Elon Musk's SEC Settlement Could Have Gone So Much Worse

In early August, Tesla CEO Elon Musk posted a fateful tweet: “Am considering taking Tesla private at $420. Funding secured.” On Saturday, two days after the US Securities and Exchange Commission filed a lawsuit against Tesla CEO Elon Musk for “false and misleading” statements made on Twitter, Musk, Tesla, and the feds reached a compromise—a settlement.

According to documents filed in a New York federal court, Musk and Tesla will have to each write $20 million checks for the misadventure, which will be disbursed to investors harmed during the wild market swings that occurred after Musk’s tweets. (Tesla announced in late August, 17 days after the tweet, that it would remain public.) The electric carmaker will appoint two additional independent members to its board. The company will have to keep firm oversight over Musk’s communications with investors—including by tweet. Most critically: Musk will have to step down from his role as Tesla chairperson for at least three years. He will remain on as the company’s CEO and will retain a seat on its board.

In reaching a settlement with the federal enforcement agency, Musk and the company seem to have reversed course. Last week, Tesla had reportedly been on the cusp of a settlement with the SEC, before backing out.

Despite that waffling, legal experts say the result could have been much, much worse for Musk and his car company, where he has served as chairperson since 2004 and CEO since 2008. “Frankly, I view this as somewhat favorable to Musk,” says Stephen Diamond, a professor of securities law and corporate governance at the Santa Clara University School of Law. “He remains CEO, he’s still the dominant stockholder in the company, and he still remains in place on the board.” (Musk owns about 22 percent of Tesla shares.)

By relinquishing his role as chairperson, Musk does lose his ability to call board meetings, as well as set their agendas. His replacement in that role, whom the SEC demands be “independent,” will break Musk’s symbolic grip on the company, at least a bit. (Indeed, a cadre of the company’s investors have been calling for Tesla to formally separate the roles of CEO and chairperson for years now.) “This will serve as a kind of check on the runaway power of Musk,” says Diamond. As CEO, Musk will retain his control over day-to-day operations of Tesla.

A major question looms: Who will the new chairperson be? Will that pick be a truly independent check on the impulsive Musk, praised often for his marketing prowess and inventiveness, but whose actions have occasionally proved destructive and expensive? Observers have long grumbled that Tesla’s board members are not nearly independent enough. (Brother Kimbal Musk is currently on the board for both Tesla and Musk’s SpaceX venture. Antonio Gracias, a founder of Valor Equity Partners, is a longtime friend of Musk’s and has invested in PayPal and Solar City.)

“If the new chairperson is somebody who is extraordinarily strong and someone who will stand up to Elon, then it will be a change in his life,” says Erik Gordon, a lawyer who studies entrepreneurship at the Ross School of Business at the University of Michigan. “If the person is as independent as the supposedly independent directors of Tesla, then it probably doesn’t change his life very much. He will dominate that chairperson in the way he has dominated his board.”

One big thing that will definitely change for Musk: The settlement instructs Tesla to “implement mandatory procedures and controls to oversee all of Elon Musk’s communications regarding the Company made in any format.” Including—you guessed it—Twitter. “The thing that will be both humiliating for Musk and good for him is that he will be the only CEO I have ever known who will have to get his communications approved before he makes them,” says Gordon. Expect this to be a particular bummer for Musk, who has built a reputation off his irreverent, goofy, startlingly transparent, and lawsuit-spurring social media posts. Professional tweet editors, polish up those resumes.

Not settling with the SEC could have led to a more dire outcome. The SEC’s initial suit sought to bar the CEO from becoming an officer or director for any public company, perhaps for life. A loss against the federal agency in court may have also made it difficult for Musk to raise money for his non-Tesla ventures: rocket-building SpaceX, neurotechnology company Neuralink, and infrastructure venture the Boring Company.

While the settlement neatly ties up Tesla’s current dealings with the SEC, the carmaker still has two more Twitter-related headaches. The first is the reported Department of Justice probe into the “funding secured” tweet, which is being investigated as a possible case of criminal fraud. The settlement here may not have any bearing on that investigation, legal experts say. The second is a series of class-action lawsuits filed by investors who say they lost big money in the market volatility following Musk’s August Twitter statements. Though the $40 million in fines will be used to mollify investors, legal experts expect the plaintiffs to push for even more funds. “Those lawsuits have always been the bigger risk to Musk and the company,” says Gordon.

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Kevin Hart Didn't Find Success Until People Started Stealing His Work. Here's Why

Kevin Hart shared his hard-earned lessons on a recent Oprah Masterclass podcast. He kept banging his head against the wall until people began stealing his work – literally. Then he found success.

People don’t care how they get your knowledge

After years as a stand-up comedian, Hart said he kept trying – and failing – to break into Hollywood as a comedic actor. His big break? A silly, low-budget movie called Soul Plane. However, the momentum behind it was strong and it was expected to be a moderate, if not big success for its size.

The problem is that it was bootlegged more than six month before it hit the theaters. People were watching the movie on DVD at home shortly after Hart finished filming the scenes. It was so bad, Hart said that a tone-deaf fan asked him to sign a copy of the Soul Plane DVD – weeks before it even hit the theatres.

The film flopped. Hart was livid.

Then he went back on the road and, suddenly, his stand-up rates went up. Why? Everyone had the bootleg of his big Hollywood debut – and were asking for him by name. They didn’t bootleg the movie to disrespect him and his craft. They bootlegged the movie because they couldn’t wait to get more of him and his craft.

In his words, that heavily bootlegged movie broke open his career – and Hollywood came calling again shortly thereafter. Today, he’s one of the highest paid comedians in the world.

You shouldn’t care how they get your knowledge, either

Here’s the lesson: Give people access to you and they will get to know you and eventually support your work with both attention and money. Withholding your insight – holding back your light for the so-called perfect moment – means that audiences are only getting a muted version of your gift.

It is one of the reasons why I freely talk about my book content on major podcasts, share my coaching insights on social media, and reveal hard-earned wisdom to audiences I speak to whether it is a paid gig or not. It shifts the intention from hording secrets to building a tribe, and that very same tribe will be the same group that will pay for your services and help market your big idea when the time is right.

The deeper you get into your craft, the harder it is to duplicate – turning you bulletproof, as I share in The Productive Bite-Sized Entrepreneur. So it’s not a matter of how people get to you, but that they get you, and the clearer your voice, the quicker they will realize how much you resonate with them – and the sooner they will happily give you the resources you need to continue your path.

Instagram Co-Founders to Leave Facebook

Instagram’s co-founders are leaving the popular photo-sharing app, raising questions about the future direction of what has been a growth engine for parent company Facebook.

Instagram CEO Kevin Systrom said Monday evening in a corporate blog post that he and chief technology officer, Mike Krieger, would step down from the social networking giant and are “planning on taking some time off to explore our curiosity and creativity again.”

Systrom did not say when he and Krieger would leave, but The New York Times reported earlier on Monday that it would be in the coming weeks. The executives notified Facebook’s management of their plans to leave on Monday, the Times report said, citing unidentified sources.

“We’ve grown from 13 people to over a thousand with offices around the world, all while building products used and loved by a community of over one billion,” Systrom wrote. “We’re now ready for our next chapter.”

Systrom did not say why he and Krieger are stepping down from Facebook, which is facing one of the most turbulent times in its history. In recent years, the company has had to deal with problems like the Cambridge Analytica scandal and its failure to prevent Russian entities from spreading propaganda on its service during the 2016 U.S. presidential campaign.

“Building new things requires that we step back, understand what inspires us and match that with what the world needs; that’s what we plan to do,” Krieger wrote.

Facebook CEO Mark Zuckerberg praised the executives in a statement, but he did not elaborate about the departure or who would replace them.

“Kevin and Mike are extraordinary product leaders and Instagram reflects their combined creative talents,” Zuckerberg said. “I’ve learned a lot working with them for the past six years and have really enjoyed it. I wish them all the best and I’m looking forward to seeing what they build next.”

Technology analysts generally consider Instagram, which Facebook bought in 2012 for $1 billion, as one of Facebook’s most important services, especially in light of the parent company’s recent scandals. While Facebook’s user growth appears to be slowing down, Instagram’s growth is booming, with analysts from Bloomberg Intelligence recently estimating the service to be worth over $100 billion if it were an independent company.

In April, Jan Koum, the founder and CEO of Facebook-owned messaging service WhatsApp announced that he would step down. Koum did not say why, but the Washington Post reported that it was due to disagreements with Facebook executives over data privacy and encryption policies that they wanted to enforce on the messaging app.

Instagram co-founders resign in latest Facebook executive exit

Rockville, MD (Reuters) – Instagram on Monday said co-founders Kevin Systrom and Mike Krieger have resigned as chief executive officer and chief technical officer of the photo-sharing app owned by Facebook Inc, giving scant explanation for the move.

FILE PHOTO: Instagram founders Mike Krieger (L) and Kevin Systrom attend the 16th annual Webby Awards in New York May, 21 2012. REUTERS/Stephen Chernin/File photo

The departures at Facebook’s fastest-growing revenue generator come just months after the exit of Jan Koum, co-founder of Facebook-owned messaging app WhatsApp, leaving the social network without the developers behind two of its biggest services.

They also come at a time when Facebook’s core platform is under fire for how it safeguards customer data, as it defends against political efforts to spread false information, and as younger users increasingly prefer alternative ways to stay in touch with family and friends. Concerns over Facebook’s business sparked the biggest one-day wipeout in U.S. stock market history in July.

Systrom wrote in a blog post on Monday that he and Krieger planned to take time off and explore “our curiosity and creativity again”.

Their announcement came after increasingly frequent clashes with Facebook Chief Executive Mark Zuckerberg over the direction of Instagram, Bloomberg reported.

In a statement, Zuckerberg described the two as “extraordinary product leaders”.

“I’ve learned a lot working with them for the past six years and have really enjoyed it. I wish them all the best and I’m looking forward to seeing what they build next,” Zuckerberg said.


Koum’s departure in May followed the exit of his WhatsApp co-founder Brian Acton.

That led to a reshuffling of Facebook’s executive ranks, increasing Zuckerberg’s ability to influence day-to-day operations. Zuckerberg ally Chris Cox, who leads product development for Facebook’s main app, gained oversight of WhatsApp and Instagram, which had been given independence when Facebook bought them.

Adam Mosseri, who had overseen Facebook’s news feed and spent a decade working closely with Zuckerberg, became Instagram’s head of product.

Instagram and Facebook have operated independently and the two services barely mention each other. But as regulators have pushed Facebook to improve information safeguards for individual privacy, to combat addiction to social media, and to stop misinformation or fake news, Zuckerberg and other leaders have been under more pressure to monitor units beyond the core social network.


Systrom and Krieger notified the photo-sharing app’s leadership team and Facebook on Monday about their decision to leave, Instagram said. Their departure would be soon, it said. The New York Times first reported the move.

Systrom and Krieger met through Stanford University and worked separately in Silicon Valley before forming Instagram in 2010.

Facebook bought Instagram in 2012 for $1 billion. The photo-sharing app has over 1 billion active monthly users and has grown by adding features such as messaging and short videos. In 2016, it added the ability to post slideshows that disappear in 24 hours, mimicking the “stories” feature of Snap Inc’s Snapchat.

The photo app’s global revenue this year is likely to exceed $8 billion, showed data from advertising consultancy EMarketer.

Increased advertising on Instagram has seen the average price-per-ad across Facebook’s apps decline this year after a year of upswing. A new privacy law in Europe also has affected prices.

Instagram had been hailed in Silicon Valley as a flashy acquisition done right, with the team kept relatively small and Systrom having the freedom to add features such as peer-to-peer messaging, video uploads and advertising.

“I see Mark [Zuckerberg] practice a tremendous amount of restraint in giving us the freedom to run, but the reason why I think he gives us the freedom to run is because when we run, it typically works,” Systrom told Recode last June.

The app’s latest product, IGTV, has been slow to gain traction. Offered through Instagram and as a standalone app, IGTV serves up longer-length video content, mostly from popular Instagram users.

Video content has been a major emphasis for Facebook as it seeks to satisfy advertisers’ desire to stream more commercials online.

Reporting by Paresh Dave and Subrat Patnaik; Additional reporting by Bhargav Acharya; Writing by Peter Henderson; Editing by Gopakumar Warrier and Christopher Cushing

Home modems, routers hit by U.S. China tariffs as 'smart' tech goods escape

WASHINGTON (Reuters) – U.S. tariffs that hit some $200 billion worth of Chinese products on Monday spare many high-profile consumer technology items such as “smart” watches and speakers, but the less flashy home modems, routers and internet gateways that make them work weren’t so lucky.

FILE PHOTO: U.S. President Donald Trump delivers his speech next to U.S. and Chinese flags as he and Chinese President Xi Jinping meet business leaders at the Great Hall of the People in Beijing, China, November 9, 2017. REUTERS/Damir Sagolj/File Photo

Consumer tech industry officials and the U.S. Customs and Border Protection agency say they expect billions of dollars worth of these products, including those designed for home use, will be subject to the 10 percent tariffs activated on Monday.

The move will effectively create a two-tiered tariff structure for consumer internet, with many products, such as Fitbit (FIT.N) fitness trackers, Apple Inc’s (AAPL.O) watch and Amazon.com Inc’s (AMZN.O) Echo smart speaker being favored over routers and internet gateways from Arris International (ARRS.O), Netgear (NTGR.O), D-Link (2332.TW) and others.

“We’re operating under the assumption that the tens of millions of devices that deliver high-speed internet into consumers’ homes will be impacted by these tariffs,” said Jim Brennan, Arris’ senior vice president of supply chain, quality and operations.

“It feels anti-consumer because our devices are what enables the core of consumer tech,” Brennan told Reuters.

The modems, routers, switching and networking gear that keep the internet functioning were not included in a newly created U.S. tariff code that was exempted from the latest China tariffs, a spokesperson for the U.S. Customs and Border Protection agency said.

The agency has made no distinction between consumer-use modems and routers and the commercial network equipment used by data centers and broadband internet providers.

Most new internet-connected devices had been lumped into a broad category in the U.S. Harmonized Tariff Schedule, 85176200, “Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus.”

The catch-all category saw $23 billion in U.S. imports from China and $47.6 billion from the world last year. It was the largest component of U.S. President Donald Trump’s latest tariffs targeting Chinese goods.

The U.S. Trade Representative’s office had said it was breaking out items such as smart watches, fitness trackers, Bluetooth audio streaming devices and smart speakers into a new subcategory that would be exempted, but it gave few details.

According to a notice posted by the U.S. International Trade Commission, computer modems would stay in a separate sub-category, while “switching and routing apparatus” would be put into a new sub-category. Neither of these sub-categories were granted exemptions from the tariffs.

“Although we have not had occasion to issue rulings on the scope of a provision for ‘switching and routing apparatus,’ we agree that as a general matter, modems, routers, and networking equipment will be subject to the remedy,” a Customs and Border Protection spokesperson said late on Friday, referring to the 10 percent tariff.

It was not clear how much of the $23 billion in Chinese imports within the catch-all category could escape tariffs, but a Reuters review of industry data suggests the share could be small.

U.S. Census Bureau data has not yet captured the volume of annual imports from China — or any country — of the goods that will be exempt.

But the Consumer Technology Association estimates that the U.S. market for fitness trackers, smart watches, smart speakers and wireless earbuds and headphones was $8.2 billion in 2017, with forecast sales of $11.6 billion for 2019.

Even if China produced a majority of those goods, exemptions would only apply to a fraction of the $23 billion category.

CTA has forecast direct sales of modems and routers to consumers at $2.3 billion for 2019, up from $2 billion in 2017, excluding the products supplied directly by cable and broadband internet providers and equipment used in data centers and other infrastructure outside the home.

But the group argues that consumers will bear the costs of the tariffs, even if their service provider buys the modems.

“Overall, access to the internet will get more expensive, mobile plans will get more expensive, and connected devices that go to your smart phones will get more expensive because everything speaks to each other,” said Izzy Santa, director of strategic communications for CTA.

Additional reporting by Jason Lange in Washington and Stephen Nellis in San Francisco; Editing by Michael Perry

The night a Chinese billionaire was accused of rape in Minnesota

MINNEAPOLIS/NEW YORK (Reuters) – With the Chinese billionaire Richard Liu at her Minneapolis area apartment, a 21-year-old University of Minnesota student sent a WeChat message to a friend in the middle of the night. She wrote that Liu had forced her to have sex with him.

JD.com founder Richard Liu, also known as Qiang Dong Liu, is pictured in this undated handout photo released by Hennepin County Sheriff’s Office, obtained by Reuters September 23, 2018. Hennepin County Sheriff’s Office/Handout via REUTERS

“I was not willing,” she wrote in Chinese on the messaging application around 2 a.m. on August 31. “Tomorrow I will think of a way to escape,” she wrote, as she begged the friend not to call police.

“He will suppress it,” she wrote, referring to Liu. “You underestimate his power.”

This WeChat exchange and another one reviewed by Reuters have not been previously reported. One of the woman’s lawyers, Wil Florin, verified that the text messages came from her.

Liu, the founder of Chinese ecommerce giant JD.com Inc, was arrested later that day on suspicion of rape, according to a police report. He was released without being charged and has denied any wrongdoing through a lawyer. He has since returned to China and has pledged to cooperate with Minneapolis police.

Jill Brisbois, a lawyer for Liu, said he maintains his innocence and has cooperated fully with the investigation.

“These allegations are inconsistent with evidence that we hope will be disclosed to the public once the case is closed,” Brisbois wrote in an email response to detailed questions from Reuters.

Loretta Chao, a spokeswoman for JD.com, said that when more information becomes available, “it will become apparent that the information in this note doesn’t tell the full story.” She was responding to detailed questions from Reuters laying out the allegations in the woman’s WeChat messages and other findings.

Florin Roebig and Hang & Associates, the law firms representing the woman, said in an email that their client had “fully cooperated” with police and was also prepared to assist prosecutors. Florin, asked if his client planned to file a civil suit against Liu, said, “Our legal intentions with regard to Mr. Liu and others will be revealed at the appropriate time.”

Representatives for both Liu and the student declined requests from Reuters to interview their clients.

The police department has turned over the findings of its initial investigation into the matter to local prosecutors for a decision on whether to bring charges against Liu. There is no deadline for making that decision, according to the Hennepin County Attorney’s Office.

The Minneapolis police and the county attorney declined to comment on detailed questions from Reuters.

Reuters has not been able to determine the identity of the woman, which has not been made public. But her WeChat messages to two friends, and interviews with half a dozen people with knowledge of the events that unfolded over a two-day period provide new information about the interactions between Liu and the woman, a student from China attending the University.

The case has drawn intense scrutiny globally and in China, where the tycoon, also known as Liu Qiangdong, is celebrated for his rags-to-riches story. Liu, 45, is married to Zhang Zetian, described by Chinese media as 24-years old, who has become a celebrity in China and works to promote JD.com.

As the second-largest ecommerce website in the country after Alibaba Group Holding Ltd, the company has attracted investors such as Walmart Inc, Alphabet Inc’s Google and China’s Tencent Holdings.

Liu holds nearly 80 percent of the voting rights in JD.com. Shares in the company have fallen about 15 percent since Liu’s arrest and are down about 36 percent for the year.


Liu was in Minneapolis briefly to attend a business doctoral program run jointly by the University of Minnesota’s Carlson School of Management and China’s elite Tsinghua University, according to the University of Minnesota. The doctoral program is “directed at high-level executives” from China.

Liu threw a dinner party on August 30 for about two dozen people, including around 20 men, at Origami Uptown, a Japanese restaurant in Minneapolis where wine, sake and beer flowed freely, according to restaurant staff and closed circuit video footage reviewed by Reuters.

Liu, who Forbes estimates is worth about $6.7 billion, ordered sashimi by pointing his finger at the first item on the menu and sweeping it all the way down to indicate he wanted everything, one restaurant employee said. The group brought in at least one case of wine from an outside liquor store to drink along with the dinner, according to the restaurant staff.

JD.com founder Richard Liu, also known as Qiang Dong Liu, is pictured in this undated handout photo released by Hennepin County Sheriff’s Office, obtained by Reuters September 23, 2018. Hennepin County Sheriff’s Office/Handout via REUTERS

Security video footage from the restaurant shows the group toasted each other throughout the night.

Later the woman told a second friend in one of the messages that she felt pressured to drink that evening.

“It was a trap,” she wrote, later adding “I was really drunk.”

The party ended around 9:30 p.m. The tab: $2,200, the receipt shows. One inebriated guest was helped out of the restaurant by three of his associates, according to the restaurant security video footage.

Liu and the woman then headed to a house in Minneapolis, according to one person familiar with the matter. Another source said that the house had been rented by one of Liu’s classmates in the academic program to give the class a place to network, smoke, drink whiskey and have Chinese food every night.

But they did not go in. Liu and the student were seen outside the house before Liu pulled her into his hired car, a person with knowledge of the incident said.

In the WeChat message to one of her friends sent hours later, the student said Liu “started to touch me in the car.”

“Then I begged him not to… but he did not listen,” she wrote.

They ended up back at her apartment, according to sources with knowledge of the matter.

Reuters could not determine what happened over the next two hours. According to the police report, the alleged rape occurred at around 1 a.m.

The woman subsequently reached a fellow University of Minnesota student who notified the police, according to two sources and her WeChat messages.

Minneapolis police came to her apartment early that morning while Liu was there, but made no arrests, another source familiar with the situation said. Reuters could not determine exactly what occurred during the police visit, but the source said the woman declined to press charges in Liu’s presence.

In a WeChat message with one of her friends, she asked her friend why the billionaire would be interested in “an ordinary girl” like her.

“If it was just me, I could commit suicide immediately,” she wrote. “But I’m afraid that my parents will suffer.”

By Friday morning, she also wrote to one of her two friends that she had told several people about what had happened, including the police, a few friends and at least one teacher. She wrote that she would keep her bed sheets. “Evidence cannot be thrown away,” she wrote.

On Friday afternoon, the student went to a hospital to have a sexual assault forensic test, the source said.

Police officers arrived at a University of Minnesota office shortly after an emergency call around 9 p.m that night. The student was present at the office, alongside school representatives, and accused Liu of rape, the source said.

Representatives for the University of Minnesota declined to comment on detailed questions from Reuters.

Liu came to the university office around 11 p.m. while police were there, according to the person familiar with the matter. As an officer handcuffed him, Liu showed no emotion. “I need an interpreter,” he said, according to the source.

Liu was released about 17 hours later. Minneapolis police have said previously that they can only hold a person without charges for 36 hours.  

Within days, Liu was back in China, which has no extradition treaty with the United States.

“Liu has returned to work in Beijing and he continues to lead the company. There is no interruption to JD.com’s day-to-day business operations,” Loretta Chao, the JD.com spokeswoman, told Reuters.

Additional reporting by Blake Morrison and Christine Chan in New York, Adam Jourdan and Engen Tham in Shanghai, and Cate Cadell in Beijing; Editing by Paritosh Bansal and Edward Tobin

Two Australian banks among six targeted by fake apps: security firm

SYDNEY (Reuters) – Customers of six banks including two of Australia’s largest lenders have had their personal details stolen by fake banking apps on the Google Play store, an internet security firm said.

Slovakian-based security software firm ESET said the official-looking apps had been downloaded over a thousand times since they were uploaded to the Google Play store in June.

In addition to Australia’s Commonwealth Bank and Australia and New Zealand Banking Group, banks in Britain, New Zealand, Switzerland and Poland were targeted, the firm said in a blog post.

The scheme was likely to have been the work of a single attacker, it added. The banks’ own apps and systems were not compromised.

“These groups are involved in phishing, obtaining your log-in credentials for your bank, or your credit-card information and in some cases both,” ESET researcher Nick Fitzgerald told Reuters from Christchurch in New Zealand on Thursday.

A Google spokeswoman declined to respond to questions about the scam, saying the company did not comment on individual apps.

Once downloaded, the fake apps asked customers for personal and banking details, including credit-card information and banking log-in details, ESET said.

After sending the data to the attacker’s server, the app would show messages saying “Congratulations” or “thank you” and end.

An ANZ spokeswoman said a customer alerted the bank to the fake app in June.

“We worked closely with the Google Play team to have the app removed in a few hours,” she said.

Commonwealth Bank declined to comment.

A spokeswoman for Auckland Savings Bank, which is owned by Commonwealth Bank, said customers alerted it of the scam in mid-May and immediately asked for the fake app to be taken down.

“No customers lost money as a result of this issue,” she said.

ESET did not say precisely how many people had been affected by the scam.

Reporting by Paulina Duran; Additional reporting by Charlotte Greenfield; Editing by Stephen Coates

Cboe exchange turns to machines to police its 'fear gauge'

NEW YORK (Reuters) – Hard pressed to quash allegations that its popular “fear gauge” is being manipulated, Cboe Global Markets (CBOE.Z) is turning to artificial intelligence to help put those concerns to rest.

People walk by the Chicago Board Options Exchange (CBOE) Global Markets headquarters building in Chicago, Illinois, U.S., September 19, 2018. REUTERS/Michael Hirtzer

The exchange, which owns the lucrative volatility index the VIX .VIX, has taken several steps to confront manipulation claims that have helped drive the Cboe’s stock down about 15 percent this year, putting it on pace for its worst year ever.

In its latest effort to police trading tied to the index, the Cboe is working with FINRA, its regulatory services provider, to develop machine learning techniques to tell whether market conditions surrounding the VIX settlement are potentially anomalous, the exchange told Reuters.

“Incorporating the use of machine learning and AI (Artificial Intelligence) is a logical part of the ongoing enhancement of our overall regulatory program,” Greg Hoogasian, Cboe chief regulatory officer, said in an emailed statement.

Cboe declined to elaborate on when it began using machine learning techniques to monitor VIX settlements.

Any steps, however, may take a while to change investors’ minds on the stock.

“Any time you see controversy over manipulating markets and it involves a company, there are people who will walk away from the stock,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

“It ends up tarnishing the company and subjecting them to legal risk that is very hard to quantify,” he said.

Tuz said Chase Investment Counsel, which owned nearly 19,000 Cboe shares in mid-2017, began selling its stake early this year, shedding the last of it on May 21.

Cboe’s stock performance this year has lagged that of other major exchange operators. Shares of Nasdaq Inc (NDAQ.O) are up about 17 percent, Intercontinental Exchange Inc’s (ICE.N) is up about 10 percent and CME Group Inc (CME.O) shares have risen 18 percent.

Concerns the index was being manipulated surfaced last year after John Griffin and Amin Shams of the McCombs School of Business at the University of Texas, Austin wrote an academic paper that noted significant spikes in trading volume in S&P 500 index options right at the time of settlement.

The paper also compared the value of the VIX at settlement with its value as calculated from S&P 500 options right after the settlement, and showed the two tend to diverge.

Instances of big deviations are taken as evidence by some that unscrupulous traders have been deliberately moving the settlement price.

Chicago Board Options Exchange (CBOE) Global Markets sign hangs at its headquarters building in Chicago, Illinois, U.S., September 19, 2018. REUTERS/Michael Hirtzer

A stock market fall on Feb. 5 that caused the VIX to surge the most in its 25-year history brought further scrutiny to the index, and led to dozens of lawsuits and ongoing probes into the matter by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.

The regulators have yet to comment on the matter and Cboe has denied the manipulation accusations, citing liquidity problems and legitimate hedging activity as reasons for unusual moves on settlement days.

“Only a forensic analysis of those episodes can confirm or refute such a claim,” said Kambiz Kazemi, partner at Canadian investment management firm La Financière Constance.

Meanwhile, the steps Cboe has taken to address the claims of manipulation are going in the right direction, said Kazemi.

The exchange operator recently overhauled the technology behind the auctions, improved the speed with which it sends alerts about auction imbalances, and sought to increase the number of market makers that provide buy and sell quotes for the auction.


Orderly VIX settlement auctions over the last few months have helped take some of the pressure off the Chicago-based exchange operator.

“I think we all will be observing the effects of the Cboe measures in the next few months,” Kazemi said.

VIX and associated products accounted for roughly a quarter of Cboe’s 2017 earnings, analysts estimate, and the controversy around the product has spooked some stockholders.

While financial firms have been using artificial intelligence software for everything from compliance to stock-picking, a growing number of firms have started to use it for market oversight.

Given the huge amount of data involved in market surveillance, machine learning algorithms can be far more efficient than humans in rooting out potential market manipulation, said Richard Johnson, a market structure and technology consultant at Greenwich Associates.

“It’s going to be a must have,” he said.

FINRA, which already monitors Cboe’s market on the company’s behalf, confirmed it was working on machine learning to enhance surveillance of the VIX settlement auctions, but would not offer specifics.

More generally, the Wall Street watchdog is working to use artificial intelligence to catch nefarious activities more quickly, including schemes that may have previously been unknown to regulators, said Tom Gira, who oversees FINRA’s market regulation department.

He said FINRA has begun using machine learning to scan for illegal activities across stock and options exchanges and is in the process of adding a feedback loop to the software that would regularly incorporate analysts’ data and allow the machines to detect ever-changing manipulation patterns.

Reporting by John McCrank and Saqib Iqbal Ahmed in NEW YORK; Additional reporting by Michelle Price in WASHINGTON; Editing by Megan Davies and Tomasz Janowski

AstraZeneca plots China robot offensive to counter price cuts

WUXI, China/LONDON (Reuters) – With smart cancer diagnostics, one-stop-shop diabetes kits and AI systems to improve ambulance pick-ups for patients with chest pain, AstraZeneca (AZN.L) aims to move from simply supplying drugs to become a broad healthcare provider in China.

A sign is seen at an AstraZeneca site in Macclesfield, central England May 19, 2014. REUTERS/Phil Noble

Tech tie-ups with the likes of Alibaba (BABA.N) and Tencent (0700.HK) will not directly lift the British group’s drug sales, since they are not specific for any one company’s products and in many cases will be low-cost or free.

But it will expand the overall market and represents a soft power play that dovetails neatly with Beijing’s support for Internet-based healthcare systems to alleviate a lack of doctors, overcrowding and poor grassroots healthcare.

“Down the line we benefit, our products benefit, because we have better relationships with doctors and hospital managers and also because we diagnose more patients and they get better treated,” Chief Executive Pascal Soriot told Reuters.

Surrounded by the latest gizmos at the World Internet of Things Exposition in Wuxi, eastern China, Soriot says he wants to use the power of artificial intelligence, robots and apps to help transform diagnosis and disease management.

AstraZeneca has been on a tear in China, more than doubling its sales since 2012, helped by regulatory reforms to fast-track new drugs, and today generates 18 percent of revenue in the country — a far higher proportion than rivals.

Yet Soriot is anxious to do more to keep doctors and government officials on-side in the world’s second-biggest drugs market, as soaring demand strains the state insurance system and squeezes medicine prices.

The company’s underlying conviction is that it has the right medicines across chronic diseases like cancer, diabetes and respiratory disorders to win in China.

Soriot believes that can keep AstraZeneca growing in a pivotal market in the coming years, even though annual growth is likely to slow to nearer 15 percent from the breakneck 33 percent seen in the first half of 2018.

The company has moved quickly to exploit China’s new-found willingness to use innovative Western drugs.

Last year it won a record-fast approval for lung cancer pill Tagrisso, which is designed for patients with a genetic mutation that is particularly common in China.

It hopes to get a green light before the end of 2018 — well before U.S. approval — for a new anemia drug called roxadustat being developed with FibroGen (FGEN.O).

China-first approvals for drugs like roxadustat and Elunate, a colorectal cancer treatment from Eli Lilly (LLY.N) and Hutchison China MediTech (HCM.L), mark a reversal of the historical pattern of Chinese patients getting new drugs years after their launch in the West.

There is, however, a trade-off. Multinationals that relied in the past on selling older drugs at premium prices in China are seeing prices slashed. AstraZeneca took a 50 percent haircut last year on the price of Iressa, its predecessor to Tagrisso.

“The government wants to give access to better medicines to more people,” said Soriot, who admitted that pressure on prices had come sooner than he expected.

“To some extent the economy is growing so there is more money to do that, but there is not enough money … They have to make room in the budget for innovation.”


With 1.4 billion people, around 18 percent of the world’s population, China has more cases of cancer and diabetes than any other nation, fueled by fast food, smoking and pollution, global health data show.

“There are enormous unmet medical needs in China, particularly in oncology, and 30 percent of the world’s cancer patients are in China,” Christian Hogg, Chief Executive of Hutchison China MediTech, told Reuters.

“There is almost an inevitability that the Chinese pharmaceutical industry is going to grow to be the largest in the world in due course.”

The firm, also known as Chi-Med, is working with AstraZeneca on a novel oncology drug targeting kidney, lung and stomach tumors.

AstraZeneca is bolstering its sales force to meet this growing demand. It has around 7,500 sales staff in China and is looking to push into smaller cities — boosting volume and helping offset lower prices.

It aims to get more drugs onto a list of medicines covered by basic insurance schemes — the national drug reimbursement list — and onto fast-track approvals, Soriot said. The list was most recently updated last year after an eight-year hiatus.

A drug joint venture, Dizal Pharmaceutical, backed by the China State Development & Investment Corporation, will promote Chinese-discovered drugs — another priority for Beijing.

“It’s the first time a government fund works with a foreign company in researching new drugs for Chinese patients,” Leon Wang, AstraZeneca’s China head, said in an interview at the firm’s Shanghai headquarters. “So we like that.”

Wang added there were still many patients who went undiagnosed or untreated, and that the firm’s aggressive expansion, even to “village clinics”, was helping make the difference against rivals tapping growing demand.

“Chronic disease, oncology drugs, specialty care, rare disease, these will all explode I think,” he said.

(For a graphic on ‘Booming China sales’ click tmsnrt.rs/2pbCLGo)

Reporting by Adam Jourdan in WUXI and Ben Hirschler in LONDON; Editing by Catherine Evans

IBM Debuts Tools to Help Prevent Bias In Artificial Intelligence

IBM wants to help companies mitigate the chances that their artificial intelligence technologies unintentionally discriminate against certain groups like women and minorities.

The technology giant’s tool, announced on Wednesday, can inspect AI-powered software for unintentional bias when it makes decisions, like when a loan might be denied to a particular person, explained Ruchir Puri, the chief technology officer and chief architect of IBM Watson.

The technology industry is increasingly combating the problem of bias in machine learning systems, used to power software that can automatically recognize images in pictures or translate languages. A number of companies have suffered a public relations black eye when their technologies failed to work as well for minority groups as for white users.

For instance, researchers discovered that Microsoft and IBM’s facial-recognition technology could more accurately identify the faces of lighter-skin males than darker-skin females. Both companies said they have since improved their technologies and have reduced error rates.

Researchers have pointed out that some of the problems may be related to the use of datasets that contain a lack of diverse images. Joy Buolamwini, the MIT researcher who probed Microsoft and IBM’s facial-recognition tech (along with China’s Megvii), recently told Fortune‘s Aaron Pressman that a lack of diversity within development teams could also contribute to bias because more diverse teams could be more aware of bias slipping into the algorithms.

In addition to IBM, a number of companies have introduced or plan to debut tools for vetting AI technologies. Google, for instance, revealed a similar tool last week while Microsoft said in May that it planned to release similar technology in the future.

Data crunching startup Diveplan said at Fortune’s recent Brainstorm Tech conference that it would release an AI-auditing tool later this year while consulting firm Accenture unveiled its own AI “fairness tool” over the summer.

Read More for an In-Depth Look: Unmasking A.I.’s Bias Problem

It’s unclear how each of these AI bias tools compare with one another because no outside organization has done a formal review.

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Puri said IBM’s tool built on the company’s cloud computing service is differentiated partly because it was created for business people and is easier to work with than similar tools from others that are intended only for developers.

Despite the flood of new AI-auditing tools, the problem of AI and bias will likely continue to persist because rooting out bias from AI is still in its infancy.