July 31, 2017

The Surprising
Resilience of
Samsung
p42
 PHOTOGRAPH BY WAYNE LAWRENCE FOR BLOOMBERG BUSINESSWEEK

59
Youve got a friend in Thailand
July 31, 2017

1
 CONTENTS Bloomberg Businessweek July 31, 2017

IN BRIEF
6 A homebuilding plan stalls in India Polands president rethinks his partys power grab Again, Chipotle? Really?

REMARKS VIEW
10 In the fight over mandatory
8 Actually, Congress, you do need arbitration, both sides
to take a vacation are missing the point

BUSINESS TECHNOLOGY FINANCE

1 2 3
12 The down jacket 19 NASA says it can 25 U.S. corporations
giant of China gives make supersonic are growing
up on being the flights superquiet more racially
down jacket giant diverse. Except
20 With an infusion of cash, the
of the world Athletic, a sports website,
on Wall Street
hopes to play on a larger field
14 A court battle in the 27 Its good to be pals
2 U.S. and Canada over with Hungarys PM
21 At Infosci, the startup
cigarette taxes for a
generation has come out
First Nation company
of retirement 28 Do financial-adviser
robots dream of electric
16 Liability lawyers beaches?
23 Innovation: Spray-on
lose on litigation
touchscreens for walls,
tourism
dashboards, even guitars

ECONOMICS POLITICS
4 5
14 The past is 31 Mexicos gas 36 Germany and
haunting us. thieves may deter Turkey are old friends
The fact that oil investors with big issues
we are selling
33 Left-leaning South Australia 38 Whatever happens in
tobacco, tries to set the pace Washington, America will still
which is a Down Under have a health-care problem
product that
34 One Fed explanation for 40 Trump commits ethanol
kills, clearly the labor shortage: apostasy. Will Corn Country
is not helping Workers cant kick opioids forgive him?

35 Indias highflying stock

market may have lost
its grip on reality
 CONTENTS Bloomberg Businessweek July 31, 2017

PURSUITS How to Contact

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34 35 36 25

Janet Yellen Narendra Modi Recep Tayyip Edith Cooper

Erdogan

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 IN BRIEF

Asia Europe
India has built A Vietnamese court Polish President Andrzej Luxury brand
sentenced blogger Tran Thi Duda vetoed bills backed
just 214,560 Nga to a nine-year prison by his ruling Law and Michael Kors has
homes in the term for propaganda Justice Party that would agreed to buy
against the state after she have replaced the countrys
past two years, criticized the governments Supreme Court judges London-based
well off the pace handling of a toxic waste and revamped the National shoemaker
spill at the Formosa steel Council of the Judiciary.
necessary to meet plant in Ha Tinh province. His decision came after Jimmy Choo for
Prime Minister
$1.2b
eight days of public protest.

Narendra Modis
stated target of
50 million by 2022.
35

Public support for In as little as one year, The U.S. Department After the revelation that
Japanese Prime Minister North Korea could develop of Justice is looking into only a third of the BBCs
Shinzo Abe has plummeted missiles able to reach the allegations that German highest-paid workers
to its lowest level since U.S., American intelligence automakers, including are women, 42 of the
he took office. Hes been agencies say. BMW, Daimler, and broadcasters employees
6
accused of Volkswagen, colluded on signed an open letter calling
cronyism for technology, strategy, and for action to eliminate the
allegedly directing parts to gain advantage pay gap. Director General
government over international rivals. Tony Hall has promised to
backing to a veterinary address disparities.
college created by a
close friend. Abe denies
wrongdoing.
YELLEN: OM WILLIAMS/CQ ROLL CALL. BBC: CLIVE MASON/GETTY IMAGES. ABE: STR/AFP/GETTY IMAGES; CHINA/RUSSIA:
NGA: YOUTUBE. CHOO: COURTESY JIMMY CHOO. COLLINS: J. SCOTT APPLEWHITE/AP PHOTO. CHIPOTLE: GETTY IMAGES.

Previously, the agencies had

estimated that development would
take about four years.

Greece returned to Fearing a hard Brexit,

international bond markets Deutsche Bank is
on July 25 for the first time considering moving
since 2014, raising $350 billion, almost a fifth
SARAH CHRISTINE NOERGAARD/AFP/GETTY IMAGES. CAPITOL: GETTY IMAGES

of its balance sheet, from

$3.5b
London to Frankfurt.

from the sale of

five-year notes.

Chinese and Russian naval warships held joint exercises

In better news for the U.K., both BMW
for the first time, in the Baltic Sea, a signal of deepening and Amazon announced plans to add
cooperation between the two powers. to their workforces in England.
By Claire Suddath and Ira Boudway Bloomberg Businessweek July 31, 2017

Americas
Hes huge. Hes Record stock Mexicos drug war is encroaching on its once-quiet
vacation hot spots. The cartels have begun trafficking in
so unattractive, prices and stolen gasoline as well. 31
its unbelievable. unemployment States at the center of Mexicos drug war
at a 16-year Tourist destinations where violence is spreading

low propelled
U.S. consumer
confidence to a Gulf of
Senator Susan Collins (R-Maine) four-month high. Mexico
was caught on a live mic insulting La Paz
MEXICO
her colleague Representative Blake Cancn
Los Cabos
Farenthold (R-Texas). Hed implied
to a newspaper from his home state Playa del
that he would have challenged Collins Carmen
to a duel over her refusal to vote Pacific
for health-care repeal if she werent Ocean
a woman. Both later apologized.

Elsewhere Petronas, Malaysias state- Chipotle reported on

owned energy company, July 25 that a sick employee
in Washington: abandoned plans to build a had caused the norovirus
outbreak earlier in the month

$27b
President Trump said at a Virginia restaurant that
he would ban transgender 7
made at least 135 people ill.
individuals from serving
in the military and lashed liquefied natural gas export
out at Attorney General terminal on Canadas
Jeff Sessions on Twitter. west coast, citing prolonged
depressed prices.
Senator John McCain
(R-Ariz.) returned to
Federal Reserve officials
the Senate and gave an
announced they would
impassioned speech on The company has struggled to come
begin to wind down their
health care. 38 back after a series of food-safety
$4.5 trillion balance sheet issues in 2015 and had just returned
The House passed a bill relatively soon. to profitability a few months ago.
limiting the presidents ability
to lift sanctions on Russia.
Jared Kushner answered
Meg Whitman
stepped down as
Africa
questions in closed-door
sessions before the House chairman of HP
and Senate intelligence on July 26, a day
Ethiopia arrested Kenya will lift its
34 people on corruption
committees on his alleged
after her name charges, including members ban on flour and
Russia ties.
appeared on a
of the Ministry of Finance gas from Tanzania,
Paul Manafort also met and Economic Cooperation
with the Senate intelligence leaked shortlist and employees of the and Tanzania will
committee and was called
of candidates to
Ethiopian Sugar Corp. in turn remove
to appear before the
Senate judiciary committee replace Travis restrictions on
before a subpoena was
Kalanick as CEO Kenyan milk and
withdrawn and the meeting
was canceled. of Uber. cigarettes, ending
a long-running
trade dispute.
 REMARKS

The Importance of
Being Idle
8
 REMARKS Bloomberg Businessweek July 31, 2017

Washington is wrapped up in getting other people. In the D.C. summer-stock adaptation, hell is
other congresspeople.
work doneeven if a hot August wont Congress could learn something from the French. Or the
produce anything. Time to take a break Germans, who work even fewer hours per year on average
than the French, yet maintain a high, well-ordered standard
of living. In Germany, people have a very strong work
By Peter Coy hard, play hard attitude. They ride their motorcycle or their
Porsche. The quality of life is so high, says Amrei Gold, who
works for the German National Tourist Office in New York.
Europeans view vacation not as a reward but as a necessitya
Gina McIntosh was born in France to Italian parents, is married periodic restorative as essential as sleep. According to the 2016
to a Canadian, and runs a bed-and-breakfast in Saint-Saturnin- Vacation Deprivation Study by Expedia, employed Americans
ls-Aptabout an hour-and-a-half drive north of Marseillethat on average are offered 15 vacation days a year but take only 12.
caters to travelers from all parts of Europe as well as South The French are offered 30 vacation days a year and take all 30.
Africa, Australia, and the U.S. So she knows a thing or two The instinct to say, Just sacrifice your time off is uniquely
about different nations attitudes toward time off from work. American and uniquely American business, says Lonnie
Nobody, she says, takes vacations as seriously as her fellow Golden, an economist at the Abington campus of Pennsylvania
French: French people, for sure, they take their vacation in State University.
August. Thats not even a question. You cant touch the vaca- In 2011, Golden conducted a review for the International
tion of French people. Thats part of their right. They fought Labour Organization of the academic literature on the rela-
for it. It is something that is very engraved in the rights of the tionship between work and productivity. In many indus-
French people. tries, he found, it appears that shorter hours are associated
Americans aredifferent. Sure, they dig their toes in the with higher output rates per hour. Golden just returned to
sand every summer, but they dont believe vacations are the U.S. from another guest stint at the ILO headquarters in
enshrined in the Declaration of the Rights of Man and of the Geneva, where the Europeans quickly called out his American
Citizen. Vacationing Americans are more likely to sneak a ways. I would bring my lunch and eat at my desk, he says.
peak at their work email once a day, or once every 10 minutes. That was completely unacceptable culturally. Everybody
Theyre torn between worrying that the office wont function takes an hour off for lunch.
9
without them orworsethat it will function just fine without Calestous Juma, a professor of the practice of international
them. And its laughably easy to get Americans to feel guilty development at Harvards Kennedy School of Government,
about taking time off when they havent accomplished what says Europeans are more evolved than Americans when it
PHOTOGRAPH BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK

they were supposed to get done before they left. comes to feelings about work and leisure. But its not just
On July 19, President Trump played on the vacation guilt of Europeans who have a healthier perspective. I was
members of Congress when he demanded that they postpone raised in rural Kenya, where work and rest were
their August recess until they managed to repeal and replace defined by season or completion of tasks, Juma
the Affordable Care Act. We shouldnt leave town until this writes in a LinkedIn message. You were free
is completeuntil this bill is on my desk and until we all go to party so long as you were done.
over to the Oval Office, he told Republican senators at a White American congresspeople are finely
House lunch meeting. attuned to their constituents feelings,
To put things in perspective, the high temperature that day so its no surprise that the American
in Washington was a humid 97F. Not a conducive environment, ambivalence about vacation mani-
even indoors, for making a negotiating breakthrough among fests itself in the almost annual
500-plus cooped-up lawmakers who were already frustrated, debate over whether to take
bored, embarrassed, or angry over the Obamacare stalemate. the August recess. On one
In Jean-Paul Sartres play No Exit, a character says that hell is hand, Congress rarely
CREDITS CREDITS CREDITS
 VIEW Bloomberg Businessweek July 31, 2017

accomplishes everything it intends to by the end of July. session the first two weeks of August to knock heads, with
On the other hand, August is a great time to be almost any- the House prepared to return from recess early to take up
where but the District of Columbia. John Nance Garner, who any bills passed by the other chamber.
was speaker of the House before becoming vice president to Honestly, does anyone think members of Congress are
Franklin Roosevelt, famously said, No good legislation ever capable of solving problems creatively at this advanced stage
comes out of Washington after June. In 1970, after a string of their stalemate? The accumulation of unresolved issues is
of agonizing summer sessions, Congress gave itself an August like a weight on their chests: not just Obamacare, but a tax
recess as part of the Legislative Reorganization Act, but both plan, infrastructure, the debt ceiling, the 2018 budget, and
houses are free to keep working if they feel they must. more. Sheer exertion isnt the answer. To schedule one fruit-
Thats where the guilt comes in. Nebraska Republican less meeting after another now could induce the congressio-
Senator Ben Sasse seems like the kind of lawmaker who would nal equivalent of rhabdomyolisisthe death of muscle fibers
love to get out of the Capitol more. Hes a devoted family man; caused by overly strenuous exercise.
his three children are home-schooled; on Fathers Day he Instead, a bit of time back home, communing with constitu-
issued a video message on Facebook telling dads to step up. ents or just staring into the distance from a ridge in the Ozarks,
But in July he told CNN that Congress should work 18 hours a the Adirondacks, the Tetons, or the Cascades might be just the
day, six days a week on repealing and replacing Obamacare, thing to help lawmakers see a way through to governing. Work,
and if necessary skip the August recess. Except he didnt the rest of the world knows, doesnt always equal achievement.
call it a recess; formally, its the August state work period. As a wise person once said, If at first you dont succeed, try, try
Ugh. At press time, the Senate was scheduled to remain in again. Then quit. Theres no sense being a damn fool about it. <BW>

VIEW
To read Barry Ritholtz on Vanguards
next CEO and Justin Fox on
Massachusetts tax-cut miracle, go to
Bloombergview.com

watchdogs solution assumes that U.S.

10
How to Make Lawsuits class-action law works well, which it
doesnt. Unlike most other developed
countries, the U.S. lets courts award

Work for Consumers large punitive damages, doesnt require

unsuccessful plaintiffs to pay defendants
costs, and allows classes to include
customers who havent actively agreed
to participateall of which leads to much
In their fight over mandatory arbitration, Congress and the financial expensive litigation. Lawyers can end up
watchdog are both missing the point gaining more than aggrieved customers,
incurring costs that can get passed on to
consumers as higher prices.
Congressional Republicans and the some markets the practice has become so Whats there to do? Simply repeal-
Consumer Financial Protection Bureau ubiquitous that customers no longer have ing the protection bureaus rule and
are clashing over a question that has a choice. This is troubling, because arbitra- leaving the current system in place, as
implications far beyond the world of tions have no juries, no rules of evidence, Republican legislators propose, wouldnt
finance: How far can companies go and no straightforward method of appeal be an improvement. The right answer
to protect themselves from customer to the courts. Arbitration procedures have starts with tort reform. Congress should
lawsuits? Neither side has gotten the also been known to go badly wrong. make it harder to form classes on an
answer quite right. Enter the CFPB, which issued a opt-out basis. It should put limits on
If youve ever signed up for a credit rule earlier this month saying financial damages and lawyers fees, and it should
card, youve most likely skipped through companies cant ask consumers to sign allow courts to tell the losing side to pay
the boilerplate contracts that are at contracts waiving their right to participate the opponents legal costs.
the center of the controversy. The dry in class actions. On the face of it, this Once thats done, the CFPBs rule
language of the documents is mostly makes sense, given that such actions would work well, because thered be no
concerned with commercial terms which bundle numerous complaints in good reason to force consumers away
such as interest rates and fees. These a single lawsuitcan be the only way for from the courts. Companies and their
standardized conditions facilitate trade plaintiffs with meager resources to gain customers could choose the appropriate
and save everyone time and money. redress. It would also bring the U.S. more venuebe it the courts, arbitration, or
Increasingly, though, the agreements in line with the U.K. and other European mediationon a case-by-case basis. But
have been including something else: a countries, where mandatory arbitration the CFPB cant get to this outcome by
clause requiring consumers to resolve dis- clauses are typically considered invalid. itself. The larger problem is one that only
putes in private arbitration, not in court. In The problem is that the financial Congress can solve. <BW>
 LOOK AHEAD At Sprints annual meeting, Tesla releases second-quarter Huntsman will price the IPO of its

1
investors may seek news about a earnings on Aug. 2 Venator Materials unit in preparation
possible cable deal or sale for its merger with Clariant

B
U
S
I Chinas Elusive Goal:
N Bosideng, the mainlands No.1 says Kelvin Mak, a Bosideng executive director. If
we want to reenter the international market, we

E
maker of down coats, wanted to will be more careful in taking that step.
conquer London. It didnt The misfire highlights the challenges for Chinese
companies, the worlds largest garment exporters,
in tapping overseas markets with their own brands.

S
For one thing, their vast domestic customer base,
historically deprived of choice, created a false sense
12
Founded in the 1970s by rural tailor-turned- of recognition, says Doreen Wang, the New York-
billionaire Gao Dekang, Bosideng International based global head of consulting firm BrandZ.

S
Holdings Ltd. grew into Chinas largest maker of Chinese consumer-apparel makers think that
down coats and the manufacturer of down apparel putting products on shelves means that youve
for top international brands including Adidas established a brand, because that is how they came
and Columbia Sportswear. How successful was up in a China where consumers just bought what
it? By 2012, Bosideng was producing 450 million was accessible, Wang says. But in the current con-
ducks worth of down jackets annually, and its sumer environment, building a brand takes a long
own branded garments were sold in more than time and a lot of investment.
10,000 stores across China. Given that success, While Chinas technology brands, such as
its executives figured that selling high-end outer- Alibaba, Huawei, Lenovo, and Oppo, have been
wear, plus a menswear line, under its own brand successful overseas, its apparel companies havent
in London and New York would be a breeze. So typically known how to build a product with
in 2012 the company opened a richly decorated both functional and emotional components,
35 million ($46 million) store on a prime corner says Richard Ho, senior partner at consulting firm
near Londons Oxford Streetintended to be the Roland Berger GmbH in Shanghai.
first of several foreign outletsand waited for inter- Whats required is a distinctive identity, says
national customers to come calling. Chan Wai-Chan, a retail partner in Hong Kong with
Bosideng is still waiting. The company balked at the consulting firm Oliver Wyman. I would hesi-
spending the huge amounts on marketing needed tate to call Bosideng a brand, he says. They had a
to create buzz around a new global brand, and in fantastic location in London, but when people walk
January it shuttered its London outpost. Worse, by, they ask, Whats the story? Whats this about?
while it was busy plotting an international expan- During a visit to the London store, Chan says,
sion, retailing in China tilted toward online sales, he was told by a shop assistant that Bosideng is
and rivals invaded Bosidengs home turf, stealing the biggest down jacket brand in China. That
market share. has limited effect, he says. They could have the
Now the company is back to focusing on its best production abilities but not the innovative
July 31, 2017 domestic market, but to help revive its profits this idea behind the brand. Thats why they can make
time, it plans to team with foreign brands coming jackets for top global brands but not sell them glob-
Edited by to China. We tried ourselves to sell our merchan- ally themselves.
James E. Ellis
dise outside China and not just be a manufacturer Bosideng, a Chinese transliteration of Boston,
Businessweek.com for other brands, but ended up reconsidering that, was selling $1.3 billion of merchandise in China
 BUSINESS Bloomberg Businessweek July 31, 2017

A Global Apparel Brand

annually, including the nations top-selling line One example of its scale: In a single year, Bosidengs
of down-filled puffer coats, when it hired British massive production included 3.5 million jackets
designers Nick Holland and Ash Gangotra in 2012 of one particular style in one particular color,
to help it take on the premium U.S. and European designer Holland told the British newspaper the
menswear markets. (The company figured mens- Telegraph in 2012. Today, Gao and his family are
wear would be easier to break into.) It even enlisted worth $1.1 billion, according to Forbes.
former Hugo Boss AG executive Marty Staff, who About a third of Bosidengs revenue comes from
helped organize the first and only showing of its col- making down jackets for brands such as Adidas and
13
lection at New York Fashion Week, in 2014. North Facea business that enables the company
Efforts to promote Bosidengs London store to get a glimpse of the styles and designs that
included lending suits to male celebrities and posts others are planning to introduce, Mak says. But
on Facebook, Mak says. Still, he says Bosideng was the company must contend with slowing outer-
unwilling to invest the millions of dollars that many wear sales growth and new rivals. Bestseller dom-
apparel brands spend on advertising and marketing inates with 3 percent of the global market, ahead
each year. We were not comfortable with making of Fast Retailings Uniqlo, with a 1.5 percent share,
that kind of investment as we were just testing the according to researcher Euromonitor International. Number of ducks
waters, he says. Bosidengs market share fell to 0.7 percent last year, needed in 2012 for
Mak cites that lack of spending as a reason from 1.4 percent in 2012. Bosidengs down use

the company hasnt struck a deal with Saks Fifth

Avenue, a showcase for high-end brands, to carry its
The company is now focused on wooing
younger, trend-conscious consumers. Its bought
450m
label. A spokeswoman for Hudsons Bay Co., which several domestic womens wear labels, including
owns Saks, says the company doesnt comment pub- Jessie and Buou Buou, and is looking for more. Mak
licly on the terms of vendor agreements. projects 10 percent to 20 percent revenue growth
In the three years ended in 2015, Bosidengs in the year ending March 2018 for the womens
earnings plunged about 90 percent as customers in workwear segment, aimed at an older, wealthier
China migrated to online platforms and foreign fast- clientele. The company also is negotiating to bring
fashion franchises including Denmarks Bestseller a Japanese childrens wear label to China to take
A/S and Fast Retailing Co.s Uniqlo moved in with advantage of the lifting of the one-child policy and a
brick-and-mortar stores. The companys shares have consumer shift to higher-end items, such as organic
slumped 66 percent over the past five years. cotton clothing.
Thats a big comedown for Gao, the chairman As for down jackets, Bosideng is trying to sharpen
and founder, who started in the 1970s with a single its branding with a line featuring characters licensed
small-town factory with six sewing machines, from Walt Disney Co., which drew 100 million yuan
11 workers, and materials delivered by bicycle ($14.8 million) in sales in its just-ended first year. Its
from Shanghai. On one of his many 180-kilometer also offering a premium line of Bosideng-branded
(112-mile) cycling round-trips, he saw customers in coats designed by Fabio Del Bianco of Italian luxury
Shanghai lining up to buy coats made of downa sportswear brand Moncler. Its quite hard, because
GETTY IMAGES (15)

luxury few people could afford and an opportu- the market has changed, and more and more inter-
nity he was quick to tap. By the early 2000s, the national players have come in, Mak says. What
company was selling huge numbers of garments. we want to do is rebuild our customer base and
 BUSINESS Bloomberg Businessweek July 31, 2017

let people know we are good at down jackets. General Eric Schneiderman sued in federal court
The expansion abroad wasnt a complete bust. in 2013, alleging GRE and its distributor violated
Mak says the London property in trendy Mayfair federal contraband and state tax laws through a busi-
is now worth 50 million, though Bosideng has no ness model specifically designed to evade paying
plans to sell. We may return in a few years when the states cigarette excise and sales taxes. In July,
we have completed our domestic restructuring, California sued the company, claiming it illegally pro-
he says. For now, international expansion is on motes discount cigarette sales without paying into a
hold. Rachel Chang, with Lindsey Rupp fund that covers litigation over health-related costs
for smoking-related diseases.
THE BOTTOM LINE Chinese apparel maker Bosideng had big
plans to take its brand to Europe and the U.S., but it was unable to GRE is having a huge impact in the Canadian
overcome Western consumers coolness to China nameplates. market and beyond because its cheap cigarettes
undercut efforts to curb smoking, says David
Sweanor, an adjunct law professor at the University
of Ottawa. Pricing is far and away the most power-
ful tool weve ever used to reduce cigarette smoking,

These he says. Weve seen a very powerful public-health

tool being rendered less effective at the same time
as reducing government revenue and undermining

Cigarettes the rule of law.

Neither Jerry Montour, GREs chief executive
officer, nor another top executive and co-founder,

Are Smokin Ken Hill, returned messages seeking comment. GRE

attorney Chantell Montour also didnt respond to
requests for comment. But the company has waged
aggressive courtroom defenses, denying it sells
Grand River Enterprises products untaxed cigarettes and challenging the authority
have sparked a lengthy legal battle of governments in the U.S. and Canada to regulate
a First Nation-owned company. Schneidermans
14
case is foundering after a magistrate judge recom-
American Indians introduced tobacco to the rest of mended dismissal last August; a district judge has
the world centuries ago, and the nicotine-laden herb yet to rule. Many other lawsuits against GRE have
remains an important part of their culture and reli- been settled for small amounts or tossed out. Hill
gious ceremonies. Its also key to the commercial was acquitted of a criminal contraband charge in
success of Grand River Enterprises, a company dom- Seattle in 2010.
inated by two Mohawk men on the Six Nations of the The business practices of GRE are inextricably
Grand River Reserve in Ontario, Canada. GRE man- bound with its First Nation-owned status. Tribal and
ufactures Seneca and other brands of cigarettes at a First Nation governments are considered sovereign
sprawling plant on the reserve in Ohsweken. Theyre nations in the U.S. and Canada, though there are legal
sold at smoke shops there and through distributors differences, and tobacco is big business on reserves
who market them across Canada, the U.S., Central such as Six Nations. Smoke shops are ubiquitous
America, and even Germany, where that nations there, selling several GRE brands for $15 a carton,
armed forces have bought them for their personnel. as well as plastic baggies with 200 unbranded ciga-
Theres only one problem with this highly visible rettesthe equivalent of a cartonfor as little as $8.
example of indigenous peoples success: taxes. Cigarettes purchased there by First Nation
Because of Canadian and U.S. laws that give the members for personal consumption generally are not DON HEUPEL/AP PHOTO; DATA: EUROMONITOR; PHOTOGRAPH: DON HEUPEL/AP IMAGES

Canadian tribes First Nation sovereign status, GRE subject to tax. But many First Nation people resent
contends sales of cigarettes manufactured on tribal that governments enforce contraband laws for the
land arent subject to many taxesgiving its smokes purchase of large quantities for resale elsewhere. I Market share for
illicit-trade cigarettes
a huge advantage over heavily regulated mainstream find it absolutely ludicrous that a government can sold in the U.S.
brands such as Marlboro. Thats caused blowback not label a natural herb, something that our people are
only from Big Tobacco companies that are required based and founded upon through our ceremonies, 4%

to pay hefty excise and sales taxes on their products, contraband, Kelly MacNaughton, a Mohawk who
but also from governments that are losing out on tax owns a smoke shop on the Six Nations reserve, said 3.5
revenue from the estimated hundreds of millions of on a podcast last year. Tobacco has laid down the
dollars in annual sales of the First Nation company. economic foundation in our communities. It has risen
That displeasure and the often disputed laws sur- us up out of that poverty. 3
rounding native businesses have made GRE execu- Health authorities say taxes on cigarettes prod
tives no strangers to courtrooms. For the past two smokers to quit a habit that kills 480,000 Americans
2.5
decades, U.S. authorities have accused GRE of avoid- and 37,000 Canadians a year. But taxes vary widely.
ing taxes throughout the country. New York Attorney In New York City, smokers pay a state excise tax of 2002 2016
 BUSINESS Bloomberg Businessweek July 31, 2017

$4.35, a city levy of $1.50, and a federal tax of $1.01. Native Wholesale Supply Co., for American Indian
Retail prices often exceed $13 a pack, or $130 a carton. retailers, and Tobaccoville USA Inc., for non-native
By contrast, the state tax in Virginia is 30 a pack. retailers, which both faced fines and criminal
Officials say such disparities foster smuggling of charges. John June Jr. and Larry Phillips, the owners
cigarettes sold in American Indian smoke shops or of Tobaccoville, pleaded guilty in 2011 to obtaining
low-tax states such as Virginia into higher-tax venues property under false pretenses and agreed to pay
like New York. For smugglers, the appeal is undeni- $6.5 million. In response, the U.S. Department of
able. A shipping container with untaxed cigarettes the Treasury moved to revoke Tobaccovilles import
can be bought for $100,000 and resold for $2 million, permit. The company claims the U.S. targeted it as an
says Alvise Giustiniani, vice president for illicit-trade
strategy and prevention at Philip Morris International
Inc. The economics are tremendous, he says. Its
big money thats attracting organized crime and, in
some places, terrorism. Theres also far less risk of
a lengthy prison term than with narcotics trafficking.
Euromonitor International estimates that in
2015 about $40 billion in cigarettes were consumed
without duty being paid. Philip Morris wants law
enforcement to boost efforts against cigarette
smugglinga tough sell, in part because of the com-
panys history of denying the health hazards of cig-
arettes. The past is haunting us, Giustiniani says.
The fact that we are selling tobacco, which is a
product that kills, clearly is not helping.
GRE is battling a taxation system that grew
far more complex in 1998. Thats when the four
largest tobacco companies agreed to pay more than importer of cigarettes made by a sovereign Native Protesters on
the Cattaraugus
$200 billion to 46 U.S. states to settle litigation over American nation. Reservation rally 15
health-care costs. Under the Master Settlement Native Wholesale Supply in 2010 pleaded guilty against a New York
Agreement, companies accepted limitations on to an obstruction of justice charge. Meanwhile, its state cigarette tax
marketing and advertising. States also passed laws on the hook for more than $47 million in payments
forcing dozens of smaller manufacturers to pay into to Oklahoma, $45 million to the U.S. Department
escrow funds for potential health-care costs over of Agriculture, and $8 million to California. But the
25 years. GRE chose not to join the agreement. When governments are trying to collect from a company
the company failed to make escrow payments, states that filed for Chapter 11 bankruptcy protection in
sued and at least 10 won judgments after GRE didnt 2011, and its reorganization plan was confirmed three
respond in court. years later.
The company launched a counteroffensive based Their distributors woes havent kept Montour and
on its practice of primarily using two large distrib- Hill from throwing lavish customer appreciation
utors to sell its products in the U.S. In court, the parties for retailers and others in the Bahamas and
company argued it bore no legal responsibility for Las Vegas, and hobnobbing with former boxer Mike
the failure of distributors to pay taxes on cigarettes Tyson and minor celebrities such as actor Emmanuel
after they left the manufacturers loading dock. GRE Webster Lewis and the stars of Trailer Park Boys,
sued 31 states in federal court soon thereafter, asking a Netflix series that follows the booze-filled misad-
a judge to declare the Master Settlement Agreement ventures of three petty criminals in Nova Scotia.
and escrow statutes in violation of antitrust law. The Near his home, Hill constructed an elaborate man
company got some escrow judgments reversed in cave, complete with luxury cars and Lamborghini-
states including South Dakota, and it settled with shaped couches. Montour has his own interests,
other states, such as Kansas. But it failed to over- including the financing of two large-scale marijuana-
turn the agreement. growing facilities on tribal lands in California, U.S.
GRE also challenged U.S. escrow and contraband authorities alleged in a search warrant affidavit,
laws before an arbitration panel under the North citing witnesses. Federal agents raided the facilities
American Free Trade Agreement. It sought at least in 2015, seizing 100 pounds of processed marijuana
$340 million in damages, arguing it didnt engage in and 12,000 plants. No charges were filed. A lawyer
retail sales and was protected by its tribal status. In for GRE told the Hamilton Spectator that the tribes
response, the U.S. said GRE failed to acknowledge acted within their sovereign rights. David Voreacos
that a large, if not overwhelming portion of their and Andrew Martin
on-reserve sales ultimately serve an off-reservation
THE BOTTOM LINE Grand River Enterprises has battled U.S.
market. The case was dismissed. and Canadian authorities over taxation of cigarettes as its built a
GREs legal defense didnt help its two distributors, lucrative worldwide business with its Indian smokes.
 BUSINESS Bloomberg Businessweek July 31, 2017

St. Louis Loses Favor

With Plaintiffs
A recent Supreme Court ruling could help companies
seeking to overturn verdicts or dismiss cases

Quick trials, big verdicts favoring consumers, and California, did not purchase Plavix in California, did
a state law that allows nonresidents to easily join not ingest Plavix in California, and were not injured
mass litigations made St. Louis a destination of by Plavix in California, he wrote. The mere fact
choice for attorneys going after companies that do that other plaintiffs were prescribed, obtained, and
business nationwide. Those days may be over, and ingested Plavix in Californiaand allegedly sustained
drugmakers such as Bristol-Myers Squibb Co. and the same injuries as nonresidentsdoes not allow
Johnson & Johnson couldnt be more relieved. the state to assert specific jurisdiction over the non-
The U.S. Supreme Court in June struck a blow residents claims.
against so-called litigation tourism, ruling there The ruling gives J&J renewed hope after the
Its going to
has to be a connection between the forum and the company lost four talc trials in St. Louisthree last be tougher for
specific claims at issue. In an 8-to-1 ruling, the top year and one in 2017. A total of $300 million was plaintiffs.
court said almost 600 people who claimed they awarded to the plaintiffs, each of whom was an out- Judges are
were injured by the blood-thinning drug Plavix of-towner. In those cases, we consistently argued
couldnt sue Bristol-Myers Squibb in a California that there was no jurisdiction, Ernie Knewitz, a J&J
going to read
court because they didnt live in the state. spokesman, said in an email. We expect the existing the Supreme
The fallout in St. Louis was quick. Within days, verdicts that we are appealing to be reversed. An Court decision
J&J, citing the Supreme Court ruling, won a mis- additional 1,000 talc claims are pending in Missouri, and force
trial in a case in which the families of three women most from out-of-state plaintiffs. We expect they
16
blamed their deaths from ovarian cancer on use of will also be dismissed for lack of jurisdiction,
them back to
the companys talc products. Two of the families Knewitz said. where they
were from out of state. Illinois-based drugmaker If that happens, the talc lawsuits could be came from
AbbVie Inc. asked the Missouri Supreme Court on refiled in, or sent to, home courts of the plaintiffs
June 26 to consider the June 19 U.S. Supreme Court or defendants. The cases could also be transferred
ruling in an appeal of a $38 million St. Louis jury to a multidistrict litigation, as has been the case
verdict that found its Depakote medication caused with federal talc suits, which have been combined
birth defects. AbbVie said the trial shouldnt have before a single judge in Trenton, N.J. While one
been held in St. Louis. Two days after the Supreme door shuts to plaintiffs, others may open. Missouris
Court decision, a Bayer AG unit tried to have thrown loss may be Pennsylvanias gain when it comes to
out a lawsuit claiming its Mirena contraceptive product-liability suits from out-of-state plaintiffs,
device caused birth defects. The lawsuit included says Tom Kline, a lawyer in Philadelphia. Many drug
98 women, but only 3 were residents of Missouri. companies, including J&Js Janssen unit, are incorpo-
The federal judge denied that request and sent the rated in Pennsylvania or have substantial research
case back to the city court. or manufacturing facilities there, Kline says. That
There are likely to be more challenges in gives non-Pennsylvania residents the hard con-
St. Louis, where complaints full of nonresidents have tacts that the Supreme Court decision said could
been pouring in in recent years. A lawsuit filed in provide jurisdiction.
2014 over Pfizer Inc.s anti-cholesterol drug Lipitor, J&J and Janssen are facing more than 5,800 claims
for example, has 91 plaintiffs. Only one is a resi- in state court in Philadelphia that the companies
dent of St. Louis. A talc complaint brought against Risperdal anti-psychotic drug causes boys to develop
Johnson & Johnson in 2014 has 65 plaintiffs, with female-like breasts. Kline persuaded a Philadelphia
one St. Louis resident and one other from Missouri. jury last year to hit J&J and Janssen with $70 million
Its going to be tougher for plaintiffs, says Carl in damages in one of the boy-breast cases. Says
Tobias, a law professor at the University of Richmond. Kline: Those cases have to go somewhere, and
Theyll find some friendly jurisdictions, but judges the Supreme Court has said they should go to the
ILLUSTRATION BY SIMON LANDREIN

are going to read the Supreme Court decision and companies headquarters or places where they
force them back to where they came from. do substantial business. Margaret Cronin Fisk
Justice Samuel Alito, writing for the majority and Jef Feeley
on the Supreme Court, set the standard clearly in
THE BOTTOM LINE States such as Pennsylvania may see a spike
describing the problem with the Plavix litigation. in drug-related product-liability suits from out-of-state plaintiffs as
The nonresidents were not prescribed Plavix in lawyers shift to states where drugmakers have operations.
 LOOK AHEAD Apples earnings report will offer a clue as to Austin hosts Sony reports earningsgrowth in

2
whether rumored parts shortages will delay the the IT conference PlayStation subscription services will
expected September release of the next iPhone ChannelCon be key in the hardware offseason

T
E
C
H
N
Mute
O
L 19

NASA says its got the secret

to quiet supersonic planes. Now
The first year of funding is included in President
Trumps 2018 budget proposal.
Over the next decade, growth in air transporta-
O
G
tion and distances flown will drive the demand for
comes the hard part broadly available faster air travel, says Peter Coen,
project manager for NASAs commercial supersonic
research team. Thats going to make it possible

For almost a half-century theres been a clear speed

limit on most commercial air travel: 660 miles per
hour, the rate at which a typical-size plane trav-
for companies to offer competitive products in
the future. NASA plans to share the technology
resulting from the tests with U.S. plane makers,
meaning a head start for the likes of Lockheed
Y
eling at 30,000 feet breaks the sound barrier and Martin, General Dynamics, Boeing, and startups
creates a 30-mile-wide, continuous sonic boom. such as Boom Technology and billionaire Robert
The ground-level disturbances that result Basss Aerion.
shattered windows, cracked plaster, maddened Lockheed helped create NASAs design, using
farm animalshave kept supersonic travel mostly fluid dynamics modeling made possible in the past
off-limits since 1973, when the Federal Aviation decade or so by increasingly powerful computers.
PHOTO ILLUSTRATION BY 731; PHOTO: NASA/LOCKHEED MARTIN

Administration banned its use over U.S. soil. Together, Lockheed and NASA tested and mapped
That may be changing. In August, NASA says, it how subtle differences in aircraft shapes affect the
will begin taking bids for construction of a demo supersonic shock waves they create. The design
model of a plane able to reduce the sonic boom theyve settled on keeps sound waves from merging
to something like the hum youd hear inside a into the sharp N pattern of a sonic boom, according
Mercedes-Benz on the interstate. The agencys to Peter Iosifidis, Lockheeds design program
researchers say their design, a smaller-scale model manager on Junes small-scale model. Instead,
of which was successfully tested in a wind tunnel at the waves are kept dispersed across a wide range July 31, 2017
the end of June, should cut the six-hour flight time of points behind the plane, leaving the resulting
from New York to Los Angeles in half. NASA pro- supersonics a mere hum. Edited by
Jeff Muskus
poses spending $390 million over five years to build NASA is targeting a sound level of 60 to 65
the demo plane and test it over populated areas. A-weighted decibels (dBa), Coen says. Thats Businessweek.com
 TECHNOLOGY Bloomberg Businessweek July 31, 2017

fly, Iosifidis says. Thats where NASA said weve

got to go change the rule, and this is the path to
making that happen.
Dont pack your bags for a supersonic trip just
yet. The fourth major obstacle may be Washington,
because the language of the 1973 ban will require
the FAA or Congress to explicitly undo it even if
technology renders it obsolete.
Whats more, while established aerospace com- NASA is looking for
panies, such as General Dynamics Corp., which bidders to turn Junes
scale model into a
owns Gulfstream Aerospace, have been researching pilotable demo plane
supersonic jets for years and startups (Boom, Spike
Aerospace) have reignited interest in solving the tech-
nical challenges, all their efforts remain in the plan-
ning stages. Theres a lot of work left to be done.
Still, if everything goes as planned, NASA will
test the demo plane over as many as six commu-
nities beginning in 2022, Coen says. Thats the first
step toward appealing to lawmakers and regula-
tors to lift the ban. This time, he says, is different,
because the toughest technical challenge has been
solved. Weve got a lot of support in NASA and
the administration and in Congress for making this
happen. Im pretty excited about our prospects.
Thomas Black
THE BOTTOM LINE NASA and Lockheed say their design
makes a supersonic plane as quiet as the inside of a Mercedes on
the highway. Theres $390 million up for grabs to make a demo.
20
about as loud as that luxury car on the highway
or the background conversation in a busy restau-
rant. Iosifidis says that Lockheeds research shows
the design can maintain that sound level at com-
mercial size and his teams planned demo will be A New Sports
94 feet long, have room for one pilot, fly as high
as 55,000 feet, and run on one of the twin General Authority
Electric Co. engines that power Boeing Co.s F/A-18
fighter jet. Now youre getting down to that level
where, as far as approval from the general public, The Athletic is covering sports
it would probably be something thats acceptable, without covering itself in ads
he says.
By comparison, the Concorde, that bygone icon
of the Champagne-sipping, caviar-scarfing super- Its been a rough year so far for the biggest names
sonic jet set, had a perceived noise level several in sports news, with outlets including Bleacher
times louder, at 90 dBa. The planes advent in the Report, ESPN, Fox Sports, Sports Illustrated, and
1970s helped lead Congress to pass the overland Yahoo! Sports cutting staff. Alex Mather and Adam
ban in the first place; its takeoffs and landings gen- Hansmann say thats an opportunity for their
erated hundreds of noise complaints and wouldnt 18-month-old site, the Athletic, which so far has
come close to meeting todays regulations. Partly focused on relatively insular coverage in a handful
because of the ban, the Concorde wound up being of cities. We cant help but try to round out our
a money pit for Air France and British Airways and local coverage with national voices, says Mather.
was mothballed in 2003. And take a few gambles. The company says
Of the three major obstacles to supersonic This month, he and Hansmann secured a fresh the recent cash infusion
will allow it to triple its
travel, which also include high carbon emissions $6 million in venture funding for the Athletic, a pool of staff writers,
and airport engine noise, the boom has been the San Francisco startup that promises an alterna- to 75
toughest to clear, Coen says. GE is working on tive to the cluttered, screechy interfaces of other
QUENTIN SCHWINN/NASA

designs that can quiet its engines, including by sports publications. Its clean, sharp-looking site
placing them above a planes wings, and NASA has carries no ads because its a subscription busi-
funded an MIT study on ways to address the envi- ness, able to turn a profit in any city where 8,000
ronmental impact. Manufacturers will not take to 12,000 readers pay $40 a year, the founders say.
the lead in developing an aircraft that they cant That means coverage is aimed at superfans. We try
 TECHNOLOGY Bloomberg Businessweek July 31, 2017

to connect with the local diehards, Mather says. (notching 1,000 subscribers in 48 hours after hiring We try to
Big names (the New York Times) and niche indus- Jason Lloyd, one of the best-known Cavaliers beat talk to every
try publications (the Information) have gotten reporters) and Toronto (where 10,000 Maple Leafs
readers to pay for news, but the Athletic is the first maniacs have made the operation profitable). player and not
site taking what looks like a credible shot at the local Mather and Hansmann say the latest cash infu- to be the 20th
sports page. And the subject seems ripe for peeling sion will allow them to hire 50 staff writers to add to microphone in
away from the rest of the local news package, says their slate of 25 (plus freelancers), including some every face
Brian Moritz, a professor at the State University of whove lost their jobs at bigger publications, and
New York at Oswego who studies the economics to add coverage in Philadelphia, San Francisco,
of sports journalism. Nobody has ever offered a and another city or two by the end of the year. The
subscription to just the sports section of the news- company is also betting big on hockey, setting up
paper for $5 a month instead of the whole thing for single-sport coverage in six more Canadian cities
$10, Moritz says. with NHL teams, and its starting to cover college
In sharp contrast to the prevailing aesthetic of football and basketball. The founders have hired
most sports coverage onlinethe visual equivalent Paul Fichtenbaum, the former editor-in-chief of
of a talk-radio host yelling at youthe Athletic is Sports Illustrated Group, as their chief content
downright serene. Readers can access stories from officer. This marks a sitewide shift from thinking
any of its four markets (Chicago, Cleveland, Detroit, about each citys coverage as a separate operation
and Toronto), but by default are shown only articles toward writing more articles with highbrow national
on their preselected teams. The Athletics editorial appeal, the sort of piece that was the calling card of
line is to distinguish itself with analysis and writing, ESPNs defunct website Grantland.
rather than chasing postgame quotes from LeBron- The sites leaders say individual city staffs will
level stars. We try to talk to every player and not to likely remain small, posting a few articles in each
be the 20th microphone in every face, says Mather. market per day. Moritz says their toughest challenge
The founders have no journalism experience. They will be persuading people that their sports thoughts
worked on product development and financial strat- are interesting enough to justify paying a couple of
egy at Strava, a social network for endurance athletes bucks a month, since fans have plenty of free options.
such as marathon runners. There, they learned to The demand for quality local sports coverage
21
ignore casual users in favor of intense ones. far exceeds the supply, says Mike Kerns, president
The company hired its first writers in Chicago, of digital at the Chernin Group, a media holding
based on the hunch that the Cubs good fortune company that just invested in the Athletic. We
would whet appetites for coverage. The teams cham- knew from our experience it was an insatiable
pionship season, their first since 1908, helped attract and increasingly underserved market, he says.
readers to the Athletics commentary. Still, it took Everybody lives somewhere. Joshua Brustein
eight months for the site to sign up 1,000 Chicago
THE BOTTOM LINE The Athletics latest $6 million in venture
subscribers. A January infusion of about $3 million funding gives the site a chance to expand its subscription model
in venture capital helped it grow faster in Cleveland for sports news in the U.S. and Canada.

That Seventies Startup

Infoscis founders say they have a promising software design but arent taking the long view

On paper, Infosci looks like a lot of startups whose referring to the well-known encryption system.
founders travel Sand Hill Road in search of venture Since the youngest of us is 75, we have to have a
capital. It has the dropout, the ex-CIA guy, the expe- different exit plan.
rienced startup sellerand they say they have a way John Kittelberger, 75, is the dropout (high school).
to protect against a key type of cyberattack. But Hes also the businessman, the former owner of a
when the three arrive for meetings with potential plumbing business in the suburbs of Washington,
investors, they arent wearing hoodies and flip-flops. D.C. Phil Dean, 80, spent 30 years handling techni-
The main founders are all 75 to 80, and theyre moti- cal operations at the CIA, was one of the original
vated sellers. members of the agencys Counterterrorism Center,
If we were all 40 years old, wed be going out, and likes to travel by unicycle. Ellingson, also 75,
raising a couple million dollars, building a company, is a lawyer specializing in identity theft who two
taking on RSA, says John Ellingson, the startup seller, decades ago cashed in on a fraud detection system
 TECHNOLOGY Bloomberg Businessweek July 31, 2017

hed invented. We call ourselves the plumber, Ventures, says Infosci has picked an especially com- Since the
the spy, and the nerd, Ellingson says. Company petitive part of the security field. Even in youth- youngest of
meetings are often held at various Panera Bread hungry Silicon Valley, however, years marinating in
Co. franchises. government security operations are an asset, says us is 75, we
The Infosci founders have been working on a soft- Dan Conde, an analyst at researcher Enterprise have to have
ware design they say would protect against hacks Strategy Group. If they are bona fide good-scientist a different
such as the one that breached the U.S. Office of types, they have a lot of things spring chickens wont exit plan
Personnel Management in 2014. That attack exposed be able to do, he says. Theyve been exposed to
the personal information of 22.1 million Americans, the nastiest stuff for literally decades. They know
including identifying information such as Social the darkest, weirdest things that could happen.
Security numbers and background-check files on The founders say their age helped them get to the
people whod done business with or worked for front of the line at the U.S. Patent and Trademark
the government. Ellingson says he and Dean num- Office, which they expect to award them a patent
bered among those who had personal data stolen. on Aug. 1. (Theres a fast track at the patent office
What made the OPM hack so effective was that for inventors over 65.) For now, the three-person
the attackers fooled the agencys network into company is running on $650,000 of funding from
accepting them as trusted contractors by using family, friends, and IT contractor Nuvitek LLC. An
shared secret codes of the kind that typically under- early version of the product is running on Amazon
gird the most secure systems. Because these codes Web Services Inc., and Infosci says its ready to start
usually dont change, the hackers were able to pull licensing the technology.
off the deception for more than a year. Infosci has But forget about spending years honing their
designed security software that changes such codes business. This group wants to get just far enough
as often as 1,000 times a second, so that cracking a to attract a buyer such as Dell Technologies Inc. or
given code wont do anyone much good. Alphabet Inc., or perhaps a private equity company.
Although this idea may sound familiar to Ellingson says he hopes to start soliciting bids as
cybersecurity wonks, usually this type of secu- early as possible. In a twist on the typical Silicon
rity measure has at least one certificate or some Valley ethos, the Infosci team is looking to move fast
such that cant change because its the piece of and hit the golf course. That doesnt mean theyll
22
data that identifies a given user. Infoscis software sell cheap. Ellingson says hes learned a thing or
design doesnt leave that component unchanged. two since selling his last invention for $2 million.
The truth is, you cant keep any secrets, Ellingson We werent so smart back then. Sarah McBride
says, so the company is taking long-term secrets
THE BOTTOM LINE Infoscis septua- and octogenarian
out of the equation. founders are looking to flip their security company as soon as
Alex Doll, managing partner at TenEleven the technology is ready.
Founders Ellingson,
Dean, and Kittelberger
(pictured with
early investor John
Monett, far right) took
advantage of the Patent
Offices fast track for
inventors over 65

PHOTOGRAPHER BY DANIEL DORSA FOR BLOOMBERG BUSINESSWEEK

 Innovation Spray-On Touchpad
Electrick combines conductive coatings or Innovator
additives with electrodes and algorithms developed Chris Harrison
at Carnegie Mellon University. It can create a Age: 33; Director of CMUs Future
Interfaces Group; professor of
touchpad on just about any surfacewalls, steering human-computer interaction
wheels, toysto control lights and other devices.

Setup

Electricks spray primes a

surface to better conduct
electricity, and low-voltage
electrodes placed around
the perimeter of the area can
register changes in the current
caused by touching the surface
in a particular spot.

Use 23

Users can control devices

by touching the sprayed
area. For example, the body
of a guitar can become the
equivalent of several
effects pedals.

Origin Funding Market

Harrison began to hone the ideas The Future Interfaces Group has Harrison sees potential for Electrick
that led to Electrick while interning been granted about $1.7 million to replace touchscreen controls
at AT&T Labs Inc. in 2006 and from the David & Lucile Packard on car dashboards and to control
2007. He built the system with Foundation, Intel, Google, Bosch, lighting and entertainment systems
doctoral students Yang Zhang and and Qualcomm for Electrick and when applied to walls in homes.
Gierad Laput. other projects.

Electrick has attracted interest from coatings manufacturers and automakers since Harrisons team
Next presented it at a conference on human-computer interaction in May, but he says commercialization
COURTESY ELECTRICK (2)

is still years away. Nevertheless, Daniel Ashbrook, a professor who runs an interface lab of his
Steps own at the Rochester Institute of Technology, says that objects with touch functionality are the
future and Electricks is a supercool approach he hasnt seen before. Michael Belfiore
LOOK AHEAD A post-IPO lockup period ends for Snap, giving AIG and MetLife An early U.S. one-cent coin,

3
inside investors their first chance to sell shares of release quarterly mintedin 1792, goes up for auction
the company that owns Snapchat earnings in Denver

I am frequently F
asked what I
country are you N
from (I grew up A
N
in Brooklyn). Ive C
been questioned E 25

about whether I
really went to
Harvard (I did)
or how I got in
(I applied)
Edith Cooper,
head of human
capital management
at Goldman Sachs
July 31, 2017

Edited by
Black bankers are underrepresented among executives. Pat Regnier
And at some companies, the numbers are getting worse and David Rocks

Businessweek.com
 FINANCE Bloomberg Businessweek July 31, 2017

Last year, Morgan Stanley held a company conver-

sation on race in New York. Speaking on the panel
was Mandell Crawley, now head of private wealth Where Are the Black Bankers?
management at the bank, who recalled that when Employers report the data to the government. Some banks didnt
make these reports public until 2012
he worked on sales and trading desks, he was often
the only African American. He told a story about Percentage of U.S. Percentage of top U.S.
traders expressing frustration by smashing phones. employees who are black executives who are black

In my early years I wouldnt dare do that for

fear of a long-held stereotype of the angry black JPMorgan Chase Bank of America
man. And being 6-foot-5 doesnt help, said Crawley. 16% 16%

Now, its important to note I got over it, Ive left

many broken phones in my wake. But the reality is
when people come here and you have to assimilate 8 8

to an environment, and you feel like everything you

do, people are sort of assessing you, that becomes
incredibly exhausting. 0 0

Thats not a story about the bad old days. For 2012 2016 2012 2016
years, Wall Streets top bosses have pledged to boost
diversity in their ranks. But the number of black Wells Fargo Citigroup
people at some large U.S. banks is going in reverse. 16% 16%

At JPMorgan Chase, Citigroup, and Goldman

Sachs, the percentage of senior black executives
and managers fell over the past five years, accord- 8 8

ing to U.S. workforce data supplied to the Equal

Employment Opportunity Commission and compiled
by Bloomberg. Black executives make up no more 0 0

than 2.6 percent of top positions at the three banks, 2012 2016 2012 2016
lower than across corporate America, where the
26
percentage is slightly better and ticking up. Morgan Goldman Sachs Morgan Stanley*
Stanley, which hasnt released 2016 data, reported 16% 16%

a small improvement in 2015, to 1.8percent, well

below the U.S.-wide level. (Companies have some
leeway to decide who counts as top management.) 8 8

Theres no single explanation for why banks have

failed to live up to their promises. Look, we can call
it not caring, we can call it not having the will, we 0 0

can call it not having incentives, not having account- 2012 2016 2012 2016
ability, says Martin Davidson, a professor of leader-
ship at the University of Virginias Darden School of same career opportunities as white colleagues. The
Business who has studied diversity on Wall Street. company said it didnt agree with the claims.
Whatever you want to call it, the bottom line is All six banks make a show of inclusiveness on
theres not enough energy and resources being put their websites. JPMorgan Chase & Co. Chief Executive
into figuring out how to catalyze this black talent. Officer Jamie Dimon boasted about the banks diver-
The trend is similar when looking at all U.S.-based sity in his annual letter to shareholders in April. He
bank employees, not just the top ranks. At Bank of added an exception: But there is one area in par-
America Corp., the percentage of black workers ticular where we simply have not met the standards
slipped to 13.1 percent in 2016 from 15.2 percent in JPMorgan Chase has set for itselfand that is in
2012. The active U.S. workforce is about 15 percent increasing African-American talent at the firm. It
black. Banks with retail branches have a higher per- was a candid admission. It was also a repeat of the
centage of black employees than Goldman Sachs same lines from a year earlier, almost word for word.
As the ranks of top
Group Inc. or Morgan Stanley, where the shares hover In his 2016 letter, Dimon said the bank was funding managers at Citigroup
around 5 percent. Both banks saw their numbers more scholarships and making an incremental grew, the share of those
improve slightly after 2012. $5million investment to improve black diversity. executives who are
black fell to
Only Wells Fargo & Co., among the six largest U.S. The bank agreed this year to create a $53 million set-
banks, showed a large jump in its share of black execu-
tives, going to 8 percent in 2016 from 2 percent in 2012.
tlement fund to end a federal lawsuit over racial dis-
crimination in a part of its mortgage business.
1.6%
in 2016
Its total workforce was 12 percent black throughout Black bankers are losing ground just as Asians,
those five years. Wells Fargo agreed to pay $35million Hispanics, and multiracial people are making
in December to settle a lawsuit by six black brokers gains. The improvement was dramatic for Asians:
who alleged that the bank failed to give them the They made up 12.7 percent of Citigroup Inc.s top
 FINANCE Bloomberg Businessweek July 31, 2017

managers last year, up from 7.7 percent in 2012. around five of the tables. At Goldman Sachs, theres
There was only one black executive in that lead- Edith Cooper, head of human capital management.
ership group in each of the past five years, even as I am frequently asked what country are you from
the number of top managers expanded to 63 from (I grew up in Brooklyn), Cooper wrote in a LinkedIn
26, according to numbers Citigroup published post last year. Ive been questioned about whether
online. That brought the share of black top execu- I really went to Harvard (I did) or how I got in (I
tives down to 1.6 percent. We are not satisfied with applied). Leslie Shribman, a Goldman Sachs spokes-
these numbers and are working hard to improve woman, says our success depends on our ability to
them, says Elizabeth Kelly, a spokeswoman for attract and retain a diverse employee base. She says
Citigroup. Diana Rodriguez of Wells Fargo says the colleagues are encouraged by the diversity of this
bank is committed to increasing diverse represen- years summer interns in the Americas, 13 percent
tation at all levels. Representatives of JPMorgan, of whom are black.
Morgan Stanley, and Bank of America declined to Young bankers pay attention to the gap at the top.
comment on the five-year trend. Jared Johnson, 27, was an associate in JPMorgans
Goldman Sachs didnt name its first black partner asset-management division until May, when he left
until 1986, more than a century after it was founded. to attend MITs Sloan School of Management. It
The year before, Princeton graduate Sergio Sotolongo is important to have colleagues at your level who
joined the company. He became a managing director look like you and share your experience as a black
before leaving in 2006. No one was wearing a white person in America, he says. But without a repre-
hood and sheets, says Sotolongo, who was born in sentative number of black leaders to look up to, it
Cuba and identifies as African American. But the is hard to imagine yourself occupying a meaning-
whole idea was that the finance industry had in it a ful position. Max Abelson and Jordyn Holman
culture that was not friendly or receptive to change.
THE BOTTOM LINE Large U.S. banks concede they arent hiring
Today when the small groups that run the six and promoting enough black employees, but they havent made a
biggest firms meet, there are still no black people dent in the problem over the past five years.

27

Friendship Is a
Bountiful Thing
*MORGAN STANLEY FIGURES THROUGH 2015; DATA: COMPANY EQUAL EMPLOYMENT OPPORTUNITY COMMISSION FILINGS

Meszaros

The worlds top-performing stock is a company with close ties to Hungarys premier

Sales at Hungarian conglomerate Konzum Nyrt. fifteenfold, making him Hungarys fifth-richest
dropped 99 percent last year, its short-term debt bal- citizen, according to financial website Napi.hu, with
looned sevenfold, and it cut its staff by 86 percent. an estimated net worth of $460 million. His busi-
This year? Konzum has the worlds best-performing nesses range from construction to wineries. The
stock, its shares soaring more than fiftyfold on the private commercial broadcaster RTL Klub, which
Budapest exchange at one point. The company has clashed with the government, calculated that
MESZAROS: BOTOS TAMS/444.HU. ORBAN: SVEN HOPPE/DPA

Orban
has a market value of about $142 million. Maybe in 2016, companies linked with Meszaros and his
Im smarter than Mark Zuckerberg, said Lorinc family won 225 billion forint ($858 million) in public
Meszaros, a former gas fitter who in February procurement contracts. In a 2014 interview with the
sparked the rally when he bought a 20 percent stake weekly Heti Valasz, Meszaros credited hard work
in Konzum, speaking to reporters that month. plus God, luck, and Viktor Orban for his fortune.
Or maybe Meszaros has better friends. A former Hungary has changed since Orban roared back
schoolmate of Hungarys prime minister, Viktor to power in 2010 after eight years in the opposition.
Orban, hes mayor of their hometown a half-hours Hes used his two-thirds majority in Parliament to
drive from Budapest and president of a sprawling rewrite the constitution, centralize authority, appoint
soccer academy Orban founded near his weekend allies to key state institutions, and create what he
house. Since 2014, Meszaross wealth has increased calls an illiberal state. While Orban has earned
 FINANCE Bloomberg Businessweek July 31, 2017

praise for stabilizing public finances and weaning acquired Hungarys largest print media portfolio.
the country off International Monetary Fund loans, Opimus, which also owns a stake in Konzum, has
Transparency International says hes eliminated become Eastern Europes most actively traded stock
checks on corruption and enriched his friends. as its share price has quintupled this year.
Its obvious that theyre pocketing public money, Konzum declined to make Meszaros or any
but it all seems to be in accordance with the laws executives available. But Chief Executive Officer
of the land, says Laszlo Urban, a business profes- Gellert Jaszai in March told the business daily
sor at Central European University in Budapest and Vilaggazdasagowned by Opimusthat Konzum is
a former member of Orbans Fidesz party. Thats plenty transparent and that its seeking to attract
really the worrying thing for me: that its all legal. foreign institutional investors.
Filings with regulators dont show that Meszaros Despite the popularity of Konzums shares
has sold significant numbers of Konzum shares, but its trading volume sometimes exceeds that of the
independent watchdogs and members of the oppo- Budapest Stock Exchanges four blue-chip com-
sition say his relationship with Orban presents, at a panies combinedmost brokerages have chosen
minimum, the appearance of conflicts of interest. not to publish regular reports and analyses about
Meszaros is a front for Orban, says Akos Hadhazy, the company. Three analysts declined to discuss
co-chairman of the LMP party, who quit Fidesz in Konzum on the record, citing its opacity and saying Were
2013 after alleging it was riddled with corruption. they couldnt see any justification for its share price. friends, but
And Orban is omnipotent in Hungary. Meszaross businesses took off in 2014 after Orban that doesnt
Orban rejects the notion that Meszaros had a falling-out with another longtime ally, whose
give me any
mocked by parliamentary opposition parties with companies had won (or were part of a group that
the rhyming nickname penztaros, or cashieris won) 11 percent of public procurement money the financial
doing his bidding. Ive never had and never will previous year. By 2016 that oligarchs share of state benefits
have a straw man, Orban told Parliament in April contracts had fallen to 0.1 percent, according to
in response to a question about his ties to his old the Corruption Research Center, a Budapest think
friend. For his part, Meszaros insists he should be tank thats analyzed 150,000 public tenders since
judged on his merits as a businessman and not on 2009. Friendship with Orban or being a member of
his relationship with the prime minister. Were his family pays off, says Istvan Janos Toth, general
28
friends, but that doesnt give me any financial ben- director of the center. You just have to make sure
efits, Meszaros told reporters in February. Hes that friendship doesnt sour. Zoltan Simon
also said bids for procurements are open to anyone.
THE BOTTOM LINE Hungarian company Konzum had 2016
Founded as a retailer a year before the fall of sales of just $91,000, yet its stock has soared since an ally of
the Iron Curtain, Konzum listed on the resurrected Prime Minister Viktor Orban bought in.
Budapest Stock Exchange in 1990. Trying its hand
at businesses such as selling building materials and
manufacturing kitchenware, it bounced along in
penny stock territory.
That changed in February when Meszaros
announced hed bought into Konzum, fueling spec-
ulation that the purchase would spark a rally even
Robot Advisers Can
though the companys 2016 sales were just $91,000.
Kids, state funding is about to pour in and the stock
price will go skyward! an investor using the handle
Be Conflicted, Too
Metwolf wrote on the financial website Portfolio.
Within two weeks, Konzums shares had quadru- Brokers shift to online advice, but fund companies still
pled; in July they peaked above 2,800 forinta gain pay for advisers to go on junkets
of 5,400 percent for the year. On July 24, Konzum
closed at 1,786 forint, the best return this year out
of about 16,000 actively traded stocks with market Robo-advisers offer the promise of impartial invest-
values above $100 million. ment guidance, but the newest ones may not be
Since February, Konzum has acquired stakes in at totally immune from Wall Streets ways. Wealth man-
least five companies with assets ranging from camp- agement units at big U.S. banks including Morgan
grounds to banks to newspapers, adding to the port- Stanley and Bank of America Corp. have rushed to
folio of hotels it bought in 2016. Some companies build so-called robo-adviser services. The products,
connected to Konzum may be owned via a web of sub- which were pioneered by online upstarts Wealthfront Some fund
sidiaries. Meszaros, for example, owns 53 percent of Inc. and Betterment LLC, use algorithms to pick companies pay Morgan
a fund manager affiliated with Konzum, which indi- investments tailored to a customers appetite for risk. Stanley up to
rectly controls MKB Bank, Hungarys fifth-largest
lender. And Konzum has a stake in Opimus Group,
They cut out a lot of the costs of working with flesh-
and-blood financial advisers, and, it would seem,
$550k
for expenses such as
a company partly owned by Meszaros that last year some of their biases. sponsoring seminars
 FINANCE Bloomberg Businessweek July 31, 2017

But it turns out that even software-based finan-

cial advisers can have conflicts of interest. Banks still
employ armies of advisers and get payments from
fund companies that want access to those advisers
clients. Theres a risk that the banks robo programs
could favor mutual funds and exchange-traded funds
from companies that make such payments, accord-
ing to disclosures by the banks.
The practice is known as revenue-sharing,
or paying for shelf space. It includes sponsoring
conferences for bank employees at luxury resorts and
lavishing top brokers with gifts and entertainment.
Vanguard Group, whose popular low-cost ETFs are
the main funds used by Wealthfront and Betterment,
refuses to make such payments. Morgan Stanley in
May dropped Vanguard from the lineup of funds its
advisers offer; it said at the time it was weeding out
funds that were less popular with its clients. Many
other asset managers, including BlackRock Inc. and
Legg Mason Inc., choose to pay.
The trend started about two decades ago,
according to John Strauss, chairman of FallLine
Securities LLC and a former wealth management
executive at UBS Group, JPMorgan Chase, and
Morgan Stanley. When Im a client of one of those
firms, I think Im seeing the best ideas, says Strauss,
whose business helps advisers go independent from
big brokerages. Really, what youre seeing are the
29
ideas they have arbitrarily decided they can make
enough money on to show you.
In June, Morgan Stanley, which calls itself the
worlds biggest brokerage, released details about its events, it disclosed a laundry list of charitable dona-
robo-adviser ahead of a planned launch later this tions and other gifts and payments companies make
year. Its version of the service has a layer of human to the bank. It said it adopted policies to prevent the
decision-making: A global investment committee payments from affecting its advice. The banks robo
will set asset allocations for model portfolios; other service picks low-cost ETFs similar to those in other
employees will pick funds that go into them. Morgan robos, including some from Vanguard. Wells Fargo &
Stanley said in the disclosure that some fund compa- Co., which is also planning a robo-advising service,
nies provided it as much as $550,000 per year for such made a similar disclosure. Wells Fargo, Morgan
things as sponsoring seminars or paying the meal, Stanley, and Bank of America declined to comment
travel, and hotel expenses of brokers attending sales for this story.
events. Companies may also pay the bank as much Strauss has a dim view of the industry training
as $500,000 a year for data about mutual fund sales events, which he says are mostly perks banks use to
and as much as $550,000 for ETF data. More than reward their top brokers. I dont need a boondoggle
120 companies participate in revenue-sharing with to some resort in Palm Beach to help me understand
the bank, according to a separate filing. the value of a money manager, he says.
The payments, according to the banks disclosure, Why would a practice rooted in rewarding human
present a conflict of interest for Morgan Stanley to brokers bleed into services driven by algorithms? It
the extent they lead us to focus on funds from those may be hard to cleanly separate one business from
fund families that commit significant financial and another. Brokerages building robo-services are
staffing resources to promotional and educational piggybacking off their existing infrastructure, says
activities. Morgan Stanley said it would provide Kendra Thompson, a managing director at consult-
objective investment advice, and that this conflict is ing company Accenture Plc. Even as some clients shift
ILLUSTRATION BY PATRIK MOLLWING

mitigated because employees dont get extra compen- their money toward robos, she says, big brokerages
sation to recommend funds from favored providers. are going to be conservative about shaking up their
Bank of America, a big player in wealth manage- existing, profitable business modelusing people to
ment under the Merrill Lynch brand, made similar sell investments to other people. Hugh Son
disclosures for its digital advice service in March.
THE BOTTOM LINE Morgan Stanley, Bank of America, and
While it didnt say how much investment manage- Wells Fargo take payments from fund companies whose products
ment companies paid for training meetings and client their advisersand robo-advisersmight sell.
 LOOK AHEAD Collection data due out on Aug. 1 First-quarter euro zone GDP growth beat The Bank of Englands

4
will confirm whether Argentina has expectations. On Aug. 1, well find out if rate-setting committee
managed to boost tax receipts momentum carried into the second quarter meets on Aug. 3

Violence Raises
Oil Risk in Mexico E
Fuel thieves could prompt
cartels have muscled their way in, with predictable
mayhem. Nine people died in a July 2 shootout
C
O
between rival gangs of huachicoleros in Puebla.
foreign companies to rethink And at least 15 people have died in military oper-
investing in the industry ations to break up fuel theft rings over the past
several months in an area of the state known as

N
the Red Triangle.
The government has started cracking down
Buying stolen gasoline in the central Mexican state of because it needs to draw foreign capital into
Puebla is easy. Pull off the main highway into a busy the energy sector, where oil output has been

O
parking lot in San Salvador Huixcolotla, and the bla- sagging because of a combination of underinvest-
marketeers are waiting in pickup trucks loaded with ment in exploration and production, aging wells,
jerrycans. Theyll siphon the fuel into your tank and deficient infrastructure. The country has a
while boasting that, unlike a lot of the countrys population about five times that of Texas, yet the

M
regular gas stations, they dont cheat customers. U.S. states fuel pipeline grid is 35 times larger.
While this illegal curbside commerce has been Investors who already look askance at the steady
going on for decades, its exploded in the past drip-drip of losses from theft and smuggling are
few years and now costs Pemex, Mexicos state oil even more likely to be deterred by drug gang vio-

I
company, more than 20 billion pesos ($1.1 billion) lence. For potential participants in the fuel busi-
a year. The huachicoleros, as the fuel thieves are ness, whether theyre importing gasoline and diesel
31
known, dig up pipelines and hijack tanker trucks. or theyre looking to construct terminals, its a
These techniques have made Puebla, with its heavy reality check, says John Padilla, managing direc-

C
vehicular traffic and extensive pipeline system, tor of energy consulting firm IPD Latin America
a target for organized crime groups looking to LLC. Exxon Mobil, Glencore, and BP have all
diversify their profit streams. The countrys drug announced plans to set up gas stations in Mexico.

S
A highway blockade
in Puebla to protest
a May roundup of
suspected gasoline
thieves
AGENCIA EL UNIVERSAL/JMA/AP PHOTO

July 31, 2017

Edited by
Cristina Lindblad

Businessweek.com
 ECONOMICS Bloomberg Businessweek July 31, 2017

A clash between rival

gangs of huachicoleros
in Huehuetln el Grande,
in the state of Puebla,
left nine people dead

Commodity trader Trafigura Group has applied

for fuel import permits. And as much as $2.3 billion
in investment has been pledged for pipelines as
well as terminals for storage and transport, accord-
ing to the industry regulator. We take theft very
seriously, Exxon spokeswoman Charlotte Huffaker
said in an email, adding that the company remains
32
committed to opening Mobil-branded service
stations in Mexico but will not directly own or
operate the stations.
Foreign capital and know-how is exactly what
A pipeline in Puebla
Mexicos reform-minded legislators wanted when after it was illegally
they voted in 2013 to end the states 76-year monopoly tapped
in the oil and electricity sectors. The liberalizers has been the scene of two shootouts triggered
have scored some wins: In July private companies by government efforts to take down fuel thieves.
announced oil finds in the Gulf of Mexico that may Ten people were killed in the town of Palmarito
hold as much as 3 billion barrels (the countrys oil Tochapan on May 3 when the military was deployed
production averaged 2.5 million barrels per day to round up suspects, and five died on July 21 in
last year). Households, however, havent seen their the Vicente Guerrero township during an attempt
energy bills shrink, and political opposition to the to capture the alleged leader of the states main
creeping privatization remains vigorous, with one smugglers gang, Roberto de los Santos de Jess,
of the leading contenders in next years presidential alias El Bukanas.
election promising to reverse the reforms. Investors will likely stay clear of places like the
Especially unpopular was the governments move Red Triangle. They are going to start in areas less
to scrap fuel subsidies at the start of this year. Prices vulnerable to fuel theft, says Alejandro Schtulmann,
at the pump immediately jumped about 20 percent. president of Empra, a risk consulting firm in Mexico
Theft grew even faster: Illegal pipeline taps in the City. They will only invest more when they see that
first five months of 2017 were up almost 70 percent the situation is safer.
from a year earlier, according to Pemex. Schtulmann says 30 percent of the consumer fuel
Fernando Chavala, a truck driver, says he was out trade is controlled by petty criminals operating
of work for six months last year after the company solo. But as much as 20 percent of the commerce is
he was working for had one of its 62,000-liter trucks run by the countrys biggest crime conglomerates,
stolen and stopped sending out deliveries. When the drug cartels.
youre on the highway, you never know what could There are echoes of the drug war in the deploy-
happen, he says, as he waits to fill up at a Pemex ment of federal troops to Puebla and in the gov-
terminal in Pueblas state capital. We dont have ernments more-than-decade-long decapitation
any security. strategy to break up the cartels by targeting their
The aptly dubbed Red Triangle, which com- leaders. Also reminiscent are the gang-on-gang
prises a cluster of rural municipalities in the state, clashes that recently broke out in the Puebla
 ECONOMICS Bloomberg Businessweek July 31, 2017

municipality of Huehuetln el Grande. Nine people Red Triangle say they pay from 13 pesos to 14 pesos When
were killed supposedly for their involvement in for a liter of illegal fuel, up from 9 pesos last year. youre on the
the fuel trade and failure to pay an extortion fee But Mexican drivers can still save about 20 percent
to a rival group; authorities said five of them were by filling up at places like the parking lot in San highway, you
kidnapped and their bodies found burned. Salvador Huixcolotla. never know
Jos Aguilar, a local resident, watched the The attendants there dont have pumps. They what could
procession of caskets, stooping under a tree to carry plastic hoses and use their mouths to create happen. We
shield himself from the afternoon sun. As the line of suction so they can siphon the gas into customers
mourners, flanked by state police trucks, wound its tanks. Some wear surgical masks to protect against dont have any
way uphill to the cemetery, Aguilar said the best way the fumes. How many liters? one shouted to the security
to halt the violence was for townspeople to form a driver of a red Honda. He dispensed the fuel, then
vigilante group. He approvingly cited similar efforts shook the empty 20-liter can at the car window to
in states such as Michoacn, where self-defense demonstrate thered been no scrimping.
militias that sprung up in farming communities have Padilla, the consultant, says the entire supply
clashed with drug cartels and government forces. In chainfrom the complicit worker at a Pemex
Huehuetln, no one leaves their homes now after oil terminal all the way down to locals acting as
6 or 7 in the evening, Aguilar said. They shut the lookouts while huachicoleros milk a pipeline
curtains, and the town is lifeless. generates about $1.5 billion, and that figure is set
Officials say theyre pursuing buyers as well as to expand. Thats a lot of money, and it ends up
sellers. Pemex has canceled contracts with seven involving a lot of people, he says.
gas stations in Puebla that are under investigation And despite the governments efforts, there
for receiving stolen fuel. Pemex Chief Executive remains public backing in Puebla for the black
Officer Jos Antonio Gonzlez Anaya has said marketeersand scorn for the federal troops sent in
the company is attacking the demand side of to catch them. Theyre only trying to survive, says
the market. In July the Attorney Generals office Dulce Rosario Martes, a taxi dispatcher in Palmarito.
arrested a mayor in the Red Triangle for alleged Theres no other work. Amy Stillman
involvement in the trade.
THE BOTTOM LINE Gasoline theft costs Mexicos state-owned
The squeeze is having some impact, judging by oil company more than $1 billion a year. And the country stands to
33
the price of black-market gasoline. Residents of the lose a lot more if investors are spooked by the growing violence.

A Rogue State Could

Swing Australia Left
FROM LEFT: CESAR RODRIGUEZ/BLOOMBERG (2); JOANNE DAVIDSON/SILVERHUB/REX/SHUTTERSTOCK

A Labor government pushes clean

energy and a tax on big banks

South Australia has always been a bit different: The which he argues are undertaxed. The proposal,
driest state on the Earths driest inhabited continent, unveiled in June, envisions raising A$370 million
it was Australias only settlement to bar the con- ($293 million) in the first four years. Banks are fight-
victs Britain transported to settle its distant colony ing back with a lobbying campaign; if that fails,
and the first place in the world to let women run theyll likely challenge the tax in court.
for elected office. Prime Minister Malcolm Turnbull, a former
These days its also a testing ground for the banker at Goldman Sachs Group Inc., has been vocal
opposition Labor Party. South Australian Premier in his disdain for South Australias experiments,
Weatherill
Jay Weatherill has set in motion a range of offbeat calling the state a socialist paradise. But it appears
policies to stimulate an economy devastated by the that Labors national leader, Bill Shorten, has been
demise of old-line manufacturing industries, from studying Weatherills playbook. He wants to commit
opening a nuclear waste dump to inking a deal with the nation to a 50 percent renewable-energy target
Elon Musk to install the worlds largest lithium ion by 2030 and has floated a plan to increase the top
battery for storing renewable energy. Weatherill personal tax rate to 49.5 percent for workers earning
premier since 2011has also made waves with a plan more than A$180,000 a year. Shorten is a populist,
to implement a levy on the nations biggest banks, promoting a more left-wing agenda than any other
 ECONOMICS Bloomberg Businessweek July 31, 2017

federal Labor leader in decades, says Haydon come when South Australia heads to the polls in
Manning, a political analyst at Flinders University March. Labor has won 11 of the past 14 elections in
in Adelaide. Hell be looking very closely at whats the state, but this time the party is running neck
going on in South Australia. and neck with Turnbulls Liberals, according to a
Having lost last years federal election by Galaxy Research survey conducted in late June.
only one seat, Shorten appears poised to seize Market realities will likely force Labor to tone
power from Turnbulls center-right government, down its more extreme proposals if the party
which is facing voter discontent as lower growth takes power nationally, says Shane Oliver, head
and stagnant wages stoke fears that living stan- of investment strategy and economics at AMP
dards are falling. A Newspoll survey published Capital Investors Ltd. in Sydney. Turnbull, after
on July 24 showed Labor ahead of Turnbulls coa- all, is already having to implement measures to
lition by 6 percentage points. Under Australias rein in the budget deficit to secure the nations
parliamentary system, the country must hold cherished AAA credit rating. Still, says Oliver, I
federal elections by 2019. like the inventiveness of South Australia. Its always
Evidence is mixed on whether Weatherills been prepared to be a bit different. Jason Scott
prescription for South Australia is working. The
THE BOTTOM LINE South Australias premier has turned the
premier, who got his start at a labor union, is state into the countrys top destination for business investment.
either trailblazing a path to the new economy or But unemployment is still higher than the national average.
desperately throwing mud at a wall to see what
sticks. South Australia is the countrys top-ranked
destination for business investment. Were the
next story coming through, said South Australias
minister for investment and trade, Martin Hamilton- Why the Fed Cares
Smith, in a July 24 interview in Singapore, where
he was promoting his state. However, with a pop- About Americas
ulation of just 1.7 million, most of it clustered in
Adelaide, South Australia is also saddled with the Opioid Crisis
countrys highest unemploymentthe rate was
34
6.6 percent in June, one percentage point higher
than the national average. Abuse is both an economic symptom
Weatherills success in attracting businesses to and a driver of labor problems
the state must be weighed against his inability to
get some of its biggest employers to stay put. In
October, General Motors Co. will close a factory Bill Polaceks industry is dealing with a labor market
near Adelaide that also happens to be Australias problem so big, even Federal Reserve Board Chair
last remaining car plant. The move will put about Janet Yellen is talking about it.
1,000 people out of work, and thousands more A few years ago, Polacek interviewed 350 people
stand to lose their jobs at companies that supply to fill openings for 50 welders and machinists at
the factory. Weatherill has for a long time been a his company in Johnstown, Pa., JWF Industries
believer in a strong role for government, but hes Inc., which makes metal products, including armor
failed to keep the input costs for companies low, plating for military vehicles. After winnowing down
says Michael ONeil, associate professor of econom- the pool to 100, he found that half of those can-
ics at the University of Adelaide. Protecting busi- didates either had a criminal record or failed the
nesses and workers through subsidies isnt feasible
in the long term.
South Australia now gets at least half its elec- A Shrinking Pool of Workers
tricity from solar and wind power. To combat Percentage-point change in labor force participation
intermittent outagesthe state suffered a state- rate of 25- to 54-year-olds since July 2000
wide blackout in September 2016Weatherills 1%

government has contracted with Musks Tesla

Inc. to build the 100-megawatt battery that will 0

store electricity generated by a wind farm thats

under construction.
DATA: U.S. BUREAU OF LABOR STATISTICS

-1
Female
More controversial was a proposal to open a
nuclear waste dump site, after a state-appointed -2

commission estimated the business could Male

generate A$100 billion in income. The idea was -3

abandoned after a citizens panel came out against

it in November. -4

A key test for both Weatherill and Shorten will 7/2000 6/2017
 ECONOMICS

Checkup India
drug test. We werent attracting the right people,
Polacek says of the episode, which prompted him The Bombay Stock Exchange may be surging, but the latest
to invest in extensive outreach to local high schools readings on inflation, capital investment, and industrial production
to build up a pipeline of workers. in India all point to an economy losing steam. Thats raised the
The U.S. opioid epidemic falls outside the odds that the central bank will cut rates in August to juice growth.
Feds traditional purview, yet it matters to the
central bank, particularly when unemploy-
Change in index since Dec. 30, 2016
ment is at a 16-year low. If addiction is rendering
Hang Seng 21%
people unemployable, it could help explain why
an historically low portion of the prime-age
populationthose age 25-54is working. Also, the BSE Sensex
14

Fed has been paying more attention to workforce S&P 500

development in recent years, and the opioid crisis Nikkei 225
7

is a drag on human capital across America.

An estimated 2.7 million adults older than FTSE 100
0

26 were misusing painkillers as of 2015, and an

additional 236,000 described themselves as current -7

heroin users, according to surveys by the Substance 12/30/16 7/21/17

Abuse and Mental Health Services Administration.
Opioid abusers account for a sliver in a workforce
of 160 million, but they probably make up a greater Counterindicators
share of the 7 million who are unemployed.
Academic research on the economic effects of Inflation is at Investment and industrial
the opioid crisis has revealed a corrosive feed- record lows production are flagging
back loop. Poor job opportunities for Americas
working and middle class seem to have helped fuel
opioid addiction. In turn, pill and heroin use can Consumer price index, Change in gross fixed Growth in production,
worsen employment chances for addicts and lead year-over-year capital formation, year-over-year
35
to criminal records that dim applicants prospects year-over-year

for years to come. 6% 9% 10%

I do think it is related to declining labor force

participation among prime-age workers, Yellen 6

said during Senate testimony on July 13, when asked

about the crisis. I dont know if its causal or if its 3 3 5
DATA: INDIA CENTRAL STATISTICAL ORGANIZATION, CIEC, RESERVE BANK OF INDIA, GOVERNMENT OF INDIA, DEUTSCHE BANK, BLOOMBERG

a symptom of long-running economic maladies that

have affected these communities and particularly 0

affected workers who have seen their job opportu-

nities decline. 0 -3 0

Regional Fed banks, too, have been increasingly 12/2015 6/2017 1Q 16 1Q 17 12/2015 5/2017
noting the fallout from the epidemic. The Federal
Reserve Bank of Boston published research in
September on the link between local economic Forward Guidance
*PROBABILITIES OF CHANGE TO BENCHMARK RATE DERIVED FROM OVERNIGHT INDEX SWAPS;

distress and opioid use in New England. And

the central banks July 12 Beige Book, a survey The economy is cooling A rate cut looms
of regional economic conditions, noted that
manufacturing contacts in Louisville and Memphis
reported difficulties finding experienced or Real GDP growth, year-over-year The probability of action on Indias
qualified employees, with some citing candidates benchmark rate at the central banks
Aug.1-2 meeting*
inability to pass drug tests. Businesses have also
raised the issue in conversations with Philadelphia 10% 100%

Fed President Patrick Harker. Cut

The Cleveland Fed hosted a policy conference in 75

June that included a panel specifically dedicated to No change

opioids. Our district is the epicenter of this crisis, 5 50

says Kyle Fee, regional community development

Hike
adviser at the Cleveland Fed. It was a good way for 25

us to dip our toe into this topic. Jeanna Smialek

0 0
THE BOTTOM LINE In Senate testimony, Yellen suggested
addiction may be one reason labor force participation is down 4Q 15 1Q 17 4/7/17 7/20/17
among prime-age workers.
 LOOK AHEAD The House plans to begin its annual August Foreign ministers of A ruling by Kenyas Court of Appeal

5
recess on July 31, while the Senate stays in the ASEAN will meet cleared the way for ballots to be
Washington for the time being Aug. 2-8 in Manila printed ahead of elections on Aug. 8

P
O
L
I
T
I
36
C
S
This
Just Got
Awkward
Long co-dependent, Germany and Turkey have deep ties, with millions of
ethnic Turks living in Germany, millions of Germans
Germany and Turkey have flocking to Turkeys beaches and historic cities, and
JOHN MACDOUGALL/AFP/GETTY IMAGES

reached a breaking point almost 7,000 German companiesfrom giants such

asDeutsche Bank, Siemens, and Volkswagen to
July 31, 2017
in their relationship tiny importers of textiles and fooddoing business
Edited by there. Add it all up, and trade between the two tops
Jillian Goodman and $36 billion a year.
Matthew Philips
But an escalating war of words over democratic
Businessweek.com values has strained those ties. After a year and a
 POLITICS Bloomberg Businessweek July 31, 2017

half of tension, the relationship between the two Fewer Guests, Less Spending
NATO allies reached an apparent breaking point in Turkey lost $12 billion in tourism revenue over two years

late July after Turkey detained a group of human Tourism receipts ($billions)
rights activists, including Peter Steudtner, a German Number of tourists (millions)
national. Chancellor Angela Merkel was uncharac- 40

teristically blunt in response, denouncing the move

as absolutely unjustified. German Foreign Minister 20

Sigmar Gabriel, with Merkels blessing, announced

a reorientation of relations between the coun- 30

tries, warning German companies about doing busi-

ness in Turkey and cautioning German travelers 10

about visiting. That prompted a denunciation from

Turkish President Recep Tayyip Erdogan, who called 0

Germanys actions unforgivable and suggested that 2006 2016

some form of retaliation might be coming. With these DATA: REPUBLIC OF TURKEY MINISTRY OF CULTURE AND TOURISM
accusations flying, it was revealed that Germanys
federal police had received a list of 678 German com- from the EU, making it loath to drop its side of the
panies suspected by Turkey of supporting terrorism, bargain. Whats more, the number of foreign visitors
which officials dismissed out of hand. to Turkey fell by more than 10 million last year; in
While relations between the two are arguably at the first five months of this year, visits by Germans,
their lowest point of the postwar era, both sides have traditionally one of the biggest tourist groups visit-
a lot to lose by letting them deteriorate. Merkel needs ing Turkey, were down 25 percent.
Erdogans help to keep the flow of refugees into Turks make up Germanys largest ethnic minority,
Germany in check, and the Turkish president relies and of the 3.5 million naturalized citizens and dual-
on Germany, his countrys largest trading partner, visa holders living there, 1.3 million are allowed to
for tourist visits and as a market for its exports. cast ballots in Turkish elections. After Germany
Relations began fraying after Merkel helped blocked Erdogans ministers from campaigning in
broker a deal between Erdogan and the European the country for an April referendum transferring
37
Union last March, at the height of the migrant crisis more power to the presidency (which the Turkish
that has roiled European politics, to control the leader went on to win), Erdogan accused them of
flow of refugees from the Middle East into Germany. employing Nazi practices. A German parliamen-
That accord has largely heldand with it, backing tary vote in June of last year recognized the killing of
for Merkels party, which had been tested by wide- Armenians a century ago during the Ottoman Empire
spread anti-immigrant sentiment. as genocide; that led Turkey to bar German lawmak-
Since then, Merkel has had to adopt a concilia- ers from visiting their countrys soldiers engaged in
tory posture toward Erdogan, even as the Turkish the fight against Islamic State stationed at a base in
leader has cracked down on dissent, jailing more Turkey. Merkel then downplayed the significance of
than 100,000 of his citizens following a failed coup the genocide vote.
last July. With a federal election just two months There are some signs Germany and Turkey are
away, the German chancellors Christian Democratic trying to cool the crisis in their relationship. With
Unionwhich leads rival Social Democrats by the jobs of thousands of Turkish workers at German
18 points in the latest pollscan hardly risk the deal companies on the line and perhaps seeking a way
with Turkey falling apart. Merkel faced potential to back down from the latest round of rhetoric,
backlash at home last year when she allowed for the Erdogans government on July 24 withdrew its list of
prosecution of a German satirist over a lewd poem supposed supporters of terrorism, calling it a com-
about the Turkish president under an antiquated munication problem. A spokesman for the German
German law protecting foreign heads of state from Interior Ministry acknowledged the clarification but Merkel greets
libel. (The state prosecutor stopped the investiga- stopped short of lifting the travel advisory. Erdogan at the G-20
summit meeting in
tion on the grounds that the alleged crime couldnt There is a critical public opinion here in Hamburg on July 7
be proven with the necessary certainty.) Germany as regards policies toward Turkey, devel-
Its been a very fine balancing act for Merkel, opments in Turkey, and above all, the reaction of
and so far it has worked, says Judy Dempsey, a the German government, says Glistan Grbey, a
senior fellow at Carnegie Europe, part of the political scientist at Berlins Free University who
Carnegie Endowment for International Peace. On specializes in Turkish-EU relations. Erdogan, she
the other hand, its given Erdogan more or less carte says, has been testing his limits with Germanyand
blanche to do whatever he likes. Erdogan may get may finally have reached a limit. Chad Thomas
a lot of points hitting Germany back in Turkey, but and Rainer Buergin
therell be a very high price to pay for both sides.
THE BOTTOM LINE Neither Germany nor Turkey can afford to
In exchange for accepting refugees, Turkey alienate the other, but politics and philosophy have Merkel and
will receive a total of 6 billion ($7 billion) by 2018 Erdogan at cross-purposes.
 POLITICS Bloomberg Businessweek July 31, 2017

Health Care Has

A Goldilocks Problem
If youre neither too rich nor too poor, whats coming out of Washington is just wrong

Whatever happens to Obamacare in Washington, cover them at all. But like those on employer plans,
the rest of America will be left with a problem its theyve seen their costs go up. That includes fami-
had for decades: Health-care spending is growing at lies such as that of Amy and Ron Shir. Shes a consul-
an unsustainable rate. Insurance and medical costs tant for antipoverty programs, and hes a computer
Average premium for
are draining the incomes of the middle classtens of programmer. Both are self-employed, and both have a family plan in 2016
millions of people who earn too much to qualify for chronic medical problems: Amy, 53, has Crohns
government-subsidized coverage, but not so much disease, a painful digestive disorder, and Ron, 46, $18,000
that they dont feel the bite of medical billsand has diabetes. Together the Louisville couple earns
nothing on Congresss agenda is likely to fix that. about $130,000 a year.
So far, rather than tackle the health-care deliv- They pay $14,000 a year for an Anthem Inc. policy
ery system directly, Republican policymakers that also covers their two teenage children. Thats
have focused on slashing insurance subsidies and less than they paid before the Affordable Care Act,
Medicaid, the state and federal program for the poor. but theyre also responsible for out-of-pocket costs
The Obamacare replacement proposed by Senate of $11,000. My own family has really been treading
Majority Leader Mitch McConnell would leave water, Amy says. They like working for themselves,
15 million more uninsured next year and 22 million but both are seeking full-time jobs, partly because
38
by 2026, according to the nonpartisan Congressional they want more robust health benefits.
Budget Office, and allow insurers to sell policies that Health cost growth did slow during the Great
cover fewer benefits and pay for less medical care. Recession and the following years as millions of
Although the chamber narrowly voted to open debate Americans lost their jobs, and with them their health
on health legislation on July 25, almost all the propos- coverage. From 2008 to 2013, spending grew at his-
als making their way to the floor focus squarely on torically low levels after adjusting for inflation and
mandates and spending rather than delivery of care. population growth. But even at this lower pace,

DATA: CENTERS FOR MEDICARE & MEDICAID SERVICES; BUREAU OF ECONOMIC ANALYSIS; CENSUS; BUREAU OF LABOR STATISTICS
By refusing to address the fundamental problems spending was 0.7 percentage points higher than
with the health-care system, Congress is ignoring projected annual gross domestic product growth,
the tough question of how to fix it. That has impli- according to an analysis by Charles Roehrig, an econ- Per capita medical
costs have increased
cations for the economy beyond health care. Most omist at the Altarum Institute Center for Sustainable faster than GDP,
Americans under 65 get their health insurance from Health Spending. Federal actuaries at the Centers incomes, and inflation.
employers177 million in 2015, or 56 percent of the for Medicare & Medicaid Services expect per capita Values are indexed to
100 at 1984 to show
total population. Average premiums for a family plan health spending to top economic growth by at least growth rates.
have increased 31 percent in inflation-adjusted terms 1 percentage point a year for most of the next decade.
since 2006, to $18,000 a year in 2016, according to Massachusetts enacted a health-care law under U.S. health spending
the Kaiser Family Foundation. Workers typically pay then-Governor Mitt Romney in 2006 that became per capita
about 30 percent of that premium, with employers a model for Obamacare. In 2012 the state passed GDP per capita
Median household
picking up the rest. Out-of-whack spending on health another law setting benchmarks for cost growth, income
care squeezes public budgets and employers payroll promoting price transparency, and nudging payment Inflation (CPI-urban)
costs: Health premiums and out-of-pocket costs systems toward rewarding quality rather than quan-
wiped out most of the real income gains for a median tity of care. The goal was to keep the total cost of care
family from 1999 to 2011, according to an analysis pub- in line with the growth of Massachusetts economy. 500

lished on the blog of the journal Health Affairs in 2013. The states health spending rose more slowly than
We dont think of it as compensation, says Darrell most others from 2009 to 2014, but costs have
Gaskin, a health economist at the Johns Hopkins exceeded state targets for the past two years.
Bloomberg School of Public Health, but many Until the country gets a grip on rising health 300

American workers have been getting their raises in costs, workers will continue to feel the burden.
the form of more expensive health insurance, he says. The U.S. health-care system is growing increas-
People who buy their own health plans bene- ingly out of reach financially, certainly for low-income
fited from Obamacare reforms that stopped insur- patients, but also increasingly for middle-income 100

ers from charging sick people more or refusing to patients, says Alan Balch, chief executive officer 1984 2015
 POLITICS Bloomberg Businessweek July 31, 2017

of the Patient Advocate Foundation, which helps Trump said. Believe me, they are under siege, folks. Weve
patients navigate the medical system and pay for care. Two weeks later, the U.S. Environmental
taken every
Mark Kemp, a certified financial planner in Protection Agency proposed the first cut to the
Harleysville, Pa., sees the costs dragging on clients amount of renewables that have to be blended into opportunity
who want to retire before they qualify for Medicare. the fuel supply. To people in the biofuel industry, to remind the
I have a lot of people that have enough money to many of whom are farmers, the move amounted to president that
retire in all areas, except they havent looked at their an about-face. If he was looking to do something
the Corn Belt
health insurance costs, he says. Even for families that would have taken care of the agricultural sector
without big medical expenses, health premiums cut that got him elected, this was a no-brainer, says helped him win
take-home pay and their ability to save. Its basically Tom Brooks, who runs a biodiesel plant in Farley, the election
robbing their future, he says. John Tozzi Iowa. Thats the disconnect. It shouldve been a
slam-dunk.
THE BOTTOM LINE No health-care legislation on
offer addresses the real drivers of cost increases, which On the face of it, the proposed cut is relatively
disproportionately affect the middle class. small, reducing the amount of renewable fuel that
refineries have to buy in 2018 to 19.24 billion gallons,
from 19.28 billion gallons in 2017. But the signal it
sends to the markettelling investors the U.S. renew-
able fuel industry will no longer growcould be dev-

A Low Blow astating. Biofuel quotas were scheduled to continue

rising through 2022; now an industry that already
struggles to make profits could be starved of fresh

In the Corn Belt capital. For Brooks, the cuts mean hell likely have
to continue operating his plant at a loss. If youre
not growing your industry, its very tough, he says.
The president understands investors and inves-
tor signals. This is one of the reasons he became
president, says Brooke Coleman, executive director
of the Advanced Biofuels Business Council, which
40
represents companies throughout the biofuel supply
Biofuel producers say Trump has chain. He says capping the ethanol industry could
turned his back on the rural Midwest undercut Trumps goals of reviving U.S. manufac-
turing and reducing U.S. reliance on foreign energy.
Rural America has a really central role to play in
As a presidential candidate, Donald Trump spent a this effort to bring back manufacturing jobs, he
lot of time currying the favor of the ethanol industry, says. This is not a pro-growth, Make America Great
barnstorming its rural Midwest base and repeatedly Again type of proposal.
expressing his support for biofuels made from corn A public hearing on the proposal is set for Aug. 1
and soybeans. He was rewarded in November: Of in Washington. The EPA has until Nov. 30 to finalize
the 184 counties with an ethanol plant in the U.S., the rule. Between now and then there will be lots
95 percent voted for Trump, according to data com- of lobbying on both sides. The American Petroleum
piled by the Renewable Fuels Association. Institute and other big fossil fuel trade groups have
How ethanol-
As president, Trump has continued to pledge that praised Trump for the cuts, but biofuel lobbyists plan producing counties
hell protect the Renewable Fuel Standard, the 2005 to amp up their campaign against them. Weve taken voted in 2016
law that requires U.S. oil refineries to blend increas- every opportunity to remind the president that the
ing amounts of ethanol and biodiesel into the nations Corn Belt helped him win the election, says Geoff
fuel supply. In its 12-year history, the RFS has gained Cooper, executive vice president of the Renewable
critics on both sides of the political aisle, while also Fuels Association. Were not going to stop.
ILLUSTRATION BY TOMI UM; DATA: RENEWABLE FUELS ASSOCIATION

pitting oil companies and refineries (which would The ethanol cuts come at a critical time for
rather not have to buy all that corn-based ethanol) American farmers, who, because of falling crop
Trump
against farmers and big agricultural companies. prices, are looking at a fourth straight year of Clinton
Support for RFS doesnt split down ideological lines declining income in 2017, the longest such streak in
as much as it does down geographical ones, depend- four decades, the Department of Agriculture says.
ing on proximity to the Midwestern Corn Belt. Farmers depend on ethanol and biodiesel plants to
On June 21, Trump went to Iowa, which produces soak up excess production. Those are his voters,
more biofuel than any other state, for a campaign- says Rob Walther, director of federal affairs for Poet
style rally. He reiterated his support for the indus- LLC, an ethanol producer in South Dakota. Trump is
try and reminded Iowans how much they need going to need Midwest votes again. Mario Parker
a friend in the White House. By the way, were
THE BOTTOM LINE By cutting the amount of ethanol that
saving your ethanol industries in the state of Iowa refiners have to blend into the U.S. fuel supply, Trump risks
just like I promised I would do in my campaign, alienating rural Midwestern voters who turned out for him in 2016.
 Corruption Exploding
scandals phones
42

By Brad Stone, Sam Kim, and Ian King

Countrywide Record
protests profits
43

Summer of Samsung
 Bloomberg Businessweek July 31, 2017

How long does a horse live? open-neck shirt, is a former equestrian reform campaign. Protesters wielded
On a Friday in June, Jay Y. Lee, the himself; in his 20s, he won a medal at the papier-mch puppets of Park and Lee;
de facto head of the Samsung conglom- Asian championships. Today, on what one sign read, Send Jay Y. Lee to prison
erate, is enduring another afternoon at happens to be his 49th birthday, he listens for being the real culprit in the scandal!
the Central District Court in Seoul, listen- intently to the proceedings, occasionally Whats good for Samsung is good
ing to the prosecution quiz a witness about smiling, passing notes to his attorneys, and for South Korea was once an overriding
the finer points of equine health. Lee is on otherwise breaking his stoic pose only to national sentiment. Following the Korean
trial for bribery and embezzlement, part apply lip balm. Late in the afternoon the War, chaebol drove the countrys devel-
of a series of scandals that led in March to judge asks whether the participants need a
the ouster of Park Geun-hye, South Koreas break, and Lee replies that he will follow
first female president. what everyone else wants. No one else
It depends whether youre talking about expresses a preference, so the judge snaps
a competition horse, or that theyll just have to get on with it. B
The windowless fifth-floor courtroom Hours of testimony later, the court
is packed with lawyers, journalists, and adjourns. As Lee departs, no one wishes
citizens who, like the rest of the country, him a happy birthdayanother small sign
are captivated by the proceedings. Some of the seemingly diminished fortunes of
people are sitting on the floor; everyone South Koreas mightiest company. opment into a global economic power.
is sweating. Clerks shake their heads in Now, polls show that domestic support
disbelief at the suffocating heat, waving Founded in 1938 by Jay Y.s grandfather, for them has collapsed, amid fresh accu-
their hands in frustration in front of the Lee Byung-chull, the Samsung group is a sations that theyve been illegally buying
stagnant air-conditioning vents. Lee, collection of about 60 interlinked compa- influence. The government formed by
his four co-defendants from Samsungs nies, the kind of corporate family known Moon Jae-in after Parks removal includes
executive team, and their phalanx of in South Korea as a chaebol. Theres a ship- prominent chaebol critics who are agitat-
counsel sip water and mop their faces building division, a construction company, ing for greater shareholder rights and less
with handkerchiefs. life insurance and advertising arms, soccer family control.
Its 20, no? It lives about 20 years and and baseball teams, and even a theme park Inside Samsung Electronics, the anger
reaches its peak between 8 and 10? 30 miles south of Seoul, called Everland. looks like just another obstacle in a series
44
Yes. I believe thats the peak. Samsung Electronics Co. accounts for of them. The company remains confident
Lee and his colleagues stand accused more than two-thirds of the conglomer- of its engineering prowess, but it has been
of bribing Park and one of her friends ates market value. Despite the accusa- working to transform a hierarchical culture
to facilitate a merger between two pub- tions of corruptionand despite recalls that has long prized loyalty, tireless work,
licly traded Samsung companiesa com- in 2016 of some of its top-loading washing and deference. Although this culture has
bination, prosecutors contend, that was machines and, more famously, its Note 7 been well-suited to a hardware company,
intended to strengthen Lees control over smartphone, which had a battery flaw executives know it will have to change if
the Samsung empire. The form of the that could cause it to burst into flames Samsung Electronics is to compete with
alleged bribe was Vitana V, an $800,000 Samsung Electronics remains associ- Silicon Valley in technologies such as cloud
thoroughbred show horse, plus $17 million ated, in the global public consciousness, services and artificial intelligence.
in donations to foundations affiliated with with cutting-edge gadgetry. Its also The shift may take place, depending
the friend, whose daughter was hoping to still making an extraordinary amount on the outcome of Lees trial, without
of money. In its most recent earnings the guiding hand of Samsungs longtime
report, released on July 27, the company stewards. For years the Lee family and
said sales were up 20 percent from the its top strategists have coordinated inter-
previous year and operating profit had actions among subsidiaries, dealt with
A climbed 73 percent. The growth was the government, and approved large
fueled primarily by the memory- chip expenditures out of a department alter-
division, but Samsung Electronics is now natively called the corporate strategy
also the worlds top smartphone maker, office, the restructuring office, and the
thanks in part to the new Galaxy S8. And control tower. But with the conglomer-
qualify for the 2020 Olympics as an eques- the company is close to surpassing Apple ate under scrutiny, that office has been
trienne. The Samsung executives describe Inc. as the most profitable business in shuttered, and strategic planning among
the gifts as standard support for the coun- the world, and Intel Corp. as the largest subsidiaries no longer exists, according
trys Olympic ambitions and deny allega- maker of semiconductors. to DJ Koh, president of mobile commu-
tions of bribery in this matter and others But while investors are applauding the nications and one of several senior exec-
the prosecution has raised. company, South Koreans are protesting it. utives Samsung made available for this
Can the price of a horse drop if an When the accusations against Lee and Park story. For the moment, the chaebol is like
incompetent athlete rides and fails to surfaced, weekly demonstrations in down- a headless octopus, its tentacles thrash-
perform well? town Seoul against the governments cozy ing about without coordination.
I believe so. relations with the chaebol swelled into the This is a new experience, Koh says.
Lee, dressed in a dark blue suit and largest rallies since a 1980s democratic We must make our own decisions.
A. Chung Yoo-ra, daughter of a friend of Park Geun-hye, in 2014 B. Effigies of Park and others associated with the scandal C. Lee Kun-hee (middle) in early 2014
 For the moment, Samsung is like a headless octopus, its tentacles thrashing

The figure most closely associated with Who owns Samsung Electronics? Its complicated
Samsungs global rise is Lee Kun-hee, the Twenty-seven percent
son of founder Byung-chull and Jay Y.s of all shares are owned
father. Kun-hee, who became chairman by Samsung Electronics,
other Samsung companies, Samsung
in 1987, was known as reclusive but char- and three Lee family Life
Samsung
Foundation
ismatic. Under his guidance, Samsung members. Shares in the Insurance
invested in massive semiconductor and other companies are in
turn held by other parts of
display-panel factories, prodding engi- Samsung and other Lees.
neers to overcome the companys early
National
reputation for creating subpar knockoffs. Samsung Samsung
Pension
C&T SDI
In 1993, with sales of consumer appliances Service
flat, he admonished executives to change
Samsung
everything but your wife and children. A
Electronics Lee
few years later he commanded underlings Seo-
Lee
Boo-jin
to collect 150,000 defective cell phones hyun Lee
Kun-hee
into a pile and set them ablaze. Although
PREVIOUS SPREAD: AP PHOTO (4); BLOOMBERG (2); GETTY IMAGES (1); REDUX (1); REUTERS (3); SAMSUNG (1); THIS SPREAD, FROM LEFT: KIM HONG-JI/REUTERS; AHN YOUNG-JOON/AP PHOTO; YONHAP NEWS AGENCY; DATA: BLOOMBERG

not great for the environment, it sent a

clear message about quality control. South Koreas
Hong Jay Y.
National Pension
Despite his eccentricities, Kun-hee is Service is Ra-hee Samsung Lee
Fire &
widely lionized. In 1997, after the value the largest
Marine
of Samsung Electronics fell to $1.7 billion shareholder, with
10 percent.
amid a wider Asian financial meltdown,
he jettisoned peripheral businesses
and doubled down on chips, screens, control over Samsung has always been entertainment properties, including the
and phones. Within a decade, Samsung somewhat fragile, at least by the stan- theme park. The combination would
Electronics market value had grown sixty- dards of Western corporations, which have given the Lee family more power
fold. Song Jae-yong, a professor of strategy allow founders to protect their stature over the combined company and was
and international management at Seoul with special classes of stock that grant allegedly intended to bolster its control
45
National University Business School, calls extra voting rights. By contrast, the Lees over Samsung Electronics. The company
Kun-hee one of the great business leaders own relatively small stakes in individ- says the move was designed to make the
of the 20th century. ual Samsung entities, maintaining voting units more competitive.
In 2014, at the age of 72, Kun-hee had control through a tangle of cross-holdings. To complete the merger over the objec-
a heart attack at his home overlooking For example, according to Bloomberg tions of some activist investors, Samsung
the Han River. Samsung reported after- data, Kun-hee owns only 3.8 percent of needed the approval of another major
ward that he was recuperating in a stable Samsung Electronics, but hes the largest shareholder, the countrys National
condition, but he hasnt been heard from shareholder in Samsung Life Insurance Pension Service. The prosecution theo-
since, and the company wont comment Co., with 20 percent of the stock. Samsung rizes that Samsungs senior managers were
further. Multiple people familiar with the Life in turn owns 8 percent of Samsung unsure enough of the funds supportit
situation, who dont want to be quoted Electronics; that share, combined with had recently cast an anti-chaebol vote
discussing a private matter, say the chair- those of other subsidiaries, adds up to a in an unrelated matterthat they sought
useful stake of more than 20 percent. for the presidents office to intervene on
This convoluted structure limits the their behalf. Prosecutors have produced
rights of other investors and frustrates financial documents linking the horse
activist shareholders. Its also vulnerable to Samsung and Parks friend, as well as
C to turns of fate like major illnesses. In the records of text messages and phone calls
event of Kun-hees death, his son and pre- between executives and Parks office that
sumed successor, Jay Y., would have to pay they say demonstrate collusion.
a steep tax bill to inherit his fathers stock However the judge decideshe will
and maintain control of Samsungas much likely render a verdict by the end of
as $6 billion, according to Chung Sun-sup, the summerthe case has struck an
man also had a stroke and remains in a chairman of Chaebul.com, which tracks exposed nerve in South Korea. The for-
vegetative state at the Samsung Medical executive wealth. This might require Jay Y. merly supportive local media has aban-
Center on the outskirts of Seoul. When to sell some of the Lee familys holdings, doned the presumption that whats good
a Bloomberg reporter recently entered further diluting their tentative sway. for Samsung is good for the country (not
the VIP wing on the centers top floor, he Thats where the horse comes in. to mention for their own bottom lines;
was immediately sent back to the lobby Prosecutors say that in 2015, Jay Y. Samsung is a major advertiser). The com-
by a frantic security officer wearing a blue orchestrated the merger of two divisions: panys influence was once such that, in
surgical mask. Samsung C&T Corp., which is dedicated 2008, on a day when Kun-hee appeared
Kun-hees health emergency set off a to construction and trading, and Cheil for questioning by a special prosecutor,
further crisis inside the family. The Lees Industries Inc., which owned several only one of the countrys three biggest
 It was a devastating experience. The Note 7 was our pride

newspapers covered the story on the listened and pledged support. I think he Regaining its technological footing has
front page; the others buried their arti- must have known how much it cost, but he come easier to Samsung. The Galaxy S8 has
cles deep inside. (Kun-hee was convicted never mentioned anything about money, been combustion-free, and in a remark-
of tax evasion the following year but was Koh says. He just said, Mr. Koh, please able sign of tenacity, the company just
pardoned months later.) manage it properly. issued a refurbished Note 7 Fan Edition
Now Jay Y. is frequently photographed In January, Samsung held a press con- in South Korea. Where many companies
walking into court with a vacant expres- ference to announce the results of its inves- would have abandoned a besmirched
sion on his face, shackled at the wrists and tigation. The cause of the exploding Notes, brand, Samsung charges ahead.
upper arms, and surrounded by as many Koh said, was improperly designed batter- To appreciate how deeply such relent-
as a half-dozen police officers. This daily, ies supplied by a Samsung subsidiary and lessness is embedded in the companys
ritualized humiliation reflects a popular then a backup vendor that had rushed into makeup, you must drive 45 miles south
desire to bring down a chaebol business- production. Samsung pledged to test its of Seoul, to flat pastures that were once
man once known for hobnobbing with the phones and their component parts more populated by pigs and cows. After navi-
global elite. And its only the latest embar- rigorously. The press conference ended gating a well-manicured path up a small
rassment for the company. with Koh bowing deeply in apology. hill in a newly fashionable neighbor-
The explanation left some Samsung hood, you arrive at an outcropping with
A year ago, Samsung Electronics mobile watchers unconvinced. The company an expansive view of a stupendously
communications division was jubilant. denied reports that it had cut corners to large construction site. Towering cranes
The company had enjoyed a stellar year, beat the iPhone 7 to market, and it hadnt dot the skyline above a 3 million-square-
surpassing Apple in the U.S. smartphone acknowledged that its hierarchical culture meter campus. Scattered buildings with
market, and was preparing to cement this might have discouraged junior employ- unironic signs such as disaster prevention
dominance with the August release of the ees from raising red flags. Employees at center and fire station ring two enor-
Galaxy Note 7, which sported a stylus pen, Samsung feel pressurized to make deci- mous structures decorated with colored
an elegantly curved display, and finger- sions that please the powerful boss, says squares in the style of the Dutch painter
print and iris scanners. A few days after Paul Swiercz, a management professor at Piet Mondrian.
the phone went on sale, the Summer George Washington University. There is This is Pyeongtaek, site of Samsung
Olympics kicked off with Samsung as a no one pushing back. Electronics newest semiconductor plant.
principal sponsor. Executives flew to Rio For years, Samsung has quietly sought The facility is designed to extend the com-
46
de Janeiro to bask in the attention. It was to reform its demanding culture. In 2009 panys dominance in memory chips and
a great moment, recalls Lee Young-hee, an internal program called Work Smart
Samsung Electronics executive vice pres- urged employees to spend their office time
ident for global marketing. more efficiently and take weekends off.
A few weeks later, Lee, one of the few In 2012 the company introduced its 119 D
female senior executives at Samsung (and program, which dictates that employees
no relation to the Lees who control the at formal outingsat which they often felt
company), was in Berlin for a conference compelled to appear and keep up with the
when ominous reports started circulat- bossbe limited to one drink, at one bar, perhaps to expand its share of the more
ing on social media. Phones were burst- ending at 9 p.m. More recently it trotted profitable logic processor business
ing into flames and in some cases burning out an initiative called Startup Samsung to competing with the likes of Intel to make
their owners. Lee says she didnt believe streamline reporting structures and elim- the brains of smartphones and PCs. The
the stories at first. Then more phones self- inate bureaucratic layers. plant, which broke ground in 2015, was
immolated. And still more. Airlines around But deference remains ingrained, one of the last projects Jay Y. approved
the world banned the Note 7 from their right down to the corporate vernacular. before his legal troubles began. Already
flights. It was a devastating experience, For example, workers at Samsung, as its producing its first chips, far faster than
she says. The Note 7 was our pride. at other South Korean companies, typi- the industry norm of three to five years to
To contain the damage, executives cally address one another by title or posi- get new plants up and running. Samsung
at Samsung Electronics headquarters tion rather than by name, unless theyre Electronics can do this because it has mas-
in Suwon, a suburb of Seoul, formed a speaking with a close friend. Such tradi- tered automation and precision manu-
task force under Koh, the mobile com- tions make it difficult for employees to facturing, and can draw on its corporate
munications chief. For four months they speak frankly or to warn of major mis- brethren to deploy hordes of construction
met every day at 7 a.m., coordinating a takes on the horizon. I hate it, Koh says. workers with militaristic efficiency. It can
response. Most important, they ordered Juniors will freeze. They will not make also easily summon capital. Samsung says
the recall of the Note 7, which involved any comment. The company has been Pyeongtaek will cost $27 billion to builda
collecting millions of phones globally, trying to get employees to call each other huge amount, but less than half the com-
and corralled hundreds of engineers into by their first names, adding the profes- panys $63 billion in reserves.
testing centers to figure out the cause. sional honorific nim as a suffix, and Over the years, deep pockets have
Koh pegs the cost of the effort at more Koh has asked employees to call him DJ allowed the Lee family to make invest-
than $5 billion, but he doesnt recall the instead of president. But, he says, snap- ments during the memory-chip industrys
Lee family blinking at the expense. When ping his fingers, For them its not easy periodic, brutal downturns. When the
he met with Jay Y. during the saga, Lee just to change in just a day. inevitable rebounds occurred, Samsung
 Bloomberg Businessweek 2017 revenue is estimated to be 237 trillion South Korean won ($211 billion) July 31, 2017

Electronics would be ready to start selling 200t you know, even though youre engaged,
the next generation of chips, leaving its you never fight with your wife or
competitors in the dust. Even for us to your girlfriend?
build one factory we have to hedge risk, 100 Anyway, our competitor is not in
Adjusted revenue,
says Mark Durcan, who stepped down as South Korean won Mountain View, Koh hastens to add,
chief executive officer of Samsung rival leaving unmentioned the company down
Micron Technology Inc. earlier this year. 0 the road in Cupertino.
The numbers are so big. They dont have 2006 2017
those issues. A month after Jay Y.s birthday court
Samsung isnt shy about celebrating its Milk Music, lag behind rival products. appearance, hes due back on another
dominance. On a trip to the Hwaseong chip Only its Samsung Pay digital wallet has sweltering summer day in Seoul. Today,
plant, about 15 miles from Pyeongtaek, shown much promise, adopted in almost the topic of testimony will be whether a
a digital clock in the visitors museum 20 countries thus far. The company is Samsung pharmaceutical division illegally
reports that its been 25 years, 17 days, hoping its new virtual assistant, Bixby, lobbied the government to get a listing on
11 hours, 24 minutes, and 54 seconds will be its first big hit. the national stock exchange. (Samsungs
since the company became the worlds Koh, who has been at Samsung for response: no.)
largest memory-chip maker. Nearby, a 33 years and has the top-floor office to Outside, beyond a heavily guarded
window opens onto one of the campuss prove it, says he knows that becoming a gate, another battle is brewing. A small
chip fabrication plants. Robots zip along leading software developer will require group of activists, led by a woman in a
ceiling tracks, zigzagging around a room Samsung to attract creative, entrepre- wheelchair, is waiting to confront Lee.
that extends as far as the eye can see. neurial employees. His pitch for Bixby, The woman identifies herself as Han Hye-
Each metallic arm totes several silicon though, demonstrates some of the com- kyung and says shes a former Samsung
wafers encased in a clear brown cartridge, panys familiar culture issues. worker in her 30s with a brain tumor. She
which it periodically lowers and inserts Koh asks a reporter, Do you touch holds a sign saying Punish Jay Y. Lee,
into refrigerator-size machines that burn your assistant? Your secretary? and her T-shirt reads, No more death in
layers of microscopic circuitry onto the Reporter: I dont have an assistant. Samsunga reference to former Samsung
surface of the disks. The only two humans Also, it would be a personnel violation. workers who contend that exposure to
in sight look on in their yellow cleansuits, Exactly! Touch is not allowed. Just say toxic materials caused disease, especially
47
supervising the production. something. So if we change our interac- cancer. After years of fighting the workers
In May, Samsung created an indepen- tion of touching [the phone] and [use our] and their families, Samsung created a
dent foundry business that makes proces- voice, that would be perfect. roughly $90 million compensation pool,
sors for competitors, such as Qualcomm When a reporter points out that but many have refused to settle on its
Inc. and Apple, that cant or dont want Google has its own voice assistant, creat- terms. The company says its keeping the
to build chip plants themselves. This ing a potential point of friction with the application channel open and working to
profitable sector is dominated by Taiwan company that makes the Android software resolve the remaining cases.
Semiconductor Manufacturing Co. Now powering most Samsung smartphones and As Lees lawyers and co-defendants
Samsung is coming for it, confident it can tablets, Koh rolls out an old Woody Allen enter the courthouse, the activists hurl
walk the tricky line of making processors routine. invective at them. But Lee has supporters
for both its rivals and itself. Once we start Koh: I want to ask you: Are you of his owndozens of mostly older people,
something, a new business, says Yoon married? representative of a large group of South
Jong-shik, the executive vice president in Reporter: Im engaged. Koreans who have started to push back
charge of the effort, we always make it a Engaged! How many rings do you against the political changes wrought by
good success in 10 years. need? the corruption scandal. The confrontation
Uh. Two? quickly gets heated.
FROM LEFT: COURTESY SAMSUNG; DREW ANGERER/GETTY IMAGES; DATA: BLOOMBERG

For all Samsungs triumphs over I would say three. An engagement What did Jay Y. Lee do wrong? He was
Japanese and American manufactur- ring, a wedding ring, and another ring is only trying to make our nation greater by
ers, one dominion remains elusive: soft- always necessary: suffering. making Samsung greater!
ware. The company pines to compete The joke draws hearty chuckles from If you dont like Samsung, just go to
with Amazon.com Inc. and Google Inc. Kohs staff. North Korea!
by developing popular cloud services In many areas, were working with Samsung has fed us generation after
and intelligent personal assistantsand Google very closely, he explains. But generation. They made our nation famous!
especially applications capable of linking Youre shameless!
its smartphones with its flatscreen TVs, Security guards step in, and things
washing machines, and refrigerators. momentarily quiet down. A reporter
A few years ago, Samsung tried intro- asks Han why she blames Jay Y. rather
ducing a smartphone operating system, E than his father, Kun-hee. She replies that
called Tizen, which didnt catch on and if the son has inherited his wealth, he must
is now used mostly in smartwatches and also embrace the responsibility. Nearby,
some appliances. Other apps, including Samsungs supporters start to chant Free
Samsung Health, Samsung Cloud, and Jay Y. Lee! <BW>
D. The new semiconductor plant in Pyeongtaek E. Koh at a Galaxy S8 launch event
 Bloomberg Businessweek

A M Y S T E R I O U S A S S AU LT. A N U N S O LV E D

T H E H I JAC K I N G O F T H E B R I L L A N T E

The tanker in May 2010,

48

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 July 31, 2017

M U R D E R . A N D A S H I P T H AT H A S N T G I V E N U P A L L I T S S E C R E T S

VIRTUOSO
B Y K I T C H E L L E L A N D M AT T H E W C A M P B E L L
in an image taken by a crew member

49
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 Bloomberg Businessweek July 31, 2017

the crew in the television room, the gunman said. Marquez

I. went cabin to cabin, rousing sleepy crewmates. After all

26 were assembled in the small TV room, now fully aware
that theyd lost control of their ship, the six gunmen split up.
W H O A R E YO U ?
Two took Gonzaga to the bridge, two marched Tabares to the
Nestor Tabares must have known the hijackers were out engine room, and two stood sentry outside.
there, waiting. It was his 13th day at sea aboard the oil tanker For a long time, the 24 sailors remaining in the TV room
Brillante Virtuoso, and as the ship turned east, into the pirate- sat there, wondering what was happening to their captain and
strewn waters off Somalia, the 54-year-old chief engineer chief engineer, until a clatter of gunshots suggested the worst.
would have understood that it made for an obvious target. They dared not open the door. At one point, the Brillantes
With a top speed of less than 13 knots and stretching 300 yards engine roared to life; the ship was moving, but no one knew
from bow to rusting stern, the black-hulled Brillante was plod- where. Suddenly, at around 3 a.m., an explosion sounded
ding into the worlds most dangerous shipping lane with a within the tanker, knocking out the electricity and setting off
cargo worth $100 million. alarms. Fearful of their guards, the crew waited in placebut
It was July 2011, and the threat of Somali piracy in the when smoke began to fill the room, a few crept out and dis-
Gulf of Aden had never been more severe. The Brillantes covered that the intruders had fled.
crew of 26 Filipinos, including Tabares and the ships captain, The Brillante was built like two rectangles joined at a right
Noe Gonzaga, 57, set up the standard deterrents. Around the angle: one vast, flat, hollow shape that held the liquid cargo,
decks perimeter they fitted coils of razor wire, aimed eight and one smaller, upright stack that contained mechanical
high-pressure hoses for blasting attackers off the hull, and systems and crew spaces. The fire was underneath them, and
propped up a scarecrow in overalls, to suggest the presence of rising. Guided by dim emergency lights, Marquez and several
a watchman. Deep inside the tanker, they stocked a mechan- other crewmen rushed to the top of the block, where they
ical space with food, water, radios, and medical suppliesa found Gonzaga on the bridge, alone and unharmed, bound
panic room in the event pirates did come aboard. Most of by plastic ties. They sliced him free. As smoke poured out
the crew had faith that would never happen. They knew the of the tankers funnels, sailors made a distress call that was
ships owner, a company called Suez Fortune Investments picked up by the USS Philippine Sea, a guided-missile cruiser
Ltd., had arranged for a small security team to rendezvous on pirate patrol nearby. Gonzaga gave the order: Prepare to
off the Yemeni port of Aden, as an escort through the most abandon ship.
50
dangerous part of their journey. On deck, the crew counted off. Twenty-five menall but
On the evening of July 5, Gonzaga ordered the crew to cut Tabares. Panic set in. The fire had reached their level, and
the engine and drift while they awaited the guards arrival they could hear loud, ominous cracks from metal buckling in
the next morning. They were 12 nautical miles off the Yemeni the heat. Inside the Brillante, the temperature in some rooms
coast. It was calm, partly cloudy, and silent, apart from the was approaching the melting point of copper, testing the fire-
hum of generators and the sloshing of breakers. proofing that for now kept 141,000 metric tons of oil from ignit-
A 40-year-old able seaman named Allan Marquez stayed up ing. A search party went back for Tabares, but the smoke was
to keep watch on the bridge. Just before midnight, he saw a too thick. At 4 a.m. the crew gave up and took to the gulf in
blip on the port-side radar, approaching fast. He reached for a a large, orange lifeboat. As they did, the thrum of rotor chop
pair of binoculars. A motorboat was moving in the moonlight. beat down from aboveit was a U.S. Navy Seahawk helicop-
As it came closer, Marquez could make out seven people ter, launched by the approaching Philippine Sea. From the
six of them in desert-style camouflage, holding what looked
like rifles. His superior on the watch, Second Officer Roberto
Artezuela, rang Gonzaga in his cabin, and Marquez made his
way to the deck.
Who are you? Marquez yelled down to the boat, trying
A C L AT T E R O F G
to sound friendly. One of the men produced a megaphone.
He said they were the security team, members of the crew
would later recount, and asked to board. Marquez didnt know air, the American crew saw fireballs rising from the stricken
what to do. Something seemed off. This was too many men, at tanker and felt the percussive boom of explosions within. They
the wrong time, and one wasnt even wearing shoes. Letting trained infrared cameras on the hull seeking signs that the oil
armed strangers onto the ship went against every antipiracy four times the volume of the Exxon Valdez spillwould pour
protocol. Marquez radioed up for instructions. After a few into the water. When the Philippine Sea was close enough,
minutes an order came back: Lower a ladder. it sent two inflatable boats to collect the rejoicing Filipinos.
Six men climbed up. They had light brown skin and wore Then, at 5 a.m., the helicopter crew saw movement on
PREVIOUS SPREAD: DIMITRIS TAMVAKOS

red-and-white keffiyehs and blue hospital masks. Their rifles deckTabares was alive, waving a flashlight. The flames were
looked like Kalashnikovs, and they carried black pistols in too intense for an aerial rescue. He leapt into the sea. Seeing
holsters on their thighs. When Marquez asked for ID, they a Navy boat, he reached out with both hands and was pulled
refused, seized his radio, and demanded to be taken to to safety.
the captain. Aboard the cruiser, Gonzaga began to tell the Americans
Gonzaga was still in his stateroom when Marquez appeared what had happened while hed been separated from the crew.
at his door, trailed by one of the armed visitors. Gather all of The hijackers, he said, ordered him to turn over $100,000 and
 Bloomberg Businessweek July 31, 2017

The Last Voyage of the and criminal investigations that are still nowhere near conclu-
Brillante Virtuoso sion. Six years after it was abandoned, the Brillante Virtuoso
is an epithet among shipping veterans, one that reveals their
industrys capacity for lawlessness, financial complexity, and
June 23, 2011
Departs Kerch, Ukraine
violence. This account is based on court evidence, private
and government records, and more than 60 interviews with
people involved, almost all of whom asked not to be identi-
June 25 fied, citing the sensitivities of nine-figure litigation and, in
Passes through
Bosporus strait some cases, concern for their own safety. Everyone at sea
that night survived. But the danger was just getting started.

June 30
Transits Suez Canal II.
T H E M O N E Y A N D DAV I D M O C K E T T
Egypt Anytime a commercial vessel is lost, the incident is recorded
Saudi Arabia with a quill pen in a leatherbound book at Lloyds, a London
July 3
institution that blends age-old ritual with modern finance.
Refuels at Jeddah Contrary to common belief, Lloyds isnt an insurer, or even
a company in the usual sense of the word. Since its origins in
a 17th century coffeehouse popular with traders who funded
Yemen
Sanaa sea voyages, Lloyds has evolved into something like a stock
exchange for risk, where actual insurers come to buy and sell
Gulf of Aden exposure. These companies form syndicates and get insurance
July 5-6 Pirate incidents of their own from even larger re-insurers, who are re-re-in-
The hijacking in 2011; more sured in turn. These layers constitute one of the worlds most
than 200 attacks
occurred in the essential and least understood markets, where premiums
Somalia
area that year alone generate about $40 billion a year. Anything that might
51
be lost or cause a loss, from Bruce Springsteens voice to a
Virgin Galactic spacecraft, can be insured via Lloyds, but
sail for Somalia; theyd fired their weapons at the ships safe shipping remains at its core. Some 80 to 100 major vessels are
when he was slow to open it. He couldnt say what caused lost each year, and the Brillante was one of the largest of 2011.
the explosion. When Tabares arrived to share his tale, he After a shipwreck, insurers and insured alike have an inter-
said hed managed to disable the Brillantes engines when est in preserving as much value as possible, so they turn to
his captors werent looking, then escaped, hiding for so long salvage. Under Lloyds rules, salvors are entitled to a percent-
that he missed the evacuation. age of anything they save from destruction, and its widely
The Philippine Sea searched for fleeing pirates, but the assumed that some shipowners steer business to favored
motorboat was long gone. Sunrise turned the sky gray and companies in return for a cut of their compensation. Just
then powdery blue. A tugboat arrived from Aden and pumped minutes after the Brillantes distress signal went out, the

UNSHOTS SUGGESTED THE WORST

seawater onto the Brillante, taming the fire until the dead tankers owner, Suez Fortune, contacted a company named
tanker drifted serenely in the morning light, low in the water, Poseidon Salvage International, which got two of its boats in
trailing a thick column of smoke. Aden to the scene by 7 a.m.
DATA: NATIONAL GEOSPATIAL INTELLIGENCE, BLOOMBERG

Barely seven hours had passed since the gunmen had taken Four days later, Suezs owner, a Greek named Marios
the ship. But already an international cast was activating: Iliopoulos, flew to Adena chaotic city on the verge of
salvors from the regions cutthroat ports, to scavenge mil- revolution. He secured the Brillantes crew in a hotel
lions from the wreckage; U.S. military investigators, to deter- and gave each sailor $200 for new clothes. On a rather
mine if Somali pirates had adopted brutal new tactics; and larger scale, Iliopoulos also prepared to submit a claim
most urgently of all, an operative from the stony world of for his ruined tanker. But before the insurers would pay,
London insurance, to discover what really happened aboard they would want a better understanding of the hijack-
his clients $100 million liability. Because if the hijacking of ing. And for that, they would need David Mockett.
the Brillante Virtuoso wasnt a case of fumbled piracy, it would Every port, no matter how remote, has a small corps of
be the most spectacular fraud in shipping history. marine surveyors, without whom Lloyds and global shipping
The events of July 6, 2011, set in motion a tangle of lawsuits would cease to function. Surveyors are hired to establish
 Bloomberg Businessweek July 31, 2017

the facts of incidents from routine collisions to deadly

storms; their assessments often make the difference between
payment or denial of a claim. Many are former captains, who
develop the skills of private investigators and execute them
in perilous situations. Mockett was the top surveyor in Aden.
Born in 1946, Mockett grew up poor in a small town near
the English port of Plymouth. Looking for a ticket out, he
signed up with a merchant shipping line, and in the 1970s
he joined a flood of Westerners seeking better prospects in
booming Saudi Arabia. He lived mostly apart from his wife
and two daughters, whom he regularly visited at home in
England. Few outsiders take to the strictures of life in an
Islamic theocracy, but Mockett found his pleasures, scuba
diving to Red Sea coral reefs. In 1998 he moved to Yemen.
Compared with orderly Saudi Arabia, Yemen was like
another planetthe poorest country in the Middle East,
riven by sectarian conflict, with huge ungovernable areas.
Men carried Kalashnikovs as standard accessories, as well
as jambiyas, curved daggers with ornate handles. Mockett,
with his ruddy face and thunderous laugh, was hardly incon-
spicuous. Locals joked that he was the tallest man in Yemen,
with hands that a colleague described as like giant plates of
meat. He soon learned how dangerous his new home could
be, when al-Qaeda suicide bombers in the port of Aden killed
17 U.S. sailors aboard the USS Cole. One day the next year,
getting out of a car at his office, Mockett heard a pop and
felt a sharp pain. Hed been shot at, and a bullet had rico-
cheted off a vehicle behind him and gone clean through his
52
neck. Being a good surveyor, he later joked, I made sure I
got the bullet. He never found out why hed been targeted.
A significant portion of the worlds maritime trade passes
within a short distance of Adens harbor, so the city offered
plenty of work for an able surveyor willing to put up with its
harder edges. Mockett found ways to soften them. He became
a regular at the sole Chinese restaurant, Ching Sing, which
served foul Eritrean gin and whiskey in defiance of the virtual
prohibition on alcohol. And he developed a certain rapport
with the locals. Driving along the coast with a friend in 2008,
he pulled over to photograph the ocean. A beat-up car stopped
alongside, and three men stepped out.
Are you American? they asked. Mockett indicated that
he was British. The men shook hands, but that turned out to
be all the English they knew. Mocketts companion pointed at
the pistol one Yemeni wore on his belt, and then to the small,
round scar on Mocketts neck. The Yemeni lifted up his robe to
go one better: A large chunk of his leg was missing. Soon they
were posing for pictures and joking with the Kalashnikov that
the Yemenis, inevitably, were carrying in the trunk of their car.
When the Arab Spring spread to Yemen in early 2011,
friends urged Mockett to leave, at least temporarily. He
refused, arguing that people back home were overreacting
to the images of turmoil on TV. Yemen was safe, he said, as
long as you stayed out of trouble.

III.
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DIMITRIS TAMVAKOS

EVIDENCE, DEAR BOY, EVIDENCE

When Mockett got the Brillante assignment later that year,
Poseidons head salvor, a gnarled Greek diving expert named
 Bloomberg Businessweek July 31, 2017
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 Bloomberg Businessweek July 31, 2017

Vassilios Vergos, refused to give him access to the wreck for On the corner was a store selling sweets; it would normally
almost a weekan unusual and unexplained delay. Finally, be crowded with children, but that afternoon it was empty.
Mockett chartered a fishing trawler to get to the tanker, where Mockett had driven a short distance onto Maalla, Adens
Vergos insisted on accompanying him on his rounds. main street, when the bomb that had been carefully placed
The ship, groaning in heavy seas, had a deceptive under his seat detonated. The blast was focused and power-
appearancethe exterior was largely intact, while the mechan- ful, loud enough to be heard blocks away. It killed Mockett
ical and crew sections within were a total ruin. As Mockett instantly, almost blowing his door off its hinges. As the car
began exploring, his boots splashed through deep puddles of burned, belching smoke into the hazy sky, a crowd of locals
oily seawater left behind by three days of firefighting. Inside in traditional white caps pushed toward the flames, shouting.
the accommodation block, the beam from his flashlight swung Mocketts body lay on the street next to the broken door, one
left and right, illuminating blackened metal contorted by heat arm extended, bent at the wrist, as if reaching for the gearstick.
and crusted with soot. Every few steps, he paused to take
photos. The engine room, near where the fire had begun, was
half-flooded, with ladders that descended into inky sludge.
It was too dangerous to go deeper.
IV.
STO P A S K I N G Q U E ST I O N S
Mockett spent the night on the trawler. On his way back
to Aden, he contemplated the strangeness of what hed seen. The murder was shocking even in a city accustomed to bomb-
As a rule, pirates dont set fire to valuable shipsthey hijack ings. A small crowd held a procession a few days later, car-
them and hold their crews and cargo for ransom. Nor do they rying placards bearing Mocketts photo and chanting, God
abandon vessels after doing the difficult work of getting on be merciful, God receive him. The Yemeni Ministry of the
board and taking control. Interior ordered an investigation, and local police asked one
Over the next several days, Mockett expanded on his suspi- of Mocketts closest friends in Aden, a fellow Brit named Roy
cions over tea in his office with friends, paging through hun- Facey, to write a report. Faceys contacts in the area warned
dreds of photos on his laptop. He had a reputation as a careful, him not to include anything too inflammatory. In the docu-
by-the-book surveyor, hesitant about inference or speculation. ment, which he submitted on July 23, Facey described dis-
Evidence, dear boy, evidence, was one of his stock phrases. cussing the Brillante with Mockett just before he died and
The Brillante evidence didnt add up. There was no sign that the hearing him dismiss the story of Somali pirates.
attackers had used rocket-propelled grenadesone of the few Facey suspected Mockett had been killed because of what
54
pirate tactics he could think of that could realistically cause an hed learnedand he now possessed the same dangerous
explosion and fire. And when Mockett reviewed accounts given knowledge. On July 25, Facey was awakened at 1:30 a.m. by a
by the crew, he found them bizarre. It was hard to believe an call from the British embassy in Sanaa, the capital. A woman
experienced captain would invite armed men onto his ship in told him his life was in danger. She wouldnt describe the

I T S N O T F O R T H E S A LV O R T O P L A

the middle of the night, in the worlds most dangerous water- threat or how the embassy knew about it, only saying he
way, if there was any question about their identity. The entire should hide until someone could retrieve himand then leave
rendezvous was suspicious: The Gulf of Aden is an area to the country immediately.
accelerate through, not dawdle in. Facey locked himself inside his apartment for more than
A world away at Lloyds, tens of millions of dollars in 36 hours. Late in the afternoon on July 26, kids playing on the
insurance payouts hinged on Mocketts findings. As he prepared street outside stopped to stare as two shiny 4x4s rolled up. A
his report, he shared his misgivings with group of burly men with American accents
some of the other shipping handssome Mockett (center) and Stokes (right) emerged, wearing civilian clothes and
at Ching Sing. Both would be dead within
local, some from overseasassembling 15 months of the hijacking
pistols on their belts. They bundled Facey
around the tanker, including one hired to into one of the vehicles, eventually depos-
offload its oil. On July 19, Mockett emailed iting him at the airport. The men didnt
the man to say hed begun to suspect that identify themselves, but Facey thought he
LEFT: COURTESY OF ADAM GREAVES TOMLINSON

the supposed Somali pirates were neither knew who they were. U.S. special forces
Somali nor pirates, but rather rogue ele- were active throughout southern Yemen
ments of the Yemeni coast guard or navy. at the time, coordinating drone strikes
He promised to explain more soon. and commando raids on al-Qaeda-linked
The next day, at about 1 p.m., Mockett militants. Facey flew out of Aden without
took his laptop, left his office, and ever learning who wanted him dead. (He
climbed into his Lexus SUV. He made declined to comment.)
the short drive to his small house in a Another British citizen soon arrived
neighboring district every day for lunch. to investigate Mocketts murder.
 Bloomberg Businessweek July 31, 2017

Jonathan Tottman, a detective sec- another Greek-run company, Five

onded to the British foreign service from Oceans Salvage, that had partnered
Londons Metropolitan Police, looked with Poseidon. With the tanker finally
less like a cop than a diplomat, partial to secure, its decks bustled with small teams
elegant suits. But he had a broad record of inspectors taking measurements and
investigating corruption, terrorism, even photos. Among them were agents from
soccer hooliganism, and ample experi- the U.S. Naval Criminal Investigative
ence in the Middle East. Hed need it. Service; if pirates were getting in the
The rule of Ali Abdullah Saleh, Yemens habit of burning commercial ships, the
authoritarian president, seemed like it Navy wanted to know about it. They were
was about to collapse, and the country joined by fire and explosives experts,
was tearing itself apart. A suicide bomber people hired by the companies that
Mocketts car after the bombing
killed nine soldiers at an army check- owned the ship and cargo, and the insur-
point just before Tottman landed, and he could move around ers of both. Previously, a surveyor hired by Suez Fortune had
the city only with a phalanx of heavily armed Yemeni guards. argued the fire was caused by an errant pirate grenade. Now
There wasnt much to investigate. The authorities had one of the explosives experts entered a space adjacent to the
cleared the site of the car bomb almost immediately, col- engine room, which had been drained and looked like the
lecting little evidence; Mocketts laptop disappeared into inside of a barbecue, and spotted an unmistakable bulge in
police custody. Al-Qaeda had menaced Westerners across a metal plate on the floor. It could only have been left by a
Yemen, but Tottman and others believed the murder was bomb, he thoughtsomething focused and powerful.
extremely unlikely to have been an act of terror. No militant
group claimed credit for killing Mockett, and the blast had
been relatively small, injuring no one else on a busy street.
In the weeks after the bombing, another of Mocketts long-
V.
T H E U N P L E A SA N T N E S S
time friends asked a Pakistani surveyor in Aden to see what
he could find out about the Brillante. The Pakistani was soon Scuttling or damaging a ship for the insurance money is, in
arrested. Yemeni officials took his passport and detained him some respects, an ideal crime: There might be no witnesses,
for five days in a shabby building near the harbor, locking him no evidence, and no law enforcement. The odds of getting away
55
in a small room with only a bucket for drinking water. After his with it are good. Even when an accident has the odor of foul
release, the man fled the country, and Mocketts friend took play, Lloyds insurers almost always pay something. The unwrit-
the incident as a warning to stop asking questions. ten law of maritime insurance is to avoid the unpleasantness
Ultimately, too much money and too many actors were of customer conflict and keep the premiums rolling in.
But if the Brillante wasnt a genuine
hijackingif it was an inside job, with
a coverup that extended to murder
Y SHERLOCK HOLMES then it had no precedent in scale or
theat ricality. Fifteen months after
the attack, a second Brit in Aden died
in mysterious circumstances. Roger
involved for the Brillantes ruin to go unexamined. Other inqui- Stokes, a soft-spoken lawyer and friend of Mocketts, had tried
ries continued. The U.S. Navy wrote up skeptical reports, based to collect an unpaid Brillante fuel bill. On Oct. 7, 2012, his driver
on the efforts of the Philippine Sea. One summary noted that found him in his apartment, bleeding severely from a head
pirates typically start fires to lure crew out of a fortified hold, yet wound. He expired on the way to a hospital. Stokess family
on the Brillante the hijackers had control of everyone on board. believed his death was accidental. But in shipping circles,
Highly suspicious that pirates would even try to attack a ship Stokes belongs on the list of those who have dealt with the
so late at night with very little illumination, the document con- Brillante and then found their life in danger.
tinued. Navy personnel also noted that, curiously, Gonzaga and In London, four months later, two groups of insurers were
Tabares had requested to board one of Poseidons tugs almost facing major Brillante claims and needed to decide whether to
immediately after being rescued. They did so, then refused offi- fight or write checks. The first claim concerned the oil cargo.
cers requests to return to the Philippine Sea for more interviews. The lead salvor, Five Oceans, was asking for about $30 million
Pirates in the Gulf of Aden are generally dark-skinned from a group of three underwritersRoyal & Sun Alliance
Somalis who speak the distinctive language of that country. Insurance Group, Zurich Insurance Group, and Allianzas a
But the Brillantes crew told Navy investigators that almost all reward for saving the payload. The second claim involved the
the gunmen had lighter skin and spoke an unidentified form Brillante itself. Suez, the owner, wanted ultimately to recover
of Arabic. And the tankers black-box-style data recorder indi- about $100 million, covering the hull, machinery, and forgone
cated that the vessel had traveled west during the incursion, profits, plus interest, from a group of 10 companies led by
when Somalia was due south. True Somali pirates, seamen of Talbot Underwriting Ltd.
the hardest kind, would have noticed. In February 2013, about 30 people gathered to discuss the
By late August, what remained of the Brillante was anchored case on the 11th floor of Lloyds headquarters, a landmark of
in safe waters off the United Arab Emirates, towed there by modern architecturean eruption of exposed steel gantries,
 Bloomberg Businessweek July 31, 2017

undulating staircases, and ventilation pipes rising from the eight large ships at once, he was for years virtually unknown
heart of the City, Londons financial district. Around a large table to his insurers, even as his vessels sometimes came to tragic
sat representatives of both insurance groups, their lawyers, and ends. In 1994, the Iron Antonis, an aging freighter Iliopoulos
four police detectives whod been invited to attend. owned with his two brothers, was due to be scrapped. The
The cargo insurers were reluctant to pay, they explained, brothers sent it on one last journey, hauling ore from Brazil
adding that if the City of London Police intervened, they might to China. It sank in a storm 2,000 miles west of Cape Town,
be able to delay a decision. More time would be useful for their one of the most remote places on the planet, killing all 24
private investigators, who were still tracking down witnesses. But of its sailors. Greek authorities charged the Iliopouloses
a representative from Royal & Sun, which had recently fought a with causing the deaths by negligence. Marios and Ioannis
nasty legal battle with a different Greek shipowner, expressed Iliopoulos were cleared, but their brother, Antonis, was con-
fears that the company could get a reputation for hostility if it victed in 2001; the case was dropped on appeal.
faced off against another client. A few weeks after the meeting, In 2015, after more than two years of preparation, the Talbot
the cargo insurers folded, paying out the $30 million to the insurance syndicate accused Iliopoulos of orchestrating the
salvors. (The insurers declined to comment.) assault on the Brillante Virtuoso. There was no attack by Somali
The Talbot syndicate took a more aggressive approach, pirates, they said in documents filed in a London court. Any
denying Suezs claim for the ship. Suez sued in response. To such attack on the Vessel was staged, they continued, with the
prepare for trial, the insurers sent investigators to the Middle involvement and connivance of the Owner and members of the
East, to dig into the attack and salvage, and to Greece, to find crewspecifically, Captain Gonzaga, Second Officer Artezuela,
out more about Suezs owner, Marios Iliopoulos. and Chief Engineer Tabares. The insurers claimed the fire was
The investigators learned that one of Iliopouloss ships had strategic: started by a bomb in a chosen location, stoked by an
been in trouble off the coast of Aden before. On May 26, 2009, a accelerant and open airways, and intended to cripple the ship.
fire broke out in the radio room of a 90,000-ton oil tanker called Talbot seized on inconsistencies in the sailors statements.
the Elli. While the crew fought the blaze, the ship ran aground According to U.S. Navy chat transcripts, the first account of the
on a sand bank. Tugs pulled it clear, but three months later the incident by a third party, the crew initially said the attackers
Elli suffered an unexplained accident in the calm waters around had posed as their security team. Yet in subsequent statements
the Suez Canal, splitting in half like a watermelon. The resulting given in Aden, after Iliopoulos had arrived, as well as in Manila
claim, for about $35 million, was disputed by the ships insur- the story changed. Gonzaga, Tabares, and Marquez, the sailor
ers and ended up in litigation; the parties settled before trial. who let the men aboard, all said instead that the gunmen had
56
The Ellis chief engineer on the day of the fire was Nestor claimed to be from the authorities. The revised account
Tabares. Two salvage companies responded to its accidents. would seem to resolve a key logical flaw: How could Somali
When the ship ran aground, Poseidon was first on the scene. And pirates have known the tanker was expecting an escort?
when it later broke in two, Five Oceans attended to the wreck. Seeking to establish a motive, the insurers said that Iliopoulos
Poseidons manager, Vergos, didnt respond to more than was deeply in debt, having borrowed $60 million or more to buy
half a dozen calls and emails to the companys Greek office his ships, and that the Brillante was hemorrhaging money, in
requesting comment. Five Oceans Managing Director Nikolaos the red by about $4 million in the first six months of 2011. Talbot
Pappas said in an interview that his companys only role in alleged that as his finances deteriorated, Iliopoulos began to
the Brillante case was to secure the ship, and that hes unable plan the destruction of the Brillante. Iliopoulos responded by
to comment on the attack or what happened to the Elli. Its accusing the insurers of unfairly and irresponsibly endanger-
not for the salvor, he said, to play Sherlock Holmes. ing my reputation. He denied the unfounded and wrongful
allegations, adding in a court statement: I am a respectable

VI. businessman, welcomed by such individuals as the Archbishop

of Athens and the Vice-President of Greece.
In April 2016, Iliopoulos was summoned to a London court-
SUPER MARIO
room to answer questions about an important pretrial issue:
Marios Iliopoulos had kept his name out of the Elli litigation. Hed Electronic records from a company managing the Brillante
owned the tankeras he did the Brillantethrough a web of anon- appeared to have gone missing. The court was brightly lit,
ymous offshore companies. Hes proba- and lawyers for both sides lined up
bly 50 years old, is based near Athens, Brillante crew members thank a U.S. Navy at long tables as Iliopoulos took the
sailor after their rescue
and controls one of the citys fast-ferry stand. With a scruffy beard, oily hair,
services to Mykonos. In Greek media and an untucked shirt that struggled to
reports, Iliopoulos is known as Super contain his ample figure, he looked an
Mario for his skill at rally-racing, a sport unlikely shipping tycoon. He spoke in
that involves hurling supercharged pro- Greek, through an interpreter. Accused
duction cars along dirt tracks and moun- of deliberately withholding the emails,
tain roads. Its a pursuit defined by scenic Iliopoulos jabbed his finger in the air.
locations, crowds of passionate fans, and He thumped the table and glowered
fearless drivers, who risk a one-way trip across the courtroom at his opponents,
off a cliff if they lose control. ignoring questions and accusing them
Although trade publications indicate of having committed crimes in the
that Iliopoulos has owned as many as course of their investigations in Greece.
 Bloomberg Businessweek July 31, 2017

Judge Julian Flaux warned him to stop government, he said. Strapped for cash,
being evasive. the Yemeni navy was also hiring its ships
As the hearing stretched into a and men out for private security jobs in
second day, an older woman with short, the Gulf of Aden, Feierstein added. It was
gray hair was watching from a chair in a time of complete political chaos.
the back of the courtroom. It was David Its only gotten worse. Yemen is in
Mocketts widow, Cynthia. She looked a state of near-anarchy, and building
on as Talbots lawyer, Jonathan Gaisman, a murder case would be impossible
told the judge that someone had hacked for even a committed team of detec-
into the emails of a Greek lawyer hired tives. British police arent investigating
by the insurers. Those messages, he Mocketts death. Apparently, no govern-
said, found their way to Iliopoulos. ment agency is. The only formal inquiry
Iliopoulos poses while enjoying
Turning to the shipowner, Gaisman one of his hobbies into his murder was held by a local
accused him of ordering the hack. coroner in Plymouth, Mocketts home-
Iliopoulos responded quietly. Staring at Gaisman, he told town, in 2012; it recorded a verdict of unlawful killing, without
the lawyer that those allegations might draw consequences. identifying suspects. (Cynthia Mockett declined to comment.)
Judge Flaux, a small man with thick glasses and a reputation The investigation into the Brillante has its limits as well. As
for toughness, had heard enough. You will not use this court- of July 19, 2017, City of London police hadnt yet spoken to Allan
room to threaten counsel or English lawyers, he shouted Marquezthe man who first spotted the Brillantes attackers and
down from the bench. You will behave yourself! When helped them aboard. That night, on the eve of the six-year anni-
Iliopoulos left the stand, he apologized to Flaux, saying he versary of Mocketts killing, a Bloomberg Businessweek reporter
was an emotional man trying to protect his reputation. reached Marquez on a ship that was just entering a French port.
Iliopoulos strolled downstairs toward the lobby. There, His words came pouring out in rapid English, his second lan-
waiting in the space between a set of metal detectors and the guage. Hed been waiting a long time, he said, to tell his story.
buildings glass doors, were four uniformed officers from the Marquez alleged that after the attack, Iliopoulos sought
City of London Police. The tallest one spoke. Mr. Iliopoulos, him out at his hotel in Aden and threatened him. The ship-
Im arresting you for conspiracy to commit fraud, he said, owner wanted him to alter or omit parts of his account of the
taking him by one arm. Eyes widening with surprise, Iliopoulos hijacking when giving statements to investigators, Marquez
57
said nothing as the officers hustled him into an unmarked blue said. He added that Tabares confronted him, too, at a hotel
sedan. Iliopoulos was questioned for hours at a nearby police in Manila weeks later.
station before being released without charge. Marquez elaborated over multiple phone calls, online chats,
The investigation into his involvement with the Brillante and an in-person interview in his native Tagalog. To explain
continues, according to people familiar with the probe, his reasons for going public, he wrote at one point that he was
though its scope is narrow. Officers are focused on deter- no longer afraid of both of them, meaning Iliopoulos and
mining whether the insurance claim was fraudulent, which Tabares. Now, he wrote, im afraid to god. How long I can hide
could carry a penalty of as many as eight years in prison. the truth in my conscience. Before signing off, he wrote, I
Iliopoulos never received his $100 million. Judge Flaux hope that justice must prevailed.
denied his claim after the witness box confrontation, writing Iliopoulos didnt respond to multiple, sustained interview
in a 2016 judgment: Mr. Iliopoulos clearly lost his temper requests sent via his London lawyer and his secretary or to
and effectively threatened the insurers and their legal rep- emails and faxes. A letter brought by courier to his office in
resentatives from the witness box in a disgraceful manner. Piraeus, Greece, was refused. Suez didnt respond to a letter
With this intemperate and menacing evidence, Mr. Iliopoulos sent to its registered address in the Marshall Islands. Tabares
lost any remaining shred of credibility. didnt respond to multiple requests for comment. Neither did
The underlying lawsuit, though, limps on: A bank that origi- Gonzaga or multiple members of the Brillante crew.
nally lent his companies money is entitled to continue it. Talbot The Brillante Virtuosos final destination was Gadani Beach, a
has submitted evidence of what it says is yet more suspicious shipbreaking yard on Pakistans Arabian Sea coast. The ship was
Brillante activitya conspiracy to mislabel its oil to avoid tax. hauled onto the sand, stripped of anything of value, and torn
apart, piece by piece, by workers who make a few dollars a day.

VII. Iliopoulos continues to be active in Greece. Local newspa-

pers reported earlier this year that he was bidding for a stake
in Hellenic Seaways, a major ferry company. Meanwhile, its
SHIPBREAKING
likely that he has at least one more major vessel at sea. Atop
In 2011, when Tottman, the London detective, returned from Gonzagas Facebook page is a photo of another tanker, the
investigating Mocketts death in Aden, he was immediately Despina Andrianna. That ships registered owner, according to
summoned to brief the British government in Westminster. maritime databases, is an obscure company with an address
LEFT: COURTESY U.S. NAVY

Officials asked whod set the bomb: Criminals? The government? opposite the ferry terminal in Piraeus. Iliopoulos has testified
Terrorists? In Yemen, Tottman said, it could be all three at the that the same address is his own. At press time, the Despina
same time. In an interview, Gerald Feierstein, the U.S. ambas- Andrianna was moored in Cuba, preparing to sail with an
sador to Yemen from 2010 to 2013, agreed with that assess- unknown number of souls. <BW> With Karl Lester Yap, Vivian
ment. Corruption was endemic in the military and the civil Nereim, and Paul Tugwell
A Haven for
The Hunted
P
Anantara Golden Triangle, a five-
star resort in northern Thailand,
U
R
is one of the only places on Earth
where you can ethically interact
with elephants in the wild
By Nikki Ekstein

S
Photographs by
Wayne Lawrence

U
I
T
S 59

64
Loafers, now
and forever

65
High-end hotels
reach the City

66
A design radical
at the Met

67
The superknife the
Iron Chefs use

68
An economist friend
A mahout, wearing the to refugees
traditional mohom outfit
denim, red neckerchief,
and yellow straw hatatop
an elephant at Anantara

Bloomberg
Businessweek

July 31, 2017

Edited by
Emma Rosenblum
 TRAVEL Bloomberg Pursuits July 31, 2017

I
m half-submerged in the Mekong Riverthe watery border elephants in Thailand? the minute-long video asks in block
that separates Laos from Thailand and Myanmarsitting letters as a melancholic violin plays. It then shows baby ele-
atop a big-eared, pink-spotted, 3-ton elephant named phants chained to posts, workers kicking the gargantuan animals
Poonlarp. Her skin looks soft from a distance, but its much as tourists struggle to climb onto them, and trainers prodding
coarser up close, covered in inch-long bristles. Her gait, which their thick hides with long, crude pickax-type tools.
at first gives the appearance of flowing-through-honey move- A 2010 study by the University of Oxfords Wildlife
ment, feels wobbly up this high. Shes alternately headstrong Conservation Research Unit exposed Thai elephant camps as
and playful. If youve ever walked a large, stubborn dog, you some of the travel industrys most irresponsible businessesnot
have an idea what its like to ride an elephant. This is the only for their poor treatment of the animals on their premises
bucket-list item that brings people here to Anantara Golden but also for encouraging locals to kidnap calves, some less than
Triangle Elephant Camp & Resort. Perching directly on top of a year old, from their mothers and force them into submission.
Poonlarps wide shoulders, forcing my legs into a permanent By 2014 influential travel operators such as Intrepid Travel
straddle behind her ears, magnifies her immensity. At one had removed elephant rides from their offerings. Mass petitions
point, she takes a deep drink and sprays the water gleefully, from World Animal Protection and Change.org rang up tens of
like a living fountain, out of her trunk. thousands of signatures in a matter of days, encouraging more
Its my second day at Golden Triangle, a 63-room honey-
moon spot set among the rice paddies and tea plantations of
far-north Chiang Rai province in Thailand. I flew with my sister
to Bangkok from New York, then caught an hourlong connect- Its extremely difficult
ing flight. The van that picked us up had massage chairs instead
of passenger seats and a welcome basket filled with cold face to come up with workable
towels and elephant-shaped shortbread cookies. We arrived after
sunset, in time for a late dinner of papaya salad and pad thai.
It wasnt until 5 a.m. this morning, jet-lagged and awake on
and elephant-friendly
the terrace, that I first heard the soundtrack of elephant roars.
It started off quietly but grew louder as the sun rose and a band
solutions
of tiny-looking animals emerged from shadows in the distance.
Anantara started in the early 2000s, when Bangkok-based than 100 travel companies, including slower adopters such as
60
Minor Hotels acquired a Le Mridien and transformed it into a Thomas Cook Travel, to nix the rides from their itineraries.
five-star resort. The companys chief executive officer, William By the time Unilad posted its video, travel junkies were
Heinecke, had the idea to turn the new property into an ele- primed to react with disgust. To date, the video has gotten
phant camphe loves the animals and felt the Polynesian- almost 17 million views and about 400,000 shares on Facebook,
style resorts small footprint on a 200-acre parcel of land along with 17,000 mostly horror-struck comments. I wish I
would lend itself to a luxury wildlife experience. The task hadnt contributed to this, one user wrote.
was given to John Roberts, a budding conservationist whod But in Africa, where poaching is the greatest danger facing
been working with elephants in Nepals Chitwan National elephants, travel has actually proved a strong engine for their
Park. He wasnt formally trained, but Roberts had a promis- conservation. Outfitters such as Singita are on the front lines
ing vision of sustainable elephant tourism. Instead of buying of the issue, and Wilderness Safaris Abu Camp in Botswanas
the elephants outright, for instance, Anantara leases them on Okavango Delta rehabilitates injured and orphaned elephants
a permanent basis to discourage locals from snaring another and reintroduces them to the wild.
animal in hopes of a big payout. For Southeast Asian elephants, the big threat isnt poaching
Fifteen years later, the resort has become a globally rec- but indentured servitude. Roughly 30 percent of Asias 40,000
ognized standard-bearer for responsible wildlife tourism and to 50,000 elephants are in captivity, often working under dan-
one of the only options in Thailand for conscientious travel- gerous circumstances in forestry or performing in the street.
ers who want face time with pachyderms. In 2006, Anantara The regions legacy of elephant labor goes back 3,000 years.
created a sibling property next door at the Four Seasons The tradition is so old, the Arthashastra, an ancient text that
Tented Campa more posh and colonial-inspired, if slightly guided Indian kings in the first millennium B.C., gave instruc-
less elephant-obsessed, experience. tions regarding the health of the forests where elephants lived.
A third camp is on its way this fall, on a 44,000-acre con- Among mahouts, the once-respected class of people who
servancy Minor Hotels has pieced together in the Cardamom work with elephants, fathers teach their sons how to manage
Mountains of Thailand and Cambodia. This resort will support an the animals, the way a rancher takes care of horses. But ele-
initiative to rehabilitate and rerelease native species such as the phants are far more difficult to keep: They can eat 450 pounds
Asiatic wild dog, black bear, and clouded leopard into the wild. of food a daymostly bananas, vegetables, and grasses.
Considering how many elephants are still in captiv-

S
ome animal rights advocates say the line should be ity, its extremely difficult to come up with workable and
drawn at looking, not touching, and its an argument elephant-friendly solutions, says Roberts, now the group direc-
thats intensified in recent months. One video making the tor of conservation and sustainability at Anantara. Outside of
rounds on Facebook, posted in February by Unilad Adventures, the resort, he helps run the Golden Triangle Asian Elephant
an online travel community with 1.7 million followers, begins Foundation and a program in Southeast Asia that teaches
with a warning about graphic content. Thinking about riding mahouts a gentler training technique focusing on positive
TRAVEL Bloomberg Pursuits July 31, 2017

61

The pool at Anantara

features a pattern
of poppies, a nod to
the regions opium-
producing history
 TRAVEL Bloomberg Pursuits July 31, 2017

reinforcement. In February he was in Myanmar working on

Mahouts and
legislation that would outlaw the capture of wild elephants. their elephants

A
at the camp
t breakfast on the third day, were joined by a 5-year-
old elephant named Pang Luck, who regularly takes her
morning meal in the company of guests on the restau-
rant terrace. After we eat yogurt parfaits with fresh passion
fruit and local honey, we give her handfuls of tiny bananas.
Using the two pointed fingers at the end of her trunk, she
sucks the fruit out of our hands, peels it against her teeth, then
helps her mahout clean up the discarded peels.
Like most of the 22 elephants here, Pang Lucks short life
has seen its share of tragedy. She was rescued from street per-
forming, where she was patted and prodded in exchange for
pocket change until the age of 3. Bounma, a fiftysomething ele-
phant with a broken ear and distinguishing white hairs at the
tip of her tail, was ill-suited for logging and spent years being
badly beaten as a result; her owner took her begging until he
gained admittance to join Anantaras community.
When an elephant is accepted, Anantara also hires the ani-
mals mahout to train and care for it, employment that includes
housing, health insurance, and education for his children.
There are also opportunities for women to join a traditional
silk-weaving collective.
A two-minute drive brings us to the Dara Camp, where most
of the elephants on duty are relaxing in a series of open-air,
canopied stables. One by one the giant creatures amble toward
us, perhaps not gracefully but with intention. Poonlarp wags
62
her tail and bats her long lashes. Dah, who survived on the
streets of Bangkok and Pattaya before coming to Anantara,
waves her ears back and forth nearby. Bo, the largest female
of the herd, stretches her jaw open for the on-site veterinari-
ans, who reward her with handfuls of sunflower seeds after a
successful oral checkup.
Elephants memory has been the subject of much
mythologythe animals never forget, right? Absolute proof
of that bit of conventional wisdom remains elusive, but over the
past decade, scientists have confirmed that elephants exhibit
a rare level of animal intelligence. Theyre capable of solving
simple puzzles and benefit from regular mental stimulation;
like chimpanzees, they use tools in the wild, usually to shoo
away flies. They collaborate with one another when problems
arise; they flinch when they see a herd member get hurt; they
mourn their dead. Elephants are capable of getting angry with
one another and then reconciling. It takes only a week for them
to learn a command, such as baen (turn) or toi (back up), and
theyre capable of mastering as many as 70 of them.
Spend even a little time with them, and youll see it for
yourself. One night we eat dinner above an elephant playpen,
while below, Pumpui, whos 50-ish, affectionately wraps her
trunk around Dahs body, like a human giving a one-armed
squeeze of a hug. Later we look up at the gleaming tusks and
towering proportions of Phuki, a 4-ton tusker and one of the
resorts two male residents. I offer a scoop of sunflower seeds.
His muddy trunk-fingers grip onto my hand and, with a for-
midable whooooosh!, the seeds are gone. <BW> Family suites at
Anantara Golden Triangle Elephant Camp & Resortstart from
$1,707 per night, including meals, limousine transfers to and from The sun rises over
the Mekong River in
the airport, high-speed Wi-Fi, and Dara Camp elephant experi- Chiang Rai
ence; goldentriangle.anantara.com
TRAVEL Bloomberg Pursuits July 31, 2017

63

The pools sala,

based on a farmers
resting spot in the
rice paddies

Elephants at
Dara Camp
 STYLE Bloomberg Pursuits July 31, 2017

The Loafer Steps Out

Once trendy, then sleepy, a laid-back dress shoe
finds the sun again. By Troy Patterson

To measure the prestige of ultrachic Gucci Creative Director a pair, habitually pad around the house wearing them with
Alessandro Michele, you could look up the brands surging thick socksor treat the insides with Vaseline or even stick
sales figures and enraptured runway reviews. Alternatively, them under the mattress, as if theyre baseball gloves. A hedge
you could look down at the feet of your fellow pedestrians, funder friend of mine once made the error of wearing a box-
at least in dressier circles. Youll notice no shortage of loafers fresh pair of Weejuns on a four-day roadshow. It ended with
adorned with the houses signature horse bit. Among those, him crippled, requiring cab rides to go two blocks.
youll spot new eye-catching versions enriched with Micheles The tassel loafer took off in the 1950s, broadly popular-
phantasmagoric visions: embroidered honeybees, appliqud ized then by the Alden Shoe Co., and these days its revered
serpents, and metallic-leather Union Jacks. among a more precious set of lads. A lot of the guys who wore
Its a great moment for the Gucci bit loafer, and thus for them back in the day are still kicking, and on those dandies a
all loafers, arguably the official footwear of globalisminspired tassel loafer looks adorably dapper and dancerly. But in some
by the Iroquois, invented in Scandinavia, mass-produced in conservative offices, the flourish is verboten. Delightfully dis-
America, refined in Italy, and now worn at Davos. reputable, even.
The Gucci staple is still a crucial point of style overlap Gentlemen who believe the tassel doesnt go far enough
between the uniforms of European playboys and American sometimes slip boldly into a Tods kiltie, which boasts a fringed
prepsters. Favored since the 1960s by Wall Street bankers and saddle. The kiltie, loud and grossly grandiose, is favored by slick-
K Street lobbyists, its a significant cultural artifact, a versatile haired polo-shirt-tuckersand by blowhards holding court at
accessory, and not necessarily a walking-around shoe. In June, the country club bar. But dont write it off for yourself, demure
64
during the menswear trade show Pitti Uomo, I witnessed a hot steppers. If the shoe captures your imagination, follow the lead
debate about Gucci loafers at Caffe Gilli, a Florence restaurant of those wild clotheshorses who balance its extravagance by
that during Pitti transforms into a gurgling fountain of Aperol wearing it with a rather casual outfit, an extremely nonchalant
spritz. Each of the debaters was a fashion type whod picked up attitude, and, most important, bare ankles.
his bit loafers the year before. One guy described the breaking-in On that note, Ill close with an anecdote from Diego Rossetti,
process as no big dealthey felt as soft as silk from the first. The president of the Milan-based shoemaker Fratelli Rossetti SpA,
other described it in profane terms, cursing the blisters raised which makes the unadorned style called a Venetian. He claims
by his rush to keep step with trends. that his father, who founded the company in 1953, single-
Loafers in general, in this era of loosening office dress ankledly made it fashionable to wear loafers without socks.
standards, still stand firm. G.H. Bass & Co. Weejuns, the He was supplying shoes to Italian suitmakers for ready-to-
American uncle of the Gucci shoe, has proved just as per- wear shows, Rossetti recalls. I remember doing a show where
sistent. Made in Wilton, Maine, since 1936, Weejuns are the tailor was showing the men on the runway with no tie
named after a Norwegian shoemaker who himself had without even an undershirt. He said, If we can get rid of the
copied Native American moccasins. In the mid-20th century undershirt, we can get rid of the sock. Now it seems normal-
heyday of the Ivy League look, Weejuns penny loafers had a ity, but that was very unusual.
wearing-pajamas-to-class aura of loungewear cool. Thats the loafer: perfect for stepping out snappily in the
Weejuns are notoriously tough to break in, even more summertime, when the living is easy and the clothing can be
so than the Gucci bit loafer. Some owners, upon acquiring deceptively difficult. <BW>

Gucci 1953 Bass Franklin

horse-bit leather Weejuns, $325
loafer, $640 e
e
Fratelli
Rossetti Estate
Venetian-style
loafer, $390
t
ILLUSTRATIONS BY JUN CEN

Tods kiltie
leather tassel
loafer, $725
u q
Alden cordovan tassel
moccasin, $700
 BUSINESS TRAVEL Bloomberg Pursuits July 31, 2017

Crowned Jewels
London has never lacked grand hotels. But the City, its financial hub, didnt have
a five-star stunner until this year. Now two contenders, the Four Seasons at Ten Trinity Square
and the Ned, are drawing upscale travelers. Heres how they stack up. By Nikki Ekstein

FOUR SEASONS AT TEN TRINITY SQUARE THE NED

65

Aside from an historically re-created rotunda in the The prevailing theme here is Edwardian largesse,
lobby and the coffee-table books on your desk, there are few reinterpreted in collaboration with the Soho House team
clues youre in London. Rooms have oversize leather Form and aimed at creative elites. In the lobby are 92 African
headboards and mirrors that double as TVs. The overall verdite-covered columns with ornamental crowns, towering
effect is both sleek and plush, if a little generic. floral arrangements, and a turquoise tufted couch.

Even entry-level rooms are spacious, and soaring ceilings Four-poster beds with tasseled pillows anchor the rooms,
contribute to the tranquil vibe. The bathrooms have but the footboards are constricting for a tall guest, and
a deep marble tub and a walk-in rain shower. The cocoonlike climbing into bed can feel like a cardio workout for a short one.
Four Seasons bed is a brand standard for a reason. Function Its one of a few impractical design choices: Lamp switches are
One oddly overlooked detail proved annoying: The heavily out of reach from your bedside; desks are too narrow. What is
scented Bottega Veneta bath amenities are impossible useful is the selection of easy-to-forget-at-home toiletries
to squeeze out of their tiny plastic bottles. (lip balm, moisturizer) from Cowshed stocked in the bathroom.

One of the most powerful French chefs in the world, Nine dining venues add up to the worlds most
Anne Sophie Pic, oversees the buttoned-up restaurant, sophisticated food hall. Go for bagels with lox on the
La Dame de Pic, where you can get an expertly done Food rooftopwhich has a view of St. Pauls Cathedral
omelet or poached eggs for breakfast. then Millies Lounge for perfectly crisp fish and chips.

The subterranean spacovered in shimmering, The vault of the former Midland Bank, on the Neds
PHOTOGRAPHS COURTESY THE NED, FOUR SEASONS

floor-to-ceiling tileis open until 9 p.m. Among the lower level, is the coolest new bar in London. Take in old-world
perks: eight treatment rooms, a full-length pool, After hours glamour, from the classic G&Ts and Champagne fizzes to
and a steamy Turkish hammam. the restored lockboxes that line the walls.

A 20-minute wait at check-in because of delayed Every inch here feels more art-directed than thoughtfully
housekeeping made for a rocky first impression. But the designed. The bedroom chandelier was stunningit looked
Trinity Square location is sufficiently royal: Across the like a palm treebut turning it on and off required the help
street is the Tower of London, home of the crown jewels. Scratchpad of a front desk attendant. (The brass dimmer doesnt work like
Request a room with a view; many of the propertys a normal one.) The Ned is only 15 minutes from the Four
100 rooms face an interior courtyard. 10 Trinity Square, Seasons, but the bustling vibe makes it seem a world away.
from $564 nightly; fourseasons.com/tentrinity 27 Poultry, from $324 nightly; thened.com
CRITIC Bloomberg Pursuits July 31, 2017

Technicolor Dreams
Rediscovering the man who colored the 1980s in neon. By James Tarmy

Rarely has one person defined an epoch as completely as the group had backing from manufactur-
architect and designer Ettore Sottsass did the late 1980s and ers eager to appropriate his avant-garde
early 1990s. The totems of the eraCosby sweaters, Swatch imprimatur.
watches, neon Rollerbladescan be traced directly to objects The result, unveiled at the famous
his design collective, the Memphis Group, unveiled at a Milan Salone de Mobile, was a collection of
furniture fair in 1981. 57 pieces ranging from a colorful poly-
This summer, the Metropolitan Museum of Art in New chrome couch to a bookshelf made out
York is taking on the task of not only reviving Sottsasss rep- of laminate-covered particle board. These
utation but also introducing the world to his lesser-known objects were never intended for mass con-
early work. In an exhibition at the museums Breuer build- sumption; they were considered luxury
ing, Ettore Sottsass: Design Radical ( July 21 items. Theyre still available to buy. After walking through the
through Oct. 8), visitors are taken on a tour Met Breuers galleries, visitors can buy Memphis furniture in
of the chairs, computers, and sculpture that the gift shop downstairs or go online, where one of Sottsasss
defined the designers world. Carlton bookshelves is on sale privately for 13,145 ($15,297).
The show is arranged in a loose chronologi- The response to the Milan exposition was immediate:
cal survey, spanning from the 1950s Sottsass and the rest of the group were lauded
to 2007, the year he died. Sottsass for mixing pop culture and high design, andthis
was born in 1917 in Innsbruck, wont come as news to anyone who spent the early
Austria, but spent most of his formative years in 1990s wearing bright pastelstheir look soon per-
Turin, Italy, where he studied architecture, follow- meated every corner of the globe. Esprit, the cloth-
ing in the footsteps of his father, a prominent archi- ing company, for instance, commissioned Sottsass
tect also named Ettore Sottsass. After fighting in to design its geometric, ebul-
World War II, the younger Sottsass established a lient showrooms.
design studio in Milan and began consulting for type- For the Met show, curator
writer maker Olivetti in 1957. Christian Larsen saddled
Soon after, in 1959, he helped design the exterior himself with the additional
of the Olivetti Elea 9003, one of the worlds first computers. challenge of pairing the 80-plus Sottsass
(The size of a living room, it could barely contain a paper- works on display with another 80 or so
backs worth of data.) In 1968, along with British designer Perry objects by different artists, primarily
King, Sottsass unveiled the companys iconic, fire-engine red drawn from the museums permanent col-
Valentine Portable typewriter, ushering in an age of sleek, visu- lection. Some of these supplementary pieces had a direct influ-
ally appealing mobile technology that pre- ence on Sottsasss practice: A 1910 mother of pearl inkstand by
saged the modern laptop. Josef Hoffmann, for instance, is paired in a vitrine with one of
By the 1970s, Sottsass had experimented Sottsasss early, Vienna Secession-inspired ceramics. Elsewhere,
with virtually every medium. Hed made a neon-pink, green, and black cabinet, Omaggio 3 from 2007, is
wooden furniture, including a magnifi- contrasted with an achingly beautiful geometric painting from
cent Jenga-like assemblage of shelves and 1921 by Piet Mondrian. Other pieces, though, seem more tan-
SOTTSASS: J. EMILIO FLORES/CORBIS VIA GETTY IMAGES; SHELVES, CHAIR,

drawers, Tower Cabinet (1962/63), which gential. One room is dominated by Sottsasss serene ceramic
the show puts on prominent display. That totems from the late 1960s. Why clutter them up with a group
DRAWERS, TYPEWRITER, TABLE: STUDIO ETTORE SOTTSASS SRL

whimsical, almost impossible piece of fur- of marble stools, designed in 2017 by an unrelated company?
niture is contrasted with a side chair from Sottsasss own work is so varied that delineating it from the
1972s Synthesis 45 Office Furniture System. Olivetti man- crowd can be difficult. Everyone other than a
ufactured the aluminum chair, with its cheerful yellow true Sottsass scholar will be forced to peer at
base and drab brown fabric, for corporate offices around wall labels to identify whats what, which is
the world. perhaps too much interrogation for a casual
Only in the final room of the show do visitors encoun- visitor. Still, the show is ultimately a series of
ter his Memphis Group designs, the most exciting objects pushes and pulls, an exhibition in true dialogue
in the exhibition. By the time he co-founded Memphis with the art it showcases. Sottsasss career was
in 1981the name is partially an homage to Bob Dylans a string of experiments, a sequence of trials
song Stuck Inside of Mobile With the Memphis Blues Again and errors that culminated in a culture-defin-
Sottsass was a major figure in his own industry, and the ing aesthetic. <BW>
 Bloomberg Pursuits July 31, 2017

Miyabi Knife
The ultimate chefs blade for everyday use
Photograph by Meredith Jenks

THE CHARACTERISTICS
Miyabi makes its knives in Seki, the home of Japanese
samurai-sword makers. The brands $280 chefs knife
usually an 8-inch-long blade with a 5-inch handle
is a favorite among professionals, including Iron Chef
Masaharu Morimoto, who endorses two Miyabi
cutlery series. A scalpel-sharp blade is protected
by 100 layers of stainless steel, forged into a
Damascene pattern, that provide added durability.
Its immersed in liquid nitrogen, a strengthening
technique known as cryogenic tempering, and
hand-finished in the Honbazuke three-step
method to give it a polished edge. The
Karelian birch handle offers a beautiful,
easy-to-grip surface.

THE COMPETITION
Miyabi is owned by Zwilling
J.A. Henckels, a cutlery 67
manufacturer based in Solingen,
Germany. (Henckels also sells
knives under its own name.) Its
biggest Japanese competition,
Shun, which is owned by Kai USA Ltd.,
sells similar models for $240 and is also
based in Seki. German-made Nesmuk
uses a special Brazilian metal to justify
the $550 price tag for its 7-inch chefs knife.
Another German brand, Wsthof, offers a
$150 model thats popular and well-respected.
For a more exclusive experience, sign up for one of
knife master Bob Kramers auctions, where cutlery
connoisseurs bid on five-figure, one-of-a-kind items.

THE CASE
Combining the heft of a Wsthof, the strength of a
Henckels, and the swiftness of a Shun, Miyabi knives
effectively fuse Japanese design with workaday utility.
The lightweight handle can withstand frequent use;
the birch doesnt get slick when wet or oily. The blades
fine edge and thin profile enliven tedious duties, whether
precisely removing rhubarb stems for your favorite pie or
splitting chicken breasts from thighs before a weekend grill
session. Miyabi chefs knife; miyabi-knives.com
PROP STYLIST: JOJO LI
 Bloomberg Pursuits July 31, 2017

GAME CHANGER

Alexander Betts
The academic has a data-driven argument for putting
refugees back to work. By Arianne Cohen

68

AT THE END OF HIS FIRST obscurity until the European

year at Englands Durham crisis two years ago, which cat-
U n i v e r s i t y, 1 9 - y e a r - o l d apulted him into policy adviser
Alexander Betts faced, as he puts roles with the governments in
it, a long summer with lots of free Jordan, Uganda, Canada, and else-
time and not much money. To pass where. There are still challenges
the hours, he took a gig volunteering ahead. The first, second, and third
at a reception center for refugees in the thing in the mind of policymakers is social
Netherlands. What immediately struck me integration of refugees rather than economic
was that these people had something to offer, he integration, says David Miliband, president and
says. A Bosniak lawyer taught me a bit of international law. chief executive officer of the International Rescue Committee,
An Iranian Olympian taught me a bit of table tennis. The refu- who was formerly a Labour Party MP in the U.K. Its import-
gees, trapped in bureaucratic limbo and barred from working, ant that the economic piece gets better understood, not least
had ample time to chat. because economic integration can lead to social integration.
With this in mind, Betts returned to his studies in eco- As a professor at the University of Oxford and director of
nomics and discovered that idling refugees are the norm: its Refugee Studies Centre, Betts has continued his research.
Afraid of taking jobs away from their own citizens, coun- In Uganda, which allows newcomers to work, he found that
tries accepting the worlds 21.3 million refugees typically ban 21 percent of refugees in Kampala run a business employ-
them from seeking employment on arrival. Much ing at least one other person and that the workers
research had been done on the negative effects of are 40 percent Ugandan nationals. Betts is quick
these policies, but alternative strategies remained b. 1980, Bristol, England to point out that the people who can help most
elusive. Betts used his undergraduate dissertation - arent policy wonks but businesspeople. Some
to design more efficient ways to manage refugee Won the European companies, like Wal-Mart and IKEA, are placing
ILLUSTRATION BY SAM KERR

Universities Debating
populations, including a matching program that Championships while orders with Jordanian and Syrian factories [that
would align migrants location preferences with an undergraduate employ refugees], but more needs to be done, he
host countries workforce needs. - says. Betts highlights Starbucks Corp.s pledge to
Ran this years
Betts spent the next decade traveling to refugee London Marathon in hire 10,000 refugees worldwide, for instance. As
camps around the globe, working in relative 2 hours and 38 minutes Miliband says: Refugees make great employees. <BW>