How Facebook Enabled Scam Advertisers Via Affiliate Marketers

IF their shares last week. Here to join us to talk a little bit about a behind the scenes look at how Facebook approached marketing and how they attracted certain shady advertisers is Robert Friedman, Senior editor on the Projects and Investigations team here at Bloomberg News. This is an amazing story. It's going to be in Business Week. It's written by Zeke Fox. I recommend everybody read it. Can you just give us a sense of where it begins

this conference at why it's notable. Well, Zeke is on a well deserved vacation this week, UM, so I'm here to uh to speak for him. This story has been in the works for over a year. UM. And Zeke came to me last spring and said, I want to go to this conference in Berlin for affiliate marketers. And I said, what is that. I just want to go to Berlin and DC And then he said, and there's also an after party and abissa which I want to go to. And I said, Zeke, are you scamming me?

And um. But the more he told me about this strange world of affiliate marketing, UM, I the more I got interested. So affiliate marketing is basically just a bunch of middleman who buy clicks and views from Facebook and sell them to people who try to sell stuff. A lot of it's legitimate. UM. Plenty of companies use this

as an advertising tool. But UM, all the shady advertisers who sell uh stuff through you know, free iPhone offers or diet pills approved by Oprah Winfrey or Elon Musk's UM smart pills, UM, fake endorsements, UM, stuff that pops up and pollutes your your your Internet experience. UM. They all actually um take advantage of this affiliate marketing deal. And they all congregate around this conference, which is hosted by a suspiciously sounded group called Stack that money. So

Zeke Z stack that mine. So Zeke went out there and the first thing he noticed was all the Facebook people that were there. They were on stage, they were moderating panels, they were out mingling with the with the crowds. And he said, what is going on here? And u uh And thus began an investigation into the strange relationship between these affiliate marketers and Facebook. Um. Facebook um, as you know, has built a very very powerful tool to

a good people. Um and and based on all the data that you and I and everybody else gives them two point to billion people and the advertising community figured out pretty quickly that this was a valuable tool for them to let Facebook find the suckers for them. And

that began this, uh, this adventure. Okay, So this sort of brings us to a fork in the metaphorical road here for Facebook, because on one hand, uh, they have said that they try to fare it out bad actors, people who are trying to sell miracle pills that don't work or iPhone iPhones that are free to end up charging you EIGHTI six dollars a month for the rest

of your life. UM. I'm just wondering what they knew about the bad actors, what they did to stop them or is there evidence that they've been actively recruiting them. So Facebook has certain rules about things you're not supposed to advertise on on it, and they have reviewers who somewhere overseas or reviewing content and UH. For years they had a very small skeletal crew of three engineers they were set to sort of combat this UH you know,

fraud on advertising fraud. But it was a half hearted effort. And at the same time their marketing people were attending conferences and UH and recruiting trying to sell these ads. It's hundreds of millions of dollars of advertising revenue. So they had they had at best a complicated, um bifurcated relationship with with this world, but they were looking the other way in in in my view, it's only recently in the last year that they're beginning to think this

more seriously. They hired a new person to sort of come up with and they've they and lots more reviewers and they've done But the the the ad scammeras are smart and they have developed a program and that's in this story. UM a guy named Rob Grin who became sort of the king of these affiliate marketers developed a

program that allows you to cloak your ads. Um cloaking means that when they can figure out when a Facebook reviewer is reviewing the ad, and when they and the Facebook reviewer clicks on the add they get an innocuous um landing page, but everybody else falls on a on on the actual uh scam add So so um, they were just much smarter than Facebook. Um was able to keep up with whatever efforts they were making. And um, uh yeah, so that's Are there any laws that were

broken here? Because on one hand, you know, people are free to try to portray their objects, they're their their wears as as positive as possible, and that's not considered a clear violation. This is a clear violation of FTC rules about fraudulent advertising. Yeah, so who's liable here? So the FTC occasionally makes a case. They busted a ring that in San Diego that was selling you know, fraudulent diet pills and made they had made a undred and

seventy nine million dollars off of their their scam. Um, but it's it's it's it's a half hearted effort on the regulatory agencies, half hearted effort on the part of the technology companies and a great opportunity for all these uh scamming marketers. This is an amazing story. I recommend

everybody read it. The main character, Grant, who's sort of the king of these, uh, these sort of shady advertisers and the intermediaries of them, said that when he first realized how much money he could make, he almost felt ill with excitement, panic, he described, panics. Yeah, but was he minting money? And then you know, he tries to sort of pedal back and wonder whether he should do something better with his life. And then thanks better of that?

And thanks? What am I a communist? Robert Friedman, thank you so much for being with me. And really I recommend people read the story. Robert Friedman, Senior editor of the Projects and Investigations team for Bloomberg News. The story how Facebook helps shady advertisers sell fake Ellen smart pills by Zeke Fox. There has been a lot of turnover

in President Trump's cabinet. Mike Pompeo going to be elevated, leading President Trump to nominated Gina has Belt to replace Pompeo as c A c I A director here with us, Jack Divine founding partner and president of the ark And Group, also former acting director of the c i A and a very familiar person with Gina Haspell. Jack, Thanks so much for being here. So Gina has been a very controversial pick. A lot of people have said that she was in charge of torture programs, that she discarded evidence

tied to video tapes. You want to be on record supporting her absolutely. I've known her for many, many years, and I think the first thing you think of is a professional and frankly, even though I've known I can't tell you whether she would vote Republican or Democrats. She's in that category of so many of us that don't

carry our politics into place. But when you look at the the panorama today of who's available here, you have someone who's been at the top of the operational director and now the top of the agency and working apparently very well with the Trump administration. Downtown and the workforce is very high on her. I think she's been painted and as more of a as a symbol of something that is not a reality. I think the hearings are actually going to be very conducive to straightening this out.

I mean, I think the confirmation process, while grueling one, I think when the facts are surface, it's going to be far less dramatic and we're understandable when they get down, as they are now getting down and asking specifics. I think she will show extremely well. And I also want want to forget the fact which I think is getting lost, how big a deal it is to have the first woman to actor of CIA. I watched it over forty years. It's really quite an amazing development. Why is that a

big deal? Well, when when I first joined the agency many years ago, the workforce had on our training class fifty people too women, None of them went in operations. Today, half of the agency's operators are now women, holding key positions that are reflective of the time. Um, but they've never been at the very top of the service. In fact, she'll be the only the second person in the history of the agency that's been in the operational part that has made it all the way to become the director.

The other was Stick Helmels back in the sixties. I think that mindset of being a careerist and having those operational background steeped in it and at the policy level is critical today when we're looking at what Russia is doing either meddling in elections and taking out people with nerve agents. I mean, we got a really tough wear world. We better have somebody in that job that understands that world.

Want to pick up on the Russia point because we did see earlier this week President Trump ejected sixty Russian diplomats over the UK poisoning incident. That was more than people had expected. How did you interpret this? Well, I know the Russians will be living. I mean I have seen and seen folks P and GD we called, you know, persona non grata, you're thrown out. I mean people have kids, they have schools that they running agents, they're doing business at pack up out of there back home. It is

a very disruptive thing. So the institutions and my bed I don't have the names in front of me, but you can bet there's a high number of the sixty that are intelligence oriented. So they are going to be losing capability. They're closing Seattle. It's a big it's a big deal and a big blow, and then it creates such a h an international development. The Russians will probably respond.

So there's some toughening of the lines between the Western Allies and Russian and I don't think this is a good This is not going to play well for Putin over the long haul. So one theory was that President Trump took a harder than expected stance on Russia in order to sort of pledge allegiance to the Allies in return for some support as h he goes ahead with ripping up the Iran Deal. What do you make of that theory. I don't put a lot of stock in that theory. I mean, you know, Tip and Neil used

to say politics is all local. I think President Trump was looking at the winds of war, if you will. And I think the American people are starting to get increasingly um agitated and concerned about Russian behavior and are going back to a mindset that's more closer to the to the Cold War, which I think is most unfortunate. But Putent seems to be determined to push this. And I must say my own estimate of of Putin he would have been flattered. I thought he was a great strategist.

Now I have great doubts about that. I really, yes, I have. I have changed my views. And the Econdis magazine had him on the cover is a great chess player. I really, I'm not even sure he's a good checkers player whoa really interesting and other uh checkers or chess player. We're not sure Kim Jong un. And I'd love to get your opinion on the surprise visit to Beijing. What do you think that's about and is there any relationship between some of the tariff talk that we've heard between

the US and China and this visit. Well, I think, first of all, I would say Kim is at least a good checkers player. I mean, they've they've been playing this game for a long time where they move their programs forward and then where they get to a plateau, they say, well, let's let's negotiate. So I'm for the negotiations. I've been urging it for a long time. You know, there's no real military option here, so you've got to

get back to the table. Who comes to the able And as you point out, the Chinese are a major factor. I think they're less so than many people realize, in the sense that the Chinese had great influence for many many decades, were the last fifteen twenty years. It's less but more than anybody else, certainly, And they can be very helpful. I think the Chinese are are torn on this one, but I don't think they want to be left on the sideline. So I think that's what we're

looking at here. Um, just taking a little bit of a step back home. I'd love to just get your impression. In some of the turnover that we've had in the White House cabinet with John Bolton becoming National Security Advisor, a lot of people were saying this brings us closer to having a war, with Ian Bremer saying that this was the single worst day for geopolitical risk in a long time. What's your take, Well, I think you know, again, there's been a number of changes, and this is very common.

As you know new administrations. The end of the first year, there's usually significant trends, and normally they move more to the center. If there to the left, the move center left.

If they're to the right, they move center right. And I think that's UM and the bureaucracies themselves and the civil servants begin to gain more and more influence, and consequently, when I look at Pompeo, the move of Pompeo, who has been a very successful director of CIA and and a confidant of the President, and I don't think they knew each other very well when it started. It's now going to be over a state. This is a good thing for the State Department. Gina. We talked about moving

her up. You now have a team that knows Trump works with them, and I think they're pragnantists and realists. The Monkey, the Wrench, the person you have not mentioned and I we're just going to say the tricky one here, and I must tell you I'm sitting back and looking at it doesn't seem to fit. Is his Bolton, And I wish I knew him and could size it up

face to face. But on the surface, my big concern with the administration early on, and it looked like the neo cons might be making a way back into the White House and that stopped. Yeah. Now I worry whether if Bolton sticks to his position, whether or not we're going to see a more oct We're gonna have to leave it there. Founding partner and president of the ark

And Group, also former acting c I a chief. Another grocery store chained Southeastern Grocers Chapter four filed four Chapter eleven bankruptcy today in Delaware, Delaware, it is similar in some ways declare Stores and Toys r US in that it has a lot of debt linked to a two thousand and five buy out, and here to kind of draw the links together for us. As Jared Dillion, a columnist for Bloomberg View, Jared, thank you so much for being with us. He is also an editor and publisher

of The Daily Dirt Nap. Jared, can you talk a little bit about how we should sort of view the growing volume of bankruptcies that we've seen with LVO financed or bought out companies UM like claires, like Toys r US now Southeastern Grocers. You know, I think I think that you know, it's just a small trickle at this point. But the alarming thing is is that, you know, we're really at the top of the expansion um and we're seeing some of these bankruptcies, and you know, usually that's

not when you see bankruptcies like these. Now the retail environment has changed a lot for Claires and Toys r US and also for groceries, but you shouldn't be seeing these deals fall apart at the top of the cycle. So what do you make of that? Well, you know, I think if you look at some of these individual deals. Uh, it's just too much debt. And you know, in the case of Claire's, they had over two billion, and this is not it's not a big business, you know. Uh,

two billion is a lot. I just I think from an outsider looking in, it just doesn't pass the common sense test. Uh, toys r Rust had fion going out the door every year and interest expense. I mean this is you know, it depends on what your philosophy of debt is. What a lot of people think that businesses should borrow as much as they possibly can without going bankrupt to maximize profits. So you're the the title of your column was private equity, it's more like pirate equity.

And you seem to place the blame on private equity companies for basically forcing these companies to incur as much debt as they have. Of you know, a lot of people would say private equity companies have some misses, this is to be expected, but they need a lot more wins in order to deliver good profits. Explain where llain here. I think I think the issue here is really one of public opinion. I think that the private equity industry

has to be careful. Um, you know, after the Toys r US deal, I saw some uh you know, left leaning stuff on social media just blaming the private equity companies for thirty three thousand job losses, which is not trivial. And if we have a recession, if we have you know, an honest to go to this downturn and we get more PD deals fall apart and more layoffs, it is going to point back directly at the private equity industry.

Um So, really like the point of the piece was about how public opinion can turn on an industry very fast, and I think we're already seeing the beginnings of that. And and this sort of is analogous to what we saw with Wall Street after the two says an innate financial crash. I'm wondering what will be the implication if, say, there is a rash of private equity sponsored companies that do go bankrupt and that does do result in many job losses. What will be the consequences if public opinions hours?

Is it more regulation? Well? I don't, I don't. I don't see how regulation would really uh benefit the situation. But I think that you know this, it's not just Wall Street, it's the academic community. It's the c f A program. It's it really is going to result in a see change about how people think about debt and how it should be used. Um, right now people are using it to maximize profits. In the future, they might

try to minimize debt in order to maximize safety. You know, one of the people I mentioned in the piece was d Ramsey, And Dave Ramsey is a personal finance expert who has a following of millions of people, and he advocates at the consumer level to pay off your mortgage, to pay off your car loan, to pay off your credit card debts, and to live debt free. And it's the corporate sector that has leveraged up massively while consumers

have de leveraged. I guess what I was trying to get at is for Wall Street, the consequences of souring public opinion were huge finds or more regulation and frankly a brain drain, with a certain number of people who would have otherwise gone to Wall Street going to say Silicon Valley. What will be the sort of analogous consequence for private equity. Well, you know, I think that, uh, you know, public opinion will turn against private equity much in the same way that it did in Wall Street.

And it could result in a brain drain. It could you know, it could result in the government talking about some you know, reasonable limits that can be placed on debt. I really, you know, I can't speculate as to how it's going to turn out. I mean I think that, um, we're still probably a year or two away from this cycle playing out. Jared Dillion, Thank you so much for

being with us. It's really an interesting column. Jared Dillion, columnist with Bloomberg View, also editor and publisher of The Daily Dirt Nap and investment strategist also at Malden Economics. Right now, I want to turn the attention to deals. There are a couple of big ones joining us now. Chris Hughes, deal's columnist for Bloomberg gad Fly. It's a commentary section for Bloomberg View in Bloomberg LP. Thank you so much for being with us, Chris. I want to

thank your take. I want to start with the Glaxo Smith Klein and Novartists deal. It's a thirteen billion dollar deal to buy some consumer mere brands from Novartis. This is already a joint venture. Shares of both companies went up. How is this possible that it is so universally thought to be good for both of them? Well, I think um Black has really gone up today and the vats up a bit. Obviously the market helps. I mean for both sides, it gives them certainty. For a while they've

been in this joint venture. Earlier this month, Novartis gained the right to sell its share of it to the blackso side everyone's been wondering, you know, when is that going to happen, on what price? And so we know it's happening now and we know the price. So there's I think relief all around that we know what the side of this is. From Blacks perspectives, there's a sort of double release because the market also knows that if they're doing this, they're going to be a bit more

constrained from doing other big deals. And the one that everyone's been focusing on is the possible deal for Fizers consumer healthcare business that could have cost up to twenty billions. So I think blackst Shells in particular, thinking well, we know what they're doing here with the joint venture buy out. They're probably not going to go for Fiser in the short term. And I think that's what's what's pleasing Clacko shareholders today. So it's going to keep them from doing

something stupid. Well in the short term, I mean, one would hope that shareholders are going to be on their toes here and keeping management from doing something stupid whatever. But UM, certainly in the short term this is this is this is sort of big deal for clacks so but further out they're probably going to be in quite a good space later in the year. They're also talking today about UM selling off some of the consumer brands within this within this business, so that's going to sort

of shrink the deal a bit. And they're talking to about exiting but possibly exiting UM that they're Indian subsidiaries. That would raise some money too. So the strain of this is certainly being offset by some other other sales they're planning. Let's talk about the other deal of the day, at least from my perspective, the Axo Noble deal. It's selling its specialty chemicals unit to US private equity firm Carlisle Group for about twelve and a half billion dollars UM.

So can you describe a little bit about what Axo Noble is and give us your take on whether this price is too high or too low. So about big European paints and chemicals company, It had an unslisted bid last year from PPG Industries of the state's very very bitter battle there which in the end saw PPG walk away. Now, this sale today of the specialty chemicals business for ten point one billion euros about UM to our thirteen billion dollars UM is actually part of really originates from that

PPG bid. One of the key aspects of access defense against the PPG approach was that it was going to split itself into and finally here nearly a year on UM, we've got we've got that split taking place, with this business being sold to m to Carlisle and on the on the on the price, well, this is this is a price that has been achieved after a very long auction. Lots of private private ecty firms interested in this sort of asset. They love, you know, unloved assets from a

big company. I did some maths on this so a few weeks ago it looks to me like a private exty owner at this price and probably double their money if they can sort of turbo charge the performances and if they can get some cost out and the revenue a bit three years time, they want to be able to double their money on this. And it caps a quarter of some pretty big buyouts. And I'm just wondering, are we expecting to see another big buyout quarter next?

I wouldn't. I wouldn't be surprised. You know you've got you've got private with a lot of dry powder. We've seen some very ambitious deals union Leavers, spreads and in Europe we've seen a bid for for TDC from private equity and infrastructure investors. To know there's an appetites out there and if they can find it, in particular unloved assets and big corporates that are available, they're kind of go for them, and it's necessary, they'll team up to

do it, as as Carlile's done here. Chris Hughes, thank you so much for being with us. Chris Hughes is a deals columnist for Bloomberg, Goadfly and Unloved or perhaps just not quite as loved. In this era of incredible amounts of cash sitting in the coffers of private equity firms and big investment companies looking for a place to go, Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,

or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio