Cartels, Collusion, Domestic Spying and Price Fixing in Silicon Valley

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Cartels, Collusion, Domestic Spying and Price Fixing in Silicon Valley

John Hudson

 

Michael Arrington has a history of breaking big news stories for his technology site, TechCrunch. His modus operandi is "to bust the door down and clean the mess up later." Today--he's got a big mess to clean up.

On Tuesday night, Arrington published a sizzling bombshell about powerful Silicon Valley investors seemingly engaged in collusion and price fixing. The story begins when Arrington is tipped off to a secret meeting of 10 "super angel" investors at a wine bar in San Francisco. Arrington says these investors account for "nearly 100% of early stage startup deals in Silicon Valley." When he walks in on their meeting, the silence is "deafening" and he says he's "never seen a more guilty looking group of people."

After an awkward exchange, he leaves the meeting but manages to speak with a handful of investors afterwards to find some damning testimonies. According to Arrington, the super angel investors were colluding against both entrepreneurs and traditional venture capital firms. They wanted to act together to "keep traditional venture capitalists out of deals entirely" and "keep out new angel investors" from entering the market and driving up valuations. They also kept an online wiki to coordinate their ideas. A handful of attendees said they were "extremely uncomfortable" with the manner of the discussion and Arrington explains why:

What's wrong with this? Collusion and price fixing, that's what. It is absolutely unlawful for competitors to act together to keep other competitors out of the market, or to discuss ways to keep prices under control. And that appears to be exactly what this group is doing.
This isn't minor league stuff. We're talking about federal crimes and civil prosecutions if in fact that's what they're doing. I had a quick call with an attorney this morning, and he confirmed that these types of meetings are exactly what these laws were designed to prevent.

Big scandal, right? Maybe, maybe not. Arrington's story is facing a wave of scrutiny on the Web. Though Arrington didn't name names in his story, one angel investor has already admitted to attending the meeting and--in a salty blog post--calls him "dead f--ing wrong." A number of other technology bloggers have raised skepticism about his story. Here' whats they're saying:

  • This Doesn't Add Up, writes Sarah Jacobsson Purewal at PC World: "If, in fact, this is a top-secret tech cartel that has funded almost all Silicon Valley start-ups, how are the members so dumb? Not only do they (a) tell Arrington when and where they're meeting, they (b) share meeting notes with him, and (c) even keep a wiki where they can talk about all their illegal colluding and price-fixing. Is it just me, or does something not add up?"

  • There's No Way Those Angel Investors Were That Powerful, writes angel investor Chris Yeh. He estimates that, at best, these 10 investors had $50 million funds. In total that makes $500 million. Given that there are "about 500,000 angel investors in the United States, and that they invest about $20 billion per year... the alleged conspirators only represent 0.5 percent of the annual angel investing activity in the United States." If we're talking Silicon Valley, they only control about 5 percent, Yeh adds. That makes Arrington's estimation of "100% of early stage startup deals in Silicon Valley" seem rather dubious.

  • It Doesn't Work Like This, writes Fred Wilson, a widely read venture capitalist from New York: "I wasn't at the meeting and I don't know for sure what was discussed. But I know most of these investors and I know what is on their minds right now... This is not a market suffering from collusion. It is a market where the investors wish they could inject some collusion. But they can't and they won't. Market dynamics, at least as they exist today and for some time to come, will not allow it. I applaud Mike for raising this issue. But I believe it is a bit of a red herring. The fear of VCs colluding is alive and well. But the act of collusion is pretty well dead in the venture business."

  • Answer Me This, Arrington, writes Dan Primack at Fortune: "There seems to be an inherent contradiction in Arrington's story: If super-angels are planning to price-fix, wouldn't that enable the very 'traditional' VCs that they are purporting to thwart? If McClure, et. all begin offering below-market terms, wouldn't the large checkbooks be emboldened? Moreover, the very reason that so many individual angels became super-angels was to reduce the need for deal syndication. This would seem to encourage it, since meeting participants would need to work together in order to preempt the aforementioned competition."

  • Hold On, Give Arrington Some Credit Here, writes Henry Blodget at Business Insider:

In other industries, such behavior is known as "price fixing" and "collusion" -- and it's illegal.
We... want to tip our hat to Mike for his story (it's great) and his, well, balls. It's this sort of work that makes this new form of journalism so valuable and fun. It's also the type of work that would make the tech industry barely notice if the mainstream media just rolled over and died.
As Mike observes, many of the folks he calls out for this meeting are friends and sources, some of whom will undoubtedly be furious at him for exposing their little game.
It takes balls to lob a grenade at your friends like that. It also takes finesse and skill (and power) to do it and still have many of those folks rushing to call you after the meeting to preserve their relationships with you.
While there are plenty more angels in Silicon Valley than just 15, it is true that, these days, companies getting investments from some of the "top" angels is seen as the ticket needed to move up the chain to big name venture capitalists as well. So hearing that a group of these investors may be colluding to effectively fix pricing is bad news for the supposed "meritocracy" of funding in Silicon Valley, and should be seen as a pretty serious problem.
Along those lines, I should say kudos to Arrington for publishing such a story. While he doesn't name names, these investors are the key sources for many of his stories, so publishing this story is probably burning some bridges with sources. It's good to see that he wouldn't let that get in the way

Judicial Watch Obtains Records from EPA Showing Obama Agencys Illegal Use of Social Media BOTS and PropaTrolls powered by Silicon Valley... (judicialwatch.org)

Judicial Watch Obtains Records from EPA Showing Obama Agency’s Illegal Use of Social Media Platform for Propaganda

‘I don’t want it to look like EPA used our own social media accounts to reach our support goal’ – EPA Director of Web Communications

(Washington, DC) — Judicial Watch obtained 900-pages of documents from the Environmental Protection Agency (EPA) which reveal the agency’s use of the mass-sharing Thunderclap social media platform to covertly promote its policies in violation of federal law.

The documents show that EPA staffers, via the Thunderclap platform, recruited outside groups to lobby in support of the Clean Water Rule or “Waters of the United States.” Thunderclap shares member messages across multiple Facebook, Twitter and Tumblr accounts simultaneously.

Federal law prohibits agencies from engaging in propaganda, which is defined as covert activity intended to influence the American public. Federal law also prohibits agencies from using federal resources to conduct grassroots lobbying to prod the American public to call on Congress to act on pending legislation.

The EPA’s Director of Web Communications Jessica Orquina, in a September 10, 2014, email, wrote to Karen Wirth, an EPA team leader in the Office of Ground Water and Drinking Water, urging the covert use of the Thunderclap technology. “I don’t want it to look like EPA used our own social media accounts to reach our support goal,” Orquina wrote to Wirth.

The Clean Water Rule, now in the process of being repealed by the Trump administration, was a significant and legally controversial increase in federal authority over streams and other small bodies of water.

A December 2015 report by the Government Accountability Office (GAO) concluded the EPA’s use of Thunderclap to promote the Clean Water Rule “constitutes covert propaganda” and violated federal law.

The records were obtained by Judicial Watch in a Freedom of Information Act (FOIA) lawsuit filed on June 21 in the U.S. District Court for the District of Columbia after the EPA failed to respond to a May 3 FOIA request (Judicial Watch vs. U.S. Environmental Protection Agency (No. 1:17-cv-01218)). Judicial Watch seeks:

All internal emails or other records concerning project administration, management, or assignment of tasks related to the EPA’s use of the Thunderclap social media platform.

On September 9, 2014, Travis Loop, the EPA’s director of communications for water, initiated the lobbying effort in an email to Gary Belan, senior director for the organization American Rivers, under the subject line “RE: IMPORTANT: Join a Thunderclap for Clean Water” that read:

EPA is planning to use a new social media application called Thunderclap to provide a way for people to show their support for clean water and the agency’s proposal to protect it. Here’s how it works: you agree to let Thunderclap post a one-time message on your social networks (Facebook, Twitter or Tumblr) on Monday, September 29 at 2:00 pm EDT. If 500 or more people sign up to participate, the message will be posted on everyone’s walls and feeds at the same time. But if fewer than 500 sign up, nothing happens. So, it is important to both sign up and encourage others to do so.

In a September 10, 2014, email from Loop to Orquina, Loop asks “What’s the best way to get the other agencies to sign up for the Thunderclap and promote on social media? Interior, USGS, NOAA, etc. I was going to tweet at them to join the Thunderclap, but thought maybe you had thoughts on that and maybe a more direct line.” Orquina responds: “Why don’t I send a message to the interagency social media listserv?”

In a September 15, 2014, email, Loop seeks assistance on the Thunderclap effort from the American Public Health Association (APHA). Loop writes to colleagues Brian Bond and Micah Ragland: “Can you reach out to your contact at the American Public Health Association and see if they can use their Twitter to support our Thunderclap for clean water? Basically we would love if they could sign up for their Twitter account to participate and then tweet to their followers an encouragement to participate? If how to do this is unclear I can talk to someone there. They have more than 440,000 followers so this would be a nice bump.”

In a September 25, 2014, email to Jay Jensen of the White House Council on Environmental Quality (CEQ), Loop noted of the Thunderclap Clean Water effort: “Right now we have 840 people who have signed up and so the message will be seen by 1.7 million people. I’m trying to make this as big as possible, so anyone that can sign up and encourage others to sign up is appreciated. I know you have lots of connections all across the board that could make this even bigger.”

“The Obama EPA knowingly did an end run around federal law to push another Obama environmental power grab,” Judicial Watch President Tom Fitton said. “These documents show how these Obama-era bureaucrats seem to be more like social activists than public employees.  Let’s hope President Trump does some major housecleaning at the EPA.”

 

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