have prompted
speculation about a
possible White House
bid of his own in 2020

3
PHOTOGRAPH BY NATHANAEL TURNER FOR BLOOMBERG BUSINESSWEEK.

FEATURES 46 YouTube’s Plan to Clean Up the Mess That Made It Rich

Propaganda, hoaxes, repellent videos—but bet you can’t stop watching

50 Thousands of Women Say LuLaRoe Is a Scam

Pyramid scheme accusations plague the leggings empire

58 Tom Steyer Is Mr. Impeachment

Many Democrats are jittery over the billionaire’s boot-Trump effort
 ◼ CONTENTS Bloomberg Businessweek April 30, 2018

◼ IN BRIEF 7 A plunging Dow; electric Ferraris; Amazon in your trunk How to Contact
Bloomberg
◼ AGENDA 8 Apple earnings; the Fed meets; a Weinstein Co. auction Businessweek
◼ VIEW 8 Lifetime education can save workers from obsolescence
Editorial
212 617-8120
◼ REMARKS 10 Surviving the Game of Thrones that is Malaysian politics Ad Sales
212 617-2900
731 Lexington Ave.,
BUSINESS 15 Kraft Heinz may be hungry for another megadeal New York, NY 10022
1 Email
bwreader
@bloomberg.net
Fax
212 617-9065
Subscription Customer
Service URL
businessweekmag
.com/service
Reprints/Permissions
800 290-5460 x100
or email
businessweekreprints
@theygsgroup.com

Letters to the Editor

can be sent by email,
fax, or regular mail.
They should include
the sender’s address,
phone number(s),
and email address if
available. Connections
17 FlixBus, having conquered Europe, heads for California with the subject of
the letter should be
18 China’s carmakers crave a bigger global footprint disclosed. We reserve
the right to edit for
sense, style, and space.
TECHNOLOGY 21 Apple teaches India’s kid coders to win at the App Store
4
2 22 Instagram becomes a very hot thrift shop Follow us on
social media
24 Intermittent-fasting startups invade Silicon Valley
25 Man vs. Machine: Meet Amelia, a customer service Alexa Facebook
facebook.com/
bloomberg
FINANCE 26 Will Blackstone buy back Chinese-owned real estate? businessweek/
3 28 BlackRock and Goldman push LGBT rights in Hong Kong
Twitter
@BW
29 Hedge funds that take a hit before their investors do Instagram
@bloomberg
businessweek
ECONOMICS 30 Everything is for sale in Cyprus—and China’s buying
4 32 What’s holding up progress on Nafta

POLITICS 34 Farm states may be the GOP’s undoing in the midterms

5 36 Saudi Arabia rethinks its Washington lobbying blitz
38 The National Guard’s new gig: Election cybersecurity
39 A legal battle could really batter Michael Cohen’s assets PHOTOGRAPH BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK

SOLUTIONS 41 Security researchers try to build a business on bugs

+ 43 Facebook and its app makers share a dicey relationship
44 Verizon’s report on data breaches

◼ PURSUITS 63 Board game nights are Wall Streeters’ latest power move
66 Critic: Test-driving the Lamborghini Urus
68 Real Estate: 15 Central Park West, the prototype condo
70 Wellness: These LED masks give space-age facials Cover illustration by
Chris Nosenzo
71 The One: Stylish garden tools from Sneeboer
Search the cover to find:
72 Game Changer: Audette Exel’s pro bono financiers ● Bok choy
● A sandwich
● A balloon dog
CORRECTION “Amazon’s Other Jeff” (Technology, April 23) incorrectly suggested that Jeff Wilke, who runs ● A skull
Amazon’s consumer division, entirely oversees the Kindle and Echo. He oversees their sales only. ● Last week's cover
37 DESTINATIONS IN FRANCE
WITH DAILY CONNECTIONS VIA PARIS
 You could waste time
sifting through random
trade ideas.
But you know better.

CUSTOM SCREENERS COMBINED WITH SCHWAB EQUITY RATINGS® KEEP YOU FOCUSED.

commission-free online trades

PLUS
EARN
500 for two years
Schwab is the better place for traders.

schwab.com/trading

Enroll in the offer and make a qualifying net deposit of $100,000 to earn 500 commission-free online trades. Limited to one account per client. Trades are good for two years and include only base equity, ETF,
and options commissions and option per contract fees up to 20 contracts. Restrictions apply. See schwab.com/trading or call us for terms and conditions. Offer may be changed or terminated at any time without notice.
Schwab Equity Ratings are not personal recommendations for any particular investor or client and do not take into account your individual circumstances, financial situation, investments, or other objectives or needs.
©2018 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (1017-70FG)
◼ IN BRIEF
Bloomberg Businessweek April 30, 2018

By Kyle Stock

● The Dow Jones industrial ● Amazon.com

average closed down
425 points on April 24, as
started delivering
industrial and tech stocks packages to
took a beating. Meanwhile, parked cars in
the yield on the 10-year
Treasury note hit
37 cities.

3%
for the first time in
four years. The option, which depends on couriers
being able to unlock the trunk, is only
available for now to owners of General
Motors or Volvo vehicles.

● Oscar Munoz, ● The U.S. Department

CEO of
United
Continental, said
he’ll forgo his
bonus for 2017.
The company also said Chairman
Robert Milton was stepping down. In
April 2017, a listless passenger was
dragged from one of the carrier’s
planes. In March, a dog died after a
flight attendant made its owner put it
into an overhead bin.
of Justice is investigating
whether Huawei
Technologies violated
sanctions with sales
to Iran. The Chinese
smartphone giant has
also received sanctions-
related subpoenas from the
Commerce and Treasury 7
departments. Huawei has
said it complies with all
applicable laws where it
● Mohamed Salah delighted crowds on April 24 with two goals as Liverpool routed
operates. Roma 5-2. Roma sold the Egyptian player to Liverpool for €37 million ($45 million)
last year. He’s now poised to break England’s Premier League scoring record.

● “We had a hierarchy in my ● Ferrari is finally going ● Comcast submitted a

$30b
electric, though CEO

MUNOZ: ANDREW HARRER/BLOOMBERG; SALAH: ALEX LIVESEY/DANEHOUSE/GETTY IMAGES; FERRARI: COURTESY FERRARI
office in Congress. If you’re Sergio Marchionne once
called battery-powered

a lobbyist who never gave us sports cars “an obscene

concept.” The brand
proposal to buy Sky,
topping a pending offer

money, I didn’t talk to you. said its first SUV will be a

hybrid, and the company is
from rival 21st Century
Fox, which already owns

If you’re a lobbyist who gave considering an all-electric

sports car for 2022.
39 percent of the European
TV giant. The bidding may

us money, I might talk to you.” be just beginning; Fox said

it remains committed to
making a deal.

Mick Mulvaney, acting director of the Consumer Financial Protection Bureau, urged
1,300 bankers to keep lobbying, according to the New York Times. He spoke at an
American Bankers Association conference in Washington on April 24.

● Nicaragua canceled an overhaul of its social security system after five days of violent protests left 26 people dead.
● Federal Judge John Bates barred the Trump administration from killing DACA, calling the move “arbitrary and capricious.”
● Tencent Music announced that it’s planning an IPO this year that could value it at about $25 billion, on par with Spotify.
● Bosch said it’s developed a diesel exhaust system with emissions far below limits going into effect in Europe in 2020.
 ◼ AGENDA
Bloomberg Businessweek April 30, 2018

▶ The U.S. Federal Reserve, ▶ On May 4, the U.S.

meeting on May 1-2, is
expected to leave borrowing
costs unchanged but lay
the groundwork for a June
rate hike.
Department of Labor issues
its employment report
for April. Job gains are
projected to rebound after
March’s weak numbers.

▶ More than 40,000 ▶ The Weinstein Co.,

people will gather in Omaha
on May 5 for the annual
meeting of Warren Buffett’s
Berkshire Hathaway.
▶ The Plight of the $1,000 Phone ▶ This year’s Facebook
With Apple preparing to announce its second-quarter Developer Conference, on
earnings on May 1, analysts are sounding funereal. The May 1-2 in San Jose, will
company’s key suppliers have reported sharply slower explore a host of topics,
growth, suggesting that sales of the iPhone X fizzled including “Authenticity and
after the winter holidays. Quality in News Feed.” ▷ 43
hobbled by accusations of
sexual harassment against
its co-founder, will auction
off its assets on May 4 in
bankruptcy court.
▶ Modigliani’s most famous
painting, Nu couché, is
expected to fetch more
than $150 million when it’s
put up for sale at Sotheby’s
on May 14.

◼ THE BLOOMBERG VIEW

older—36 million adults—have some college education but no

8
Learning Over a Lifetime
● Too many workers lack the skills employers demand.
Here’s how to help
The world’s rich countries face a looming challenge in
education: Too many of their citizens lack the skills and
credentials for the jobs of the future. To keep people pro-
ductively engaged in the coming decades and to ensure that
economies maintain robust growth, governments, educa-
tors, and employers need to make lasting investments in a
new class of students: adults.
The trouble for now is demographics. Although the share
of people age 18 to 24 going to college is growing, the popu-
lation of young adults is shrinking in the U.S. and Europe. So
college enrollment is largely in decline. Meanwhile, the pop-
ulation of older workers keeps growing. By the middle of the
next decade nearly one-quarter of the U.S. workforce will be
over 55. Many adults lack the post-high school education and
training employers demand.
A majority of jobs created in the U.S. since 2010 have
credential to show for it. If all U.S. “near-completers” finished
at least an associate’s degree, incomes would rise by $112 bil-
lion, according to the American Council on Education.
One hurdle is financial aid. Government subsidies are
overwhelmingly geared toward traditional college-age stu-
dents. In the U.S., Pell Grants, which provide $36.8 billion to
low-income students, can’t be used for most of the short-term
certificate-granting programs, including coding boot camps,
that older students want.
Government educational grants and loans should be
expanded to cover such programs, as a bipartisan bill in the
U.S. Congress would do for Pell Grants. In Singapore, the gov-
ernment’s SkillsFuture initiative provides every citizen over
25 a $500 credit to enroll in a career-training program, with
additional subsidies for those over 40. Private companies
should give their existing employees incentives to go back to
school while they remain on the job, through tuition assis-
tance and opportunities for promotion.
Colleges should also accommodate working adults by
expanding online classes and giving returning students
credits for the skills cultivated on the job. Older adults fare
better in—and are more likely to graduate from—“accelerated”
monthlong courses than in standard, 18-week semesters.
ILLUSTRATION BY ARINA SHABANOVA

required workers to have medium to advanced digital skills.
Over the next decade, the percentage of jobs worldwide
requiring a college degree or higher will increase, according
to a McKinsey Global Institute analysis.
As a result efforts are needed to bring adult workers back
into the classroom. About 17 percent of Americans age 25 and
Most critically, older adults need to be steered toward the
education that employers want them to have. Training pro-
grams and apprenticeships that connect local businesses with
students and technical colleges should be expanded. <BW>
For more commentary, go to bloomberg.com/opinion
SAVE LIVES NOW
JOIN THE BATTLE AGAINST CANCER TODAY
MARVEL STUDIOS’ AVENGERS: INFINITY WAR IS TEAMING UP WITH STAND UP TO CANCER
AND AMERICAN AIRLINES TO FACE THEIR MOST POWERFUL ENEMY YET.
YOU TOO CAN JOIN THE FIGHT BY FUNDING CANCER RESEARCH THAT HELPS SAVE LIVES NOW.

DONATE $25 OR MORE TO STAND UP TO CANCER AND YOU’LL RECEIVE

10 AMERICAN AIRLINES AADVANTAGE® MILES FOR EVERY DOLLAR YOU GIVE.
VISIT STANDUPTOCANCER.ORG/AMERICANAIRLINES TO JOIN THE BATTLE AGAINST CANCER AND TO LEARN MORE.

PICTURED: MEMBERS OF MARVEL STUDIOS’ AVENGERS ALONG WITH CANCER FIGHTERS DR. PHIL SHARP AND AMERICAN AIRLINES TEAM MEMBER, SHANDRA FITZPATRICK.

STAND UP TO CANCER IS A DIVISION OF THE ENTERTAINMENT INDUSTRY FOUNDATION, A 501(C)(3) CHARITABLE ORGANIZATION.
AMERICAN AIRLINES AND THE FLIGHT SYMBOL LOGO ARE MARKS OF AMERICAN AIRLINES, INC. © 2018 AMERICAN AIRLINES, INC. ALL RIGHTS RESERVED.
AVENGERS: INFINITY WAR IN THEATERS APRIL 2018
 ◼ REMARKS

10

The Sultan of Survival

 ◼ REMARKS Bloomberg Businessweek
● Malaysia’s prime minister has
withstood rivals and scandal. But he
could do with one more big victory
● By Shamim Adam
Abdul Razak Hussein, a revered former premier in Malaysia,
didn’t think his son was cut out for politics. Turns out Prime
Minister Najib Razak is quite skilled at the mortal combat
required for public life, despite his stately manner and
posh, accented English. He’s withstood a multibillion-dollar
financial scandal at a state fund, known as 1MDB, that caught
the attention of investigators in the U.S., Singapore, and
Switzerland. His onetime political mentor has also turned
on him, posing a serious challenge to Najib. Yet he’s still
favored to prevail in a May 9 election that could keep him
in power well into the next decade.
His political instincts and cunning have allowed him to
sideline threats at home and conduct affairs of state unim-
peded overseas, even charming Donald Trump at the White
House last September. Malaysia’s image may have taken a hit
from the 1MDB scandal, yet there’s no denying that 64-year-
old Najib, the prime minister since 2009, has survived
challenges that would have leveled most leaders in Western
democracies. “I’ve gone through some hard times,” he said in
an April 24 interview with Bloomberg News, his first with an
international media organization in more than three years.
“Not only recently, but when I started in politics—the rough-
and-tumble world of politics. I’ve learned to get along with
difficult people, difficult circumstances.”
Najib spoke at his party’s headquarters in Kuala Lumpur,
where, during this election period, he often meets with
people seeking help getting seats in the legislature. “I believe
in developing personal relationships within the party, so
even during difficult times the party stood by me,” he says.
As for the opponents who tried to topple him in the past:
“They couldn’t shake me. The support base was strong. I
may appear to be mild in my temperament, but I have a
strong resilience in me.”
For all of Malaysia’s trappings of multiculturalism and
wealth—it’s home to both classic Ottoman-style mosques
with blue-tiled minarets and the César Pelli-designed
Petronas Twin Towers—muted racial and religious tensions
among Chinese, Indians, and the predominant Malay pop-
ulation have shaped government policies, and political cal-
culations, since the country’s independence in 1957.
Najib’s Barisan Nasional ruling coalition, anchored by the
United Malays National Organisation, the country’s biggest
BRENT LEWIN/BLOOMBERG
party, is trying to prolong a six-decade run in power. It
has unveiled a big-spending manifesto, with promises of
debt forgiveness for farmers, more affordable housing,
and infrastructure projects that are targeted mainly to its
April 30, 2018
base of ethnic Malays, who are the core of what is called
the bumiputera, or “sons of the soil.” Najib has warned his
supporters that a win by the opposition coalition, which
he says is led by an ethnic Chinese party, would turn the
bumiputera into “vagabonds, beggars, and destitutes in
their own land.”
Business leaders, including property and commodities
billionaire Robert Kuok and Najib’s own younger
brother Nazir Razak, a banker, have argued against the
affirmative-action program favoring the bumiputera, with
some saying it impedes competitiveness and shackles the
economy at a time when regional peers are opening their
markets to lure investment. The government says the pro-
grams are still needed to improve the economic plight of
Malays, even 47 years after the so-called New Economic
Policy sought more wealth for them.
“Change—that’s a cliché,” Najib says. “Everyone talks
about change. But you can’t be ahead of the curve, doing
something people aren’t ready for. I believe in change, but
I also believe you have to set a timetable for change that is
constant with the acceptance and willingness of people.”
Najib has also indulged in some Trumpian flourishes,
ranging from his campaign slogan (“Make My Country
Great With BN”) to his tweet blasts at opponents. On April 2,
Parliament passed a “fake news” law that calls for sentences
as long as six years and big fines for creators or publishers 11
of information “wholly or partly false.”
The prime minister’s nemesis is his former patron,
Mahathir Mohamad, 92, who had been the longest-serving
premier. He defected from Najib’s party in 2016. Mahathir
has said Najib’s tenure has hurt Malaysia’s global standing
and that his economic policies will leave the country awash
in debt. “Najib has to be stopped,” he wrote in a blog post
in February, urging voters to come out in force and support
the Pakatan Harapan coalition. “Companies and businesses,
big and small, are closing down. People have to pay more
because of high cost of living.”
Yet the four-party alliance Mahathir leads faces sev-
eral obstacles. Anwar Ibrahim, who helped the opposition
win the popular vote in 2013, is in jail on a sodomy con-
viction. A key Muslim party that won almost a third of the
opposition’s votes quit in 2015 because of differences over
Shariah, or Islamic, law. In March, Najib’s allies in Parliament
pushed through electoral maps that critics say favor the
ruling parties. Then, on April 5, Mahathir’s Malaysian
United Indigenous Party received a 30-day ban from cam-
paigning for failing to meet a deadline for documents—a
decision the High Court has suspended while it hears
an appeal.
“Najib is not a firebrand like Mahathir, but he knows
how to play the game and he plays the game very well,”
says Ahmad Martadha Mohamed, an associate professor at
Universiti Utara Malaysia. “Mahathir had that charismatic
leadership whereas Najib’s style is more of a transactional
and situational leader.”
 ◼ REMARKS Bloomberg Businessweek
Najib’s family is political royalty in Malaysia. He was a
teenager when his father became the country’s second prime
minister. (His uncle was the third.) He studied industrial
economics at the University of Nottingham in England, then
spent two years at state oil company Petroliam Nasional
Bhd., before the sudden death of his father in 1976 at the
age of 53. Najib stood for his father’s parliamentary seat and
was elected unopposed at the age of 22.
In 2009 he caught a break when Mahathir, who gave up
his premiership in 2003, orchestrated a campaign to push
out Abdullah Ahmad Badawi, his successor in the long-ruling
coalition, which had lost its two-thirds parliamentary major-
ity the year before. Najib then assumed the office of prime
minister, promising to revamp the economy and abolish out-
dated British colonial-era laws. He launched his 1Malaysia
campaign, a government-led drive to promote ethnic har-
mony. An existing sovereign wealth fund was renamed
1Malaysia Development Bhd., with Najib serving as chair-
man of its advisory board, with a mission to invest in energy,
real estate, and tourism.
Concerns about 1MDB’s debt levels and the fees it paid
for bond sales started to surface in 2013. Then leaked
documents showed that about $700 million may have moved
through government agencies and companies linked to
1MDB before appearing in Najib’s personal accounts. That
12 set off a firestorm. In August 2015, hundreds of thousands
took to the streets of Kuala Lumpur to vent their rage—much
of it directed at Najib. Investigators in the U.S., Switzerland,
Singapore, and other countries started uncovering
what they alleged was a labyrinth of embezzlement and
money laundering.
The U.S. Department of Justice is seeking to seize about
$1.7 billion in what it says are misappropriated funds used
to purchase a 300-foot yacht, luxury homes, artwork, and
stakes in several Hollywood films, including The Wolf of Wall
Street, starring Leonardo DiCaprio. As for the $681 million
that showed up in his bank account, Najib said it was a polit-
ical donation from a royal family in Saudi Arabia and that
most of it was returned. Saudi Foreign Affairs Minister Adel
Al-Jubeir has backed him up on this point.
The scandal hurt the prime minister, but it hasn’t sunk
him. For ordinary Malaysians, the troubles at 1MDB, with
its maze of bonds, syndicated loans, and debt guarantees,
didn’t register. A professor who researched local politics
said at that time “the only bond that most Malaysians know
is James Bond.”
Najib received an opportunity to smooth ties with the
U.S. after his robust response to the assassination of Kim
Jong Nam, the half-brother of North Korean leader Kim Jong
Un, at Kuala Lumpur International Airport in February 2017.
Malaysian and U.S. authorities say the attack was ordered
by Kim and involved the use of VX, a widely banned
nerve agent. The once-cozy ties between Kuala Lumpur and
Pyongyang went into a deep freeze after Najib expelled the
North Korean ambassador and banned travel between the
April 30, 2018
countries. Malaysia has since drastically reduced imports
from the isolated regime.
Investigations by the Justice Department aside, the
Trump administration considers close ties with Malaysia
a priority. It’s a moderate Muslim nation that borders the
Straits of Malacca, a narrow waterway and trade route
between the energy-rich Middle East and the world’s biggest
oil consumers. Malaysia has helped pursue Islamic State-
linked terrorist groups based in the southern Philippines. At
the same time, China is Malaysia’s biggest trading partner,
and Beijing wants to deepen its defense ties with the coun-
try. “We believe in good relations with major global pow-
ers—China and the U.S.,” Najib says. “Both countries have a
role to play in Asia.”
Trump praised Najib for not doing “business with
North Korea any longer” in remarks during their White
House meeting last fall. His guest came bearing gifts: a
pledge to buy $10 billion worth of Boeing 737 MAXs and
787 Dreamliners over the next five years and a commitment
to join the U.S. in “ideological warfare” to “win the hearts
and minds of the Muslim world.”
At home, the 1MDB affair now seems less immediately
threatening to Najib. A Malaysian inquiry cleared him of
wrongdoing. While multiple probes continue, he hasn’t
been identified as a target in any. Only 6 percent of young
Malaysian adults said 1MDB was a top concern for them,
according to a survey by the Merdeka Center for Opinion
Research last year. Najib’s integrity was a concern for
5 percent.
“You cannot just accuse somebody of being a thief unless
there is evidence,” he says. “I stand by it: There’s no wrong-
doing. The Saudi government has come out with a statement
admitting it’s an official donation. The facts speak for them-
selves, but it’s been turned into a political issue.”
Malaysia’s economic recovery has also strengthened his
position. The unemployment rate held at 3.3 percent in
February, the lowest level since 2015, and wages are on the
rise. Gross domestic product increased 5.9 percent in 2017,
the fastest pace in three years.
“We have been able to grow the economy and ensure fis-
cal discipline,” Najib says, adding that Malaysia has had a
“tremendous turnaround” in reducing dependence on oil
revenue by two-thirds in recent years. “We will continue to
make Malaysia a globally competitive nation.”
All the same, he needs a decisive win. In 2013, under his
watch, the ruling coalition failed to win a majority of the
popular vote. While Najib has made the tax system more
progressive, removed subsidies that have burdened govern-
ment finances, and implemented a minimum wage, he’ll
need greater political clout to do more.
Najib needs a victory for yet another reason. If Mahathir’s
coalition were to somehow pull off an upset, it has pledged
it will set up a commission to investigate the 1MDB mess and
arrest officials implicated in the scandal. As Najib knows,
Malaysian politics can be a nasty business. <BW>
Disappearing bees.

North Korea.

Bitcoin.

Fracking.

Populism.

Fintech.

Opioids & heroin.

Central bank independence.

Hard-to-explain topics,
explained simply.

bloomberg.com/quicktake
 Nature
hydr ates

Did you know that each person needs

20-50 liters
of fresh water a day to meet their basic needs
for drinking, cooking and cleaning? *

By preserving and restoring essential lands upstream, we help strengthen

the natural fow, fltration and regulation of watersheds that supply
drinking water to people across Latin America, North America and Africa.

How can you help meet nature’s needs? Learn by visiting nature.org.

* World Water Assessment Programme (WWAP)

 CONTENTS ● How Europe’s FlixBus ● China automakers’

1
got on the road to riches secret weapon for
global growth: EVs

B
U
S
I
N
E
S
15

Slow Pour, Slower Growth

S

Sure, it’s tough to find sales growth, with consum-

● Kraft Heinz has finished
ers looking for fresher and edgier products and gro-
integrating its two venerable cers improving their house brands and increasingly
PHOTOGRAPH BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK

parts. Now all it needs is
another deal to satisfy Wall
Street’s appetite
Kraft Heinz Co. was supposed to be different. The
packaged-food giant, created in a 2015 merger
orchestrated by private equity firm 3G Capital and
investor Warren Buffett, was viewed, on Wall Street
at least, as immune to the headwinds pummeling its
peers in the industry.
giving shelf space to upstart names such as Halo Top
and Chobani. But for Kraft Heinz, it almost didn’t
matter. The marriage was never about selling more
Maxwell House coffee, Kraft macaroni and cheese,
and Oscar Mayer deli meats. It was about 3G finding
another company to buy and doing what its notori-
ously thrifty managers do best: slashing costs and
making money—big money—for shareholders.
April 30, 2018
For a while, that’s how it played out. Even as the
industry struggled, investors pushed Kraft Heinz to Edited by
James E. Ellis
a high of $96.65 on Feb. 17, 2017, a big price-earnings and David Rocks
premium to its packaged-food peers. Since then, Businessweek.com
 ◼ BUSINESS
the shares have plunged roughly 40 percent, wip-
ing out almost $50 billion in market value.
On the February day that Kraft Heinz stock closed
at its all-time high, reports hit that the company
had offered $143 billion for Unilever, the European
household-products giant that makes Dove soap,
Hellmann’s mayonnaise, and Ben & Jerry’s ice
cream. The bid surfaced right on schedule: four
years after 3G and Buffett teamed up to take Heinz
private and two years after they’d bought Kraft and
merged it with the condiment maker in a $55 billion
blockbuster. Each time, 3G had employed a ruth-
lessly efficient playbook: fire thousands of workers,
shutter factories, and produce industry-leading mar-
gins. Adding Unilever to the mix would provide even
more opportunities for cost-cutting, and applauding
investors quickly sent Kraft Heinz stock up 11 per-
cent on the news.
Unilever, though, wasn’t having it. Fearing a cul-
ture clash and playing on Buffett’s well-known aver-
sion to hostile deals, Chief Executive Officer Paul
Polman pushed back, creating enough dissonance
to effectively quash the deal. That’s left investors to
ponder a world where Kraft Heinz had to give its
investment bankers a rest and actually sell more
16 cheese and hot dogs.
In February 2018 the company said it had, as
promised, cut $1.7 billion in expenses by integrat-
ing the two businesses. That effectively marked the
end of the post-merger period for Kraft Heinz. And
with each passing day without a new deal, the out-
fit looks more and more like any old food company,
struggling to reignite growth in its annual sales—
$26.2 billion last year—with a portfolio of products
whose best days are behind them. (Remember that
pickle relish in the back of your fridge?)
Kraft and the nine other largest packaged-food
companies in the U.S. have seen more than $19 bil-
lion in revenue evaporate over the past three years.
And it’s not expected to get much better: U.S. sales in
the industry will grow about 1 percent a year through
2022, according to Euromonitor International. An
index of the stocks of the 10 largest packaged-food
companies is down 16 percent this year, while the
S&P 500 has fallen only about 1.5 percent. Worse,
that stock slump has come amid increased turmoil
in the equity market, which historically would send
investors flocking to the safety of food stocks. That’s
because people always have to eat, the old market
adage goes, no matter the economic environment.
It’s not the case for food stocks this time, at least
not yet. “They’re not behaving as defensively as
they once did,” says Brittany Weissman, an analyst
at Edward Jones.
There’s a shopping cart full of factors conspiring
Bloomberg Businessweek April 30, 2018
against Big Food. For one, customers are shopping
more on the so-called perimeter of the grocery store,
meaning the areas where fresh vegetables, fruit, and
meat are sold and away from the shelves dominated ● Change since Jan. 1,
2016, weekly close
by packaged-food behemoths including Kraft Heinz.
Index of 10 largest
Even in the center of the store, market share is going packaged-food
to younger brands that have resonated with consum- companies*
ers. Some, such as Kind bars and SkinnyPop pop- S&P 500
corn, have been around less than a decade, but they 45%
already are logging hundreds of millions of dollars in
annual sales. Americans are also eating out more fre- 30
quently, and the rise of meal kits such as Blue Apron,
Sun Basket, and HelloFresh has also taken a chunk 15
out of grocery spending.
Then there’s the grocery price war. Amazon.com 0
Inc.’s deal to buy Whole Foods Market has rattled all
corners of the food industry. The day the deal was -15
announced, food stocks plunged, with investors bet- 1/1/16 4/20/18
ting that the internet giant’s entrance into the mar-
ket would mean even thinner margins for suppliers. *BY MARKET VALUE;
U.S. consumers are also increasingly shifting their
DATA: COMPILED BY BLOOMBERG
shopping to low-priced outlets operated by Aldi
Inc. and the American unit of its longtime German
competitor Lidl. About 90 percent of the merchan-
dise stocked by the huge German discounters are
private-label items, meaning a shopping trip to their
stores is a loss for the big national brands.
Kraft Heinz acknowledges it’s looking for a take-
over target and says it expects the changes in the
industry will drive further consolidation. But the
company also insists it doesn’t need a merger to
generate growth. “Kraft Heinz will continue to meet
consumer needs around the world—with or without
another acquisition,” the company said in a state-
ment, adding it’s “best positioned” to navigate the
tough environment thanks to its “iconic brands.”
Even before Amazon, food companies were
grappling with a resurgent Walmart Inc., which has
improved its food business and now gets more than
half its revenue from groceries. Like other retailers,
Walmart has invested in its house brands, which
boast higher profit margins because they cost it less
than branded products from big packaged-food com-
panies—and can be potent weapons in a price war.
“Retailers have the edge right now,” says Jennifer
Bartashus, an analyst at Bloomberg Intelligence.
Kraft Heinz has sought other ways to raise its
bottom line. The company in February announced
it would invest $1.1 billion in savings from tax
reform toward its supply chain and brands, and it’s
repeatedly said it’s committed to nurturing brands
and developing products that resonate with con-
sumers. Kraft Heinz recently scored a marketing
win on Twitter, generating buzz for its new may-
onnaise with a poll asking if it should release a
◼ BUSINESS
ketchup-mayo mash-up. And the company’s new
startup incubator, called Springboard, has part-
nered with celebrity chef David Chang to take his
Ssäm sauce national on Amazon in a bid to grab
some foodie cachet. Still, it’s hard to see these
efforts moving the needle much.
Most observers still expect Kraft Heinz to make
an acquisition to get its cost-cutting playbook back
in action. But the stagnant growth in packaged food
has also sent rivals on the hunt for deals, leaving tar-
gets increasingly expensive. One example: General
Mills Inc. paid $8 billion for premium dog food
maker Blue Buffalo Pet Products Inc.
Europe’s
Magic Bus
Is California
Dreaming
● Germany’s FlixBus has become Europe’s
biggest network. Now it’s aiming for the U.S.
With their reputation for skid row stations,
grueling rides, and stinking toilets, intercity buses
have long been the travel option of last resort. But
in Europe, a startup called FlixBus has given buses
a trendier, eco-friendly, sharing- economy vibe.
Now it’s aiming to take on Greyhound Lines Inc.
in the U.S.
Since introducing a handful of routes in Bavaria
when Germany liberalized its long-distance bus
market five years ago, Flix has become Europe’s
biggest network, serving 1,700 destinations in
27 countries. More than 100,000 people board
one of the company’s 1,500 bright-green coaches
every day, embarking for destinations as far-flung
as Kiev, Lisbon, and Oslo. With backing from pri-
vate equity companies General Atlantic LLC and
Silver Lake Management LLC, Flix in March added
train travel in Germany and is experimenting
with long-distance electric buses—an escalating
ambition reflected in the change of its name to
FlixMobility in 2016. “We didn’t win because
Bloomberg Businessweek April 30, 2018
In 2017 the premiums paid above market price
for deals in the food industry surged 50 percent
above the yearly average from 2010, according
to Jefferies LLC. So even with the financial back-
ing of Buffett, the ability to squeeze profits from
a megamerger will hinge on not overpaying. That
means it could take time to find the right target—
intensifying the focus on Kraft Heinz’s uphill efforts
to sell more food. �Craig Giammona, with David
Russell and Brandon Kochkodin
THE BOTTOM LINE Managers have wrung $1.7 billion in cost
savings from Kraft Heinz. But the food industry’s tepid sales growth
has investors focusing on more dealmaking rather than food sales.
we had the most money, and we’re not always
the cheapest,” says André Schwämmlein, the
company’s co-chief executive officer and one of
three founders. “We focused on the customer, the
brand, and the technology.”
By that, Schwämmlein means Flix has stayed
out of the messy and capital-intensive business
of owning and operating buses, instead adopt-
ing a model akin to that of Uber Technologies
Inc. The company leaves the driving to 300 part-
17
ners—mostly small, family-owned companies that
keep 75 percent of ticket receipts—allowing Flix to
focus on scheduling, customer service, and online
ticket sales. “They’re a marketing machine,”
Nico Schoenecker, managing director of partner
Autobus Oberbayern GmbH, says in his Munich
depot brimming with dozens of coaches, includ-
ing two with FlixBus branding. Like all others in
the Flix fleet, they feature Wi-Fi, electric outlets,
and aisle seats that can slide over for a little more
personal space—paid for by the operators. Before
teaming up with FlixBus, Autobus Oberbayern was
squeaking by on its route between Munich and
Prague. Since handing the line over, the service
has grown more than sixfold. “They’re closer to
the customer” than traditional bus companies,
Schoenecker says.
Schwämmlein and his partners aim to replicate
their model in the U.S., with plans to roll out across “At the
the Southwest this summer, linking destinations beginning,
such as Los Angeles, Las Vegas, and Phoenix. In tak- you’re driven
ing on the market, Flix follows Britain’s Stagecoach by pain. You
Group Plc, which in 2006 introduced its Megabus grow because
brand in the U.S. After an initial splash, Megabus you have to”
retrenched as low fuel prices made driving a
cheaper alternative. “This isn’t our first rodeo,”
says Andy Kaplinsky, chief commercial officer at
Greyhound. “The chatter and buzz of an upstart
helps build awareness.” Greyhound, owned by
 ◼ BUSINESS
British bus operator FirstGroup Plc since 2007,
introduced its own hipper, bargain alternative,
BoltBus, in 2008, and it has since added Wi-Fi and
electric outlets on all its buses.
Flix is confident it can transfer its success from
Europe to the U.S. It has, after all, managed to
thrive—turning a profit last year for the first time—
in an environment where there are ample alterna-
tives to the bus: an extensive train network and
plenty of low-cost flights. Schwämmlein likens
the U.S. to Europe five years ago, with untapped
demand and an array of local operators ready to
make buses available. “At the beginning, you’re
driven by pain. You grow because you have to,”
says Schwämmlein, who went to school with fel-
low founder and technology chief Daniel Krauss
and met co-CEO Jochen Engert when both worked
for Boston Consulting Group. “Now we’re more
opportunity-driven. We think we can create a mar-
ket in the U.S.”
China Wants to Give You a Lift
18
● It’s determined to break the hold the U.S., Germany, and Japan have on the global automotive industry
On a bright spring day in Amsterdam, car buffs
stepped inside a blacked-out warehouse to nibble
on lamb skewers and sip rhubarb cocktails cour-
tesy of Lynk & Co., which was showing off its new
hybrid SUV. What seemed like just another launch
was actually much more: the coming-out party for
China’s globally ambitious auto industry. For the
first time, a Chinese-branded car will be made in
Western Europe for sale there. The ultimate goal is
landing in U.S. showrooms.
That’s the master plan of billionaire Li Shufu, who
has transformed his Zhejiang Geely Holding Group
Co. from a refrigerator maker in the 1980s into an
automotive powerhouse that owns Volvo Car Group,
British sports car maker Lotus, and the maker of
London’s black cabs. It’s also the largest stakeholder
in Daimler AG—the inventor of the automobile and
owner of Mercedes-Benz. Li is spearheading China’s
aspirations to become an auto industry leader along-
side the U.S., Germany, and Japan. “I want the whole
world to hear the cacophony generated by Geely and
other made-in-China cars,” Li says. “Geely’s dream
is to become a globalized company. To do that, we
must get out of the country.”
At l e a s t f o u r e s t a b l i sh e d C h i n e s e
Bloomberg Businessweek April 30, 2018
Key to that will be prices, and by almost any
standard, FlixBus is cheap: just €25 to €50 ($30-
$60) gets you from Berlin to Amsterdam, vs. €40 to
€150 by train. Flix also takes a targeted approach
to setting up routes, going where customers are
rather than making them trudge to the bus sta-
tion. In Berlin the company has 16 stops and fre-
quently revamps timetables and routes to fine-tune
the network. That helps keep the buses full—and
persuades operators to hire drivers and invest
the $350,000-plus that each new coach costs.
“FlixBus isn’t a classic bus company but a highly
professional sales platform,” says Christoph Gipp,
managing director of IGES Institute in Berlin, which
tracks infrastructure trends in Europe. “They’ve
managed to get away from the stigma associated
with bus travel.” �Chris Reiter
THE BOTTOM LINE With a model akin to Uber’s, FlixBus uses an
online platform to connect more than 100,000 riders a day with
300 operators serving 27 European countries.
carmakers—including Geely—and three Chinese-
owned startups—SF Motors, NIO, and Byton—plan
to sell cars in the U.S. starting next year. Meanwhile,
Warren Buffett-backed BYD is building electric buses
in California; Baidu is teaming up with Microsoft,
TomTom, and Nvidia on a self-driving technology
platform; and Beijing-based TuSimple is testing
autonomous-driving big rigs in Arizona.
The industry in China is set for upheaval after
 ◼ BUSINESS
Beijing said in April it will unravel a two-decade-
old requirement that foreign carmakers enter joint
ventures with local manufacturers, of which they
could own no more than 50 percent, to build vehi-
cles on the mainland. While the change may ener-
gize companies including Volkswagen and Ford
Motor to seek a bigger piece of the world’s largest
car market—and also allow Tesla to set up a fully
owned unit—it also may convince Chinese carmak-
ers to get serious about expanding abroad if they
want to maintain their sales volumes.
“They are in a better position now than they
ever have been,” Anna-Marie Baisden, head of
autos research in London for BMI Research, says
of Chinese carmakers. “They’ve had so much time
working with international manufacturers and have
become a lot more mature.”
China has made a similar move before. It used
the shift in technology from basic flip phones to
hand-size computers to dominate the smartphone
manufacturing industry, trouncing then-dominant
makers from Finland, Sweden, the U.S., Japan, and
Germany. Last year, three of the top five smart-
phone makers in the world were Chinese, accord-
ing to Gartner Inc. Yet, even with China’s advances
in electric vehicle technology, the auto business
may take longer to crack, given deep brand loy-
alty. “Chinese carmakers intend to come over, but
what need will they fill?” says Doug Betts, senior
vice president of global automotive operations at
J.D. Power. “What is the reason to buy their cars?”
Chinese cars probably would compete more
directly with Japanese and Korean models, says
Bob Lutz, retired vice chairman of General Motors
Co. U.S. consumers mostly cross-shop Asian
brands. “If they start coming in, they won’t be any
more competent than Korean and Japanese cars,”
he says. “They would probably take share from
other Asian brands because the vehicles will be
more Asian in character.”
That’s not to say the road westward for Chinese
automakers is impassable. A few decades ago,
South Korea’s Hyundai Motor Group was knocked
for building fragile engines and rust-sensitive body
panels. Now, it’s one of the five biggest carmakers
ILLUSTRATION BY WOSHIBAI; DATA: COMPILED BY BLOOMBERG
in the world, selling about 1.3 million vehicles in the
U.S. last year, according to Bloomberg Intelligence.
Hyundai also operates factories in Alabama and
Georgia. “Competitors emerging from China must
be taken seriously,” says Matthias Müller, former
chief executive officer of Volkswagen AG.
The Chinese also are buying up parts suppli-
ers and making batteries for the world’s EV fleet.
Chinese companies have announced at least $31 bil-
lion in overseas deals over the past five years, buying
Bloomberg Businessweek April 30, 2018
stakes in carmakers and parts producers. The most ● Chinese automakers’
global reach
prolific buyer is Li, who’s spent almost $13 billion on
stakes in Daimler and truckmaker Volvo AB. Tencent SAIC MOTOR
Holdings Ltd., Asia’s biggest internet company, paid Has research centers in
about $1.8 billion for 5 percent of Tesla Inc. Silicon Valley, the U.K.,
and Israel
China is also making sure it doesn’t lag in the
Makes vehicles in
increasingly critical areas of automotive software Indonesia and Thailand
and electronics. Baidu Inc., owner of the nation’s Will invest $750 million in
biggest search engine, announced a $1.5 billion India by 2025 to double
production capacity to
Apollo Fund to invest in 100 autonomous-driving
projects during the next three years. “We have
secured a chance to compete in the U.S. market
200k
units
of self-driving cars through those partnerships,”
GREAT WALL MOTOR
says Li Zhenyu, a vice president overseeing Baidu’s
Plans to sell cars in the
intelligent-driving group. “Everyone has a good U.S. starting in 2021
chance to win if it has good development plans.” Will begin building a
The Chinese government’s goal to deploy 30 mil- factory in Russia in 2019
capable of rolling out
lion autonomous vehicles within a decade is seed-
ing a fledgling chip industry, with startups such as
Horizon Robotics Inc. emerging to build the brains
80k
vehicles a year
behind those wheels. And Contemporary Amperex
BYD
Technology Ltd. (CATL), the maker of electric
Operates bus plants in
vehicle batteries, is planning a $1.3 billion factory California and Brazil
with enough capacity to surpass the output of Tesla Has a factory in
and dwarf the suppliers for GM, Nissan, and Audi. Hungary, adding ones in
France and Ecuador
That would make CATL the world’s biggest pro- 19
ducer of lithium-ion batteries. As early as this year, NINGBO JOYSON
the Ningde-based company plans to raise 13.1 billion ELECTRONIC
yuan ($2.1 billion) by selling a 10 percent stake at a Has spent
valuation of about $20 billion, with the bulk of the
funds paying for the manufacturing plant.
$1.6b
acquiring German
The Chinese government sees EVs as its best automation companies
chance to seize global leadership as this emerging Owns Evana Automation
and Key Safety Systems
power-train technology gains ground. Cleaning the in the U.S. and will buy
mainland’s notoriously smoggy air and reducing Takata’s airbag assets
its dependency on foreign petroleum are bonuses.
WANXIANG GROUP
Already the world’s biggest vehicle market,
Bought A123 Systems,
China overtook the U.S. as No. 1 for EVs in 2015. The a bankrupt U.S. electric
Beijing auto show in late April featured 174 new- car battery maker
energy vehicles (which include electric cars, plug-in
GEELY GROUP
hybrids, and fuel-cell vehicles), with 124 of them
Bought a
developed by Chinese companies. “China does
intend to lead and dominate the electric vehicle
industry,” says Michael Dunne, president of con-
49.9%
stake in Malaysian
carmaker Proton
sulting firm Dunne Automotive Ltd. in Hong Kong.
Owns Volvo Cars, and
Western companies ruled the auto industry for chunks of Daimler and
almost a century because they refined the internal- truckmaker Volvo. Owns
combustion engine. The electric motor threatens to
erase that disadvantage. Says Hu Xingdou, an eco-
51%
of the U.K.’s Lotus Cars
nomics professor at Beijing Institute of Technology:
“China and the rest of the world can now start from
the same starting line.” �Bloomberg News
THE BOTTOM LINE China, already the world’s largest market for
car sales, is quickly expanding its automotive footprint outside its
borders. Taking the lead in electric vehicles is key.
Application-Optimized Server Solutions
Scientific Computing Built to Meet Your Specific Needs

The Fastest Image Processor in the World

With 41 of our GPU optimized SYS-7048GR-TR servers,
the New GPU based Supercomputer named
ARTS (Apertif Radio Transient System) is now the Fastest
in the Netherlands with a calculation capacity of two PetaFLOPS.
This supercomputer is Application-Optimized
to scan 20,000 images per second then uses machine learning
algorithms to detect if there are any fast explosions in space
using one of the largest
lar Radio Telescopes in the World.
For Exac
Exactly the Best Enterprise Computing Solution
for your Application, Choose Supermicro.

Application-Optimized Server Solutions

Learn more at supermicro.com/application-optimized
© Super Micro Computer, Inc. Specifications subject to change without notice. Intel, the Intel logo, Xeon, and Xeon Inside are trademarks of Intel Corporation or its subsidiaries in the U.S. and/or other countries.
 CONTENTS ● Instagram’s vintage ● Starving yourself gets
clothing shops sell out the startup treatment
in seconds
Apple’s India Strategy:
Think of the Children
● The company needs the
country’s young developers
to help take market share
from Google
For his seventh birthday, Ashwat Prasanna’s parents
gave him a MacBook. Three years and one Apple
boot camp later, his free measurement-converter
app, Quickvert, has been downloaded more than
1,000 times on the App Store.
Ashwat, who often skips cartoons to code, is
among thousands who’ve passed through the
company’s App Accelerator in the Indian tech
hub of Bengaluru, formerly known as Bangalore,
over the past year. In several sessions over two
days, engineers and designers showed him how
ILLUSTRATION BY KATYA DOROKHINA
to write sleeker code for an app that translates
units of measurement, such as Celsius tempera-
tures to Fahrenheit and vice versa. “The uncles
here taught me to build a better user interface,”
says the gap-toothed 10-year-old, using the familial
term to denote respect for his programming elders.
● A chatbot that handles
2
thousands of carping
customers at a time
T
E
C
H
N
O
L
21
By choosing Ashwat’s app as one of a handful of
accelerator projects to showcase, Apple Inc. is show-
ing India’s most junior developers it wants to help
O
G
smooth their way to the App Store.
The accelerator initiative, which Chief
Executive Officer Tim Cook announced in a
high-profile India visit in 2016, invites select
Y
developers every week for tutoring and modules
on fast-track app development. In rooms painted
Apple’s signature all-white, professionals share the
latest technology in sessions ranging from a day to
two weeks. Web retailer Flipkart Online Services
Pvt. and food delivery platform Zomato Media
Pvt. are among those that have sent developers
through the program.
The more successful the app, the bigger Apple’s
cut. And the more young talent Apple can recruit,
the more appealing its mobile operating system
looks to developers who might otherwise join
the local armies programming for Facebook Inc. April 30, 2018
or Google’s Android. “Apple’s strategy is to lock Edited by
developers into the iOS ecosystem,” says Anshul Jeff Muskus
and Julie Alnwick
Gupta, an analyst at researcher Gartner Inc. Apple
declined to comment for this story. Businessweek.com
 ◼ TECHNOLOGY
In the U.S., the company already has sought
to build lifelong ties to designers by pitching high
schoolers and community college students to work
with its streamlined app-coding language, Swift. In
India, the world’s fastest-growing smartphone mar-
ket and the second-biggest behind China, Android
dominates. Of the 125 million smartphones Indians
bought last year, about 3.2 million were iPhones—
almost all the rest were powered by Google’s
operating system. Two years ago, Google started
corralling thousands of younger developers with a
free government-backed training program offered
through a network of public and private universi-
ties, and only now is Apple playing catch-up.
India has the world’s largest population of people
25 years old or younger, including an unprecedented
number of precocious developers, says Ravi Teja
Bommireddipalli, CEO of Robosoft Technologies
Pvt. in the coastal town of Udupi. Robosoft’s devel-
opers, who create apps for companies such as
McDonald’s Corp., also build them for Apple and
Google, but they make more money from the App
Store. And while a whole previous generation of
Indian programmers became globally known for
writing code-to-order at outsourcing companies, the
22 next generation prefers to push its creative limits.
Apple’s accelerator, tucked into an office tower in
the suburbs north of Bengaluru, is spare and vast,
with minimalist, modular rooms whose flexible
walls can be moved to accommodate a few people
or a few hundred. When 16-year-old Harshita Arora
arrived from a small town outside Delhi at the end
of February, Apple’s engineers had plenty of advice
in the two days she spent with them. “They told me
how to write code that consumes less device mem-
ory, runs faster and more efficiently,” the schoolgirl
developer says. Her Crypto Price Tracker has been
downloaded more than 10,000 times since its debut
at the end of January. Harshita is already pretty savvy
about the economics, too. “IOS apps are known to
earn four times more than Android apps,” she says.
Beyond the accelerator, Apple is also trying
to court cost-conscious Indian customers with
cheaper devices. The iPhone maker has begun
assembling its budget SE models in Bengaluru and
is pushing for more government incentives to set
up full-fledged manufacturing operations there.
That would allow the company to meet the local
sourcing rules that have so far kept it from open-
ing retail stores in the country.
In the meantime, the accelerator will start
offering business-model and marketing courses
for app developers this summer. Harshita prob-
ably won’t need them: A few weeks after her
training session, a California venture firm bought
Bloomberg Businessweek April 30, 2018
her app, which tracks and displays live prices of
more than 1,000 cryptocurrencies across 32 coun-
tries’ exchanges, for an undisclosed price. Now
she’s learning artificial intelligence technologies
to develop a health-focused product.
Ashwat is also thinking about next steps. The
soon-to-be fourth-grader, who taught himself
coding through YouTube videos, is toying with a
Facebook-like social network app where “only users
below 16 will be allowed to create an account.”
While it may discreetly champion that kind of chutz-
pah, Apple can’t present Ashwat or his app at its
annual developer conference in San Jose in June.
At 10, he’s three years too young to be invited there
on a student scholarship. �Saritha Rai
THE BOTTOM LINE Google and Facebook own the developer
community in India, the world’s fastest-growing smartphone market,
so Apple is belatedly trying to woo a younger crowd there.
The Mad Dash
To Buy Old Clothes
On Instagram
● The site’s vintage shops can sell items in seconds
and generate thousands of dollars a week
The moment Dee Ibrahim checked the alert on her
phone, she knew she had to buy that pink blazer. ①
She coveted the $50 jacket just listed by a vintage
clothing seller on Instagram. But there were bills to
pay and she couldn’t really afford it, so she messaged
a friend and asked her to claim the blazer. No luck.
Fine, Ibrahim recalls thinking, I’ll buy it any-
way. But when she refreshed the page, it was gone.
“Sold,” it read. Her heart sank.
Such is the roller coaster of regret and triumph for
a new breed of shoppers who have made Instagram’s
vintage shops part of their daily routine. Hundreds
of accounts post carefully curated looks several
times a day, and they often sell within minutes—or
seconds. Since the clothes are plucked from thrift
shops or a grandmother’s closet, they’re effectively
one-of-a-kind. Miss an alert, and it’s gone forever.
Ibrahim, a 22-year-old fashion model, does some-
times win this mad dash, though. Like when she
 ◼ TECHNOLOGY
saw a $32 nightgown she just had to have. Scrolling
through her phone one day, she quickly grabbed it.
“I commented my ZIP code and she responded in
like a minute,” she says. “And that was it.”
These social media clothiers represent a unique
corner of social commerce. While networks such
as Facebook, Twitter, Pinterest, and Instagram can
heavily influence purchases, transactions happen
mostly on retail sites, not social platforms. A 2017
report from visual search company ViSenze Pte.
said 54 percent of online buyers still don’t make
purchases via social media. But the landscape is
changing, says Andrew Lipsman, an analyst at
research firm EMarketer. He predicts major retail-
ers will soon adopt similar tactics.
Instagram, with its 800 million monthly active
users, has been slowly rolling out products to make
the process of selling vintage clothes, and anything
else, easier for its big retail partners and many small
businesses. In 2016 it added the ability to see prod-
ucts in Instagram stories and click through to a
brand’s retail site. “Shopping on Instagram” allows
retailers to tag products in an image and direct
users to a “Shop Now” link. Businesses use it to sell
everything from 3D-printed objects to house plants
straight from their feeds. “Our goal is to make it as
easy as possible,” says a spokeswoman.
Vintage shops, however, are using old-school
methods. Sellers post their outfits with a caption list-
ing size, price, color and style, and how to claim it—
direct message or a public comment, usually. They
often ask for a ZIP code to give an estimate of ship-
ping costs, and transactions are typically conducted
via PayPal or a cash-sending app. Since sellers usu-
ally have only one of each item, it’s first-come, first-
serve, which sometimes creates a feeding frenzy.
“You don’t think about it as much when it’s
a race to buy it first,” says Rose Soiffer-Kosins, a
21-year-old student who runs her own Instagram
shop, Ecru Vintage, out of Claremont, Calif. “If you
miss out on a vintage piece, you’re probably not
going to find it again.”
A vintage shop on Instagram has almost no
startup costs. Some generate as much as $5,000
or more in sales per week, with customers from
around the world mostly aged 18 to 35. Sellers say
those with significant followings can accrue up
to six-digit annual sales. But being a purveyor of
apparel on Instagram means keeping your shop-
ping brain constantly engaged. Sellers must spend
time rifling through the racks of Goodwill, Salvation
Army, local thrift shops, and estate sales to buy
their goods. After washing, mending, and ironing,
INSTAGRAM (2)
they conduct photo shoots, banking auction images
to post gradually over a week or a month.
Bloomberg Businessweek April 30, 2018
① ②
Ivia Retrò, an online shop started in late 2016
by Brooklyn student Olivia Capierseho, gets about
two-thirds of its business from the account’s 7,000
Instagram followers, rather than from its own web-
site. The page relies on visuals and makes discovery
easy via hashtags. Capierseho, 22, says she usually 23
takes in about $3,000 a month.
Na Nin Vintage ② is a full-fledged Instagram
retail operation. Kate Jennings, 33, began resell-
ing clothes on Etsy as a side gig in 2009. She
opened a physical store in 2014 on a quiet street in
Richmond, Va. She went on Instagram two years
ago, and things took off. With 136,000 followers,
sales happen in a flash—usually within the first five
minutes, she says.
Facebook-owned Instagram’s tweaks have
messed with the nascent industry to varying “If you miss out
degrees. In 2016, Instagram shifted from a chrono- on a vintage
logical feed to one based more on a complicated piece, you’re
calculus of readers’ estimated interest in the posts. probably not
While recent changes to its feed have helped, not going to find it
everyone sees posts at the same time, making for again”
an uneven playing field.
Vintage buyers remain undaunted. Used apparel
is a growing alternative to fast fashion, the mass-
market retailers that take runway styles and con-
vert them into cheap, disposable clothes. Reworn
clothing is like recycling, with each new wearer
preventing another garment from being added
to the world’s trash heaps. For them, it’s worth
battling one another for the coolest clothes.
�Alexandra Stratton and Kim Bhasin
THE BOTTOM LINE Hundreds of Instagram accounts dedicated
to vintage clothing are driving ultrafast flash sales, and some
generate as much as $5,000 or more in sales per week.
 ◼ TECHNOLOGY
Silicon Valley
Discovers Hunger
● Several startups are working to commercialize
the tech world’s latest health craze: Fasting
Like most of the health fads that catch on in Silicon
Valley, this one broke through thanks to word-of-
mouth—and a Medium post. Entrepreneur Sumaya
24 Kazi extolled its virtues to 650,000 readers, while
venture capitalist Phil Libin and others preached
about it to anyone who would listen. Their mirac-
ulous idea was in fact a very old one: eating noth-
ing at all for long stretches of time. Monthly Google
searches for “intermittent fasting,” which has
become a catchall term for various forms of the
practice, have risen tenfold over the past three
years, to as many as 1 million. That’s about as many
as “weight loss” gets and more than “diet.” Now
comes the next step, as businesses try to turn var-
ious forms of the craze into profit.
The idea may sound troubling depending on your
relationship with food, but paid-for fasting regimens
are finding an audience in the Valley, partly because
they’re framed in terms of productivity, not only
weight loss. (Fasting falls under the techy-sounding
buzzword “biohacking,” like taking so-called smart
pills or giving your brain tiny shocks.) There’s a
growing body of research and anecdotal evidence
showing a link between periods of noneating and
increased focus and output, and perhaps even lon-
ger life. “Periods of nutrient restriction do good
things,” says Peter Attia, whose medical practice
focuses on the science of longevity. “The subjective
benefits are evident pretty quickly, and once people
do it, they realize—if this is going to give me any ben-
efit in my performance, then it’s worth it.”
As part of a diabetes-prevention program,
PlateJoy, a meal-plan subscription app, encourages
Bloomberg Businessweek April 30, 2018
users to fast to shed pounds and lessen their risk
of developing the disease. The company wouldn’t
say how many customers it has, but about 20 mil-
lion people are eligible to get the $230-a-year coach-
ing and progress-tracking program for free through
their health insurer. (Insurers pay PlateJoy when
their customers lose weight.) Co-founder Christina
Bognet, a former health-care consultant and MIT-
trained neuroscientist, says the plan encourages
time-restricted feeding, in which practitioners eat
only during a window of a few hours each day.
Maintaining those restrictions, she says, has helped
her keep off the 50 pounds she’s lost in recent years.
“We instruct our patients to jump right into it,”
Bognet says. “We’re hearing from people who’ve
said, ‘I have not been able to get my weight to
budge, but now I’m down 7 pounds in two weeks.’
This is life-changing.” Five-year-old PlateJoy is
profitable and looking to raise venture capital
to supplement a smidgen of early funding from
Y Combinator, 500 Startups, and other incubators.
Hvmn (pronounced “human”) pitches custom-
ers mostly on productivity and performance. Its
chewable coffee cubes and other dietary supple-
ments are supposed to enhance focus and cognitive
function. One product contains synthetic versions
of ketones, compounds your body creates when
it’s fasting long enough to burn fat. Hvmn markets
the drink to athletes ($99 for three small vials) as
a way to boost performance and accelerate recov- ● Worldwide searches
for “intermittent fasting,”
ery. “It’s more efficient fuel for the brain and body,” as measured by the
says co-founder Geoffrey Woo, though he says they Google Trends index*
aren’t meant to replace the benefits of fasting.
Formerly known as Nootrobox, Hvmn has 100
attracted more than $5 million in venture backing
from the likes of former Yahoo! Chief Executive
Officer Marissa Mayer and Zynga Inc. founder Mark
Pincus. The technology behind its ketone drink lies 50
in more than a decade of research into supplements
for combat troops, work financed by the Defense
Advanced Research Projects Agency, the National
Institutes of Health, and the University of Oxford. 0
Woo, who still fasts for 36 hours once a week, 1/1/15 4/15/18
also helped start WeFast, a set of Facebook and
Slack forums with thousands of members that
*HIGHEST POINT INDEXED TO 100; DATA: GOOGLE TRENDS
began as a weekly breakfast for Hvmn employ-
ees. Members post advice and encouragement,
track their progress, and link to the latest scien-
tific research on fasting. “This will be considered
just like exercise,” Woo says, adding that he expects
fasting to become a multibillion-dollar industry.
“Our problem is overconsumption, and that means
reinstalling a new culture around eating.”
Valter Longo, a professor at the University of
Southern California, has studied food restriction
 ◼ TECHNOLOGY

Man vs. Machine Customer Service

and longevity for decades. His research has shown
that mice on fasting diets live longer and perform IPsoft Inc.’s Amelia is a virtual, text-based
tasks better; that fasting in mice starves cancer cells customer service agent that accurately
and aids chemotherapy drugs; and that a very-low-
calorie diet can slow multiple sclerosis by killing off resolves requests as much as 90 percent
bad cells and generating new ones. He advocates of the time, according to client SEB, a
multiday fasting and sells a five-day, $250 diet pack- European financial-services firm. It’s close,
age that he says mimics the effects of a fast. The
box, called ProLon, includes soups, drink mixes, IPsoft says, to becoming indistinguishable
breakfast bars, vitamin supplements, and even des- from humans.
serts, but the portions are small enough that the
customer will take in only about 1,100 calories on
the first day and about 750 on each of the next four. The Benefit
Since its introduction in 2016, more than 52,000
people have tried ProLon. Longo’s company,
Built by analyzing text chats from top customer service workers,
L-Nutra, is targeting about $12 million in revenue
Amelia can handle thousands of requests simultaneously, day or
this year and estimates that sales will more than
night, says IPsoft Chief Executive Officer Chetan Dube. He says
double next year. L-Nutra and the research behind
the system frees up humans for more creative pursuits.
it have received close to $60 million in grants and
investment capital, including from the NIH, the
National Cancer Institute, the National Institute on Background
Aging, and the U.S. Department of Defense. CEO
Dube, an Indian-born
Joseph Antoun says he’s aiming for reimbursement computer science
deals similar to PlateJoy’s with insurers and corpo- professor, left New York
University in 1998 to found
rate wellness programs; he plans to take the com- IPsoft, which specializes
pany public within three years. in IT automation for
25
businesses. The company
Even if you don’t remember the Valley’s last few introduced Amelia in 2014;
health fads—Soylent, anyone?—there are plenty of users include American
International Group,
reasons to be skeptical of just how much these Deloitte, Electronic Arts,
products are worth. Female rats on fasting diets Royal Caribbean, and UBS.

have shown hormonal imbalances and ovary

shrinkage. As for humans, there isn’t enough data
Tasks
on the long-term effects for doctors to reach a con-
sensus. What is clear is that restricted-eating plans Amelia, whose avatar is
based on Lauren Hayes, a
can make people more susceptible to anorexia model, answers customer
nervosa and other disorders, says Lauren Smolar, questions and processes
transactions (opening
director of programs at the National Eating accounts, moving money)
Disorders Association. through a chat window
in a browser or on a Investment
“We consistently see cases where people have mobile app. Customer
tried to control their intake of food, and it’s led to service agents monitor Dube says a pair of family trusts keep IPsoft afloat,
interactions and guide though he won’t say how much they’ve invested. In
an eating disorder,” she says. “There ends up being the AI through any tricky the $12 billion market for development of artificial
this kind of reward feeling they’re going through, conversation trees for intelligence, customer service is the top spending
future reference. category, according to researcher IDC.
which triggers them to continue on this diet. And
slowly this feeling of losing control, and not being
able to know when to stop, can occur.” The Verdict
Libin, now CEO of startup studio All Turtles
Corp., lost 60 pounds fasting. He acknowledges it
ILLUSTRATION BY KURT WOERPEL; GETTY IMAGES

isn’t for everyone. “It’s just something that works
super well for me,” he says. “I have more energy,
more stamina, more mental clarity. My mood is
better—all of this stuff. And I’ve measured all of it.”
�Tom Giles and Selina Wang
THE BOTTOM LINE Startups focused on time-restricted feeding
and low-calorie meal regimens plan to expand aggressively, but
they may be a bit too far ahead of the science.
For now, virtual customer service agents still need human
partners to learn from, says IDC analyst David Schubmehl.
Jason Laska, who heads machine learning at Clara Labs, an
AI-augmented meeting-scheduling service, says he’s skeptical
that customers will be well-served without any human agents
around, even once the machines are comparably helpful.
�Michael Belfiore
 CONTENTS ● Banks stand for LGBT ● John Paulson makes

3
rights in Hong Kong a big bet—on himself

China’s Real Estate Connection

F
I
N
A
N
C
E
26

Gray, Schwarzman’s second in command and des-

● Schwarzman’s Blackstone
has been a big seller to
Chinese companies. Will it
want to buy anything back?
In February 2017, Stephen Schwarzman toasted
Wang Jian, co-chairman of HNA Group, at a char-
ity event at Manhattan’s Park Avenue Armory.
Wang lauded the billionaire Schwarzman as a “god
of fortune” and a man with the “key to opening
up the chest of treasures.” Fourteen months later,
Wang has had an unexpected change in fortune—
and Schwarzman and his Blackstone Group LP
may be uniquely placed to unlock some of HNA’s
real estate treasures.
Chinese authorities have moved to curb and
unwind overseas investments by homegrown deal-
makers including HNA, Anbang Insurance Group,
and Dalian Wanda Group. At least one common
thread in those companies’ deals has emerged:
Each company found itself sitting across from
ignated successor, rose within the company by
building up that business. As a seller, Blackstone
spent much of the past few years feeding a hun-
ger from Chinese buyers that proved insatiable—
until now.
Among other transactions, Anbang bought
from Blackstone New York’s Waldorf Astoria for
$1.95 billion, a record-breaker that thrust the
financial conglomerate into the spotlight in the
U.S., as well as a DoubleTree by Hilton next to
Amsterdam’s Centraal Station. Blackstone sold a
stake in a Hong Kong property developer to HNA
and a Sydney office tower to Wanda. Data from
Real Capital Analytics Inc. show that Blackstone
has been by far the largest seller to Chinese com-
panies, reaping $25.3 billion from 708 proper-
ties since 2013, with a single deal accounting for
more than 600 of them. The figure would jump
to $31.8 billion were it to include HNA’s purchase
of part of Blackstone’s stake in Hilton Worldwide
Holdings Inc. in 2016. That’s almost triple the vol-
ume of any other seller to Chinese buyers over the
PHOTO ILLUSTRATION BY 731

Blackstone at the negotiating table, often more
April 30, 2018
than once, as it executed its global spending spree.
Edited by Although it may be more commonly thought
Pat Regnier
of as a private equity firm, Blackstone has $120 bil-
Businessweek.com lion in real estate assets under management. Jon
same period, and roughly a fifth of Blackstone’s
real estate sales in that time.
The troubles of Chinese companies aren’t great
news for anyone with real estate to sell—some big
buyers have left the market. But with $32 billion
◼ FINANCE
in so-called dry powder earmarked for new real
estate investments, Blackstone could be posi-
tioned to grab back some of its favorite assets, if
the price is right. Beyond valuations, a key factor
that might weigh on Blackstone is perception. Is
it going to be viewed as saving these companies or
humiliating them? If it’s the latter, which could tar-
nish the firm’s reputation among potential buyers
or sellers, as well as among its bevy of foreign fund
investors, it may well decide to abstain.
As RXR Realty LLC Chief Executive Officer
Scott Rechler, who’s sold real estate to Blackstone,
explains, the firm takes a long-term approach.
“They respect their relationships as part of that
approach,” he says. Still, it’s possible the firm
would proceed with purchases if it viewed any
intervention as helpful. “Blackstone could come
in in one fell swoop, if the [Chinese] govern-
ment wants to take the pain and call it a day,”
Rechler says.
Schwarzman, the New York firm’s co-founder,
chairman, and CEO, has personal ties to China—
ties so close that the Washington Post dubbed him
the president’s “China whisperer,” a moniker he
has disavowed on Bloomberg Television. The bil-
lionaire has funded the Schwarzman Scholars
program—modeled on the Rhodes scholarships—
that sends promising students to study in Beijing.
He’s put up at least $100 million, roughly a fifth
of the funding. Perhaps to forge a closer bond,
HNA has thrown its weight behind Schwarzman’s
program, committing to fly those students around
China and providing a library.
A Blackstone spokeswoman says of the sales to
Chinese buyers that “the vast majority have been
highly successful investments.” HNA did very well
with its Hilton stake, which it has since sold, mak-
ing about $2 billion on its investment. The pub-
lic market stepped in as a willing buyer of the
company’s shares in Hilton Worldwide as well as
in the spinoffs Park Hotels & Resorts and Hilton
Grand Vacations.
Where Blackstone is perhaps most likely to
reenter the picture is as a partner or buyer for
all or part of Anbang’s stake in Strategic Hotels &
Resorts Inc. Initial talks have already been held,
Bloomberg News has reported. A partnership-
type structure would give Anbang some cash now
and the ability to achieve a better outcome for
later sales. Potential buyers might take comfort
in Blackstone’s involvement, since Anbang has
had bigger problems in China than its peers. The
government has accused Wu Xiaohui, the former
chairman, of fraud, and in February it took
temporary control of the insurer.
Bloomberg Businessweek April 30, 2018
Outside the real estate world, Blackstone has
already benefited from Anbang’s misfortunes in
at least one way. A year ago, Iowa-based insurer
Fidelity & Guaranty Life abandoned a deal
with Anbang, in part because it failed to obtain
necessary U.S. regulatory approvals for the trans-
action. That made it possible for a group compris-
ing Blackstone and its affiliated funds to buy the
company for $1.8 billion.
Some market observers believe Blackstone’s
● Blackstone’s “dry
ability to move fast could work to its advantage. powder” for new real
“If you want to get out of an asset quickly, the fast- estate deals
$32b
est buyer is the person you purchased it from,
because they know it better than anybody else,”
says Woody Heller, vice chairman and co-head
of capital markets at property brokerage Savills
Studley. “Blackstone is famously and fabulously
known for making large decisions quickly.” But just
how fast the companies will have to sell is uncer-
tain. Anbang has received a $9.7 billion injection
from the Chinese government.
While it’s not exactly commonplace for
investment firms such as Blackstone to revisit prior
holdings, it does occur. The firm in December
repurchased a 10 percent stake in European
warehouse owner Logicor Ltd., half a year after 27
selling the company to China Investment Corp.
for €12.3 billion ($15 billion). Separately, it pur-
chased Mumbai-based outsourcing company
Intelenet Global Services Pvt. in late 2016, some
five and a half years after it sold its initial stake in
the company.
Other companies that sold real estate to
Chinese groups have a chance to retrace their foot-
steps, too. Perhaps Brookfield Property Partners
LP could once again own a share of 245 Park Ave.,
the New York office tower that HNA bought for an
eye-popping $2.2 billion last March. That deal is
just one of many examples of HNA far outbidding
sophisticated longtime investors. The company
reached on price to prove its credibility within
the U.S. market.
A key unanswered question is how low Chinese
companies such as HNA and Anbang will be will-
ing to go as they sell real estate holdings. The
prospect of deep bargains may draw Blackstone
in, but to date it’s played only a minor role. It has
bought from HNA a small office tower in Sydney—
one that it didn’t previously own. All eyes in the
real estate world are on whether Blackstone will
veer from this quiet approach. �Gillian Tan and
Sarah Mulholland, with Amanda L. Gordon
THE BOTTOM LINE Blackstone was especially successful in
working with Chinese dealmakers when they were on the way up.
And it may be well-placed to benefit as they’re pressured to sell.
 ◼ FINANCE
A Global City Freezes Out
Same-Sex Spouses
● Banks urge Hong Kong to change its stance on long-term visas
When Patrick Sinclair and his husband, Marty
Forth, moved to Hong Kong, they took a step back
in time. Hong Kong doesn’t recognize same-sex
marriage or civil partnerships. That meant Sinclair,
a former assistant U.S. attorney in New York who
was joining a multinational law firm, couldn’t
sponsor Forth for the visa that opposite-sex
spouses typically receive. Instead, Forth entered
Hong Kong as a visitor and had to make cross-
border trips to avoid overstaying his short-term
visa. He also couldn’t get a job or join a business,
according to Immigration Department rules for
visitors. “There’s an emotional toll to it,” Forth
says. “You’re not counted. You’re not included.”
28 As they fight against their second-class status,
LGBT people in Hong Kong have allies in the city’s
crucial financial sector. Goldman Sachs Group,
BlackRock, and Deutsche Bank are among 15
financial institutions that have filed an applica-
tion with the city’s high court in a landmark case
on LGBT rights, according to a statement released
on April 12 by Davis Polk & Wardwell, the law firm
representing them and where Sinclair is a partner.
(He isn’t working on the case.) The companies are
supporting a British woman who sued after being
denied a visa as a dependent of her same-sex civil
partner. She won a court ruling in her favor, but
the government is appealing it.
It’s not just faraway places in the West that
are extending marriage rights: Australia legalized
same-sex marriage in December, and Taiwan’s
constitutional court last year gave lawmakers a
2019 deadline to do the same. Hong Kong is at
risk of falling behind, says Steven Chan, a manag-
ing director at State Street Corp., another mem-
ber of the group. “To retain its competitiveness,
Hong Kong really needs to create a diverse, open
society, and that means including equal rights and
protection for LGBT people.”
Hong Kong promotes itself as “Asia’s World
City,” a multicultural business and financial
center. But as marriage equality wins acceptance
elsewhere, the city’s unwillingness to recognize
same-sex couples jeopardizes that position. LGBT
Bloomberg Businessweek April 30, 2018
people and their allies are making slow progress ● Top Global Financial
Centers*
in the wider Hong Kong population. A 2016 report Where same-sex
sponsored by the city’s Equal Opportunities marriage is legal
Commission said LGBT people reported extensive 1 London
discrimination, in settings ranging from the work- 2 New York
place to housing to restaurants. The same report 3 Hong Kong
also found 56 percent of survey respondents sup- 4 Singapore
ported anti-discrimination legislation on the basis 5 Tokyo
of sexual orientation, gender identity, and inter- 6 Shanghai
sex status, almost twice the level of support as a 7 Toronto
decade earlier. 8 San Francisco
Global financial institutions have sponsored 9 Sydney
LGBT networking events and ally groups in Hong 10 Boston
Kong, as well as the annual Pride Parade. The
big banks argue that the government’s stance
on marriage equality complicates their ability to
operate in Hong Kong. “We’re a global organiza-
tion that moves talent around the world,” says
Bruce Larson, head of human capital manage-
PHOTOGRAPH: AMANDA GORDON/BLOOMBERG. *CITIES RANKED BY MEASURES OF BUSINESS ENVIRONMENT, HUMAN CAPITAL, INFRASTRUCTURE,
ment in the Asia-Pacific region for Goldman Sachs.
“Limiting our access to the best talent is not in our
best interest.”
The lack of equality drives some people away
from the city. Cotter Christian, who was a pro-
fessor at the Savannah College of Art and Design,
transferred to the school’s Hong Kong campus in
2013. His husband, Josh Erdman, had owned a bak-
FINANCIAL-SECTOR DEVELOPMENT, AND REPUTATION. DATA: GLOBAL FINANCIAL CENTRES INDEX, ILGA
ery in Georgia but with just a tourist visa couldn’t
get regular work in Hong Kong. Within three years,
the couple left for New York, and Christian says he
would recommend gay couples think twice about
accepting a transfer to Hong Kong and having their
marriages snubbed. “Because we now know what
we can have, why would we go somewhere where
we’re giving that up?” he says.
“Our society is divided,” says Regina Ip, a rep-
resentative in the legislature and a member of
Chief Executive Carrie Lam’s top advisory body,
the Executive Council. “There are some bastions
of conservative opinion, but I think the younger
and well-educated sectors are aware of the global
changes taking place.” Unlike most other politi-
cians aligned with the government, Ip is a vocal
supporter of LGBT rights. The government as
◼ FINANCE
a whole isn’t budging on legalizing same-sex
marriage. “I’m afraid for the time being, this
remains a highly sensitive and controversial
subject,” Lam said at a conference hosted by
Bloomberg in Hong Kong on April 11.
Outside pressure has spurred changes in the
past: After talks with representatives of foreign
governments, Hong Kong in 2016 began allow-
ing same-sex spouses and partners of consular
officials to stay in the city. For now, the best most
other same-sex couples can get is a longer exten-
sion of the visitor visa. For instance, instead of
the usual three-month visa, Forth got six months
after he and Sinclair presented proof of their
relationship, including statements of their joint
bank account in the U.S. and pictures from their
wedding. “That’s when you start to get annoyed,”
Forth says. “They are doing the work to check,
but the government is not willing to say that it’s
acceptable.” Each application for a visitor’s visa
“is determined on its individual merits,” according
to the Immigration Department’s website.
After about 18 months on what he calls “the gay
visa,” Forth enrolled in a doctoral program at the
University of Hong Kong’s department of social
work and social administration and now has a
longer-term visa. “We knew there were going to be
difficulties but were confident we would be able
to work them out,” Sinclair says. “We are incred-
ibly fortunate. For others, it’s a totally different
environment.” �Bruce Einhorn
THE BOTTOM LINE A court in Hong Kong has ruled in favor of a
woman seeking a visa as a dependent of her same-sex partner, but
the government is appealing.
A Hedge Fund That
Eats Its Losses
● John Paulson offers to protect investors from
his mistakes—in exchange for a steeper fee
Billionaire hedge fund manager John Paulson,
famous for his winning bet against subprime
mortgages before the financial crisis, has been
having a rough time. After a stretch of poor per-
formance, many of his clients have fled. His firm’s
assets have shrunk to about $9 billion from $38 bil-
lion in 2011. Now he’s embarked on a strategy that
could attract investors and generate big fees but
Bloomberg Businessweek April 30, 2018
puts more of his own money on the line.
Paulson & Co. signed up last year with the three
leading providers of so-called first-loss funds,
according to a March regulatory filing. In a first-
loss fund, managers such as Paulson put their own
money into an account, then first-loss firms contrib- “The
ute nine times as much from their investors. If the downside,
trades Paulson makes with that money pay off, he if you do
gets to keep about 55 percent of the profits. That’s poorly, is
more than double the typical 20 percent hedge fund disastrous”
cut. But should things go awry, all the losses come
out of Paulson’s stake, until it’s gone. Only after that
money is depleted can the other investors take a hit.
In essence, Paulson is making a leveraged bet on
his own skill. “The upside, if you do well, is good,”
says Karl Cole-Frieman, whose law firm advises
hedge funds. “The downside, if you do poorly, is
disastrous.” Paulson declined to comment.
First-loss funds were pioneered by TopWater
Capital, based in Norwalk, Conn., one of the firms
Paulson & Co. is working with. The other two
are Prelude Capital Management and Boothbay
Fund Management. First-loss funds traditionally
appealed to startup money managers who lacked
the track record and name recognition to attract big
institutional investors. Now they’re signing up vet- 29
eran managers, many of whom are under pressure
to lower fees as investors flock to cheaper index
funds. First-loss accounts offer a way to pay the bills
for firms that have lost fee-paying clients.
Institutional investors such as pensions like first-
loss funds because they promise steady returns
with little downside. “If someone is willing to
take the loss on the first 10 percent, it makes the
other 90 percent far less risky,” says Keith Danko,
the managing member of Witherspoon Partners,
a consultant to hedge funds. While first-loss fund
providers and their investors supply most of the
money for these vehicles, they almost never lose
any, because they can shut down an account when
most of the hedge fund manager’s capital is gone.
“Believe me, Prelude and Topwater never get a
loss,” Cole-Frieman says.
Managers in first-loss funds tend to take a low-
volatility approach. Paulson is managing his first-loss
accounts using the same strategy as his Paulson Pure ● Paulson
Spread fund, which makes bets based on announced
corporate mergers. Pure Spread returned 12 percent
last year. The Paulson Partners fund, which pursues
a riskier strategy that bets on potential mergers as
well as announced ones, has suffered heavy losses
in the past several years. �Miles Weiss
THE BOTTOM LINE Want to bet on famous hedge fund managers
but aren’t sure you can handle the risk? First-loss funds offer to
take some of the pain away.
 CONTENTS ● What’s holding up a

4
new Nafta deal?

E Cyprus Is
C For Sale. $80b

O Guess
N Who’s
O Buying
M ● The Mediterranean nation is throwing
open the gates to Chinese money, Beijing cracks down on

I
30 overseas investment by

while Germany and France build barriers Chinese companies

40

C Value of Chinese acquisitions

S
of European companies,
by home nation of target

◼ Germany
◼ Italy
◼ Switzerland
◼ U.K.
◼ Other *THROUGH MARCH 31. DATA: COMPILED BY BLOOMBERG

April 30, 2018

Edited by 0
Cristina Lindblad

Businessweek.com 2008 2018*

 ◼ ECONOMICS
The heavy scent of citrus blossom hung outside the
Hilton Park hotel in Nicosia, Cyprus, where about
100 small-business owners, lawyers, accountants,
and their partners packed into the ballroom to mark
the Chinese New Year. Guests were treated to a fan
dance and a performance by drummers clad in red
silk costumes. But the symbolism went far beyond
celebrating the Year of the Dog’s arrival: This was
about cementing a burgeoning relationship between
two unlikely partners.
One is an increasingly assertive global power-
house of 1.4 billion people, the other an island
nation of 1.2 million that boasts a strategic location
and a reputation for a no-questions-asked approach
to financial affairs. That makes for a compelling
match as China seeks to expand its footprint inside
the European Union. “We have [Chinese] invest-
ments right across all sectors of the economy,”
Christodoulos Angastiniotis, president of the Cyprus
Chamber of Commerce and Industry, said before
joining the other guests to hear speeches extolling
the excellent state of China-Cyprus relations.
As President Trump builds barriers to Chinese
trade, Cyprus is throwing open the gates. The
Mediterranean country’s stance is also at odds
with those of some of the EU’s bigger economies.
Alarmed by China’s appetite for acquisitions, some
governments are becoming more assertive in vet-
ting deals.
Bloomberg has undertaken the most comprehen-
sive audit to date of China’s presence in Europe. It
shows that China has bought or invested in assets
amounting to at least $318 billion over the past 10
years. The Continent saw roughly 45 percent more
China-related activity than the U.S. during this
period, in dollar terms.
Few countries can afford to shun investment
from China, with its $11 trillion state-run economy.
This is especially true for Cyprus, which has a per
capita gross domestic product of $27,000, a little
over half that of Germany. It may not be imme-
diately visible, but Chinese money is everywhere
on the Mediterranean island, from real estate to
shipping, financial services, tourism, and renew-
able energy. The only exceptions may be olive oil
and halloumi cheese, though these are now being
*THROUGH MARCH 31. DATA: COMPILED BY BLOOMBERG
exported to China.
At the event in Nicosia, Chinese Ambassador
Huang Xingyuan spoke of the “huge potential”
offered by China’s Belt and Road initiative to
double bilateral trade to more than $1 billion—
equivalent to about 5 percent of Cyprus’s annual
economic output.
Lawrence Ho, billionaire owner of Hong Kong-
based Melco Resorts & Entertainment Ltd., visited
Bloomberg Businessweek April 30, 2018
Cyprus in January to lay out his plans for what’s
● European industries
being billed as Europe’s biggest integrated casino with the largest volume
resort, a $670 million project. China’s JimChang of Chinese investments,
2008-18*
Global Group is investing €100 million ($122.4
million) in a five-star hotel and housing devel-
opment near Ayia Napa via a joint venture with
Cyprus property group Giovani. And at Larnaca,
home of Cyprus’s main airport, state-owned China Chemicals
$49b
Communications Construction Group Ltd. is one
of two bidders shortlisted to take control of the
port and adjacent marina. There are also plans to
start direct flights to Beijing after Cypriot airline
Cobalt Air received a capital injection from Aviation
Industry Corp. of China. Writing in the Cyprus Mail, Traditional
an English-language daily, at the end of March, energy
$26b
Ambassador Huang placed all this activity firmly
in the orbit of the Belt and Road initiative, citing the
economic opportunities it opens to all, “regardless
of their size and wealth.”
Standing at the crossroads of Europe, Africa, and Property
$22b
the Middle East, Cyprus has fallen under Greek,
Byzantine, Ottoman, and British influence through
the centuries. More recently, it became the des-
tination of choice for Russian money before the
European debt crisis forced the Cypriot government Mining
$22b
to take an international bailout in 2013. The econ- 31
omy has yet to return to its size before the crisis.
Part of Cyprus’s pitch is that the island has
a European legal and institutional framework Internet/
that’s familiar to Chinese investors from Hong software
Kong, says Christos Scordis, a partner at Scordis, $15b
Papapetrou & Co., whose clients include Melco. It
also has that geographical advantage. “Cyprus is
the first European port as you exit the Suez Canal Automotive
and enter European waters,” says Scordis, who $15b
recently organized a seminar in Beijing on doing
business in Cyprus. “China tends to see Cyprus
as a gateway.”
Finance
One person’s gateway is another’s back door, $14b
according to recent reports on the nature of China’s
involvement in Europe. The most comprehensive,
called China at the Gates, by the European Council
on Foreign Relations (ECFR), asserted that Beijing is
trying to divide the EU to further its interests. China,
it said, “seized the opportunity of the euro crisis for
massive takeovers in southern Europe,” where the
economies were most ravaged.
German Chancellor Angela Merkel and French
President Emmanuel Macron have argued that “China tends to
China should not be allowed to take advantage of see Cyprus as
Europe’s open economy while it maintains barriers a gateway”
to foreign investment at home. They back EU moves
to tighten screening of investments from China.
The wake-up call for Germany was the $4.5 bil-
lion acquisition of robot maker Kuka AG by
 ◼ ECONOMICS

Trade
China’s Midea Group Co. in 2016. More recently,
Chinese billionaire Li Shufu’s purchase of a $9 bil- The clock is running out on Nafta talks.
lion stake in Mercedes-Benz parent Daimler AG has Mexico will hold presidential elections
stoked government concerns that the balance of
national interests is now weighted in China’s favor. in July. And with the midterms looming
Berlin is faced with China getting its hands on in the U.S., the White House is under
“the jewels in the crown of German industry,” says
François Godement, the Paris-based director of
pressure to clinch a deal in time to get
the Asia program at the ECFR and the report’s lead it approved by the current Congress.
author. The risk for smaller EU economies such as That’s brought fresh urgency to the
Cyprus “is more about actual influence and lobby-
ing rather than dependence.”
process of hammering out a new
Cyprus’s ally Greece has already pivoted to and improved North American Free
China, which bought the country’s government Trade Agreement, which got under
bonds during the debt crisis. In recent years,
Chinese investors also have acquired control of
way last August. “My negotiating team
the port of Piraeus, along with a major stake in the is practically living in Washington,”
national power grid. Last year, Greece blocked an Mexico’s economy secretary, Ildefonso
EU statement at the United Nations that was criti-
cal of human rights in China. Guajardo, said recently. Despite
Lying adjacent to Turkey, Lebanon, Syria, and assurances from all parties that there’s
Israel, Cyprus has long been on the front line of
been progress over the past several
geopolitical power plays. Turkish forces invaded
the northern part of the island in 1974 and UN months, there are still some major
troops still patrol the buffer zone that bisects the sticking points. Here’s the state of play
country. Later it was Russians fleeing the Soviet
32
Union who began arriving in numbers, lured by
on five. �Josh Wingrove
the sun, the taxes and, latterly, the chance to pro-
cure an EU passport in exchange for an investment ① The Sum of a Car’s Parts
of €2 million in a Cypriot business or real estate.
The same winning combination is now drawing
wealthy Chinese. While just a few hundred strong, Mexico has emerged as an their initial proposal of 85 per-
the fledgling Chinese community in Cyprus is automaking powerhouse with- cent). The U.S. also wants to
making its presence felt on an island that takes in Nafta, with monthly exports expand the “tracing list” of
barely two hours to traverse by car. Many of those to the U.S. averaging $2.6 bil- components whose origin is
arriving have settled in Paphos, where Greek leg- lion in finished vehicles and tracked. Canada and Mexico
end has it that Aphrodite emerged from the sea. $4.3 billion in parts over the warn that the U.S. proposals
On the coastal road, ostentatious villas occupy past five years. Under current are too much, too fast. Some
the hills overlooking the city. Billboards advertis- rules, at least 62.5 percent of a manufacturers indicate that
ing prime property line the highway, in English, car must be sourced from the they would prefer to start
Russian—and now Chinese. three Nafta countries for it to paying U.S. tariffs—which
Panicos Kaouris, president of the Cyprus China be tariff-free. U.S. negotiators are relatively low—rather
Business Association, shrugs off concerns that the have said they want to raise than having to remap their
onetime British territory may wind up becoming that to 75 percent (down from supply chains.
a client state of China. Cyprus is small and open,
and its people are survivors, so why not wel- Mexican vehicle exports
come the new wave and make some money along 3.0m

the way? “There’s an ocean of investments from

China,” he says. “We would be drowned with just
a drop of that.” �Alan Crawford, with Georgios 1.5

Georgiou, Paul Tugwell, Keith Zhai, Peter Levring,

Francine Lacqua, Richard Bravo, and Andre Tartar
0
THE BOTTOM LINE China’s footprint in Europe is expanding, with 1998 2017
$318 billion in acquisitions over the past decade. A spate of recent
deals in Cyprus indicates that geopolitics matter as much as profits.
 Nafta’s Points of Contention
② Contract Sizes Matter ③ Berries and Cream—and Chicken

The U.S. is seeking the gradual phaseout of Canada’s

supply management system, a mix of quotas and tariffs
used to protect local producers of dairy and poultry.
“Canada has made business for our dairy farmers
in Wisconsin and other border states very difficult,”
tweeted Trump last year, taking up the call of those
who blame the system for a slump in exports of certain
milk products. Mexico has fought back against U.S.
efforts to set up a mechanism to limit its exports of
farm products such as berries and asparagus.

Canadian imports of U.S. milk protein substances annually, in kilograms

50m

Mexico and the U.S. are at loggerheads over

government procurement rules. After the U.S. proposed
curtailing Mexican and Canadian companies’ access
25
to its public projects, Mexico hit back with a plan
that would cap the value of government contracts
awarded to American corporations at the same amount
that Mexican businesses get in the U.S. American
0
companies likely would lose out, since they do more
government business in Mexico than vice versa. 2013 2017 33

④ How to Deal With Dumping ⑤ An Expiration Date?

The U.S. wants to add a sunset clause to a revised

Nafta that would allow the pact to expire after five
years unless the three trade partners agreed to
extend it. Businesses warn that such a move would
create uncertainty and deter long-term investments.

DATA: ASOCIACION MEXICANA DE LA INDUSTRIA AUTOMOTRIZ; STATISTICS CANADA; ILLUSTRATIONS BY NEJC PRAH
Negotiators may settle on some kind of nonbinding
periodic review. Nafta already has an exit clause: Any
country can quit with six months’ notice.

Two Nafta provisions for settling disputes are under

fire. One established “Chapter 19” panels to review
complaints of dumping, which in trade-speak means
flooding another country with an underpriced prod-
uct. Canadian Prime Minister Justin Trudeau calls the
panels “essential”; Trump wants them gone. Washing-
ton is also taking aim at a mechanism for dealing with
disagreements between a government and a company.
U.S. negotiators have proposed making that system
optional, a change American businesses oppose.
Canada and Mexico have said they’d strike a side deal
to preserve it if necessary.
 CONTENTS ● Saudi Arabia’s stateside ● Concerns over election
5
charm offensive meddling? Call in the
National Guard. Seriously
P
O
L
I Sowing the
T
I
Seeds of a
34
C Midterm Dis
S
Supporters of Donald Trump don’t come much
stronger than Republican Representative Steve King
of Iowa and his constituents in the sprawling 4th
Congressional District. Stretching across the north-
west quarter of the state, the rural district lies in
the heart of farm country and went for Trump by
27 points. “We’re the No. 1 agriculture-producing
congressional district in all of America,” says King,
“the flagship for districts across the country.”
Farm districts such as King’s put Trump in the
White House and are the backbone of the GOP
majorities in Congress. They’re also uniquely posi-
tioned to suffer from a trade war with China. In early
April, responding to Trump’s proposed $50 billion
in tariffs on Chinese goods, China announced or
implemented retaliatory levies on roughly $50 bil-
April 30, 2018
lion in U.S. exports, including wheat, corn, cotton,
Edited by sorghum, tobacco, and soybeans—a direct strike at
Matthew Philips
the deep-red, Trump-friendly heartland.
Businessweek.com It’s also a strike at the Trump voters the GOP is
● The resources Michael
Cohen can marshal for a
legal defense
depending on to show up in November. According to
data compiled by Bloomberg measuring which U.S.
congressional districts rely most on soybeans for
economic activity, far more GOP than Democratic
districts will suffer, with King’s atop the list. But
party affiliation alone doesn’t capture the extent to
which Trump voters stand to be hurt: Of the 30 dis-
tricts most reliant on soybeans, Republicans rep-
resent 25 and Democrats 5; all voted for Trump in
2016. “It’s like he’s microtargeting policy to screw his
own supporters,” says a frustrated GOP strategist.
While the president’s campaign-trail broadsides
against China were a hit with voters in the Rust Belt,
they may boomerang on Farm Belt lawmakers such
as King. China is the largest importer of soybeans
and many other commodities. “There’s a tremen-
dous amount of concern on soybeans and a number
of other ag products, too,” says King, whose district
has 18,000 soybean farms. “Our grain prices right
now are a little more than half what they were at
 ◼ POLITICS
aster
their peak 10 years ago. In my neighborhood, to take
a hit in a trade war on top of the depressed commod-
ities prices, it just sends a chill down your spine.”
After China imposed a 179 percent duty on U.S.
sorghum on April 17, China-bound ships laden
with U.S. sorghum turned around mid-sea. China
accounted for some 80 percent of U.S. sorghum
exports last year. “There’s been very little trade”
PHOTOGRAPH BY CHRISTINE CARR FOR BLOOMBERG BUSINESSWEEK
since mid-April, says Bob Ludington, an executive
at Scoular Co., an Omaha grain-handling company.
The collapse of U.S. sorghum exports to China hit
another red state, Kansas, the largest U.S. producer.
“We knew this was hanging over our heads,” says
Kurt Winter, a sorghum farmer in Sedgwick County,
just outside Wichita. “When we heard the news, it
was still just devastating to us. It’s really going to put
the hammer to our price prospects.”
Beyond the human toll, a trade war would be
politically ominous for Republicans. Midwest farm
states will host many of this fall’s tightest races for
Bloomberg Businessweek April 30, 2018
● Chinese tariffs make farm-state
Republicans nervous and threaten
the GOP’s grip on Congress
35
Senate (Missouri, Indiana, North Dakota) and gover-
nor (Ohio, Michigan, Iowa, Minnesota). “The farm
community is a pretty powerful voting bloc,” says
Jennifer Duffy, who tracks Senate and gubernatorial
races for the nonpartisan Cook Political Report. “If
they’re unhappy, they turn out in big numbers and
can really change things in a hurry.”
That could imperil Republicans’ hold on power,
especially if Trump voters don’t bother going to the
polls in November, when Trump won’t be on the
ticket. “Republican candidates face serious head-
winds this year, and this trade war has the potential
to make it much, much worse,” says Michael Steel, a
GOP strategist and former top aide to House Speaker
John Boehner. “It’s just a terrible, counterproductive
idea, both economically and politically.”
Much of the economic damage from a trade war
would be inflicted on red states and districts where
Democrats aren’t competitive. Despite Iowans’ anx-
iety about soybean tariffs, political forecasters
 ◼ POLITICS Bloomberg Businessweek April 30, 2018

consider King a shoo-in for reelection. The same Seeing Red Over Chinese Tariffs
is true for Representative Roger Marshall, whose Soy elevators by congressional district
Kansas district is known as “The Big First” for its
5 Democratic-controlled districts
ample farm acreage and will be hardest hit by the 25 Republican-controlled districts
new sorghum tariffs. In 2016, Marshall’s constituents 10 100+
voted for Trump over Hillary Clinton by 45 points.
In districts like these, lawmakers hoping to mit-
igate the economic damage Trump’s confronta-
tion with China could inflict on constituents may
be forced to do something Republicans have been
reluctant to do: confront their own president. On
April 12 a group of farm-state Republicans met with
Trump to express their concerns, though many
emerged doubtful of the president’s claim that
farmers will “do fantastically well” in trade negoti-
ations. Nebraska Senator Ben Sasse called Trump’s
approach “nuts,” while Kansas Senator Pat Roberts
reminded the president of looming midterms.
“What you don’t want to do is hurt the folks who
brought you to the dance,” Roberts said afterward.
King knows what that might look like. In 1980,
DATA: DTN, U.S. CENSUS BUREAU
Jimmy Carter halted grain shipments to Russia to
protest the Soviet invasion of Afghanistan, causing that “trade wars are good, and easy to win.” Over
a price collapse that sparked the farm crisis. “The Easter vacation, King traveled across his district
markets fell off the table immediately, and we went meeting with farmers and others alarmed at the
36 into an economic tailspin,” says King, whose con- economic threat Trump has stirred up. “They’re
struction company almost went bankrupt. “There uneasy, they’re edgy, and some of us see through
was nobody to sell to. You couldn’t get money. I the looking glass into a world we don’t want to see
went to farm sale after farm sale and saw families again,” says King. “Nobody out there is saying, ‘This
watching their life’s work be sold off for pennies is going to work out great for us.’ ” �Joshua Green,
on the dollar—mom and kids standing there crying, with Alan Bjerga and Shruti Singh
loaded up like the Clampetts heading out of town.”
THE BOTTOM LINE Chinese tariffs on a host of U.S. agricultural
His constituents remember the farm crisis, too. products could spell trouble for farm-state Republican candidates
Few agree with Trump’s claim in a March 2 tweet in this year’s midterm elections.

The Kingdom Reboots the Charm

● After a number of diplomatic defeats, the Saudis rebrand with fresh faces in Washington
PHOTOGRAPHS FROM TOP: REUTERS; AP PHOTO; ZUMA PRESS

For more than two decades, Prince Bandar bin
Sultan was Saudi Arabia’s man in Washington, a
fighter pilot-turned-ambassador who’s a charismatic
entertainer, storyteller, and close friend of the Bush
family. After resigning in 2005, Bandar held a series
of positions in Riyadh before fading from public
life. Now in his late 60s, he’s rarely seen at events.
Rumors swirled in Riyadh that he—along with other
ex-power brokers—was now on the outside in Crown
Prince Mohammed bin Salman’s new Saudi Arabia.
So when the Saudis held a gala in Washington
to celebrate Prince Mohammed’s U.S. visit, the sur-
prise of the night was that Bandar not only came but
was feted. Before a lineup including Senator Lindsey
Graham and former Vice President Dick Cheney, he
gave a nostalgic speech about his D.C. days and the
relationship between the U.S. and Saudi Arabia—now
effectively led by 32-year-old Prince Mohammed.
“The crown prince embodies youthful energy,
which I lack,” Bandar quipped to laughter.
◼ POLITICS
At a nearby table was the kingdom’s new ambas-
sador, 30-year-old Prince Khalid bin Salman—the
younger brother of Prince Mohammed (known as
MBS) and, like Prince Bandar, a former fighter pilot.
Khalid is part of a new generation of Saudis who
have moved to Washington to revamp the kingdom’s
reputation and rebuild its relationship with the U.S.
Their job is harder than Bandar’s ever was. “It
used to be that you would have a conversation with
the political leadership in Saudi Arabia, and they
would say, ‘Oh, we spoke to the secretary of state
and the national security adviser, and that should
take care of it,’ ” says Hady Amr, who was a senior
diplomat in the Obama administration. Those rela-
tionships were strained over the years, first by a shift
in public opinion after the attacks of Sept. 11, then
by policies that reduced the U.S. role in the region.
“After 9/11, the public space went sour on Saudi
Arabia,” says Ali Shihabi, an ex-banker who came
to Washington in January 2017 to set up a pro-Saudi
think tank called the Arabia Foundation. After a
close though complicated relationship with the
Bush administration, the Saudis felt sidelined, and
in some cases targeted, by policies under President
Obama. They lobbied against the Iran nuclear deal
and a bill, passed by Congress in 2016, that let family
members of the victims of Sept. 11 sue Saudi Arabia.
Foreign Minister Adel al-Jubeir, himself a former
envoy to Washington, camped out in town for weeks
in an unsuccessful attempt to change the law.
According to filings with the Department of
Justice under the Foreign Agents Registration Act,
the kingdom spent at least $7.5 million lobbying
against the 9/11 law. They brought American vet-
erans to D.C. to tell members of congress that the
law would put U.S. soldiers in harm’s way. The tab
included $270,000 spent at the Trump International
Hotel for lodging and other expenses. None of it
worked. The vote in favor of the bill, and the subse-
quent lawsuits that have moved forward, served as
a wake-up call to Saudi leaders. “It was a slap in the
face that all the lobbyists and all the personal rela-
tionships” were ineffective, says Shihabi.
It didn’t help that after Bandar, the kingdom had
three ambassadors in 10 years. The Saudis ended up
outsourcing much of their work in D.C. to the U.A.E.
ambassador, Yousef al-Otaiba, and his boss, Abu
Dhabi Crown Prince Sheikh Mohammed bin Zayed,
a close Saudi ally. With the April 2017 appointment
of Prince Khalid as ambassador, the Saudis started
taking charge of their lobbying efforts again.
Khalid is MBS’s full brother and is thought to be
among his most-trusted relatives. Khalid speaks flu-
ent English and flew missions against Islamic State
and over Yemen as part of the Saudi-led war there.
Bloomberg Businessweek April 30, 2018
“His job above all is to reinvigorate the relation-
ship between the kingdom and the U.S. across the
board,” says a senior Saudi embassy official.
In his most striking act as ambassador, last fall
Khalid announced that the kingdom was ending its
decades-long ban on women driving. Tellingly, it
was made in the afternoon in Washington, which
was the middle of the night in Riyadh. “We are not
Westernizing or Easternizing—we are modernizing,”
Khalid said in English. The news coincided with the
appointment of the embassy’s first spokeswoman,
Fatimah Baeshen. Raised in Mississippi, with a
Southern accent and a master’s from the University
of Chicago, Baeshen came to D.C. in 2017 to work
at Shihabi’s Arabia Foundation, writing pro-Saudi
reports and research.
The Saudis have also found friends in the Trump
White House. MBS has become close to Jared
Kushner, and he’s been embraced by Trump, who
went to Saudi Arabia for his first foreign trip in May ● Shihabi
2017. For much of Trump’s first year, the Saudis
were emboldened, particularly last June when they
embargoed Qatar and accused it of being too close
to Iran. The move caused a rift in the White House,
as then-Secretary of State Rex Tillerson scrambled to
assure Qatar of America’s continued support. Trump 37
has since appeared to recalibrate, hosting Qatar’s
Emir Tamim bin Hamad Al Thani in the Oval Office
and praising the country for its anti-terror stance.
The rise of MBS has created image problems of its
own. He’s the driving force behind the war in Yemen ● Baeshen
and the arrest of dozens of domestic critics. He also
jailed hundreds of Saudi elites in what he called an
anticorruption campaign, releasing most after they
agreed to financial settlements.
To manage their brand, the Saudis still rely on a
contingent of lobbyists in Washington, though they
have cut ties with some since MBS began his ascent.
The senior embassy official acknowledges that
while American lobbyists and consultants still have
a role, the new emphasis is to make Saudis the face
of any D.C. campaign. “Saudis talking about Saudis ● Prince Khalid
is always going to be much more effective than hav-
ing an American consultant speaking on our behalf.”
The Saudis have also, in a way, returned to
Bandar. His daughter, Princess Reema, has emerged
as a key player in the reputational revamp. She trav-
eled to the U.S. in March. In January she went to
Davos, where a clip of her defending Saudi Arabia
went viral. “There is a determination to not allow us
to create a new narrative,” she said. “And my ques-
tion is, why?” �Vivian Nereim and Bill Allison
THE BOTTOM LINE Saudi Arabia is rethinking its lobbying strategy
in Washington, starting with its new ambassador, Prince Khalid, an
ex-fighter pilot who’s flown bombing missions against Islamic State.
 ◼ POLITICS
Election Hacking?
Call in the National Guard
When floods swept through West Virginia polling
places during the 2012 presidential election, the
National Guard came to the rescue with tents and
generators. For the state’s congressional primaries
in May, the Guard will be on the lookout for another
potential disaster: Russian interference. West
Virginia’s top election official, Republican Secretary
of State Mac Warner, has embedded a member of
the Air National Guard in his office to scour election
networks. Short on funds and expertise, a number
of his counterparts across the country are also tap-
ping the Guard to bolster their cybersecurity before
November’s midterms.
The federal budget that Congress just passed
includes $380 million that states can use for election
security. Yet that’s not enough to cover basic secu-
rity expenses and to replace old voting machines.
38 For example, Louisiana is set to receive $5.8 million
in federal funds, yet state officials estimate they
need $40 million to $60 million to update their vot-
ing technology. States need all the help they can get,
and while some election officials are wary of federal
overreach, the Guard gives them access to services
they see as in-house assets they control.
The threat is certainly real: U.S. intelligence chiefs
warn that Russia could repeat its election meddling
this November. The decision to seek expertise from
the Guard seems unexpected—but not to everyone.
Best known for responding to hurricanes and tor-
nadoes with so-called weekend warriors, the Guard
has been building its cyberdefense expertise, in part
with volunteers whose day jobs involve advanced
technology. By next year, it aims to have cyber
units in 38 states, with some 3,800 soldiers and air-
men. In testimony to the House Appropriations
Committee in April, General Joseph Lengyel, chief
of the Pentagon’s National Guard Bureau, said he’s
seeing a growing demand from state governments
to use the Guard for election security.
There’s a lot of work to do. The Arkansas National
Guard, for instance, says the state doesn’t have an
operational cyber team yet. The Department of
Defense has failed to maintain a required “data-
base that identifies the National Guard units’ cyber-
related emergency response capabilities,” according
to a September 2016 report by the Government
Accountability Office. A 2017 Rand Corp. report
Bloomberg Businessweek April 30, 2018
● Stacking sandbags
is one thing. Can
part-time soldiers
protect states from
cyberattacks?
estimated that the Army National Guard and U.S.
Army Reserve have more than 100,000 people
with some cyber competence—though that num-
ber represents everything from basic information
technology know-how to units specifically trained
in cybersecurity. “The National Guard needs to be
ready to respond to a wide variety of disasters,” says
Maurice Turner, senior technologist at the Center for
Democracy and Technology in Washington. “So get-
ting them on board and developing a response to an
election disaster is new territory.”
But the Guard has one inarguable benefit for
states: It’s available quickly. By law, the federal gov-
ernment can deploy the Army and Air National
Guard in U.S. missions overseas. Governors can
oversee Guard soldiers who help out with large
disasters such as hurricanes, while the feds pay
for it. State-level cyber assistance falls under “state
active duty” status, meaning that states foot the bill
and control the forces.
West Virginia’s Warner, an Army veteran who
later worked as a contractor in Afghanistan, says the
Guard airman who’s poring over his election net-
works brings another key asset to the task: a security
clearance. One of the main frustrations of state elec-
tion officials looking to thwart cyberthreats is that it
can take months if not years to get federal security
clearance. Warner wanted a faster way to get classi-
fied information from federal sources, so his office
ILLUSTRATION BY BRANDON CELI
◼ POLITICS

Wealth Michael Cohen

plucked the airman from the Guard in September
and agreed to cover his salary as the state gears up As the subject of a federal criminal investigation, Cohen, Donald
for its May 8 primary elections. Russian election Trump’s lawyer, could face a lengthy legal battle if charges are
meddling is a “form of information warfare,” Warner brought—one that could cost millions to fight. Here’s a look at
says. “You’ve got to think outside the box and fight his major holdings. �Caleb Melby and Shahien Nasiripour
technology with technology.”
The National Guard Bureau doesn’t keep track
of how state units are helping with election secu-
Taxi Medallions
rity. But a quick, rough survey shows some of what’s
under way. In Colorado, Guard soldiers with cyber- Cohen and his wife own Median sale price of
security backgrounds will help monitor networks 54 taxi medallions in Chicago a Chicago medallion
on Election Day, says Trevor Timmons, chief infor- and New York City. Ride-
mation officer for the secretary of state’s office in sharing services have caused $357k
3/2013
Denver. In Rhode Island, during a special election the value of Cohen’s 32 NYC
in January, the Guard did a vulnerability assess- medallions to drop from
ment of the state’s new electronic poll book system about $1 million each to as
that contains voter lists and reviewed the state’s little as $175,000. Loans the
election-management network and voting machines, Cohens took out for the NYC
medallions in 2014, when their
Secretary of State Nellie Gorbea says. In Wisconsin,
value was near record highs,
$35k
the Guard is providing input for an assessment
DATA: CHICAGO
DEPARTMENT OF 3/2018
could squeeze him for cash.
BUSINESS AFFAIRS AND
of election systems under the state’s Homeland CONSUMER PROTECTION

Security Council. Washington state officials say

they’re in talks with Guard officials about how units
could support cyber- and physical security.
Real Estate
Guard experts have already demonstrated their
① 502 Park Ave. ② 330 E. 63rd St.
value in South Carolina, where state officials are apartment 39
still making improvements to their election systems
Central
$22m*
based on Guard assessments from 2016 on voting $5m Park
Investment
Purchase price ① ②
and voter-registration systems as well as physical $6.5m
security in each of the state’s 46 counties. “We con- $2.5m Mortgage
Mortgage
sider them part of our security team,” says Chris $23m
Whitmire, a spokesman for the South Carolina State $8m ③ Estimated value
Estimated value
Election Commission. *Values based on
Cohen’s 38% stake
Duncan Buell, a computer science professor at in the property
the University of South Carolina, reviewed redacted
copies of the Guard’s county-level reports. While
he was encouraged to see the Guard soldiers study- Manhattan ④ 133 Avenue D

ing the counties’ protocols for servers and file $10.5m

Eas

transfers, their work uncovered a lot of problems.

t Ri

Purchase price

$5.5m
ver

“Pretty much every county got really strongly nega- ③ Trump World
tive reports—virtually every county has high vulner- Tower apartment, Mortgage
sold in 2017 for
abilities or critical vulnerabilities across the board” ④ $17m
in the 2016 assessments, says Buell. “They weren’t $3.3m Estimated value

just whitewashing.”
Still, there’s a learning curve for most of these
soldiers, says Lawrence Norden, deputy director
The Takeaway
of the Democracy Program at the Brennan Center
for Justice in New York. “The value of cybersecurity “If you truly believe that you are innocent of the conduct that you
guidance is going to depend on an understanding of are alleged to have committed, then protracted litigation is worth
the mechanics of elections,” he says. “Merely throw- the dwindling assets,” says David Weinstein, a former criminal
ing a bunch of ‘tech’ people at a problem isn’t going defense attorney and federal prosecutor. “If you have a common
to magically secure everything.” �Nafeesa Syeed sense recognition of what you did, and you want to walk away
with some money in the bank, then you’re going to be a little
THE BOTTOM LINE The National Guard plans to have more realistic about the money you want to spend.”
cyberdefense units in 38 states by next year; election officials are
increasingly turning to it for protection.

Security
The Bug
Short
Security researchers can be greedy. So what?
The message came on the morning of March 12
like a warning shot—or, as executives at
Advanced Micro Devices Inc. might have seen
it, a sucker punch.
In an email sent to the general security inbox
maintained by the Santa Clara, Calif., chip-
maker, an executive of a security company
located on the other side of the world claimed
to have discovered 13 critical vulnerabilities in
AMD’s line of chips. The alleged flaws, which
the sender described in detail, could allow
an attacker to get into the most secure part
ILLUSTRATION BY JACK SACHS
+
S
O
L
U
T
I
O
41
of AMD’s chips, where passwords and other
sensitive information are typically stored. Any
network with the faulty AMD processors, the
N
researcher claimed, would be in serious danger.
Under normal circumstances, the note, sent
by CTS Labs, a six-person security startup in
Tel Aviv, would hardly have created an emer-
S
gency for an established chipmaker such as
AMD. Under a practice known as responsible
disclosure, security researchers inform com-
panies of their findings in secret, allowing them
30 to 90 days, depending on the bug’s severity,
to develop a patch before going public with the
findings. A company may pay a modest reward,
known as a bug bounty, if it judges a security
company’s work to be particularly important.
But responsible disclosure is a custom, not a
legal requirement, and one that CTS argues is
unnecessary and outdated. The company’s busi-
ness model involves researching security flaws
at big hardware manufacturers, then peddling
that research to short sellers, who can profit
once the disclosure is public. For the business
model to work, CTS can’t offer its targets grace
April 30, 2018
periods. So instead of 90 days, the company
gave AMD less than 24 hours. Edited by
Dimitra Kessenides
The following day, March 13, CTS went
Businessweek.com
 ◼ SOLUTIONS Bloomberg Businessweek
public with its findings. It issued a news release directing
people to a website, AMDFlaws.com, where it had posted
a description of the vulnerabilities with dystopian-sounding
names—Ryzenfall, Chimera, Masterkey, and Fallout. The
security company had briefed journalists in advance.
The same day, a well-known short seller, Viceroy
Research, published a blistering report titled AMD—The
Obituary, contending that the flaws would force the chip-
maker to file for Chapter 11 protection. AMD’s stock rose
that day, but by early April it was down almost 20 percent.
(Other chip stocks fell during the same period but not as
sharply.) CTS says Viceroy isn’t a client, but it acknowl-
edges having shared its research with other short sellers,
one of whom may have tipped off Viceroy.
CTS’s tactics are unusual—and hugely controversial.
“They’re serious guys in the security industry,” says Nimrod
Ben-Em, the chief executive officer of Viral Security Group,
another Israeli security company, referring to CTS. “But I
don’t want to legitimize their way of acting.” CTS didn’t
make the technical details of the vulnerabilities public, shar-
ing them only with AMD, but Ben-Em says that announc-
ing its findings before a fix was ready was irresponsible.
Even so, trading based on knowledge of an otherwise
undisclosed vulnerability is generally legal, says Joshua
Mitts, a securities law expert at Columbia University, who
42 published an article on the topic in the Harvard Business
Law Review earlier this year. “It’s not insider trading if the
information originates outside the firm.”
The ethics of the CTS disclosure have become a mat-
ter of fierce debate. Critics pilloried the company for pro-
moting the vulnerabilities rather than working quietly
to help fix them. GamersNexus, a hardware trade pub-
lication, described the research as an “assassination
attempt.” And in a social media post, Linus Torvalds, the
creator of the Linux operating system, called the research
“garbage,” adding that “it looks more like stock manipula-
tion than a security advisory to me.”
AMD acknowledges that the vulnerabilities are real but
says CTS exaggerated their impact. Privately, executives
have intimated that CTS acted in bad faith, according to
people familiar with AMD’s thinking. CTS, these people say,
made no phone calls and sent no emails to individual AMD
staffers who typically deal with security issues. The impli-
cation, as far as AMD is concerned, is that CTS had sought
to make a buck by helping investors short the stock rather
than playing the role of the good Samaritan.
CTS’s response: So what? “We’re not doing this out of
the goodness of our heart,” says Chief Financial Officer
Yaron Luk-Zilberman. “We’re doing it because there is a
business here.”
Luk-Zilberman, a veteran of the elite Unit 8200 of the
Israel Defense Forces who previously ran a hedge fund,
started the company with two other ex-Israeli intelligence
officers, his brother, Ilia, and Ido Li On, now CTS CEO. The
April 30, 2018
three men say responsible disclosure comes with its own
ethical limitations—namely, that consumers are frequently
left vulnerable during the period between when a flaw or
data breach is discovered and when it’s disclosed. Equifax
Inc., for instance, failed to act on warnings from the U.S.
Department of Homeland Security about a software vul-
nerability and then, after learning it had suffered a data
breach, waited six more weeks before alerting consumers.
The slow response allowed hackers to steal Social Security
numbers from about 150 million Americans.
In some industries, such delays are regarded as unac-
ceptable, Luk-Zilberman says. “Imagine if there were a
pharmaceutical company that developed a drug with poi-
sonous qualities and that the researchers who discov-
ered those qualities were expected to give it secretly to
the company and wait 90 days,” he says. “The absurdity
jumps out at you.”
The custom of keeping vulnerabilities secret until they’re
patched is designed to avoid broadcasting them to other
hackers, who could then use the information to steal data
from unsuspecting consumers. To incentivize researchers
to follow this protocol, companies often offer bug boun-
ties to anyone who reports a legitimate flaw. These boun-
ties are more about recognition than compensation, giving
researchers a valuable credential. The prizes can range
from a few hundred dollars for a small mistake to about
$100,000 or so for an enormous one. United Airlines Inc.,
for example, pays its bug bounties in airline miles.
Such sums aren’t enough to cover the costs of a com-
pany like CTS, whose six employees worked full time
for a year to produce the AMD report. Many companies,
including AMD, offer no bug bounties at all, often reward-
ing security experts with a consulting gig after the fact.
“You can’t fund researchers this way,” says CTS CEO
Li On. The result of the current framework, he says, is
that rather than take findings to a company, research-
ers frequently sell vulnerabilities to private security com-
panies. One such business, Zerodium, pays $1 million or
more for big discoveries. Black-market brokers, who work
with organized criminals and rogue states, pay even more.
CTS says that even though selling research to short
sellers might seem distasteful, it’s not as bad as selling it
to groups that will use it to hack or spy on users. In mid-
March, in response to the CTS report, AMD promised to
address “in the coming weeks” three of the four catego-
ries of flaws identified, rejecting any suggestion that it was
incapable of doing so.
“We’re proud of the project,” Luk-Zilberman says. “They
are fixing this stuff, and they’re probably doing it faster
than they would have.” �Max Chafkin, with Ian King
THE BOTTOM LINE Security company CTS’s research on vulnerabilities of
several AMD chips represents a test case for the ethics of uncovering and
publicizing security flaws.
 ◼ SOLUTIONS Bloomberg Businessweek
Caught in Facebook’s
Security Crisis
The company’s
alliance with
developers grows
uneasy as both
sides try to prioritize
user safety
Almost every year for a decade, Facebook Inc. has
gathered makers of all sorts of apps, games, and adver-
tising tools at its F8 conference to explain how much bet-
ter their businesses could be by forming a partnership with
the company to make them more social. The event gener-
ally had a celebratory vibe, starting with applause for Chief
Executive Officer Mark Zuckerberg’s product introductions
and ending with a performance by a popular musical artist.
The 2018 conference, which kicks off on May 1 in
San Jose, Calif., is shaping up to be a lot less festive.
Facebook finds itself in a crisis of public trust after a devel-
oper shared the personal data of as many as 87 million
people with Cambridge Analytica, a conservative politi-
cal consulting company. Facebook said it would quickly
address the problem—though it can’t retrieve the data that
was leaked—while admitting there could be many similarly
sized data security problems involving other developers it
doesn’t yet know about.
When Facebook opened up its platform to third-party
developers in 2007, it helped drive hundreds of mil-
lions of new users to the social network. The arrange-
ment has grown into a codependent relationship in
which apps and websites personalize their offerings
using Facebook user data, and Facebook gains more
visibility into its users’ behavior beyond its own site.
Security fixes announced over the past several
weeks include pausing the approval process for new
applications and restricting some of the data devel-
opers get from Facebook for logging into apps as well
as Facebook Groups, Pages, Events, and Instagram.
Developers say such measures are unfair and unnec-
essarily punitive, holding their businesses accountable for
Facebook’s own lax policies. “Facebook needs to really
simplify and clarify the way they use and protect data
ILLUSTRATION BY JACK SACHS
and allow developers to deal directly with their audience,”
says Andrea D’Ottavio, the founder of Webing Ltd., an app
developer. Panicked messages posted on the Facebook
developers blog in recent weeks reveal deep anxiety
April 30, 2018
about how long the freeze on app approvals will last. “You
really, absolutely must give us an ETA,” Benjamin Ritter, a
web designer at a company called Firecracker Software
LLC, wrote in early April, warning that Facebook will
lose developers’ trust if the delay continues indefinitely.
“We are unable to provide a specific time frame for
when we will be reviewing apps for the platform again,”
Facebook replied, promising to provide more detail in the
coming weeks.
Apps have encouraged people to use their Facebook
credentials to open accounts. Millions did so because it’s
easier and doesn’t require yet another password. Soon
after the Cambridge Analytica revelations, some devel-
opers noticed a drop in users signing in via Facebook.
Socialive TV, a British company that sells livestreaming
yoga classes, saw a 15 percent drop in Facebook logins
in the two weeks after the news broke. Joseph Black and
Oliver Jacobs, co-CEOs of U.K.-based student market-
place UniDosh Ltd., say new users haven’t been registering
via Facebook as much. Sign-ups via UniDosh’s own login
system rose about 23 percent in the three weeks ended
March 29. Facebook says it hasn’t seen a decline in the use
of its login system for third-party websites.
Bumble Trading Inc., a popular dating app, expanded its
user base in part because it was so simple to sign up—a
date was within reach just by logging into Facebook. 43
Now the Austin-based company, which boasts 30 million
users, lets people sign up with a phone number, bypassing
Facebook. The move “isn’t about Bumble moving away from
Facebook by any means,” says Bumble Chief Operating
Officer Sarah Jones Simmer. The company had planned
on this before the Cambridge Analytica reports. Still, the
business remains heavily dependent on the social network,
because it was the only way users had to log in since 2014.
Zuckerberg at F8 may turn the focus from security
to the cool hardware that Facebook plans to start sell-
ing soon, according to a person familiar with the plans
who requested anonymity because the plans are pri-
vate. A $200 Oculus-branded virtual reality headset will
be unveiled. But hardware also presents challenges. The
company has scrapped plans to announce one of its most
hotly anticipated products—a speaker assistant and video
chat device for the home—in part because of the public
uproar over privacy issues, people familiar with the plans
have said.
Until the conference kicks off, the company is encourag-
ing developers to fill out a complaint form. But they proba-
bly shouldn’t expect help anytime soon. “Due to the number
of inquiries,” the form reads, “you may experience a delay
in response.” �Sarah Frier and Nate Lanxon
THE BOTTOM LINE On the eve of Facebook’s annual F8 developer
conference, the company and app makers are questioning their
codependency.
 Report The State of Cybercrime
Verizon Communications Inc.’s annual Data Breach 53,308 incidents

Investigations Report is used by companies, 4% of the

incidents were
organizations, and governments to assess breaches that
resulted in
security vulnerabilities and needs. The latest the confirmed
disclosure
version reflects data Verizon collected from 67 of data to an
unauthorized
organizations around the world for the 12 months party

ended Oct. 31, 2017.

Who was behind breaches

Doctor Former employee
◼ External ◼ Internal or nurse 15
32
Organized crime Nation- Manager Customer 1
681 breaches state 9
21 Competitor 4

Developer Other Human

15 external resources 5
9
Unaffiliated
State- Finance 6
215
affiliated
138 System Other Executive 8 Activist 6
admin. End user internal
72 62 62 Cashier 6

Acquaintance 7

44

The report’s findings Attack types Data compromised

can help organizations
focus on combating Use of stolen credentials 399 Personal 730

the most likely RAM scraper 312 Payment 563

threats—for example, Phishing 236 Medical 505

by instituting two- Privilege abuse 201 Credentials 221

factor authentication Misdelivery 187 Internal 154

to better protect Hacking 148 IP 137

against stolen Physical theft 123 System 62

Automated malware 117 Bank 60
credentials.

ILLUSTRATION BY JACK SACHS. DATA FROM 2018 VERIZON DATA BREACH INVESTIGATIONS REPORT
Manual malware 115 Classified 24
Pretexting (social) 114

Attack analysis by industry

Industry Total Main type of Attackers Top motives

breaches attack ◼ External ◼ Internal Espionage Financial Fun Ideology
Lodging/hotels 338 Point-of-sale intrusions x
Education 101 Other x x x
Financial 146 Payment card skimmers x
Health care 536 Misc. errors x x*
Information 109 Other x x x
Manufacturing 73 Cyberespionage x x
Professional 132 Other x x
Public administration 304 Cyberespionage x x x
*MOTIVES FOR HEALTH-CARE INDUSTRY EVENTS ARE CALCULATED AS A SHARE OF INCIDENTS
Hoping
can’t help a kid
struggling
with drugs.
But together,
we can.
We partner with parents and families to
get help for kids whose drug or alcohol use
threatens their lives with addiction.
We provide the science-based information
parents need to understand substance use
and programs to help parents effectively
engage with their teens and young adults.
Our counselors will listen to parents and
provide one-on-one guidance for families
struggling with their son or daughter’s use.
And we offer support from a network
of families that have successfully faced
this disease.

We’re here to help.

Our services are free.
Let’s work together.
Call our toll-free helpline,
1-855-DRUGFREE.
Or visit us at drugfree.org.

© Partnership for Drug-Free Kids, Inc.

Partnership is a nonprofit, 501(c)(3) charitable organization.
Bloomberg Businessweek

An ever-expa
ending, time-
rabbit hole of
that starts wit
together and heal as a family,” Wojcicki wrote on Twitter.
Extremist propaganda, dangerous The incident was tragic and awful in all the ways that have
hoaxes—YouTube is having its become a depressing American routine. It also put an excla-
worst year ever. Except financially mation point on a dreadful stretch for YouTube, which has
lurched from crisis to crisis over the past year. While Donald
By Lucas Shaw and Mark Bergen Trump has in one way or another kept Facebook and Twitter
in the headlines—and not the good kind—YouTube has strug-
gled to contain the fallout from the darker impulses of its vast,
Susan Wojcicki, the chief executive officer of YouTube, was in decentralized creative community.
a meeting on the second floor of her company’s headquarters Somehow, things keep getting worse. PewDiePie, a
in San Bruno, Calif., when she heard the first gunshot. It came Swedish comedian and top YouTube personality, made an
from outside; more followed. Some of her employees ran for off-color joke about Nazis. The Times of London reported
the exits; others barricaded themselves in conference rooms. that many mainstream brands were unwittingly funding
Those eating lunch on the outdoor patio hid under the tables. white supremacists and Islamic extremists by advertising
At a press conference the following day, April 4, the alongside their videos. The Manchester bomber report-
San Bruno police confirmed that the suspected shooter was edly used a how-to clip from YouTube to make his deadly
Nasim Aghdam, 39, an enigmatic social media personality explosive. A series of investigations showed how the com-
from San Diego. She’d acted alone, wounding a handful of pany’s algorithms were serving up bizarre, grotesque videos
passersby, then taking her own life. Prior to to young children. After several mass shoot-
the rampage, Aghdam posted hundreds of ings, conspiracy theorists flooded YouTube
videos on YouTube, holding forth on subjects with videos falsely claiming that gun control
such as veganism, bodybuilding, and ani- activists had staged the massacres. Parents
mal rights. According to police, she’d grown of children killed at Sandy Hook Elementary
enraged with YouTube, which she said was School filed a defamation lawsuit against Alex
YOUTUBE(7)

intentionally limiting the reach of her work Jones, whose show, InfoWars, is a major pres-
and her ability to profit from it. “We will come Logan Paul tasering a rat ence on YouTube, with 2.3 million subscribers.
 April 30, 2018

anding, never-
-sucking
a problem
th 47

And of course there’s the case of Logan Paul, a popular avoid political fallout than its fellow internet titans partly
YouTube personality with a penchant for shock humor. In because politicians and media scolds don’t watch it as closely.
December, while visiting Japan, Paul posted a video showing The site skews younger than Facebook, the social network that
a dead body he and his buddies discovered in a forest known actively helped the Trump campaign target ads, or Twitter, the
for suicides. During the resulting backlash, Paul apologized for president’s biggest platform. And because YouTube doesn’t
his insensitivity. A few days later he posted a video in which he look like social media, it’s tougher to recognize how its most
tasered dead rats. “No rat comes into my house without getting horrifying videos spread. (You probably heard about them
tased,” he said. “I hate rats.” on Facebook or Twitter.) In the fall, when Facebook, Twitter,
For years, YouTube has bragged to marketers that its and Google sent lawyers instead of executives to testify before
laissez-faire attitude toward video creators was a feature, not Congress about Russian meddling in the presidential election,
a bug. The company was pioneering a form of mass entertain- Team Google repeatedly stressed that YouTube and its other
ment more democratic, diverse, and authentic than traditional properties aren’t really social networks and therefore can’t fall
TV, its argument went, because it was unfettered by produc- prey to the worst of the internet’s trolls, bots, or propagandists.
ers, network executives, or regulators. Its legions of creators Much like Facebook and Twitter, however, YouTube has
fly around the internet with minimal guidance or oversight: long prioritized growth over safety. Hany Farid, senior adviser
Here are the keys to the jumbo jet, kid—knock yourself out. The to the Counter Extremism Project, which works with inter-
ensuing string of crashes has grown difficult for its 1.5 billion net companies to stamp out child pornography and terrorist
monthly users to ignore. messaging, says that of the companies he works with, “Google
Creators and advertisers may grumble about is the least receptive.” With each safety mis-
YouTube’s imperfect editorial policies and woe- hap, he says, YouTube acts freshly shocked.
ful communication, but few comparable venues “It’s like a Las Vegas casino saying, ‘Wow, we
reach such a massive audience of youngsters. can’t believe people are spending 36 hours in
As a result, YouTube’s no-good, messy, horrify- a casino.’ It’s designed like that.”
ing year has also likely been massively lucrative That’s not how Google or YouTube see
for its parent company, Google. PewDiePie, of the
things. Over the past year, YouTube has made
YouTube, so far, has been better able to anti-Semitic “joke” the most sweeping changes since its early
 Bloomberg Businessweek April 30, 2018

days, removing videos it deemed inappro- you watched one video starring a wild-eyed
priate and stripping away the advertising from conspiracy theorist, the algorithm would feed
others. But to date, both the video-sharing ser- you another, and another, and another—and
vice and its corporate parent have struggled to A Syrian bombing video on it went down a rabbit hole of untruth.
articulate how their plan will make things better. Only recently, “You come into that filter bubble, but you have no way out,”
as Washington has edged closer to training its regulatory eye on says Chaslot, who left the company in 2013 and now runs
Silicon Valley, did YouTube executives agree to walk Bloomberg a project called AlgoTransparency. “There’s no interest for
Businessweek through its proposed fixes and explain how the YouTube to find one.”
site got to this point. Conversations with more than a dozen Despite YouTube’s rapid growth, advertisers stayed
people at YouTube, some of whom asked not to be identified wary of the website, and it didn’t generate much revenue
while discussing sensitive internal matters, reveal a company until 2010, when Kyncl arrived from Netflix Inc. Over the next
still grappling to reach a balance between contributors’ free- several years, he turned YouTube’s amateur creator base
dom of expression and society’s need to protect itself. from a weakness to a strength. Netflix had to spend hun-
“The whole world has become a lot less stable and more dreds of millions of dollars to license TV shows and movies,
polarized,” says Robert Kyncl, YouTube’s chief business offi- but YouTube’s users offered a bottomless reservoir of content
cer. “Because of that, our responsibility is that much greater.” for free. Kyncl set about identifying the most popular person-
alities and turning them into marketable stars.
In interviews at the San Bruno complex, YouTube executives In 2011, YouTube tweaked the rules so more creators could
often resorted to a civic metaphor: YouTube is like a small make money from ads that its algorithm automatically pack-
town that’s grown so large, so fast, that its municipal systems— aged with their videos. A year later it opened a studio in
its zoning laws, courts, and sanitation crews, if you will—have Los Angeles so some of the best amateurs could use high-end
failed to keep pace. “We’ve gone from being a small village to production equipment. YouTube also did some advertising of
being a city that requires proper infrastructure,” its own, plastering the faces of its rising stars
Kyncl says. “That’s what we’ve been building.” on billboards in major cities. More and more,
But minimal infrastructure was a conscious YouTube was starting to convince advertisers
48 choice, according to Hunter Walk, who ran it had become the new TV. Kyncl said as much
YouTube’s product team from 2007 to 2011. onstage at Madison Square Garden in 2015
When the markets tanked in 2008, Google during the company’s annual “brandcast,”
tightened YouTube’s budgets and took staff- Conspiracy theorist Alex Jones at which executives showcase new YouTube
ers off community safety efforts—such as patrolling YouTube’s programming in front of the world’s top advertisers. Google
notorious comments section—in favor of projects with better doesn’t release financial numbers for YouTube, but analysts
revenue potential. “For me, that’s YouTube’s original sin,” at Morgan Stanley estimate that the service’s revenue will top
Walk says. “Trust and safety has always been a top prior- $22 billion in 2019.
ity. This was true 10 years ago and it remains true today,” Unlike with traditional TV, where very little goes on the air
YouTube said in an emailed statement. unlawyered, top creators can achieve cultural sway without
As oversight dwindled, the amount of material posted on telling anyone at YouTube where they’re going, who they’re
YouTube doubled in two years. By 2010, 24 hours of video filming, or what they might be tasing. All of which, under U.S.
were being uploaded every minute. (Today, it’s more like law, protected YouTube from liability for damages stemming
450 hours per minute.) Suddenly, YouTube needed a better from the videos it distributed. It also left YouTube in a reactive
system to help viewers navigate the deluge, something that position: Whenever controversies ignited, executives could do
would keep them from feeling overwhelmed and wandering little but try to douse the flames of umbrage long after they had
back to the comfort of their TVs. spread. And that bare-bones bucket brigade stood no chance
In 2010, YouTube hired French programmer Guillaume of meeting the challenges of the Trump era.
Chaslot, who soon began developing algorithms that could
better match viewers with videos that would keep them watch- Through the long string of YouTube fiascoes, one thing has
ing. Eventually, YouTube engineers found a simple, winning been constant: The company has struggled to explain its deci-
formula: When a viewer finished a video, the site immediately sions. It took several days, for example, to come up with a
recommended another on a similar topic with punishment for Logan Paul’s Japanese forest
a comparable sensibility. Chaslot says the team video. Various YouTube contributors lam-
learned it could increase engagement, and hit basted the company for taking too long to
ad goals, by bumping up videos with a proven respond. “When the nature of the content
record of keeping viewers watching. is that sensitive, and the video is trending,
Over time, Chaslot saw adverse effects. you expect YouTube to be more on top of
Garbage often floated to the top—rants by both Monalisa Perez, who accidentally their game,” says Aditi Rajvanshi, a former
flat-Earthers and Holocaust deniers did well. If killed her boyfriend in a video stunt YouTube employee who now consults for
Bloomberg Businessweek April 30, 2018

“We hear feedback on both sides: people criticizing us for not

doing enough, and others feeling like we’re going too far”

YouTube stars. Kyncl says avoiding a snap judgment should discouraged from working for more than two hours at a
be seen as evidence of YouTube’s attentiveness to editorial time. A psychologist is on call, and group therapy sessions
concerns, not as dereliction of duty. The deliberations over are available. Some moderators are contract workers in the
how to handle Paul were complex and protracted, he says, Philippines. Some, like those on Raul Gomez’s team, work
because the company didn’t consider the video star beyond out of San Bruno.
redemption. He included a message for a suicide prevention Weeks before the Aghdam shooting, Gomez walked
hotline, for instance, and chose not to register the video for Bloomberg Businessweek reporters through a scenario involving
ads. “We hear feedback on both sides: people criticizing us anger directed at his co-workers. Gomez isn’t his real name—
for not doing enough, and others feeling like we’re going too he insisted on a pseudonym because people in his line of work
far,” said director of public policy Juniper Downs. often face death threats. Nobody likes it when his video is taken
Behind the scenes, YouTube executives acknowledged down; the psychologically disturbed, even less so.
that their infrastructure-challenged megacity needed a mas- Inside an office named “Gangnam Style,” Gomez projected
sive police presence. They stopped Holocaust-denial videos a video on the wall. The clip was first posted last summer,
from popping up in the recommendation feature. In March, soon after a Google engineer was fired for writing an inflam-
YouTube reached out to BuzzFeed CEO Jonah Peretti for matory internal memo about gender imbalances in tech.
ideas, according to a person with knowledge of the exchange. Afterward, apoplectic right-wing commentators accused
(Peretti declined to comment for this article.) Google of discriminating against conservatives. The clip, pro-
Meanwhile, Wojcicki went on a listening duced by a popular right-wing media outlet,
tour, reassuring nervous advertisers. She met opened with a jaunty young woman direct-
with top buyers at a marketing conference ing viewers to her laptop, where she pulled
in late 2017 and at the Consumer Electronics up Twitter pages of several Google employees. 49
Show in January. At some client meetings, She scoured through their posts, reading aloud
YouTube brought along staffers from its con- certain passages while ridiculing the named
tent and software teams to ask how traditional The Toy Freaks channel, deleted individuals as dimwitted liberals.
after allegations of child exploitation
TV standards departments work, says Susan With a grimace, Gomez said that while it
Schiekofer, head of digital trading for media buyer GroupM. may be unpleasant to see colleagues singled out for pub-
In December, Wojcicki said in a company blog post that lic mockery, the video didn’t violate YouTube’s harassment
YouTube would appoint as many as 10,000 people to help policy. The performer didn’t exhort her viewers to violence.
cut the spread of misinformation and abusive content. (As it And if the video were taken down, YouTube would likely face
turns out, the hires were for all of Google and represented a another round of censorship allegations at Breitbart News or
25 percent hike in moderator staffing.) YouTube also pledged the Drudge Report.
that a human moderator would review every video in its Not unlike their Silicon Valley peers, YouTube executives
Google Preferred program for advertisers before any ad was remain convinced that the long-term solution isn’t old-timey
attached. The goal was to reduce the risk of, for example, a Homo sapiens but technology. During the service’s early
cereal ad running alongside a beheading video. The prob- days, it was rife with pirated videos uploaded and shared
lem has persisted in the months since then, however, in part without copyright owners’ consent. Eventually, YouTube
because of an institutional disconnect: The staff that mon- built an automated system to weed out copyright violations.
itors YouTube’s content is separate from the Google team The idea is that someday humans will be able to train the
that oversees the ads. machines, in a similar manner, to sniff out misinformation,
In recent months, Marc Pritchard, the top marketer at smut, and abuse. They’ve already made some progress. After
Procter & Gamble Co. and a prominent Google critic, has October’s mass shooting in Las Vegas, YouTube engineers
met with Wojcicki multiple times. “You went to a large galaxy adjusted the algorithms so they recommended more con-
that was beyond what anyone had ever seen,” Pritchard tent only from sources the company deemed authoritative.
recalls telling her at one point. “And I don’t Finding the right people to help this refine-
think you’ve realized the impact you’ve had.” ment process is proving to be a challenge.
“We want to be on the right side of history,” For months, YouTube has been trying to hire
Wojcicki assured him. someone who can more clearly define its
YouTube’s growing ranks of modera- internal policies and messaging about what
tors now scan the worst videos online: makes a video publishable. As of mid-April,
torture, bombs, porn. Moderators are People eating Tide Pods the position remains vacant. <BW>
 Bloomberg Businessweek Month 00, 2018

LuLaRoe dangled high incomes for selling groovy new clothes from home.

50

Hook, Line,

Amy Jo Reece in her basement in Culpepper, Va., with her unsold inventory CREDITS CREDITS CREDITS

By Claire Suddath
 April 30, 2018

Now, thousands of women are saying it’s an old-fashioned pyramid scheme

and Leggings 51
CREDITS CREDITS CREDITS

Photographs by Damon Casarez

 Bloomberg Businessweek
R
oberta Blevins likes to talk to strangers. If you’re
next to her on an airplane or behind her at the gro-
cery checkout, she’ll notice something about you
that she finds interesting and ask you about it. “I’ll
be like, ‘Oh, you’re buying apples? I love apples! What’s your
favorite kind?’ ” she says. “My husband makes fun of me for it,
but it’s like, ‘Sorry I’m so friendly, OK?’ ”
Blevins is 37 and lives with her husband and two kids in
Alpine, Calif., a suburb of San Diego. Her chattiness is what
led her, in October 2015, to ask a woman she knew through
a motherhood-themed Facebook group about the leggings
she was advertising online. “I was like, ‘What’s LuLaRoe?
I’ve never heard of this company,’ ” Blevins says. The woman
explained that she bought clothes wholesale from LuLaRoe
and then sold them at roughly double the price. It was a mul-
tilevel marketing company, or MLM, sometimes called direct
selling. Perhaps she’d heard of the most successful examples:
Amway, Herbalife, or Mary Kay?
LuLaRoe makes colorful, patterned clothes—lots of chev-
rons, stripes, geometric shapes—in benign, loose-fitting styles
young mothers might wear to playdates or on a Starbucks
run. Mark and DeAnne Stidham say they founded it as a way
for women to stay at home and still support their families.
Unlike the old Tupperware party days, most of LuLaRoe’s
“independent fashion consultants” sell on Facebook.
52 Blevins was intrigued. She’d been looking for a way to sup-
plement her hairstylist’s income, so she bought a few tunics
and pairs of leggings. “I liked them,” she says. “A lot of the
styles were stuff I was buying at Target, but this way I felt like
I was supporting a real person, a small business.” In March
2016 she paid $9,000 to become a LuLaRoe consultant.
When Blevins talked to people about her new job it didn’t
feel like a sales pitch; she just gushed about the clothes.
There were only a few thousand consultants back then,
and Blevins made money easily. Then LuLaRoe exploded.
It declined to say how many people sold its clothes at its
peak, but at one point, according to several sellers, it had an
estimated 150,000 consultants across all 50 states. The com-
pany hit $2.3 billion in sales last year, making the five-year-
old brand about the size of J.Crew.
LuLaRoe grew so big so quickly because, right now, there
are a lot of women who want to sell leggings on Facebook.
According to a 2012 Pew Research Study, the majority of
women under age 34 aspire to high-paying careers, but the
lack of parental leave policies and the cost of day care often
make it difficult for single mothers to hold full-time jobs
and lead many two-parent families to drop to one income.
Tradition and stunted earning capabilities dictate that most of
the time the decision to stay home falls to the woman. Fewer
mothers work now than in the late 1990s.
It’s not easy, abandoning a career and relying on your
spouse (if you have one) for everything. A side business can
look appealing. According to the Direct Selling Association
(DSA), the industry’s primary trade organization, the num-
ber of Americans participating in direct selling jumped from
April 30, 2018
15.6 million to 20.5 million from 2011 to 2016. Three-fourths of
those people are women. You may have seen their pitches on
social media. They’re out there hawking skin care (Nu Skin,
Rodan + Fields), jewelry (Stella & Dot), fingernail art ( Jamberry,
Color Street), makeup (LipSense), fragrances (Scentsy), and
weight loss plans (Team Beachbody, It Works!). The DSA esti-
mates that the median income for someone participating in
these kinds of businesses is $2,500 a year. From the begin-
ning, LuLaRoe pitched itself as the exception: “What does
your dream home look like? What car do you dream of driv-
ing? What schools do you envision your children attending?”
the Stidhams wrote in their From the Founders letter, printed
in LuLaRoe’s welcome guide for new retailers. “Where else
can you make $50,000 to $100,000 yearly working part time?”
Mark, who’s CEO, said in a video talk with consultants last year.
“I didn’t care about the leggings, I just wanted to make
money again,” says consultant Adrianne Merkling, a for-
mer analytical flavor chemist who had to give up her career
when one of her three children was diagnosed with apraxia
of speech and needed therapy four times a week. She started
selling LuLaRoe clothing in 2016.
Now, she, along with Blevins, are two of thousands of
women who claim they’ve been duped by LuLaRoe. In the
past year the company has faced more than a dozen lawsuits.
The largest, a proposed class action, calls LuLaRoe a pyramid
scheme focused on recruiting consultants and persuading
them to buy inventory rather than actually selling clothing.
Since the lawsuits were filed, consultants have fled LuLaRoe
by the thousands. Many say the company owes them millions
of dollars in promised refunds. Women have garages, clos-
ets, guest rooms—and, in one case, a farm shed—filled with
LuLaRoe clothes they say they can’t sell.
As DeAnne often tells it, LuLaRoe began in 2012 when she
sewed a maxi skirt for her daughter, then took orders and
made skirts for her daughter’s friends, too. “I sold 300 skirts
in three days,” she said in a 2015 promotional video. “It was
Mark that said, ‘Why don’t we put our heads together? Let’s
come up with a business plan that can help other women
make money.’ ”
DeAnne, 59, favors bright, girlish clothes and
raspberry-colored lipstick. She keeps her Barbie-blond hair
long and curled. Mark, her second husband, maintains a trim
goatee. Their large, Mormon family, spread across Southern
California, can trace its lineage back to one of Joseph Smith’s
brothers. DeAnne has 10 siblings, including a twin sister
named Dianne Ingram who has her own direct selling clothing
company, Piphany, and, confusingly, the same inspirational
origin story, right down to the daughter and the style of skirt.
“I don’t know why she tells that story,” DeAnne says. Sam
Schultz, their nephew, who was LuLaRoe’s event manager
before he grew disenchanted with the company and quit,
says Ingram made the skirt. “Dianne was the seamstress. She
actually made the first maxi,” he says. DeAnne had the direct
selling experience; for years she’d made money selling girls’
Bloomberg Businessweek
Christmas and Easter dresses. Schultz says the sisters briefly
worked together but had a falling out and decided to form sep-
arate companies instead.
The Stidhams founded LuLaRoe as an MLM in 2013. It was a
logical choice; a disproportionate number of MLMs are started
or run by Mormons. The church’s members’ familiarity with
pitching something to strangers as well as their preference that
women remain at home have helped make direct selling Utah’s
second-largest industry, after tourism. From the beginning,
Christian phrases permeated LuLaRoe’s culture. “Through
fashion we create freedom, serve others and strengthen fam-
ilies,” proclaims an introductory booklet given to new con-
sultants. The Stidhams sometimes quote Mormon elders and
like to talk about using the company to “bless people’s lives.”
The company’s blessing and strengthening message hit
a chord with non-Mormons, too. LuLaRoe launched amid
a cresting wave of female empowerment that seemed at
odds with many women’s reality. After all, how could they
lean in if they didn’t even work? Maybe selling LuLaRoe was
Blevins in the garage of her Alpine, Calif., condo, aka her LuLaRoom
April 30, 2018
their answer. “I’d look at pictures of these women in these
crazy-patterned leggings and looking so confident,” says
Kimie Flynn, a stay-at-home mom in Florida who was inspired
to join LuLaRoe in December 2016.
The Stidhams hired a designer named Patrick Winget,
who’d been recommended by one of their sons-in-law, to
create low-priced apparel. LuLaRoe’s clothes are manufac-
tured in Asian and Central American factories owned by a Los
Angeles company called MyDyer, which also makes clothes
for major retailers such as Urban Outfitters Inc. and North
Face Inc. “When they told me what they planned to do,”
says Dan Kang, MyDyer’s CEO, “I thought, This is going to
be explosive.”
LuLaRoe’s clothes weren’t innovative—can you really claim
a scoop-necked T-shirt as a proprietary design?—but they came
in so many sizes, colors, and patterns that customers browsing
online rarely saw the same item twice. DeAnne made an early
decision to order only 2,500 of any one pattern (later changed
to 5,000). “I watched women go out of their minds with grab-
it-while-you-can deals,” she explains.
LuLaRoe consultants couldn’t choose what pat-
terns they’d get, and starting inventory packages
cost thousands of dollars. A survey of 215 current
and former consultants, conducted by Flynn, the
consultant in Florida, puts the typical initial invest-
ment at about $7,000. This is unusually high for 53
a direct selling company; Mary Kay, for example,
offers a $100 makeup starter kit. “We have real
strict controls so people don’t end up with the
proverbial garage full of inventory,” says Joseph
Mariano, president of the DSA, of which LuLaRoe
is not a member. “That’s the hallmark of a pyra-
mid scheme.”
By definition, multilevel marketing compa-
nies are pyramid-shaped, with a few people at
the top level, some in the middle, and the major-
ity toiling at the bottom. This kind of hierarchical
structure is legal as long as the company’s main
goal is to sell a product; it becomes a scam when
the goal is to lure people into buying inventory
regardless of whether they can sell it. There are
state laws against pyramid schemes, but at the
national level the job of spotting them falls to the
U.S. Federal Trade Commission. It primarily does
this by checking to see if a company abides by a
standard established in the wake of a 1972 law-
suit against a now defunct beauty products com-
pany called Koscot. The Koscot standard, as it’s
known, says that while a company can compen-
sate people for recruiting new sellers, it can’t
base that compensation on how much inven-
tory the recruits buy. Most state laws, includ-
ing California’s, also require compensation plans
to be based on sales.
It’s a simple rule. The DSA requires it of all its
 Bloomberg Businessweek
members. LuLaRoe didn’t follow it for the first four years of
its existence, instead basing its bonuses on wholesale orders.
For a while it apparently neglected to track what types of
clothing actually sold. “If we make 40 different products, I
know what I’ve sold, but I don’t know if those have moved
through into the consumer,” Mark said last year in a deposi-
tion during a breach of contract dispute between LuLaRoe
and a software provider. In this same deposition, he affirmed
that he had received communications from the FTC about his
business. “Basically the Federal Trade Commission looks at
direct sales and marketing businesses like ours, [...] one of
the primary criteria is, does the product move to an end user
or is it a pyramid scheme.” (When asked about this, LuLaRoe
denied the FTC was in touch and said Mark had been refer-
ring to the FTC’s general guidelines.)
Not tracking retail was a strange decision, since the cou-
ple worked with direct selling consultants to set up their busi-
ness. One of them was Terrel Transtrum, who’s been advising
MLMs for more than two decades. “They literally were selling
skirts and little girls’ dresses out of tubs in the back of their
Suburban,” he says. Transtrum says that while for the first
couple of years the Stidhams listened to most of his recom-
mendations, they ignored his advice to base bonuses on retail
sales; the high buy-in requirements also made him uneasy.
“There’s a major shift of risk to the consumer and to the busi-
54 ness builder,” he says. Mark disagrees. “We don’t want that
casual participant,” he says. “We wanted people who looked
at this as a business opportunity.”
Courtney Harwood, 38, lives in Greenville, N.C., with her three
children. When she joined LuLaRoe in March 2015, she and her
husband were thinking about separating. “I think I was maybe
consultant No. 1,100,” she says. Harwood made thousands of
dollars a month selling clothes. After seven months, she quit
her marketing job. “It was the scariest thing I ever did,” she
says, “but I was making too much money. DeAnne took a lik-
ing to me. I felt like I’d found my tribe.” Then in January 2016,
Harwood’s sponsor—the woman who’d enrolled her—asked for
a favor. She needed Harwood to up her recruiting.
LuLaRoe’s army had four tiers: regular consultants, train-
ers, coaches, and, at the top, mentors. There were different
wholesale, retail, and recruitment requirements for each.
SIDE HUSTLE OR SIDE HASSLE? Popular multilevel marketers by the numbers
MLM Arbonne LuLaRoe
SELLS Skin care and shakes Women’s clothes
billed as botanical
COST OF ENTRY $79 kit $3,000 (since March)
NUMBER OF SELLERS 260,000 63,000
OWNER Groupe Rocher DeAnne and Mark
acquired it and parent Stidham
company Nature’s Gate
in February
2017 REVENUE $553 million Won’t disclose revenue;
$2.3 billion in retail sales
April 30, 2018
Additional caveats and rules made things even more compli-
cated. A coach with four trainers working underneath her,
for example, would get a larger bonus than one who had just
three. “You sign people up in a way to move up the fastest,”
says Blevins. “It’s called stacking.” Harwood says her sponsor
offered her $2,500 if she could hit coach status within a week,
which would boost the sponsor up to mentor. Similarly, Blevins
says the coaches and mentors above her—referred to within
the company as an “upline”—stacked people underneath her,
which is how she became a trainer within four months.
In the fall of 2015 the Stidhams hired Schultz, DeAnne’s
nephew, who had some experience as an event planner, to
host a series of conferences to draw in new consultants. In
theory they’d teach women how to be successful salespeople,
but Schultz says there was no practical business advice. “I
thought, Look, these women don’t want to feel like they’re
getting recruited. … They’re probably desperate housewives,
vulnerable, they want to feel more beautiful, more confi-
dent—what woman doesn’t, you know?” he says. “It was just
promising them a dream of making money.” His first event,
in January 2016, was held at Disneyland. There was cheering,
flashing pastel lights, oonce-oonce dance music, and a paid
appearance by Mario Lopez. Women shook DeAnne’s hand
and listened to her maxi skirt story. “The Monday after it was
over we woke up and there were 11,000 people in the queue,”
says Schultz. “We had no idea what to do.”
LuLaRoe started to balloon. “We had to build new infra-
structure just to manage their business,” says Kang, at MyDyer.
He scaled back his work with other brands to give LuLaRoe
more attention. Prices for initial inventory packages went up.
The consultant craze was great for those who’d joined
LuLaRoe early. By mid-2016, Harwood was making $30,000
in bonus checks each month simply because the people below
her were buying so many clothes. Another mentor, Lindsey
Wheeler, who’s still active in the company and says she has
2,000 people underneath her, was able to pay off her mort-
gage. This kind of success was highly unusual; according to
the company’s income disclosure statements, the median
bonus payment earned by consultants then was $526 per
year. The newer recruits, and the 75 percent of consultants
who didn’t qualify for bonus checks, were starting to struggle.
Harwood and Schultz say they both voiced concerns about
Mary Kay Pampered Chef Piphany
Makeup Food prep tools Women’s clothes
$100 kit $109 starter kit or $59 $199 annual fee
to host a party
2.4 million 40,000 1,500
Original founder Kay’s Berkshire Hathaway Dianne Ingram (twin of
son Richard Rogers LuLaRoe co-founder
DeAnne Stidham) and
Jack Peterson
$3.5 billion Won’t disclose $50 million to
$60 million
Bloomberg Businessweek
signing up too many people, only to be brushed off. Lainie
Cotell, a stay-at-home mom in Myrtle Beach, S.C., says last
year she went from selling $12,000 worth of clothes every
month to just a few thousand; there was no one left to buy
them. “At one point there were 70 consultants in Myrtle
Beach,” she says, “and those were just the ones I knew about.”
While Cotell made decent money for a while, she didn’t
keep much of it. “Leave that money in your business! Continue
to turn that money over and freshen your inventory,” DeAnne
told consultants in May. Since consultants couldn’t pick their
patterns, stale styles piled up. “Every penny we made went
right back into ordering more clothes,” says Amy Jo Reece in
Culpepper, Va. “That’s what they told us to do.”
In January 2017, with 3,500 consultants working under-
neath her, Harwood became the 25th person to hit the cov-
eted mentor status at the top of LuLaRoe’s pyramid. At the
company’s request, she flew to California to meet with the
Stidhams. “They asked me to bring my husband,” she says.
“We were basically separated, sleeping in separate beds. But
he came.” LuLaRoe often urged women to bring husbands to
events. Stacy Kristina, a mentor who quit LuLaRoe, says she
was once disinvited from a conference because she was single.
After discussing the business, Harwood says, the Stidhams
urged the couple to stay together. “They said that if he quit
his job to help me sell LuLaRoe, it would bring us together.
That I should focus on being subservient to my husband,” she
says. Harwood was humiliated. “I was like, ‘What am I doing
here? This is crazy.’ My husband was like, ‘But look at your pay-
check.’ ” Thanks to the wholesale orders of those beneath her,
she’d made hundreds of thousands of dollars the previous year.
It wasn’t the first time things at LuLaRoe had gotten weird
for her. In November 2016, Harwood had traveled with
DeAnne to a handful of conventions to talk about her success
at the company. At dinner in Detroit one evening, DeAnne
asked if she had any interest in getting gastric surgery. “She’s
like, ‘Courtney, oh my God, you have got to go get it. I’ll have
my sister call you next week,’ ” Harwood says. Four people I
spoke with for this story say that they’d been approached by
either DeAnne or her sister Lynnae Knapp, who offered to
take them to a Tijuana clinic called Obesity Not 4 Me so they
could get a gastric sleeve. “Lynnae charges $5,000, but it only
Rodan + Fields Scentsy Stella & Dot
Lash boosters, skin- Flameless candles, Women’s jewelry
care products scented products
$45 business portfolio $59-$99 $199 kit plus $59
or a $395-$995 kit annual fee
200,000 120,000 30,000
Katie Rodan and Kathy Orville and Heidi Jessica Herrin
Fields, friends Thompson
$1.5 billion $470 million $500 million
April 30, 2018
costs $4,000. You pay her through PayPal, she gets a cut, then
takes you to Mexico,” says Schultz, who got the surgery him-
self. “I was told by DeAnne herself that she likes her leaders
to be a size small or medium,” says Kristina. Harwood says
the sisters referred to themselves as the Tijuana Skinnies.
Back in San Diego, Blevins saw none of this. She flew around
the country to attend company events. She joined a clique
of top-selling consultants who claimed to be her friends but
mostly just fed her insecurities as if LuLaRoe were a high
school popularity contest. She quit her job. Then one day in
July 2016, she walked into her LuLaRoom—the nickname con-
sultants give to the room in their house where they store all
their inventory—popped the lid on a plastic storage container
full of leggings, and gagged. “The smell hit me like, whoosh,”
she says. “It smelled like someone pooped in a bathing suit, put
it in a Ziploc bag, and left it for a week.” The stench’s source
turned out to be four pairs of leggings that had never been
worn. Then some leggings arrived in the mail soaking wet along
with a pale mint-colored pair with black spots that looked like
mold. She sent LuLaRoe’s customer support team an email.
She got one back saying that customer support emails were
no longer monitored and to use a special software system to
put in a formal ticket. So she did. Her ticket was closed. She
opened it again. Closed again. Opened. Closed. It took more
than a month of this, but eventually the company credited her 55
account $42. “That’s the first time I realized things at the com-
pany were off,” Blevins says.
LuLaRoe was straining under the growth. Its warehouses
were too small, its customer service line perpetually busy.
Designers had to come up with hundreds of new patterns
every day so the company could maintain its small produc-
tion runs. Soon, there were more misses than hits. Flower
patterns looked like wallpaper. Animal prints resembled
commonly available clip art. The more ridiculous mishaps—
like a pair of leggings covered with flesh-colored Leaning
Towers of Pisa—circulated on social media. By January 2017
consultants were increasingly reporting that they’d had to
issue refunds to customers who said leggings were ripping
after one or two wears. Several customers went so far as
to file a class action, claiming the company sold defective
clothes. In February 2017 a former customer in Pennsylvania,
which doesn’t collect sales tax on clothes, sued the company
for charging her tax. (Within a week of the filing, LuLaRoe
identified about $6 million in improperly collected taxes it
says has since been refunded to customers, faulting soft-
ware for calculating tax based on the seller’s, rather than
the buyer’s, location.) A few months later the company was
hit with copyright infringement lawsuits from designers
who claimed their artwork had been printed on LuLaRoe’s
clothes. (They have since been settled out of court.) Angry
customers started a Facebook group nicknamed Defective.
Soon, LuLaRoe sellers started joining, too. “Once the con-
sultants found us,” says Heather Blithely, who co-runs the
group, “it was like the floodgates opened.”
56
For a lot of them, selling LuLaRoe’s clothes was becom-
ing more trouble than it was worth. Schultz says the vibe of his
tours also changed. “There was a little more desperation,” he
says. “You could feel it in the air.” To ease the tension, LuLaRoe
announced in April 2017 that if someone wanted to quit, it
would buy back their inventory at the full wholesale cost.
Instead of providing reassurance, the buyback policy back-
fired. People at the bottom of LuLaRoe’s pyramid used it to
cut their losses and get out. Within a few months, the num-
ber of people underneath Blevins dropped from 75 to about
40. Then, when LuLaRoe switched to an FTC-friendly sales-
based compensation plan in July, her bonus checks dried up.
Apparently those 40 people weren’t actually selling much.
Blevins’s husband made just enough from his construction job
to cover the family’s mortgage and utilities, but Blevins had
always been responsible for groceries and kids’ needs. Those
bonus checks were all she’d had. Like so many others, she’d
Harwood in her Greenville, N.C., house with a LuLaRoe boutique on the top floor
used the profits from her own LuLaRoe sales to buy more
clothes. She’d heard of the Defective group. She asked to join.
On a warm September evening, Blevins sat on her sofa, iPad in
her lap, scrolling through post after post from women who felt
they’d been swindled by LuLaRoe. Reece, in Virginia, was in
there. She’d resigned in August but couldn’t get the company to
send her the proper forms so she could return roughly $40,000
worth of inventory. Merkling, in Michigan, was there, too. Her
inventory orders were often missing items, and she couldn’t
get anyone at the company to explain why. Other women said
they’d been able to send back clothes but were fighting with
LuLaRoe over how much they were worth. Some talked about
being bullied by mentors. A few said their husbands had been
pressured to quit their jobs so the family could devote more
time to LuLaRoe. A woman posted several pictures of what
appeared to be piles of unsold inventory sitting in the parking

lot of LuLaRoe’s warehouse, then asked if anyone had ever
received moldy or smelly clothes. Blevins started crying. (The
company calls the stinky legging allegations unfounded. It says
that during its “explosive growth,” products were kept briefly
on loading docks but were covered and that it maintains strict
quality control.)
Blevins had stopped selling LuLaRoe but hadn’t for-
mally quit when, on Sept. 13, the company canceled its
100 percent buyback policy. “I had people who’d made
over $200,000 turn around and send me back $30,000
worth of inventory,” Mark says. “I hadn’t anticipated that.”
Now when someone quit LuLaRoe, it would pay out only
90 percent of the wholesale value of clothes purchased
within the past year. But even that didn’t seem guaran-
teed. Many women say LuLaRoe offered them much less.
Blevins didn’t want to fight with LuLaRoe anymore. When
she formally quit in January, she just sold what she could. The
Bloomberg Businessweek April 30, 2018
rest of it, about $10,000 worth, is still sitting in her garage.
Harwood did the same thing. “We were told ahead of time
that if a mentor tried to send inventory back,” she says,
“LuLaRoe would not pay on it.” She says she has $40,000
worth of clothes stashed in a spare room and has hired a
lawyer to help her get a refund as well as about $20,000 in
bonus checks she believes she’s owed. LuLaRoe says it has
“long-running disputes” with Harwood and is “unable to dis-
cuss them publicly.”
Last fall, several former consultants sued the company,
alleging LuLaRoe is a pyramid scheme. The suit grew to 22
people seeking $1 billion in damages on behalf of thousands
of sellers. But they may never get a chance to argue their
case in court; last week a California judge ordered the case
be moved to arbitration on the grounds that consultants’ con-
tracts require legal disputes to be decided that way. “I think
the easiest way to look at this case is by what the intent of the
parties is,” says Peter Pearlman, one of the attorneys repre-
senting the former consultants. “The law requires that if you
are going to encourage people to sell a product, that you have
made a legitimate effort to satisfy yourself that they can do
what it is you tell them they can do.” The FTC declined to say
whether it was aware of the lawsuits.
LuLaRoe still has roughly 63,000 consultants, whom it now
calls retailers, but it owes an untold amount of money to
those who’ve quit and sent back their clothes. It’s found a way 57
to sell their returns off, though. “In 2018 you could be receiv-
ing something from 2015. How could that happen?” designer
Winget asked consultants in January. “It’s called curating.” In
April the company set bins of clothes outside its warehouses
and invited consultants to purchase anything they wanted.
In February, several hundred LuLaRoe die-hards put on
their perkiest, most colorful outfits and went on a Royal
Caribbean cruise. “I’m not profitable yet, but I think you can
set yourself apart from other sellers by just being a really good
person,” says Joanne Black, a mother of two in Greensboro,
S.C., who joined LuLaRoe last year and is only vaguely aware
of the allegations against it. Black plans to quit her job as an
assistant professor of sociology and criminal studies at Salem
College in May so she can focus on LuLaRoe. Right now she’s
making about $2,500 a month in sales but has mostly been
reinvesting it in her business. She hopes it’ll double when
she goes full time. “There were, for sure, challenges,” says
Wheeler, in Seattle, who’s still one of the top-selling consul-
tants in the company. “I think people just got into this and
realized it was more work than they wanted to do.”
In chats with consultants, the Stidhams say that all big
companies face lawsuits and not to worry. They also note
that some disgruntled sellers now pitch other MLMs’ prod-
ucts and have a reason to make LuLaRoe look bad. “You can
never predict outcomes of litigation, but I’m comfortable that
we acted honorably and legally,” says Mark. “This is the best
time ever to be a part of LuLaRoe,” he told consultants in
January. “If you haven’t thought about building a team yet,”
DeAnne said, “this is the time to do it.” <BW>
 Bloomberg Businessweek

A lot of Democrats think

billionaire Tom Steyer
is the wrong man
with the wrong idea.

Ask him if he cares

58

Mr. Impeachment
By Max Abelson Photograph by Nathanael Turner

Narcissism was in the air in Washington. On a February night
a few hundred yards from the White House, Tom Steyer, the
hedge fund billionaire and political activist, had taken over
three rooms at the National Press Club for a panel called
Presidential Mental Health & Nuclear Weapons. On the dais,
two psychiatrists, a psychologist, a Jungian author, and a
warhead-security specialist were settling into blue chairs in
front of a blue curtain. They were there to discuss the matter
of Donald Trump’s ego. But Steyer, stepping to the lectern by
their side, was unmistakably the star of the show. Applause
broke out. He smiled and locked eyes with people around the
room. Fans following the Facebook livestream sent thumbs-
ups by the thousands as he and the five speakers set about
explaining why Trump’s sadism, paranoia, unpredictability,
and self-obsession make him ill-suited to nuclear weaponry.
Steyer has commanded the spotlight before. His fund,
Farallon Capital Management, made him a finance kingpin, and
he became a darling of environmentalists after quitting in 2012
to fight climate change full time. His third act began six months
ago, when he paid for and starred in his first nationwide ad
agitating for Trump’s impeachment. If you’ve watched cable
news recently, you’ve probably seen him, 60 years old with a
healthy tan and a look of grim concern, staring into your soul.
“I’m Tom Steyer, and like you, I’m a citizen who knows
it’s up to us to do something,” he says in the first spot, his
voice gravelly and grave. He’s sitting by a fireplace wearing a
folksy-billionaire midnight-blue denim shirt. His name comes
on screen above “American Citizen” in smaller letters. Strings
murmur eerily as the camera closes in. “People in Congress
and his own administration know that this president is a clear
and present danger,” Steyer says. Within four months of the
ad’s first airing, 5 million people had joined his campaign,
Need to Impeach, providing names for an impeachment peti-
tion and email addresses for his budding list.
Steyer isn’t the first to claim there are grounds for boot-
ing Trump from office, but his enormous pools of wealth,
outrage, and ambition mean he can do more than the mem-
bers of Congress responsible for impeachment proceedings:
He can spend the money required to stoke a fire and fan its
flames until a real chance to burn down the administration
presents itself. Thus far, he’s pledged about $40 million for
Need to Impeach and an additional $30 million to get millen-
nials into voting booths in November. He views himself as the
leader of a movement to deliver America from evil—not one
of those billionaires who cut checks merely to buy influence
in Washington. Never mind that Steyer spent more on dis-
closed donations during the 2014 and 2016 election cycles than
anyone else, according to the Center for Responsive Politics.
His spending over the past year has bought him at least
three kinds of opponents. The first are supporters of Trump,
the celebrity-king who’s survived bedlam, bankruptcy, and
scandal that would have wiped out, or at least embarrassed,
mere mortals. To them, Steyer is a younger George Soros, pull-
ing strings from the shadows. The second are fellow Democrats
who think his fixation is distracting at best and harebrained at
worst. They point out that no president has been removed via
April 30, 2018
impeachment, that Democrats don’t have the congressional
majority they would need to initiate the proceedings, and that
polls show less than half the country wants them to try. Steyer’s
third set of opponents are skeptics who see his vast resources
as the symptom of a disease, not its cure. Does America, they
ask, need one billionaire to save it from another?
At his event in Washington, Steyer toggled between his two
dominant modes, apocalyptic and jubilant. Toward the end,
he riffed on the motivational value of fear. “When you’re abso-
lutely sure you’re right,” he said, “and you’re fighting for the
things you think are most important, then there’s also great
joy in being able, once you’re in it, to push as hard as you can.”
He stepped down from the dais and was mobbed. As aides
tried to usher him out, Steyer hugged and high-fived. Only
when a lawyer launched into a sales pitch for a project did
Steyer start to extract himself—except, no, he couldn’t help
but stick around to listen. When he finally moved on, an aide
tried again to focus his attention, but Steyer swung around
him to say something into a supporter’s ear. He leaned back
to show he was listening as the man replied, then plunged
back in, aiming his finger at the guy’s heart. He was still gab-
bing as he left, the long goodbye of a born candidate.
A chemical reaction seems to take place inside the brains
of the megarich when their fortunes grow from extraordi-
narily big to inconceivably vast. It convinces some of them
that they possess the power to solve a great challenge or cri- 59
sis of the day. This might help explain why billionaires go on
quests to colonize space ( Jeff Bezos), slow the aging process
(Larry Ellison), build flying cars (Larry Page), or bore holes
into the Earth for transportation by tunnel (Elon Musk).
Steyer isn’t living out a sci-fi fantasy. A former prep school
jock who says he crushes 300 crunches a day, he’s cast him-
self as the hero of a black-and-white Western, ever preparing
for a showdown at high noon. He even wears cowboy boots
these days, though he says it’s for the heel support.
Before he can take down Trump, though, Steyer will have
to claw past his own party’s sheriffs. Congressional minority
leaders Nancy Pelosi of California and Chuck Schumer of New
York are among those who’ve aired their displeasure with
calls for impeachment, arguing that such talk is divisive and
premature. David Axelrod, Barack Obama’s former senior
adviser, has punched harder. “Steyer impeachment ads seem
to me more of a vanity project,” he tweeted in November. “It
is-at least [at] this point-an unhelpful message.” It took Steyer
exactly one hour to slap back: “Unhelpful to whom, David?”
He followed up a minute later with the less aristocratic “No
fear.” The spat resumed a few months later. “Dems should
NOT commit to impeachment,” Axelrod wrote on April 8.
Steyer really didn’t like that. “Appeasing Mr. Trump and being
polite is what’s wrong with the Establishment,” he replied.
“Spare me,” Axelrod wrote back. “Don’t make the mistake of
confusing your ad copy for a bill of impeachment.”
This kind of talk infuriates Steyer. A week before the
Washington event, he was at a hotel bar in Las Vegas, bang-
ing his hand on a table. “There was no one in the United
 Bloomberg Businessweek
Share of registered voters who support ● 76% of
starting the process to impeach Trump* Democrats
States who wanted to make a big deal out of impeachment!”
he said. Some billionaires find Vegas irresistible for its baccha-
nalia, but Steyer was drinking seltzer with cranberry juice,
light on the juice. He was in town to demand protections for
young immigrants and to back an effort to make Nevada’s
electricity greener.
Steyer’s most distinctive feature is a Roman nose, though
it often cedes the stage to eyebrows that perform circus
tricks when he gets excited. Trump gets them going. Steyer
maintains that the president has disqualified himself from
the land’s highest office by obstructing justice, conspiring
with Russians, violating the emoluments clause of the U.S.
Constitution, undermining the free press, and simply being
dangerously crazy. “We believe we have a gigantic threat to
our democracy,” he said at the bar. “We believe this guy is
very dangerous to the health and safety of American citizens.”
The “we” risked coming off as royal, but Steyer was reach-
ing for the unifying vibe of a stump speech. Decades ago, he
ran (successfully) for student body president at Phillips Exeter
Academy, the New Hampshire school where Abraham Lincoln
sent one of his sons. Steyer went from there to Yale, joining
Morgan Stanley’s training program after graduation. He left,
earned an MBA at Stanford, and in 1983 got a job at Goldman
60 Sachs on Robert Rubin’s merger arbitrage team, which trained
at least three future billionaires. Steyer quit a few years later
for the only comparably glamorous job in finance: manag-
ing his own fund. While getting it up and running, he scored
an intro to the investment firm Hellman & Friedman from
Matthew Barger, a friend from Yale. “Tom’s possibly the only
person I’ve ever met who I think could be president of the
United States someday,” Barger told his colleagues at the time.
Hellman & Friedman helped Steyer set up the fund that
would become Farallon, based in San Francisco and named
for nearby islands that jut out of shark-infested waters. It made
money every year for decades, buying up the junk bonds of
distressed companies, betting on some stocks, shorting others,
investing in real estate, and doing some private equity. Before
2008, when the financial crisis reached its nadir, Farallon’s
main fund was returning an annual average of almost 15 per-
cent, and the firm was overseeing more than $30 billion, mak-
ing it one of the biggest hedge funds in the world.
It was also, to Steyer’s growing embarrassment, investing in
oil, private prisons, subprime lending, and coal. By 2008 he’d
grown alarmed about climate change; he was going to church
more often and thinking seriously about politics. When a prop-
osition to suspend some of California’s robust air pollution
rules reached the state ballot in 2010, he donated $5 million
to the campaign that ultimately defeated it. Two years later he
left Farallon and went on to start NextGen Climate, a nonprofit
with a super PAC arm, writing seven-digit checks that helped
candidates willing to fight for the environment.
The Supreme Court’s 2010 decision, in Citizens United v.
Federal Election Commission, to strip away long-standing limits
April 30, 2018
● 65% ● 55% of 18- to 34- ● 51%
of blacks year-olds and Hispanics of women
on corporate money in politics had inaugurated an era of his-
toric hospitality to politically motivated billionaires. Some of
the cash they’ve spent has stayed hidden, but as far as disclosed
donations go, Steyer reigns supreme. By that measure, he out-
spent even notable Republican kingmakers Charles and David
Koch, Sheldon Adelson, and Robert Mercer during the 2014
and 2016 national campaigns. The $75 million Steyer spent in
2014 exceeded the total from the next three donors combined,
according to the Center for Responsive Politics. (One of those
three was Michael Bloomberg, founder and majority owner
of Bloomberg LP, which publishes Bloomberg Businessweek.)
Steyer spent even more in 2016, about $91 million.
Bankers love to talk about their return on investment, but
his was mediocre. Half of the eight Democrats he backed in
big races in 2016, including Hillary Clinton, lost. That was
slightly better than in 2014, when three of his seven candi-
dates in Senate and gubernatorial races won. Steyer had a bet-
ter run backing California ballot propositions, helping kill the
2010 air pollution plan and, two years later, spending more
than $29 million on a measure that changed corporate tax
rules and funneled money to green jobs.
He didn’t see Trump coming. But only a few hours after
the election, he published a pledge that he’d stand up to the
incoming president. In July, six months into Trump’s term,
something new took shape. Steyer changed NextGen Climate’s
name to NextGen America and said its mission would expand
to include health care, equality, and immigration issues.
That wasn’t enough for him, though. He was also think-
ing about running for the U.S. Senate or for governor of
California, his home since he left Goldman Sachs. (He and
his wife, Kat, own a mansion overlooking San Francisco Bay, a
place whose marketing brochure showed a ballroom, five bed-
rooms, and two fireplaces. They also have an 1,800-acre cattle
ranch down the coast.) In September, Steyer met Democratic
consultant Kevin Mack, a direct-mail specialist who’s worked
for Planned Parenthood and the AFL-CIO. “I sat down with
him to talk about a whole range of things: ‘This is what it
might look like to run for office, this is what it might look like
to start a movement,’ ” Mack said.
Within days, they’d landed on a crusade for Steyer—
something national and big. The logic was that Steyer could
spend, say, $150 million to try to win a Senate seat—or he
could start “running a national movement right now to hold
this president accountable,” Mack said. “You do that for a
hell of a lot less.”
Steyer decided to launch this movement outside the
auspices of NextGen America, choosing the name Need to
Impeach. He shot the fireplace spot and bought time on cable,
including enemy territory: Fox News. It took mere days to
catch the attention of his target. On Oct. 27 at 6:58 a.m.,
before the sun rose over Washington, Trump tweeted that
Steyer was “wacky & totally unhinged.” Fox pulled the ad not
long after. In a statement, the channel’s co-president cited
 Bloomberg Businessweek
● 49% of 35- to 49- ● 45% total ● 39% of those
year-olds 50 and older
“the strong negative reaction to their ad by our viewers.”
With that, Steyer had earned his spurs, complete with a pair
of shiners to exhibit to the resistance. Signatures soared. He
filmed more ads, set on a ranch, in front of the White House,
by the Liberty Bell, and in Times Square, where he also paid for
jumbo impeachment billboards. By February, Need to Impeach
had about 40 staffers and a headquarters in a San Francisco
Beaux Arts building. The group set up a war room for oppo-
sition research, plus a media arm and a legislative outreach
team, and sent Steyer on a 30-stop tour to press his case across
the U.S. The plan for November is to compare the organiza-
tion’s list of millions against voter files, register anyone who
isn’t signed up, and turn out everyone on Election Day.
Mack likes to say that Steyer’s list is now bigger than the
National Rifle Association’s. But there are reasons why old
hands such as Axelrod see the campaign as a billionaire’s van-
ity project. As with the ads, almost every Need to Impeach
press release places Steyer front and center, announcing plans
to file Freedom of Information Act requests about Trump or
to mail 5,100 impeachment guides to 2018 candidates.
Still, Steyer has fans inside the impeachment cottage indus-
try who are grateful for an ally rich enough to turn their ideas
into zeitgeist. Laurence Tribe, a Harvard Law School professor
who teaches a class on Trump and has a book about impeach-
ment coming out in May, credits Steyer with pushing the topic
into late-night talk shows and dinner-table conversations.
“He’s encouraging people to take seriously something that
might have been too much in the background,” Tribe said.
“People need to be conditioned to think about it. And he’s cer-
tainly put it on the national agenda in a really important way.”
As Steyer’s eyebrows bounced across the airwaves late last
year, talk about his political ambitions grew louder. In January
he stepped before a row of American flags in Washington to
*ASSUMING DEMOCRATIC CONTROL OF THE HOUSE. DATA: QUINNIPIAC UNIVERSITY POLL, CONDUCTED JAN. 5–9
announce that he wouldn’t run for office in California, at least
not in 2018. Instead, he said, he would double his impeach-
ment spending and focus on registering millennial voters.
Watching him, though, you sense that the itch hasn’t sub-
sided. His teams at NextGen and Need to Impeach include
flacks and Obama veterans, even a body man who keeps his
Honest Tea at the ready. He’s been known to invoke Lincoln
twice in an hour while espousing policies that position him
as a billionaire Bernie Sanders: single-payer health insurance,
higher taxes for the rich, and clean energy.
In the past year, a titillated press has played are-they-
running with entertainment mogul Oprah Winfrey (after she
delivered a galvanizing speech at the Golden Globe Awards in
January), Facebook Inc. co-founder Mark Zuckerberg (after
he hired two top Obama campaign operatives), and Starbucks
Corp. Chairman Howard Schultz (whose unofficial side job
is calling for nationwide transformation). Each eventually
offered the ritual not-I.
Although Steyer did the same for 2018, he’s been coy
April 30, 2018
● 37% of men ● 7% of
and whites Republicans
about 2020, refusing to say whether he’ll run for the White
House. He nevertheless gets exercised when asked about one
hypothetical billionaire rival. “The day that Howard Schultz
gets up with me at 4:25 to walk in Palmdale, I’m going to
start thinking differently about him,” Steyer said, invoking
a recent NextGen door-knocking trip in California. Schultz
didn’t respond to an email asking for comment about Steyer,
but Dallas Mavericks owner and Shark Tank star Mark Cuban,
who’s said there’s a chance he’ll run, obliged. “Don’t know
him. Never met him,” he wrote. Eight minutes later, Cuban
sent a follow-up: “Don’t have any thoughts on him at all.”
Whether he’s thinking about a presidential run or not,
Steyer is clearly enjoying himself. In Las Vegas he met with
young immigrants at the University of Nevada, then headed
out into the desert sun to ask students what they cared about.
Afterward, sitting outside a campus cafe, he was practically
glowing. He teased a reporter and laughed at his own zinger,
then kept on laughing, clapping his hands and thumping the
table before taking a breath and howling some more. Finally,
12 seconds on, he silenced himself with a final slam of the hand.
Moments later, talk of Trump flipped him to apocalyptic
mode. But like a hero saddling up against formidable odds,
he professed to be up to the task. “Politics is understood by
very few people in the United States of America, and if you 61
want to understand it, then I think you’ve got to put in your
10,000 hours,” he said. “I have, actually. Do the math.”
A week later, at a Presidents Day panel in Philadelphia,
he was confronted by the possibility that five digits wouldn’t
be enough. As Steyer sat on a stool in his jeans and cowboy
boots, a man in the audience interrupted. “You’re talking
about good and evil,” the man said, “and there are those of
us who think that a billionaire who has $1.6 billion to throw
around of his own money may be a threat to democracy.”
Steyer listened, hands on knees. “So you want me to
address that?” he said.
“I think so,” the man replied.
Steyer’s mood seemed to dim. “OK, fine,” he said. “Let’s
talk for a second about money in politics.”
“Let’s talk about you,” the man said. The room fell so quiet
you could hear a throat clear. Before Steyer could address the
expensive elephant in the room, a fan piped up: “Thank God
you’re doing what you’re doing!” People clapped.
“Let me answer this question,” Steyer said, pointing at the
heckler, forefinger wagging twice. “I think it is true that my
ability to be heard is disproportionate based on the amount
of money I have.” The man tried unsuccessfully to interrupt.
“Look, I think we have a great system,” Steyer continued.
“But we have very far from a perfect system.”
He was getting worked up. “If there was no money on the
side of progressivism,” he said, “then, actually, we wouldn’t
be able to organize against the people who are—”
He kept on speaking, but it was hard to hear him over
the applause. <BW>
CYBERSECURITY
INTERNET OF THINGS

22-23 May
ARTIFICIAL INTELLIGENCE

Station F
Paris, France

BE READY FOR THE

I M M I N E N T LY P O S S I B L E .

Atte nd S ooner Than You T hi nk ,

Bloom berg ’s premier tec hn ology
event i n Par is. Learn h ow A .I .,
the Inter net of Th ing s, an d AT T E N D T H E E V E N T
cy bers ecurit y are res hap in g
the very near fut ure. bloomberglive.com
 P
THE
Board game nights let

U
a new generation of executives
compete—and collaborate
By Mark Ellwood

POWER R
Photograph by Stephen Lewis

S
OF PLAY U
I
T
S 63

66
Behind the wheel of
Lamborghini’s new SUV

68
Robert Stern, architec-
tural conservative

70
The facial that came
from outer space

71
Tools to spruce up your
garden game

72
A philanthropist puts
financiers’ anxiety to
good use
PROP STYLIST: KODY PANGBURN

April 30, 2018

Edited by
Chris Rovzar

Businessweek.com
 OFF HOURS Bloomberg Pursuits
T
he rattle of dice is syncopated but constant.
A dozen or so men sit at different tables, each lit-
tered with an elaborate assortment of board game
pieces—plastic figures, cards, and tokens. A bowl filled
with candy-colored dice sits on one table like a giant
assortment of the worst-ever M&M’s.
Although these guys are playing to win, there’s an
atmosphere of camaraderie more than combat—no money
is wagered—and they walk one another through each round,
thinking aloud and discussing strategies. No wonder, given
how complex many of the games are. “I could memorize the
Torah, or this,” says one man, laughing as he brandishes the
brick of a rulebook for Advanced Squad Leader.
The group meets once a week in a gaming den in
Manhattan’s Chelsea neighborhood. Every surface in the
wood-paneled room is piled with bright boxes. They’re
stacked precariously on the floor and windowsills and loaded
onto shelves amid leather-bound books. The games display
an array of styles: A Roman Empire-themed game is called
Trajan; another one, Churchill, honors wartime politics; Star
Wars: Rebellion lets you play on the side of the rebels or
the Empire. There’s even one based on Ken Follett’s epic
The Pillars of the Earth.
When J.R. Tracy bought this loft several years ago, he
carved it in two—one half became the family home, the other
64 a dedicated gaming lab. Tracy works in finance, and most
of his fellow gamers are fortysomething bankers or lawyers
or executives in other highly paid, highly stressful fields.
“These guys come from taking depositions all day in a suit
and tie. Then they look so happy to leave that all behind for
a few hours,” Tracy says, sipping a beer.
Tracy and his crew aren’t outliers: They’re part of a quiet
network that’s more Snakes & Ladders than Skull & Bones,
where groups of mostly white white-collar types come
together to decompress with dice. “I used to be this weird
freak, who had this odd hobby that I didn’t share with any-
one,” says financier Jim Doughan, another
CURRENT OBSESSIONS
You may know Monopoly and
Risk, but these newer favorites
are heating up game nights
POWER GRID GLOOMHAVEN
In this German- Like Dungeons &
designed game, Dragons without the
utility managers dice (or role-playing).
bid for power Players team up for
plants in an effort to battles in a shifting,
dominate supply. puzzlelike storyline.
April 30, 2018
regular gamer. “You would do it on the down-low. Now more
people are doing it than I ever knew. In the finance industry,
you don’t have to play golf anymore—you can play games.”
He marvels at how wide-reaching his once-niche hobby is
becoming. “My neighbor showed up the other day at a gam-
ing event. He’s a doctor. I had no idea.”
One demographic that’s underrepresented is women.
“The hobby as a whole is nowhere near parity, so it’s a
very male group,” Tracy says of his club. “But there are two
women who come at least two or three times a year.”
He pegs the gender divide to the hobby’s war-gaming her-
itage, and Mindy Kyrkos, a corporate travel agent and avid
gamer, agrees on its lingering impact. “Very often I’m the
only woman at the table,” she says. “It’s not that women
don’t enjoy conflict, but not that type.”
As with fraternal groups since time immemorial, this net-
work provides other advantages beyond the chance to unwind.
“When I was changing jobs, one of the best career decisions
I’ve ever made, it came directly through a gaming contact,
and I’ve certainly recommended people that way,” Tracy says.
“And I’ve hired people I’d never have known without gaming.”
There are no formal statistics on the number of such groups,
but the trend has caught hold enough that some compa-
nies have opted to include gameplay in their hiring process.
Recruiters for Pennsylvania-based Susquehanna International
Group LLP stage game nights at colleges and universities to
seek out potential hires, looking for the strategic thinking
such a hobby engenders. SIG also hosts regular play evenings
for employees; multiple groups will play the same game,
stress-testing it to see if it leads to good team-building.
“We approach it the same way we approach trading,” says
Todd Simkin, a 20-year veteran of the company who co-heads
its education team. “We look for ways to play the game,
the different nuances, and we stop and discuss strategies.
Then we have a debriefing afterwards.” A favorite, Avalon,
divides players into good and bad guys, then tasks them with
deducing who is on each side. SIG operates a standalone,
PANDEMIC TERRAFORMING CARCASSONNE
Health experts work MARS This world-building
together to stop the Aspiring Elon Musks game is often
global spread of a race together toward compared to Catan,
disease, amassing a common goal. where the goal is to
cards that bestow Gameplay is backed populate a French
unique abilities. by real science. countryside.
OFF HOURS Bloomberg Pursuits
company-run website, raiseyourgame.com, maintained by
employees who share their observations, tips, and theories
on all kinds of gaming, from sports to board games to cards.
It’s this type of collaboration that makes board games dif-
ferent from the every-man-for-himself mentality of poker,
says Benjamin Hoffstein, who works on the tech side of
finance. He runs Compass, a scavenger hunt and puzzle
competition where “New York City is the game board.”
Every year it attracts almost two dozen teams from Goldman
Sachs Group, Bridgewater Associates, Barclays, BlackRock,
JPMorgan Chase, and other companies to compete in live-
action puzzles at various locations across the city—and raise
money for charity along the way.
Winning in business is rarely a
“IN THE FINANCE
solo endeavor, and Hoffstein says
his successful players have a group
mindset. “You might work on a
INDUSTRY, YOU DON’T
trading desk for a firm,” he says,
“where you’re trying to get a team
of people to quote-unquote win.”
According to NPD Group Inc.,
U.S. sales of board games in 2017
were $1.1 billion, up 7 percent from
HAVE TO PLAY GOLF
the previous year. Travis Parker,
who runs Game Crafter LLC, a cus- ANYMORE—YOU CAN
PLAY GAMES”
tom game business, estimates that
more than 3,000 games are released
annually. Their producers range
from big companies such as Hasbro
Inc. to individual creators using
crowdsourcing platforms like Kickstarter. Crowdfunding has
been crucial to the board game boom: In 2017, for instance,
Kickstarter saw 400 more successful campaigns for tabletop
games than in the previous year, and revenue was up 30 per-
cent. Not all titles become household names—the jury’s still
out on Advanced Squad Leader, for sure—but some have
become best-sellers: Pandemic, Carcassonne, and Ticket to
Ride, though none comes close to the sales of Catan (origi-
nally known as Settlers of Catan), a game in which players
trade commodities to build an empire on a fictional island.
Launched in 1995, Catan has sold more than 20 million
copies worldwide. It drummed up new enthusiasm for board
games in a world of Nintendo consoles and was therefore piv-
otal in the emergence of networking groups such as Tracy’s.
Reid Hoffman of LinkedIn Corp. has called Catan “the board
game of entrepreneurship.” He’s described board games in
general as a kind of off-duty MBA course that can exercise the
brain to think strategically. Hoffman and Zynga Inc.’s Mark
Pincus were among the Silicon Valley execs who began making
game nights popular among the tech set about a decade ago.
Not long after, East Coast legal and finance types began
playing the same way. Spencer Sloe is in a weekly game
group in Brooklyn, N.Y., whose ringmaster is a health-care
lawyer. Ranged around the table are hedge funders and
wealth managers. Sloe himself is an executive with media
April 30, 2018
company Oath. “I’ve helped people network—like, ‘Hey, my
niece wants an internship, do you know XYZ person?’ ” he
says. “It’s like getting people into a cult.”
Justin Carroll is a bankruptcy lawyer and fervent board
gamer. The crowd at Carroll’s games is a mix of gay and
straight and largely white. Most players didn’t know one
another before showing up and were drawn by word-of-
mouth. Indeed, that’s how he met a lawyer who specializes
in pro bono programs, who in turn helped Carroll begin a
similar project at his own employer.
Wall Street insiders have been monitoring the rise of
board gaming as a low-pressure networking device, accord-
ing to executive coach Roy Cohen.
He says playing such games has
become more popular in the
last three or four years. Gaming
cabals can prove so useful, Cohen
actively encourages many clients
to seek them out to get ahead. One
Scrabble-loving financier ended up
joining a group after a chance con-
versation in a cafe in East Hampton,
N.Y., and later found work through
its members. “It’s for obvious rea-
sons,” Cohen says. “They can blow
off steam, decompress, and net- 65
work all at the same time.”
British journalist Tristan
Donovan, the author of It’s All a
Game, which explores the history
and enduring appeal of board games, suggests their cur-
rent popularity derives from a newly time-pressed culture.
Those who might once have spent an entire Saturday golfing
together see an evening of board gaming as far more efficient.
Networking at the table is also simpler than on the links: The
structure of the evening makes conversation easier and erases
the hierarchies of the 9 to 5. “You’re sitting around pieces of
cardboard, leaning in close, and it all feels a little more inti-
mate,” Donovan says. Unlike poker, which relies on bluffing
and concealing your true self, board games can act as inad-
vertent personality tests. These nights can provide a preview
of how someone might behave as a colleague—those sore los-
ers at Catan are likely to throw the same tantrum when a deal
doesn’t go as planned.
Of course, the surge in popularity of Catan and other
games came hand in hand with the rise of nerd obsessions in
general; video games, fantasy books such as the Harry Potter
series, and films based on comics have become so perva-
sive that geekery is no longer a subculture, it’s the culture.
Back at Tracy’s group, the conversation grows noisier as
the evening (and dice) rolls on, and wine glasses and beer
cans begin cluttering the few empty surfaces. “I like the tac-
tile nature of it, the social aspect of it,” Tracy says, before
leaping into a Japanese history game called Rising Sun to
help steer a clan leader from making a losing mistake. <BW>
 A pit stop in
Bracciano, Italy

66

A Supercar in SUV Clothing

Test-driving the Urus, Lamborghini’s bad boy
of supermarkets and soccer practices
By Hannah Elliott

“You must have a vision, or you have the Huracán and Aventador. At full pro- Aston Martin, Rolls-Royce, Ferrari, and
nothing,” says Maurizio Reggiani, head duction, the SUV will almost double that Mercedes-Maybach are the last holdouts
of R&D for Automobili Lamborghini number, strengthening Lamborghini’s in the segment, and all four have SUV
PHOTOGRAPHS: FEDERICO CIAMEI FOR BLOOMBERG BUSINESSWEEK

SpA, who was in Rome in mid-April to
announce the brand’s latest SUV, the
Urus, its first since the “Rambo Lambo”
LM002 was released in 1986.
This vision, put simply, is to make
more money. The Volkswagen AG sub-
sidiary needs to add affluent families,
millennials, and women to the ranks
of the power-hungry gentlemen driv-
ers it has historically attracted. Last
year, Lamborghini sold fewer than
3,900 units worldwide of its two models,
position as VW moves to bundle some
of its iconic brands into a new internal
product group called “Super-Premium.”
Although the Urus follows utility
vehicles from rivals such as Bentley,
Lamborghini is hoping sales will support
its less profitable models, much the way
Porsche introduced the Cayenne SUV
in 2002 and “saved” its 911 model from
extinction. Numbers don’t lie. Sales
of all luxury SUVs were up more than
20 percent in March from a year earlier.
plans in the works.
The $200,000 Urus certainly brings
the heat, with seven all-terrain drive
modes, seating for as many as five, room-
ier cargo space—and a zero-to-60 mph
sprint time of 3.6 seconds. Imagine
it as the love child of a Countach and
the LM002: a 4.0-liter V8 engine with
641 horsepower and 627 pound-feet of
torque, the most of any SUV today. Top
speed is 189 mph.
Racing around a track in Italy, the
CRITIC Bloomberg Pursuits April 30, 2018

Urus grips each corner in an iron fist; it

barrels down the straights with an inten-
sity previously reserved for supercars.
You can feel the rear wheels adjusting
as you slide out of each corner; braking
comes hard and fast.
And yes, the guttural roar of the Urus
will more than adequately announce
your status as the enfant terrible of gro-
cery runs and school pickups. Interiors
are smooth enough to balance the raw
power, with a foot-long touchscreen
and optional sunroof—plus, you can
finally see out the back, although there
are some blind spots directly over your
shoulder. It’s telling that 68 percent of
preorders are to “conquest buyers,” or
those who don’t yet own a Lamborghini.
Test-driven on sandy and rocky dirt
roads—what you may find on a remote
country estate—it handles like any other
top SUV thanks to all-wheel drive, four-
wheel steering, and torque vectoring,
even if each clunk or potential scratch
wracks your nerves. Unlike a typical
Lambo, it has some clearance, as much 67
as 9.8 inches. But even with adaptive
air suspension, the Urus is among the
lowest-riding SUVs available.
Then again, taking this brawny
auto off-road isn’t the idea. You buy
this car, or a Bentley Bentayga or
Mercedes AMG G Wagon, to access all
the power and performance of a sto-
ried, respected brand in a rig that sits
high on the road and is big enough to
fit friends and children and, yes, even
baggage for road trips, particularly if
the seats are down. There are even four
cup holders—a miracle! Compared to
the $460,000 Aventador, the Urus is the
best way to get a lot of Lamborghini for
your money.
Initial interest is on track, accord-
ing to Stefano Domenicali, chief execu-
tive officer of Lamborghini. The Urus is
sold out for two years following its June
debut, and 18 percent of those on order
are to be painted the company’s tradi-
tional screaming yellow hue. A hybrid
version is on the way.
It’s all coalescing into a rather clear
message from Lamborghini that’s echo-
ing across the pastures of northern Italy:
Ferrari, your move. <BW>
 REAL ESTATE Bloomberg Pursuits April 30, 2018

Looks Prewar,
Is Postwar. Looks Like a
Co-Op, Is a Condo
Clones of 15 Central Park West, all designed by the same architect,
are taking over Manhattan. By James Tarmy

Robert Stern, the former dean of the Yale Unlike the 100-year-old buildings that “Fifteen Central Park West changed
School of Architecture, has designed line much of Fifth Avenue and Central real estate,” says Donna Olshan, pres-
dozens of buildings in widely varied Park West, 15 CPW is relatively new, ident of Olshan Realty Inc. and pub-
styles across New York City. But then he which means everything works. The lisher of the Olshan Luxury Market
designed 15 Central Park West, a soaring apartments are configured for a modern Report. “All of a sudden it became
limestone condominium built in 2008 in family (large kitchen, fewer bedrooms, extremely cool and elitist to live in that
a faux-prewar style. Ever since, develop- expansive living areas) rather than, say, building, and it set the tone for condo-
ers have mostly wanted one thing from a household that relied on multiple miniums that came after.”
68 him: more of the same. It may seem odd to try to
It’s understandable. Before build an exact copy of 15 CPW,
it was even completed, 15 CPW albeit smaller or at a less
broke New York records. In prestigious address. But “it
2007, Sanford Weill, then chair- was seen as a successful tem-
man of Citigroup Inc., set a plate,” says Jonathan Miller,
city record by paying more president and chief execu-
than $6,400 a square foot for tive officer of Miller Samuel
his $43.7 million penthouse. Inc., a real estate appraiser
Celebrities, including Alex and consultant. “Why on
Rodriguez, Robert De Niro, Earth would 220 Central Park
and Sting, filled its halls. In the South use the same architect
initial frenzy, apartments were as a building that’s a quarter-
being flipped just months after mile away facing the park?
they were bought. During the Because it sold.”
financial crisis, when the rest And Miller says Manhattan
of the real estate market floun- isn’t even close to saturated
dered, the building became with Stern condos. Unlike
its own overheated market. In buildings by other starchi-
2010, Min Kao, the executive tects such as Frank Gehry
chairman of Garmin Corp., A rendering of the entrance hall of 520 Park Ave., which is covered or Jean Nouvel, which are
in stately walnut and French marble paneling
paid almost $10,000 per square often meant to stand out
foot via an LLC for his 41st-floor condo. live-in staff members. And most import- with striking designs, 15 CPW and its ilk
There are now five similar Robert ant, it’s a condominium, which means are meant to blend in. And that’s why
ZECKENDORF DEVELOPMENT LLC

A.M. Stern Architects projects under that if a buyer has the cash, she can Stern is building more of them than his
construction in Manhattan. Developers move right in—New York co-ops have peers. “The genre of [starchitecture] is
hope each will have the specific appeal notoriously restrictive boards known defined by creating something unique,”
that became 15 CPW’s hallmark: all the to reject celebrities and foreign buyers. he says. “The multiple versions of
graciousness and convenience of a pre- And unlike many co-ops, residents of 15 Central Park West are a conserva-
war co-op without any of the hassle. 15 CPW can rent out their apartments. tive version of something new.” <BW>

REAL ESTATE
20 EAST END AVE.
Location: The far eastern reaches of the
Upper East Side, with river views for some
apartments.
Neighboring buildings: Mostly postwar
co-ops.
The story: Thirty-four of the original
41 units have sold. That includes a couple
of units that were purchased and flipped.
The building already has residents and an
active buyer pool, with demand consistently
matching availability. The most expensive
unit, aside from the penthouses, is an
11th-floor, five-bedroom apartment with
almost 5,000 square feet, which is listed
for $15.5 million.
Average price per square foot: $2,860
250 W. 81ST ST.
Location: The heart of the Upper West Side,
nestled among reliable restaurants and
shops.
Neighboring buildings: To the west of
Broadway, you’ll find endless rows of
gracious brick co-ops along either side
of West End Avenue. To the east are
townhouses and, a few blocks over, the
co-ops of Central Park West.
The story: 250 W. 81st has 25 active
listings, 20 of them in contract. The
apartments are fairly manageable in size,
ranging from 1,571 sq. ft. to 3,836 sq. ft., and
relatively affordable: A two-bedroom on the
fifth floor costs $3.9 million; at the top end,
a five-bedroom on 16 goes for $14.8 million.
The price per square foot is a bargain, too.
“They didn’t try to kill everybody with the
price,” Olshan says. “They built the right mix
of product, and it moved.”
FROM TOP: SANDRA BAKER/ALAMY STOCK PHOTO; ZECKENDORF DEVELOPMENT LLC; WILLIAMS NEW YORK,
Average price per square foot of all
active/in-contract listings: $2,891
30 PARK PLACE
Location: Straddling the edge of Tribeca
and the Financial District, the building
went up in one of the wealthiest ZIP codes
in the U.S.
Neighboring buildings: There’s a
combination of office buildings, lofts, and
super-high-end luxury condominiums. The
newly converted-to-residential Woolworth
DESIGN BY ROBERT A.M. STERN ARCHITECTS
Building, with its $110 million penthouse, is
next door.
The story: The building contains a Four
Seasons Hotel and an affiliated set of
apartments. The 157 residential units occupy
its upper floors and offer access to all of
the Four Seasons’ amenities, including a
75-foot pool, double-height gym, spa, salon,
15 Central Park West
April 30, 2018
and catering. The cheapest apartment,
according to StreetEasy, is a two-bedroom
unit on the 53rd floor that costs $4.4 million.
The most expensive, excluding the
penthouses, is a 19-room, 8,100-sq.-ft.
apartment on 74 that’s asking $26.2 million.
Average price per square foot: $3,330
520 PARK AVE.
Location: Technically the Upper East Side,
but on the border of Midtown East, an area
dominated by massive offices and banks.
Neighboring buildings: It’s a few blocks
south of the traditional limestone beauties
that crowd most of Park Avenue. On the
flip side, residents are only half a block
520 Park Ave. from Barneys New York.
The story: There are currently two active
listings and 10 past listings, not including
the penthouses, according to StreetEasy.
Every apartment takes up an entire
floor, offering 360-degree views of the
city. Because none have closed, the only
information available is the asking price,
which means that true prices could be
below what’s listed. The two active listings
on the 19th and 32nd floors, respectively,
range in price from $4,443 a square foot to
69
$6,838 a square foot.
Average price per square foot, taken with
a grain of salt: $5,144
220 CENTRAL PARK SOUTH
Location: Just north of Billionaires’ Row,
this does its peers on 57th Street one
better by being directly on Central Park
South. Carnegie Hall, should you want it, is
a short walk away.
Neighboring buildings: It’s in expensive
company, standing side by side with some
250 W. 81st St.
of the world’s priciest residential real estate.
The story: We don’t know much, to be
honest. Given that 220 Central Park
South isn’t releasing sales information,
there are no active or past listings on
StreetEasy, and the website lists zero
availability. However, there’s one indication
that easily puts it at the top of the pack:
Vornado Realty Trust CEO Steven Roth, the
building’s developer, is on record saying it
will cost more than $5,000 a square foot
to build. Developers, as a rule, aren’t in the
business of losing money—so the average
price per square foot here should easily
soar above those of its peers.
Average price per square foot: Well
above $5,000
Data exclude penthouses, which can
throw off average prices.
 WELLNESS Bloomberg Pursuits
70
The
Space Facial
LED masks are NASA-tested skin
boosters that don’t require needles
By Mark Ellwood
You may have seen them on Instagram: featureless, eerie
white masks glowing brightly in selfies by Jessica Alba, Kate
Hudson, Chrissy Teigen, or even soccer player Paul Pogba.
In photographs, these LED beauty masks can make even
these attractive specimens of humanity look like Hannibal
Lecter from The Silence of the Lambs.
The strange device dispenses the latest cutting-edge
anti-aging regimen: LLLT, or low-level light therapy. The
masks are studded with light-emitting diodes that pulse or
flash in preprogrammed patterns of red, blue, and infrared
April 30, 2018
light. Devotees swear that they are an electrical fountain
of youth.
“While it’s hard to imagine that these devices work, there
is real science backing it up,” says independent beauty chem-
ist David Pollock. He explains that NASA first harnessed the
power of LEDs to grow plants on the space shuttle in zero
gravity. The light encourages cells to produce more of the
chemical adenosine triphosphate, or ATP, which fuels
healthy growth and functioning; fibroblast cells, for exam-
ple, will become better at producing collagen with more
ATP. When the scientists tried red light on astronauts, their
wounds healed faster, too—again, thanks to higher levels of
ATP. Further research showed the various positive effects
of infrared light, as well as visible red and blue light, on bio-
matter, and thus the science of LLLT was born.
Advocates say the masks can help minimize wrinkles (red
light) or treat acne (blue light), with different color combi-
nations depending on one’s goals. For high-end spas rapidly
embracing the technology, the masks have an even better
feature: No invasive procedures or injections are necessary.
But you don’t have to visit a salon to try the therapy. For
$2,300 you can own the same mask celebrity estheticians
use: Opera, from Korean skin-care firm Déesse, offers eight
treatment modes and five wavelengths in different colors
that aim to address skin troubles including rosacea and fine
lines. California-based wellness provider BioPhotas Inc. pro-
duces a range of devices under the Celluma brand. Rather
than a hockeylike mask, it sells a flexible panel, equipped
with Panasonic LEDs, that can be used anywhere on the
body—handy when you need to treat wrinkly décolletage or
an acne-prone back. Celluma Pro, one of its pricier models,
costs $1,595.
If it’s laughter lines that have you frowning, just try the
SpectraLite Eyecare Pro ($159), a visor from Dr. Dennis
Gross. Neutrogena’s acne-busting light-therapy mask is only
$34.99, but it requires monthly refills of its portable battery
pack for ongoing treatment, each costing $14.99.
Most manufacturers advise using an LLLT mask on clean
skin for 30 minutes daily or every few days; it will take about
a month of treatment to see full results. Wearing these masks
feels like staring at the sun, with your eyes closed, on the
beach; it’s slightly warm, too, but not unpleasantly so.
(There’s no risk to sight, since the light isn’t a laser; none-
theless, it’s best to wear a sunbed-style eyeguard.) Thirty
minutes under a Celluma Pro doesn’t bestow an instant glow
to the skin, but a day later, it may seem a little firmer.
ILLUSTRATION BY BEN GILES, FACES: GETTY IMAGES
Not all beauty insiders are convinced. Christine Chin, a
Manhattan-based expert in microdermabrasion, laser pig-
mentation erasure, and other treatments, prefers the instant
impact of an intense pulsed light (IPL) treatment. The big-
gest problem with masks, she argues, is the commitment.
“For half an hour every day? Be honest—would you do it?”
she asks. “Lemme tell you, it’s hard enough to get people
to wash their face. It’s like exercising at home. If you don’t
have a trainer, it’s always tomorrow.” <BW>
 THE ONE Bloomberg Pursuits April 30, 2018

THE COMPETITION

A Pretty
For a more rustic perfectly adequate.
look, try the hand- The rubber-handled
forged $174 Heirloom trowel, rake, and

Piece of
garden tool set from hoe are all made of
Fisher Blacksmithing, powder-coated steel.
based in Bozeman,
Mont. It combines THE BOTTOM LINE

Work
reclaimed materials You can certainly
with hand-turned move dirt for less
black walnut handles. money; cleaning
Of course, something planter beds with
like the $12 G&F these Sneeboer
Don’t be tempted to keep these garden tool set
from Home Depot is
tools can feel a bit
like using a Ferrari
Sneeboer garden tools clean for a milk run. But
Photograph by Jessica Pettway they’re built to be
used. That they
work beautifully
is a bonus. $760;
sneeboer.com
Dutch company Sneeboer & Zn. has been making garden
tools since 1913, but only recently has it added an element
of luxury to an otherwise dirty job. The company’s
walnut-handled titanium tools—this $760 set includes
a transplanting trowel, hand fork, and hand hoe—are as
much as 30 percent lighter than typical cast-aluminum
versions and much stronger. But you’re not spending that 71
much for practicality: These tools look so good, they’ll
compete with your flowers for attention.

w
The company
spent three
years testing
seven grades
of titanium
PROP STYLIST: KODY PANGBURN
 GAME CHANGER Bloomberg Pursuits April 30, 2018

Mississauga, ON L5T 2N1. E-mail: bwkcustserv@cdsfulfillment.com. QST#1008327064. Registered for GST as Bloomberg L .P. GST #12829 9898 RT0001. Copyright 2018 Bloomberg L .P. All rights reserved. Title registered in
Bloomberg Businessweek (USPS 080 900) April 30, 2018 (ISSN 0007-7135) H Issue no. 4567 Published weekly, except one week in January, February, April, June, July, September, and December, by Bloomberg L.P. Periodicals

changes to Bloomberg Businessweek, P.O. Box 37528, Boone, IA 50037-0528. Canada Post Publication Mail Agreement Number 41989020. Return undeliverable Canadian addresses to DHL Global Mail, 355 Admiral Blvd., Unit4,

the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or e-mail: busweek@nrmsinc.com. Educational Permissions: Copyright Clearance Center at info@copyright.com. Printed in the U.S.A. CPPAP NUMBER 0414N68830
postage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Offices: Bloomberg Businessweek, 731 Lexington Avenue, New York, NY 10022. POSTMASTER: Send address
Audette Exel
The groundbreaking philanthropist is getting investment
bankers to use their skills for good. By Laura Colby

72

“Financial services, particularly post the global crisis, had Graham Goldsmith, formerly vice chairman of Goldman
been seen to bathe itself in dishonor,” says Audette Exel, Sachs Australia, the work offers unique opportunities—
a former lawyer and banking executive in Sydney. “Many including the chance to work side by side with former
great bankers and financial-services professionals—people competitors. “It is quite an experience to be negotiating
of great integrity—had huge concerns about that.” with them and not against them,” he says.
Exel operates an unusual consulting company that cap- Exel’s dealmaking experience proved crucial to manag-
italizes on that anxiety. Called Adara Partners and based ing a charity. “The investment banking community taught
in New South Wales, Australia, it’s staffed by people with me to keep my back straight and fight,” she says. Adara’s
day jobs at the likes of Goldman Sachs, UBS, and Deutsche projects so far have been concentrated in communities
Bank who contribute their time on a pro bono basis. One- that tend to be ignored by larger charities, Exel says. The
hundred percent of the advisory fees paid by Adara’s clients organization was already building schools and clinics in
flow into Adara Development, Exel’s charity, which she remote villages outside Kathmandu when the devastating
started way back in 1998 to help people living in poverty. 2015 earthquake struck Nepal, and it added reconstruction
The consultants get the benefit of good karma, and infrastructure development to its list of proj-
while Adara gets a steady source of income. ects. In Uganda, one of Adara’s neonatal clinics
Since its founding in mid-2015, Adara Partners b. 1963, Wellington, has helped improve the survival rate of infants
New Zealand
has earned $3.7 million in fees working with - weighing 3 pounds or less to 89 percent, from
companies in Australia and New Zealand, with Cut her teeth as an just 27 percent in 2005, in the town of Kiwoko.
activist protesting
$2.8 million more in the pipeline for the first half South Africa’s rugby Exel hopes to replicate her investment-
ILLUSTRATION BY SAM KERR

of 2018. Although it’s relatively small, Adara has team during apartheid banking-for-good model on Wall Street. “It’s
-
some high-profile clients, including Australia’s Befriended Uganda’s
a sector that has not showcased its skills for
national football league. (Exel also runs a first lady, Janet good,” she says. “But these skills are important
small financial-services company called Adara Museveni, at the World
Economic Forum in to the economy and to making the world a bet-
Advisors.) For Adara consultants, including Davos, Switzerland ter place.” <BW>
 SMALLER. “The best home
security system”

FASTER.
WIRECUTTER
APRIL 2018

STRONGER. “...SimpliSafe
belongs at the
top of your list...”
Meet the all new SimpliSafe.
CNET EDITORS’ CHOICE
It’s smaller, faster, stronger than ever.
3/28/18
Engineered with a single focus: to protect.
With sensors so small they’re practically invisible.
Designed to disappear into your home
And blanket it with protection.
More than easy to use—downright delightful. “A seamless
system”
All at prices that are fair and honest.
PCMAG EDITORS’ CHOICE
It’s home security. Done right. 4/2/18

Right now get free shipping at

SimpliSafe.com/bbw
LET’S ALWAYS PUT
INVESTORS’ NEEDS
ABOVE OUR OWN.
LET’S MEASURE UP.
Our society will reap the benefits when we make investing
more transparent and client-focused. At CFA Institute, we
advocate for business models based on outcomes that are
good for investors, not just outcomes that are good for us.

Demand the best. Demand a CFA® charterholder.

Get started at letsmeasureup.org

© 2018 CFA Institute. All rights reserved.