Portfolio.com: Careers

Which Tech Product Frustrates You the Most?

Wed, 11 Feb 2009 13:00:00 GMT

“Excel as a production system. People do a simple what-if prototype in Excel, but then don’t know when to quit.—Richard Bookstaber, author; financial risk manager

“Remote controls. The phone system at CNN is a close second.”—David Bohrman, Washington bureau chief, CNN.

“The iPhone.”—Evan Williams, CEO, Twitter.

“Digital picture frames.”—Marissa Mayer, vice president of search products and user experience, Google.

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What Katy Did

Wed, 11 Feb 2009 13:00:00 GMT

Playing to her audience, a crowd of several thousand in Toronto, pop singer Katy Perry wiggles through the last teasing bars of her latest hit single, “Hot N Cold.” She slides between the open legs of a muscular male dancer and delivers her punch line. “I wish you were straight,” she says, looking the dancer up and down.

She gets an avalanche of applause.

When you’re a former Christian singer whose breakthrough hit is “I Kissed a Girl,” your fans want you to be bad. Or at least campy. Perry, 24, manages well on both fronts. She has girl-next-door looks but paints her Kewpie-doll mouth in bright-red lipstick and favors retro, Bettie Page-like getups. She purposefully belly flopped into an anniversary cake on an MTV awards show in Guadalajara, Mexico, and teased the gay community with her song “Ur So Gay.” (Opening line: “I hope you hang yourself with your H&M scarf.”) As a button-pushing act, Perry sells. To date, she has sold more than a million and a half copies of her debut, One of the Boys, and more than 3 million of the single “I Kissed a Girl.” She has also been nominated for a Grammy.

Yet as the recording industry is remaking itself for the digital age, Perry stands out not just for her faux naughty-girl antics but for her career trajectory. To offset declining budgets and CD sales, labels are beginning to turn to the Web as a cheaper way of discovering new talent. The British pop singer Lily Allen, for example, was discovered on MySpace. The rock band Journey recruited its current vocalist, Arnel Pineda, after seeing him perform on YouTube. At least a half-dozen startups are trying to “crowdsource” the A&R process, Wikipedia-style, by studying what internet users listen to. Even EMI chairman Guy Hands—who took over when the private equity group Terra Firma Capital Partners bought the company—has suggested that the music business use social-networking sites to find new acts.

Perry, instead, is an old-school performer who worked toward her big break for almost a decade. The daughter of born-again Christians who didn’t allow pop music in their home, Perry released her first album—a collection of gospel songs—on a small label in Nashville in 2001. The CD didn’t sell, but Perry wrangled an audition with Glen Ballard, producer of Alanis Morissette’s Jagged Little Pill. Ballard signed Perry to his label, through which she recorded several albums of material that were supposed to come out on Island Def Jam and Columbia. But neither label felt the music Perry had recorded had commercial potential. Def Jam executives, Ballard says, “point-blank told me they didn’t think she was a star.”

By late 2006, frustrated that Columbia wouldn’t release a CD, Perry negotiated an exit deal. To make ends meet, she took a job at a small California company that critiques work by aspiring songwriters. That’s where she was in January 2007 when Capitol Records chairman and CEO Jason Flom (son of legendary corporate lawyer Joseph Flom) called her with an offer. “It was a 917 number, so I picked it up,” she says, referring to one of New York City’s area codes. Though Flom had heard a recording of Perry’s in 2006, it took a while for him to pull the trigger. “We almost made a big mistake,” he told her.

Flom wanted to pair Perry with Dr. Luke, a proven hitmaker who’d written for stars like Carlos Santana and Kelly Clarkson. “It was a tough deal to make because Luke is a very astute guy who wanted very particular things, but I managed to broker something where everyone felt good working together,” Flom says. The matchmaking took. The first single Dr. Luke and Perry collaborated on was “I Kissed a Girl.”

Though Flom declines to give details of the deal, top producers typically receive an advance against future royalties. A pop album like One of the Boys might cost $500,000 to make, and Flom started promoting it early by releasing the track “Ur So Gay” on iTunes. When Madonna mentioned that she liked the song in a radio interview, Perry became a gossip-column item. Capitol, which is a division of EMI Records, stoked interest further by placing a handful of Perry’s songs on the MTV hit series The Hills and in the movie Baby Mama. By the time One of the Boys was released, in June 2008, fans were ready to buy her music. The CD debuted at No. 9 on Billboard’s Top 200 list and went gold in September. “Hot N Cold” finished the year in the No. 1 spot on Billboard’s Top 40 airplay chart.

Last year, Perry admitted to never having actually kissed a girl. But no matter. Her fans today greet her waving tubes of cherry ChapStick—a reference to a line in “I Kissed a Girl”—and there’s even a Katy Perry doll on the market.Related Links
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What Do You Wish Someone Would Invent?

Wed, 11 Feb 2009 13:00:00 GMT

“Cell-phone batteries that last for a monthbetween charges."—Jason Kilar, CEO, Hulu

“An electric energy-storage device to power our cars and homes from handheld devices that could be charged from renewable resources.”—Jon Wellinghoff, commissioner, Federal Energy Regulatory Commission

“Payment via cell phones.”—Marissa Mayer, vice president of search products and user experience, Google.

“Meters that know whether a car is parked at them and garages that network their capacity and rates. Drivers could then specify where they want to park and how far they’re willing to walk and reserve the cheapest space.”—Richard Bookstaber, author; financial risk manager.

“A Google-like image-search engine.”—John Yemma, editor, Christian Science Monitor.
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The Private Equity Meltdown Myth

Wed, 11 Feb 2009 13:00:00 GMT

Michael Gross, a founding partner of the private equity firm Apollo Management LP who is now at a hedge fund, recently asked a group of business students at Northwestern University this question: In three years’ time, what might the private equity and airline industries have in common? His answer: From day one, neither will have ever made a return for its investors.

It’s hard to imagine another industry that has suffered quite the unmasking that private equity has. Hedge funds underwent a calamity, but their basic business of buying and selling stock still works in a leaner world. The business of providing investment advice and making trades—the meat and potatoes of investment banking—will exist even if no independent investment bank does.

But private equity firms are another matter. Once, they purported to be in the business of buying troubled companies and turning them around. They contended that they could manage the companies better away from the public glare of shareholders. That pretense was dropped during the boom earlier this decade. When private equity shops took over companies like the Texas utility TXU Corp. or the casino operator Harrah’s Entertainment Inc., which was bought by Apollo, it was clear that these were thriving enterprises, not troubled at all. The private equity firms were simply engaged in “financial engineering,” a then-admiring euphemism for a simple conceit: loading up fine companies with massive amounts of debt in the hopes of flipping them to new owners at some point down the road.

When money was loose and leverage was king, private equity firms thrived. No more. In the wreckage of the bust, they have been revealed as hapless corporate stewards and gullible investors. The competition for the highest-profile debacle is stiff. Cerberus Capital Management hasn’t been able to manage Chrysler LLC or GMAC LLC. The private equity firm TPG leaped into buying a stake in Washington Mutual far too early and saw its investment wiped out. Stephen Schwarzman took his company public only to see its stock collapse. Apollo has faced one disaster after another. It lost money on Linens ’n Things when the retailer went bankrupt, and Harrah’s is struggling. Apollo’s Realogy Corp., a real estate brokerage that controls Century 21 and Coldwell Banker, is in the ICU. And Apollo has been knee-deep in litigation with chemical maker Huntsman Corp. and Carl Icahn.

Add to that the reality that private equity firms generally don’t make their money by choosing good investments. They make it on an amazing Technicolor array of fees: management fees, deal completion fees, consulting fees, performance fees, special events fees, fees of every kind and stripe. Chalk it up to yet another racket of the
bubble years.

So it would be natural to assume that private equity is in trouble. Yet, in one of the richer ironies of the Great Recession, private equity firms are poised to flourish. They’ve raised money for new funds and locked it in before investors have had a chance to fully realize how disappointing the returns will be on the last ones. Capital is king now, and many private equity firms have enough money for 10 years.

The private equity industry is shaping up to be a great example of why it can be rewarding to do irrational things in a bubble.

Finding the SuckersFor years, the academic research has revealed private equity’s pretense: After fees, private equity firms as a whole don’t beat the market. University of Chicago scholar Steven Kaplan studied the industry’s returns and in a 2005 paper reported that over a period of about three decades, the average private equity firm’s annual return was no better than that of Standard & Poor’s 500-stock index. Since then, he has asserted that private equity returns often appear inflated because of some flaws in the way in which they are compared with the broader market. Kaplan points out, for example, that Blackstone Group LP’s annual 26 percent return from 2002 through 2006 looked heroic against the S&P 500’s 6 percent. But if you lop just a year off the comparison and use Blackstone’s performance from 2003 through 2006, the results look much less impressive because the S&P returned 20 percent annually during those years.

More recently, a pair of European academics, Ludovic Phalippou and Oliver Gottschlag, demonstrated in a paper that the poor performance of private equity firms could be understated. When private equity firms report the value of their funds, they include estimated values of deals before the investments are actually realized through a sale or share offering. Surprise, surprise: Those estimates tend to be biased upward. When the data is cleaned up, Phalippou and Gottschlag found, it becomes clear that the private equity industry tended to underperform the S&P 500 by three percentage points a year after fees.

In the end, the data is all largely irrelevant. Private equity thrived—and will continue to thrive—because its execs have excelled at finding believers. Private equity firms long ago persuaded pension funds and endowments to commit to their funds; by 2006 and 2007, they were snowing the banks, which fell over themselves to lend money on questionable terms. Much of this was known at the time and reported in broad strokes. But it’s only now becoming clear how masterfully the private equity firms handled those negotiations. Investors poring over beaten-up bonds of private-equity-owned companies currently in trouble are now discovering trip wires galore.

Private equity execs were adept at more than just relaxing the covenants of their companies; they also were brilliantly elastic in defining how profitable their companies were. Take Apollo and its absurd investment in Realogy, which Apollo acquired in December 2006, for a fat premium over the stock price. In a standard loan agreement, the lender gains power and might even assume control if the borrower triggers certain clauses of the contract. Typically, the borrower is required to keep up a certain level of cash flow.

The Realogy credit agreement is a cunning thing of beauty to behold. For one, it has an “equity cure” provision, which stipulates that if Realogy starts running into problems, it can raise money from investors, including Apollo, and then count that money as cash flow for the purposes of its loan covenants. Neat trick No. 2 is that the agreement allows Realogy to take its trailing cash-flow figure and adjust it for the cost savings the company intends to reap if it has merely identified them. That’s sort of like asking your mother for your allowance today based on all the chores you plan to finish over the next year.

Such slick terms won’t be enough to save Realogy, whose bond prices now reflect the expectation that it is headed toward bankruptcy. The terms were primarily for the benefit of Apollo, which will be able to retain control of its investments much longer than it would have under normal lending conditions.

Siren SongThe other major factor working in private equity’s favor is that many of the biggest firms have raised money for their follow-on funds—often before the current fund results that contain the 2006-07 time bombs are fully known. Throughout last year, private equity firms asked their investors to make good on those commitments. Many universities and pension funds began to redeem from hedge funds to fulfill their obligations.

Even though these limited-partner investors in private equity firms are generally sour about the funds’ current terrible performance, they don’t really have anywhere to go. Pension funds, in particular, overpromised to their pensioners and are now so desperate for returns, they are going to buy into the private equity story. The academic research shows that the top-performing funds are more likely to continue to perform well. Therefore, if you can somehow get into a great fund, the thinking is that over time, you’ll be in good shape.

“Anyone who goes into private equity thinking the average of private equity will beat the average of the public markets is misguided,” says Britt Harris, chief investment officer of the Teacher Retirement System of Texas. “It’s well-known that as a whole, it’s not a value-added operation.” But he latches onto the academic research that finds that the top funds will most likely remain the best performers. “If in first quartile,” he says, “outperformance is likely to be very high.”

That belief leads to his forgiving mood: “Obviously, we will pay a little bit closer attention,” he says of his fund’s private equity investments. But when we talked about the terrible time Apollo was having, he said, “Their bread and butter is really dislocated markets like we are in now. The story will unfold over time, but I’m not going to lose a lot of sleep over Apollo.” Nor, it seems, are most investors. Despite its multiple calamities, Apollo managed to raise almost $15 billion by December for its next fund.

They should be more wary. The returns of the top performers are unlikely to hold up. The best-performing funds were the ones that dived headlong into the bubble investments. A full 37 percent of the money committed to private equity since 1980 was pledged in 2006 and 2007. That suggests that in a few years, those top performers won’t stay on their perch. “My guess is that the megafunds will have lower returns than the smaller funds,” says the University of Chicago’s Kaplan. “Given that the megafunds had performed well in the past, that would mean that persistence will not occur. Historically, size is the enemy of persistence.”

I expect pension funds and endowments will just ignore that prospect and keep giving money to private equity firms anyway. Tony James, Blackstone’s chief operating officer, says, “Our limited partners tell me private equity is the single best performing asset class by a lot, but there are parts of cycles that don’t look great. Now there are great opportunities that don’t require much debt.” He adds, “It’s one of the greatest times in history to invest money.”

That is why the industry won’t see further shakeout. Not that things will be rosy by any means. The private equity industry cannot lever up its investments nearly as aggressively as it used to, because banks are no longer willing to lend to them. (Private equity companies hope to compensate by buying businesses so cheaply that they can still make adequate returns.) Dealing with the disasters of 2006 and 2007 will require an enormous amount of time and resources, which will drain capital for new investments. And few private equity firms have adequate skills when it comes to distressed investing, despite the fact that they have raised money to invest in those very situations.

Furthermore, while these firms believe they have raised the money for their follow-on funds, their desperate investors are starting to resist. By the end of last year, TPG and the British firm Permira were letting their investors out of capital commitments, a sign that the leverage of the private equity firms may be ebbing. So the new funds will most likely be much smaller, meaning private equity as an industry will be less lucrative.

Despite all of that, when markets and the economy go south, some investment opportunities become more attractive. Fed-up investors hold on to the hope (which in some cases becomes reality) that the private equity firms will be able to make superior investments in this “vintage,” as the jargony industry term has it. Even sophisticated investors who know that the game is rigged think the time is right. I spoke to one former private equity professional who now sits on the other side, at a family office, making investments. “I see no consequences” for the private equity firms from having made all those stupid investments in the bubble years, he told me.

His own experience bears that out. He had investments in a private equity fund of funds that had committed to a TPG fund that had invested in Washington Mutual. The $20 billion TPG fund had put 2.5 percent into WaMu, a disaster, and was offering investors a chance to reduce their capital commitments, but only by 10 percent. His family office’s direct exposure to the WaMu failure was paltry. Given that 95 percent of the fund’s capital is left to be invested in what he is convinced will be a good vintage, he says, “I’m psyched to be in it. I’m going to double my money. You have an element of robbery, and there are never consequences, but people are happy to be in the next fund.”Related Links
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The Girl Next Door

Wed, 11 Feb 2009 13:00:00 GMT

You’re severing ties with the company—giving up your board seat and stepping down. Why? If I’m going to make this move—particularly with the election of Barack Obama—now is the time. It’s not about wanting to be CEO of another company. I never planned to spend my career in the family business. I took it over because the company got in trouble.

What’s next? I want to be involved in how we develop leaders. I know Barack and have worked for him since he announced he was running for the Senate. One of the things I most admire about him is that he believes you can combine progressive values with pragmatic problem-solving. So one piece of it will be public policy. I’m going to work with the Center for American Progress. I’m also talking to the International School of Business at my alma mater, Brandeis.

Are you going to pull a Meg Whitman and run for office? No. But it’s a legitimate question. My husband and I love living in Chicago. So even the question of taking a job in the administration, which is similar to but different from running for office, is not something that appeals to me.

The company’s revenue is down, and circulation has dropped more than 50 percent from its peak of 6.6 million in the early ’70s. You’re even closing the New York office. Is now a good time for you to go? I couldn’t leave if I thought the company was in trouble. It was in trouble when I became president, so I know what that looks like. This is not trouble. It’s a bad stock market, a bad ad market, and a recession. We have to be fiscally conservative. There’s the expression, “Don’t bet the ranch.” We call that, “Don’t bet the mansion.” I don’t want to pick up the phone and call Hef and say, “Bad news, honey. The moving van is coming at noon. I found you a lovely two-bedroom in Westwood.”

How does the magazine need to change in order to survive? Looking ahead, it needs to be relevant for young men. That has to be reflected in everything from the look of the models and how they’re shot to which celebrities are featured to what is covered.

Is there a mistake you made as CEO that haunts you? The things I didn’t do were as important as what I did do. In the 1980s, Michael Milken tried to persuade me to let him do a half-billion-dollar high-yield bond deal for the company. I couldn’t see how we needed it. Milken said, “First you get the money. Then you figure out what to do with it.” I said, “I’d be more comfortable not having that debt.”

What have you put off that you’ll have time for now? I’ve gone on record with my husband to say that I’d like to redo our kitchen, because I love to cook and entertain.

How many pairs of Playboy jeans do you own? Zero. I avoid wearing the Playboy insignia because it makes it inevitable someone will recognize me. I’m remarkably successful at being invisible, until I pull out a credit card and somebody says, “Oh, how’s your dad?”Related Links
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The 4.6 Billion Scoop

Wed, 11 Feb 2009 13:00:00 GMT

The Deal: Two years ago this month, the McClatchy Co. paid $4.6 billion to buy Knight Ridder Inc. and its 32 dailies, among them the Miami Herald. McClatchy, based in Sacramento, owned only 12 newspapers at the time, and one analyst joked that “McClatchy is a dolphin swallowing a small whale.” The acquisition, which made McClatchy the third-largest newspaper publisher in the U.S., was expected to save the company more than $60 million once the two firms were fully integrated.

The Aftermath: McClatchy immediately sold 12 Knight Ridder papers, including the Philadelphia Inquirer, and in 2008 laid off 20 percent of its employees. But the company is still carrying about $2 billion in debt, and since 2006 its stock has cratered, falling from almost $50 a share to about $1. In 2008, advertising was down 22.4 percent through November.

The Bottom Line: Bad idea, worse timing—as if Zenith had decided to snap up Sony’s Betamax operations circa 1987.
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The "I'm F*&#ed!" Number

Wed, 11 Feb 2009 13:00:00 GMT

It was the start of the new year, a bright and glorious day, marred only by the near total collapse of the global economy. Standard & Poor’s 500-stock index was down almost 40 percent from where it had been 12 months earlier. In the last four months of 2008, 1.9 million U.S. jobs had disappeared. You opened your mailbox. You found a letter. It was from the firm that keeps tabs on your erstwhile holdings: your 401(k) or, as wags had begun to call it, your 201(k), and the 529 plan you conscientiously opened so your kids’ college funds could grow and grow—tax-free! The letter was earnest and as empathetic as a form letter can be. It went something like this:

Dear Valued Client,
Our mission has always been to light your path to the secure financial future you’ve always envisioned. Our philosophy has long been that day-to-day market volatility is simply “noise along the journey.” Yet recent market developments have no doubt impacted the value of your holdings. A few days from now, when you receive your year-end statement, you will most likely see that the value of your portfolio has been severely diminished. While we remain optimistic that the economy will eventually rebound, we wanted to alert you—prior to the arrival of your statement—that it’s more important than ever to stay focused on a game plan for the long term. Meanwhile, please don’t hesitate to contact us with any questions.

You were relieved, actually. The letter could have rubbed it in. It didn’t mention that your spouse had been among the nearly 2 million job casualties. Or how obsessed you are with keeping your health insurance. Or that your home had been on the market for three years and that the asking price was now a shadow of its former self. The letter, in fact, could have been far more concise:

Dear Valued Client,
You’re screwed. You’re poor. Please don’t hesitate to contact us with any questions.

A step back to happier days: In 2006, I began research on a book about how much money we think we’ll need to feel emotionally and financially secure over the long haul: How much does it take to go off to write the great American novel or buy an unlimited pause to refresh? How much does it take to quit the rat race, devote time to a worthy cause? How much does it take to underwrite a satisfying retirement? ( View an interactive feature about best and worst case financial scenarios.)

Part of my research consisted of asking people to explain what money signified to them. Nearly everyone answered the same way. Money is “freedom.” Money is “security.” Money provides “peace of mind.” Now and then, someone reached for the moon and offered an original take. “For me,” one woman said, “money is fuel. It allows me to put my best ideas into action.”

The book, published three years ago, was called The Number.

“The Number? Oh, you mean ‘Fuck you’ money,” a veteran Wall Streeter said.

Anyway, that was then, this is now. Then was about daydreams and wishful thinking as to what lay ahead, fantasies captured on the covers of money magazines: Adirondack chairs on a beach. Happy, toothy couples who own small vineyards or charming country inns. The headline: how to retire rich!

Now is about the gloom and doom embodied in that letter. Now is the auto industry gone to hell. Now is Bernie Madoff. Now is several international financiers dead of self-inflicted wounds. ( View an interactive feature to see what your number is.)

Wanting to take a further look at now, I dusted off the old questions and returned to the field. I spoke with friends or friends of friends, across professions. I spoke with people on Wall Street. “What would it take to feel safe and snug?” I asked them. People rolled their eyes and said, “You must be kidding.” It was clear right away that the Old Number had given way to a New Number. “Fuck you” money? How quaint. “I’m fucked” money? Now we’re talking.

The New Number Hits Wall Street
Nowhere is the New Number more top of mind than in Lower Manhattan. I put in a call to someone who used to be a brokerage honcho. Eight years ago, he was smart enough to jump ship when the jumping was good. He traded the security of a solid job at a big financial-services firm for a risky partnership at a midsize hedge fund. Today—all things considered—he’s in solid enough shape, certainly compared with those who soldiered on at the mainstream financial behemoths, chasing their Old Numbers at wire houses and banks, not a few of which went poof. I asked my informant to give me a reading on the state of mind of those he’d left behind. He agreed, but only if I’d withhold his name. He said he didn’t want to betray confidences or further humiliate former associates. I’ll call him Mr. Lucky.

“The first thing to understand,” Mr. Lucky tells me, “is that no one—I mean no one—is thinking about ‘Fuck you’ money now, even though that’s all they once thought about, talked about, lied through their teeth about. You know, ‘I got a million; I need five,’ or ‘I got 20; I need 40.’ Now all they care about is hanging on to a job, assuming they still have a job.”

There’s a senior money manager—I’ll call him Mr. Ashamed—a solid and good guy, by all accounts. Mr. Ashamed spent decades at a respected advisory firm founded in the late 1930s that Lehman Brothers swallowed up in 2003. He continues to live in the same nice but not ostentatious home outside New York City.

Mr. Ashamed did just about everything right. He didn’t throw his money around. He was scrupulous about setting up trusts that would send his grandchildren to college. About the only thing he did wrong was stay true-blue to his firm, before and after its acquisition. The assets he had set aside to educate his grandchildren? Mostly Lehman stock—now worthless. Today, Mr. Ashamed is embarrassed and humiliated—not for his own sake, but over how he failed his family. Sure, he’s an old pro and knows the markets will eventually come back. But he also knows he won’t be around to see the day, to set things right.

Then there’s a man who is a couple of decades younger than Mr. Ashamed—not as heavy a Wall Street hitter, but also a good guy. I’ll call him B. Prepared. Conservative, realistic. For years, he knew that one day—not a matter of whether, but when—the bubble would burst. He was so sure of it that five years ago, to protect his Old Number, B. Prepared cashed in his stock, worth around $5 million, and left his job at a brokerage. The plan was not to retire but maybe to explore a startup. But the startup never got started. With his kids soon to enter college, B. Prepared again took preemptive action. He and Mrs. Prepared sold the family house, accepting far less than they believed it was worth—a cushion, at least. Today, the Prepareds live in a rented place not far from their former, larger one. Their New Number will soon be taking them much farther away, to a state where the cost of living is lower and the public universities are, well, good enough.

Finally, there is someone who needs neither introduction nor sympathy from us. He’s the Wall Street stereotype we love to hate—arrogant, free-spending, and rapacious. I’ll call him Mr. Jackass. Mr. J. started working on the Street in the 1990s, went around bragging how he’d be a $1 million-a-year man in no time, and—faster than you could say Stan O’Neal—he was. By any reasonable view, Mr. J. should be in good shape, even now. To make a million dollars a year for 10 years ought to have gotten him to a Number big enough to fund a comfy retirement, more than enough to chuck a job and start a novel.

But Mr. J. had other uses for the money. A million dollars a year was about what it took to own a house in Connecticut, another in the Hamptons, two or three expensive cars, plus have the clothes, wine, food, vacations, and boat that befit the Jackass lifestyle. It’s not as if Mr. J.’s Old Number went down with the markets. He had no Number to start with, no plan for a nest egg. In the words of a celebrated investment analyst (not Jim Cramer), “When you ain’t got nothin’, you got nothin’ to lose.”

The New Number Hits Main Street
This change from the Old Number to the New Number is, in essence, all about lifestyle relapse. A recent AARP survey reports that more than 65 percent of respondents over the age of 45 now say they plan to put off their once-hoped-for retirement dates. The number of applications to graduate schools is decreasing, but Teach for America applications are up. Those who can’t find work in business, finance, marketing, publishing, or technology teach—a lifestyle-relapse prevention measure.

Not everyone I talk to is teetering on the precipice of a lifestyle relapse. But nearly everyone is stepping gingerly. I talk to an architect on the West Side of Manhattan—Mike the Architect, I’ll call him. He doesn’t want clients or clients-to-be—if there are any—to know how he’s feeling right now. Mike tells me he’s somewhat fortunate because his independent practice has low overhead and he has a handful of funded projects that are now far enough along that they will probably be completed. Fundamentally, though, he’s pessimistic. His Old Number? Forget about it. His invested assets are worth roughly half of what they were a year ago. On the bright side, he says, there’s still decent equity in the apartment he and his wife bought in the 1980s. But just in case, they are seriously thinking about splitting the place in two, living in one half and selling the other.

I ask Mike the Architect if he and his wife have a financial plan to cope with their New Number—far fewer than half of Americans have a financial plan, which is a good thing to have when wrestling with either the Old Number or the New Number. “Yes, we do have a financial plan,” Mike says. “To be honest, it’s more like a sketch than a plan. Let’s just say that if an architectural plan I gave a client was anything like our financial plan, the building would fall down.”

Help!

Back when I was interviewing people about their Old Numbers, I was struck by how few wanted to talk specifically about what it would take to feel secure over the long haul. They opened up about sexual fantasies. They rattled on about the drugs in their medicine cabinet. They fessed up to nips and tucks. But as for whether they’d saved enough for the future to retire or quit their current job, they wouldn’t talk. The Number was the last taboo. If they talked about it at all, it was with a financial adviser, assuming they had one. Of those who did, more than a few had lousy ones—and not just those latchkey, so-called money managers who passed along their clients’ fortunes to Madoff. There are plenty of garden-variety financial advisers out there who mismanage nest eggs the old-fashioned way, by churning assets, selling questionable annuities to their clients, and recommending lopsided portfolio allocations stuffed with high-fee mutual funds and exotic financial instruments that nobody understands.

But there are also reputable and wise financial advisers out there, so I checked with a few whom I had gotten to know while researching my book. They tell me it’s a reasonably good time to be a financial adviser if you get paid by the hour or take a percentage of assets under management, but not if you depend on commissions. They tell me their phones have been ringing off the hook—hands to hold, spreadsheets to rerun. Old Numbers need to be revisited or scrapped. “If I can’t retire now, then when? If I can’t tell the boss to shove it tomorrow, then when?” And there are New Numbers to be addressed from the ground up: “How long do we have? What’s the worst that can happen?”

Jonathan Smith, a managing partner of a firm in Greensboro, North Carolina, tells me about the questions he was asked during two recent phone calls, typical of many: “What are you doing with my money so I won’t lose a lifetime of savings?” and “Am I broke yet?”

Dan Danford runs the Family Investment Center in St. Joseph, Missouri. He says that older clients—boomers and up—are jumpy if not altogether panicked, assuming they’re reasonably well diversified and not overleveraged. Gray hairs at least have the benefit of previous, less calamitous run-throughs: inflation in the 1970s, Black Monday, the internet bubble.

Steve Smith runs an advisory practice outside Denver. He says he tries to get clients to look for a silver lining amid the current calamity. He sees a glimmer of a “back-to-the-future economy” taking shape now, wherein those on the edge of lifestyle relapse—jobless or soon-to-be jobless bankers, autoworkers, newspaper reporters, and millions of others—may find gainful employment and solace through entrepreneurialism. Bad times are not a bad time to start your own business, Smith says. Rents and the price of equipment are low; employees are there for the asking, their demands modest; putative competition is in a weakened state. (Okay, maybe that’s a tin lining.)

My final call is to George Kinder, who had a feature role in the book I wrote. Kinder is a financial adviser, yes, but an unusual character: a Harvard-educated classics scholar, a seeker of enlightenment through meditative practice. He runs an enterprise called the Kinder Institute, which is dedicated to teaching other financial advisers (who then try to teach us miscreants) how to close the gap between money and meaning, between money and fulfillment. That may sound New Agey, but those issues are relevant today: How do you buy a ticket to freedom if you’re as poor and screwed as that letter from your money-management firm said?

Kinder is 60, the father of young twins, and has a lifestyle that would seem especially vulnerable to significant relapse: He has a house in Hawaii and another on a tranquil pond near Boston. He claims a strong spiritual connection to both places. I ask him how worried he is about his own financial situation. Kinder says that, yes, he’s concerned, but he believes his family is reasonably “weatherproofed” by two layers of protection, one financial, the other—well, I’ll get to it.

Financially, he says, he is staying the course, not selling into the down market, hanging in there. He cites one of the few universal truths about how to lessen the odds that you will run out of money before you die: If you’re somewhere around Kinder’s age, reasonably diversified (60 percent stocks, 40 percent bonds, give or take), and you don’t draw down more than 4 or 5 percent a year, then 80 years of historical market returns indicate that there’s almost no chance that you’ll outlive your nest egg.

But what if history doesn’t apply? I ask him. What if it’s worse this time? Here’s where Kinder’s second layer of protection comes in.

“If necessary,” he says, “I’ll sell one or even both of our homes. We’ll do what we must. Keep in mind, the issue is freedom, not freedom to spend. But unless we think hard about what freedom means to each of us—and it varies from person to person—we default to the idea that freedom is the life Angelina and Brad can afford but we can’t. Why? Because we’ve been taken in by false images of what freedom looks like”—meaning, I presume, those retire rich! magazine covers.

The bottom line here is that the things that truly matter in life do not come with daunting price tags attached. Sure, we all need food, health care, and shelter from the storm. But other than that, we don’t need an especially big Number to buy that which we “can’t live without,” the things that are “bedrock important,” as Kinder says.

Now, to some—Mr. Jackass, for example—Kinder’s self-protection plan sounds squishy and naive. But for others—Mr. Ashamed, B. Prepared, Mike the Architect, perhaps you and me—it may offer a ray of hope. To sell a house we love is no small lifestyle relapse. But if the tradeoff is freedom gained—the opportunity for creative expression, doing good for others, keeping loved ones connected—well, I call that comfort, even if it’s cold comfort, in this, the winter of our discontent.

Slimed Online

Wed, 11 Feb 2009 13:00:00 GMT

Brittan Heller and Heide Iravani, two typically hyperaccomplished women from Yale Law School, have recently had restored to them one newfangled inalienable right—a right yet to be enumerated in the United States Constitution but one that, increasingly, seems just about as essential. Once again, they can do Google searches on themselves and not see a torrent of abusive falsehoods pop up on the computer screen.

Type in Brittan Heller, for instance, and you now get her article in the Yale Law Journal on genocide and something about her appearance years ago on Teen Jeopardy. For Iravani, there’s a LinkedIn link and a reference to her canvassing in high school for the Sierra Club. Scroll down, though, and you’ll find shocking remnants of what the two women have been subjected to in the past couple of years, not only when they Googled themselves but whenever a law firm or a classmate or a date—or anyone else, for that matter—checked them out. “Is Brittan Heller a lying bitch?” screams one link. “Heide Iravani deserves to be raped,” shrieks another.

Those comments originated on AutoAdmit, a popular forum for law students and, sometimes, the lawyers who recruit and hire them. AutoAdmit bills itself as “the most prestigious law-school discussion board in the world” and claims to have 700,000 unique visitors a month. When it comes to Heller and Iravani, some of them were unique all right: uniquely sadistic, subjecting the women to what can only be called a cyber-stoning, in which participants vied to hurl the biggest rock. They wrote, falsely, that Heller has herpes and had bribed her way into Yale—helped by a secret lesbian affair with the dean of admissions—and that Iravani has gonorrhea, is addicted to heroin, and had exchanged oral sex with Yale Law School’s dean for a passing grade in civil procedure. The spectacle was either astonishingly horrific or almost banal, depending on how old and what sex you are, on what you deem funny, and on how much time you spend on the internet. And where.

Autoadmit, like innumerable other sites catering to a particular profession or community, is comparatively obscure. What makes it matter to the world at large is Google, which collects whatever AutoAdmit and millions of other websites make available and then spews the results out around the planet. A Google search is the new universal background check and is unfettered, unfiltered, and nearly impossible to appeal. But not to manipulate. To ensure that their calumnies topped the Google cache, AutoAdmit posters filed multiple slurs about both women—a practice known as Google bombing—to crowd out or shove down anything else.

Were Google and AutoAdmit newspapers or television stations, Heller and Iravani would have had a ready remedy: They could sue. Someone printing or airing falsehoods or statements likely to defame or cause extreme emotional distress couldn’t then simply walk away. But different rules apply to internet intermediaries: Websites like Google and AutoAdmit merely deliver content rather than producing it themselves. Just over a decade ago, seeking to encourage the free flow of information on the internet and itself under pressure from telecommunications companies, Congress passed legislation stating that such websites could not be sued for carrying defamatory material. The measure in question is Section 230(c) of what has surely become one of the most striking misnomers on the books: the Communications Decency Act of 1996.

As a result, two entirely different brands of discourse have developed. In the traditional media, things remain reasonably decorous. But online the promise of anonymity, though far flimsier than most suspect, unlocks something ugly and menacing in ostensibly normal people. And while anything goes in the Google era, everything also stays, and spreads. The whole world is now the bathroom wall, and that wall can never be entirely painted over.

With the online carriers off-limits, the two women have pursued their anonymous tormentors directly. In June 2007, they sued dozens of them in federal court in New Haven for defamation, invasion of privacy, and infliction of emotional distress. “Hiding behind pseudonyms and the smug assumption that their carefully aimed hostility can pass as merely juvenile misconduct,” the charges read, electronic wraiths trashed Heller and Iravani “for the sheer joy of destruction.” The online monikers leap off the title pages of otherwise solemn-looking court documents: Cheese Eating Surrender Monkey, The Ayatollah of Rock-n-Rollah, hitlerhitlerhitler, Dirty Nigger, Sleazy Z, stanfordtroll, lonelyvirgin, Yalels2009, ak47, et al.

Who are they? Not just the usual geeks and misfits, but also, as one AutoAdmit poster put it, “some of the best-informed smart-ass procrastinating wannabe lawyers in the world.” Some came from Yale Law School, leaving Heller and Iravani to ponder whether the staid and respectable guy sitting alongside them in class was the very same fellow who had just trashed them on the Web.

The women, whose case is in the pretrial stage, stand at the forefront of a growing number of people taking to the courts to unmask their online attackers. A former board member of the World Chess Federation has accused chess grandmaster Susan Polgar and her husband of anonymously posting obscene messages about him. (They have denied the charges.) A onetime Vogue Australia cover model has gone after a nameless blogger who called her “a psychotic, lying, whoring...skank.” The former mayor of Manalapan, New Jersey, is trying to uncover who called him, among other things, a liar, a crook, a bum, a pedophile, an alcoholic, and a wife beater.

But the Yale lawsuit has sparked considerably greater interest than the others, many of which remain tabloid curiosities. It’s a test case for the fragility, in the internet era, of one’s professional reputation and for what—if anything—can or should be done to protect it. Heller and Iravani, who both declined to comment, are seeking monetary damages—though, given the paltry resources of some of their adversaries, the two women may not get much. They are trying to reclaim their good names and guard against career harm. They’re also trying to send a message: that even in the wild world of the internet, smearing comes at a cost. Perhaps they’re hoping that by tracking down, outing, and punishing a few loudmouths, they can muzzle—or at least sober up—an exponentially greater number.

Though they do not raise the issue explicitly in their suit, Heller and Iravani may even end up helping prompt a change in the law: forcing internet intermediaries to bear greater responsibility for what they carry. Frank Pasquale, an authority on internet law at Seton Hall University’s law school, predicted that the case could hasten calls to make intermediaries take down offensive material, in the same way they must remove pirated copyrighted material. The suit’s potential impact helps explain why one of the country’s leading litigation boutiques, the San Francisco law firm Keker & Van Nest, is representing the women for free. But Keker is proceeding cautiously. The firm does some legal work for Google, and according to a figure close to the plaintiffs, the company has demanded that the lawyers neither challenge Section 230(c) directly nor erode its protections. (The plaintiffs’ chief lawyer, Mark Lemley, said this is not so. A Google spokesman said the company backs current interpretations of that law, which he says “enable the free expression of hundreds of millions of individuals,” but declined to comment on any conversations with Keker.)

In the 21 months since they filed suit, the women have already made some headway. But there are also accusations that the victims are becoming victimizers. Some of the defendants say the case amounts to an all-expenses-paid elitist temper tantrum in which two privileged women have cast an overly broad net, thus failing to differentiate between the really wicked and some of the tamer flamers, and have jeopardized careers in ways far more serious than theirs ever have been. One way or another, their suit highlights a culture and a legal system that still aren’t quite sure how freely people can or should speak online, how seriously to take what they say, and whether they can or should be sued for saying it.

AutoAdmit—the name refers to applicants with grades and test scores high enough to be admitted to law school without much deliberation—was created five years ago by an insurance broker in Allentown, Pennsylvania, named Jarret Cohen, who was 20 years old at the time. He never aspired to law school; he never even went to college. But he frequented the uninhibited online discussion board of the Princeton Review, an educational testing company. When it began filtering out some of the more inflammatory posts, people abandoned it in droves. Cohen quickly created an alternative board, whose appeal, as one poster put it, was that “no thread, ever, would get vaporized by the thought police.” He targeted law students, since that niche was largely unfilled. Besides, he found their conversations witty and intelligent.

Cohen then took on a sidekick, Anthony Ciolli, a 20-year-old wunderkind who had completed Cornell in two years before moving on to the University of Pennsylvania Law School. Cohen controlled the message boards; Ciolli supplied research, such as the rankings of law schools and firms. This earned him the title of “chief education director” in the two-man operation, which Cohen ran from his house. For its first two years, AutoAdmit carried no advertising; in 2006, Cohen signed up with Google AdSense, which supplies particular advertisers suited to a given website’s content. Advertising typically brought in about $1,000 a month.

Many other websites control extremely salacious material either by using special coding to keep it to themselves (so that Google doesn’t pick it up) or by filtering it out, particularly if asked to do so. But AutoAdmit was a place, one poster told me, where you could tell someone to “fuck off and die” and not get banned. The site’s on-topic stuff was standard fare having to do with getting and succeeding. But off-topic threads were full of obscene bluster and ritualized intramural insult. Posters appeared to be overwhelmingly male; it was women, particularly beautiful women, particularly beautiful women at the top law schools, particularly beautiful minority women at the top law schools, who were most often skewered, dissected, and fantasized about.

Ciolli, who posted regularly, became AutoAdmit’s public face, although he insists he didn’t control what went—or stayed—up. Pleas to remove threads usually came to him; he’d generally pass them on to Cohen, and Cohen, who rarely posted on the site, would generally ignore them. To both, even its depravity was a public service. “One finds a much deeper and much more mature level of insight in a community where the ugliest depths of human opinion are confronted, rather than ignored,” Cohen wrote in a March 2005 email to Eugene Volokh, a professor at UCLA Law School and the author of a popular law blog.

In the view of Dave Hoffman, a professor at Temple University Law School who has blogged about AutoAdmit, the site offered its patrons a peculiar, vicarious kick: It allowed people who were straitlaced and risk-averse enough to want to be lawyers in the first place to become briefly, crazily irresponsible. They could spout outrageous lies, or, in the manner of Sacha Baron Cohen, invent entirely new personalities for themselves, invariably as homophobes, racists, or misogynists. Speaking a common language and flouting the same taboos, such posters became a close-knit fraternity of complete strangers who rarely even knew one another’s names. But for all their trash talk, many could even feel principled about their misbehavior; after all, they were free-speech absolutists. And they became cyber-survivalists when anyone tried to tone down or remove their posts.

Inevitably, naïfs stumbled onto the site and were mortified by what they saw. Among the most outraged was Brian Leiter, then a professor at the University of Texas Law School. In early 2005, he counted 250 threads with the word nigger in them and 350 more with Jews or Jew, including “Are Jews smarter or just craftier?” Three hundred other threads had bitches or cunt in them, and another 200 had fags. In March 2005, Leiter complained about the site on his blog. He promptly met the fate of all AutoAdmit critics. He was vilified so brutally on the site—for instance, in posts claiming that he had AIDS—that he retained counsel and briefly considered suing. Jarret Cohen, fearing that he’d have to reveal the identities of his posters in any court action, stopped collecting their internet-protocol addresses.

Women attacked on AutoAdmit saw Leiter as a sympathetic soul and emailed him with their horror stories. A black student at Vanderbilt Law School was so traumatized by such threads about her as “Gangbanged by 4 Cincinnati Bengals” that she had changed schools. At one point, Vanderbilt officials contacted Gary Clinton, dean of students at University of Pennsylvania Law School, to complain. That Ciolli attended the school was well-known around AutoAdmit; people assumed that a powerful university administrator like Clinton would have some sway over him. On several occasions, Clinton suggested that Ciolli desist and warned him that his affiliation with the site could hurt him professionally; each time, Clinton says, Ciolli expressed anguish over what was happening but said he was powerless to stop it. And he would not walk away. “I refused to allow a few jerks to ruin what I thought was a good thing,” Ciolli told me.

The attacks against Brittan Heller began in the summer of 2005, after her graduation from Stanford. “Stupid Bitch to Attend Yale Law,” declared STANFORDtroll. “She will be part of the class of ’08, and her name is Brittan Heller.” The usual cyber-mauling ensued. “I’ll force myself on her, most definitely,” promised neoprag, who added, “I think I will sodomize her. Repeatedly.” To which stanfordtroll replied, “If you go after that, you’ll be in for a suprise [sic].” Then someone calling himself :D chimed in, “Just don’t fuck her, she has herpes.”

Seeking to have the inflammatory thread taken down, Heller turned to Google—in vain. Its policy is clearly stated on its website: “Google does not remove allegedly defamatory material from our search results. You will need to work directly with the webmaster of the page in question.” So, using a mix of humor, flattery, and steel, Heller contacted AutoAdmit. “While sometimes I can be stupid and sometimes I can be a bitch, I can only aspire to be both at once...since I’m just terrible at multitasking,” she joked in an email message to Cohen and Ciolli, adding, “I would like to get this settled quickly and not have to involve any outside legal authorities.” The implied threat irked Cohen, who by law didn’t have to do anything. “Sounds like a nut,” he wrote to Ciolli. Two days later, after hearing nothing, Heller wrote again. “Please remove the post, and if you’re willing, allow me to confront my slanderer,” she pleaded.

Again, she got no reply.

By the time Heller started at Yale in the fall, the online locusts had moved on to other targets, as they often do, and Heller had moved on too. But when she interviewed for jobs for the summer of 2006, she claims, she was shut out of the first 16 spots she applied for—almost inconceivable for a Yale Law student. As far as she was concerned, there could be but one explanation: The firms had Googled her, and when they had, “Stupid Bitch to Attend Yale Law” and its progeny had come up first. In January 2007, she turned to ReputationDefender, a fledgling “online-reputation-management solution company” based in Redwood City, California. For a monthly fee, it flags negative internet content and then, usually through moral persuasion, helps get it taken down. ReputationDefender agreed to represent Heller for free.

She was initially on her own. Before long, though, AutoAdmit had created a confrere who would come in for vastly more abuse. A poster calling himself hi launched a new thread on January 31, 2007, entitled “Rate this HUGE breasted cheerful big-tit girl from YLS” with a link to a picture that Heide Iravani had put up on her Facebook page. There ensued ample, graphic discussion about whether Iravani’s breasts were real or fake, and all of the things one could do with them. Then a poster named Vincimus, clearly a Yalie, weighed in on Iravani’s workout attire: “Anyone who goes to the gym in the afternoon has seen her trapsing [sic] around in spandex booty shorts and a strappy tank top,” he wrote. This report didn’t satisfy Cheese Eating Surrender Monkey, who demanded, “Take your goddamned cell phone next time and snap a pic, for Chrissakes.”

Like Heller, Iravani had never heard of AutoAdmit. But she soon learned that she had been targeted and that it had popped up on Google. Iravani complained to the Yale administration but found little sympathy; one top administrator told her to tough it out and learn how to take criticism. (A spokeswoman for the school says, “We did everything in our power to assist them.”) But another Yale official, who knew that Heller had spoken to ReputationDefender, suggested Iravani contact her. Though they hadn’t known each other before (and still aren’t close), the two soon joined forces.

Iravani turned next to AutoAdmit. She complained that she couldn’t concentrate on her work, was now embarrassed to be seen in public, and had begun therapy. “I can’t tell you how much I would appreciate it if you would simply deactivate this thread and make my life go back to normal,” she pleaded in an email. “I am a nice person and don’t deserve this humiliation.” This time, Ciolli, who’d grown impatient with such complaints, snapped back in an AutoAdmit post, writing, “Do not contact me...to delete a thread, especially if I have no idea who you are and have never spoken to you in my entire life.” If he kept receiving similar requests, he warned, he would just post them all on the message board for everyone to see. The discussion about Iravani then metastasized, appearing on a website (which Cohen and Ciolli were not directly involved with) that linked to AutoAdmit called T14Talent. Without her knowledge, Iravani had been entered in a contest to name the “most appealing women” in the top 14 law schools in the country.

In the meantime, ReputationDefender launched a campaign to embarrass AutoAdmit into cleaning up its act. It put up a new website and mounted a petition drive urging AutoAdmit to police its message board and respond to complaints. ReputationDefender also contacted the deans of several law schools. After Harvard Law School students were targeted, the dean, Elena Kagan (President Obama’s choice for solicitor general), sent an email urging students to boycott AutoAdmit, which she called a “new and highly efficient mechanism for malicious gossip.”

With Ciolli’s encouragement, the online beauty pageant was quickly terminated. But ReputationDefender’s actions whipped the AutoAdmit community into even more of a frenzy, with Iravani caught in the crossfire. When one poster wrote of wanting to “titty fuck” Iravani, another, who called himself “a horse walks into a bar,” ordered, “Get in line,” and said he wanted to make an ice-cream sundae out of her, “complete with whipped cream, sprinkles, and a cherry.” Then Yalels2009 offered a series of “fun facts” about Iravani, including that she had “whored around like a feral cat.” Another contributor, Whamo, suggested Iravani had “the clap.” In the meantime, a poster retrieved a Washington Post article from 1994 relating how Iravani’s father, a former World Bank official, had been charged with using forged checks to buy her a Thoroughbred horse. Iravani was 10 years old at the time; the incident was something she had never divulged, even to her closest friends, and the night she saw it plastered online, she was upset enough to go to the hospital.

Even by the merciless standards of the message board, this post apparently crossed the line. It takes something, after all, to move “Josef Stalin” to pity. “People, this is sick,” this particular poster wrote. “Have you forgotten there’s a real human being behind this? A flesh-and-blood girl, and apparently a somewhat emotionally fragile one? This isn’t funny anymore. It’s becoming evil.” Still, feeling not just aggrieved but evidently invulnerable, the abusers kept at it. In an email sent to members of Yale Law School’s faculty on March 9 and CCing Iravani herself, one “Patrick Bateman” (the name of the serial killer in American Psycho) denounced her as a damaged character out to suppress free speech. Then someone posted the letter on AutoAdmit. For Ciolli, who’d grown progressively more frustrated with the site, the letter was the last straw, and he quit the website. When another poster begged for a cease-fire, Whamo shot back, “No way. Let’s keep pushing it!” Things intensified further when the women went public with their cause but withheld their names. First, they spoke to the Washington Post, which wrote about the matter on March 7. Two days later, Heller, her face obscured and her voice slowed, went on Good Morning America.

Someone at Google was obviously reading or watching: On March 9, the company notified Cohen (by posting on AutoAdmit) that the website had violated Google’s terms of service by placing its ads alongside adult or mature content. Google’s post cited a thread entitled “I stick my Asian dick inside white pussy at Georgetown.” Fearing that any interference would prompt the kind of mass exodus that had sunk the Princeton Review’s message board, Cohen had kept his hands off his own site. But the result, he now concedes, was that he lost his website to “parasites” and “freaks.” Even his timid, belated attempts to weed out the worst abuses, an effort Ciolli seconded, prompted open rebellion. Cohen stopped visiting the site altogether; when his girlfriend pulled it up onscreen, he walked out of the room. “Looking back, I was naive and a weak leader,” he said.

Soon, AutoAdmit was the talk of Yale Law School. People were checking the site constantly—thereby, of course, moving the scurrilous links higher still on Google. When a group called Yale Law Women held a meeting in support of Heller and Iravani, most of the law school, including the dean, Harold Koh, turned out. Quietly, the school attempted to ferret out the miscreants in its midst, going so far as to interview any gym-goers who might be able to identify the man who described Iravani’s getup. “It’s a shit storm,” one Yalie who’d posted on AutoAdmit emailed a friend. “There’s a semi-restrained witch-hunt mentality right now.”

Not everyone agreed with the women. Posters had targeted another first-year student, Caitlin Hall, so viciously—“Who will Caitlin Hall (prestigious bitch) fuck first at Yale Law?” read one thread—that she had almost decided not to come to New Haven. But Hall thought it preferable to ignore such taunts or deal with them quietly rather than turn them into a cause célèbre. Other students, including some women, considered Heller and Iravani overly sensitive and felt that Heller had overstated her employment difficulties. (She eventually landed a summer job at the prestigious San Francisco firm of Morrison & Foerster, reportedly earning $3,080 a week.) But for all of Yale’s vaunted devotion to free speech, few students felt free to speak out.

Some concerned Yale students weighed a number of options. One was finding out the firm where Ciolli would be working upon graduation and pressuring it to withdraw its offer. It turned out to be the Boston law firm of Edwards, Angell, Palmer & Dodge, which in April rescinded its offer. The message board violated “principles of collegiality and respect that members of the legal profession should observe in their dealings with other lawyers,” the firm’s managing partner, Charles DeWitt, wrote Ciolli.

There were attempts to settle, and even contact between the parties. “I’m sorry, sorry, sorry for what’s happened,” Cohen wrote Iravani in March 2007, hinting that he might take down the threads. But the rancor and distrust ran too deep. ReputationDefender had enlisted Keker & Van Nest and Mark Lemley, a professor at Stanford Law School and a top intellectual-property expert who was working with the firm. In June 2007, Heller and Iravani—identified only as Doe I and Doe II—filed their claim against 28 anonymous defendants. “Two women who have done nothing except work hard in school and show promise of making contributions to society have been targeted because of their appearance and out of spite to be the subject of pornographic abuse,” they charged. They put no price tag on their injuries but sought $245,400 in punitive damages. Through a claim of copyright infringement (based on the use of Iravani’s picture in the beauty contest), they got into federal court, where the case’s visibility and potential impact would be much greater than if it had been brought in a state tribunal.

Under Section 230(c), AutoAdmit and Cohen could not be sued. Neither, theoretically, could Ciolli, but he was nonetheless listed as a defendant—the only one charged under his real name. According to Lemley, the plaintiffs believed Ciolli had written some of the defamatory postings, making him vulnerable to a lawsuit. Ciolli counters that he was included either out of spite or to be held hostage until Cohen, over whom the women otherwise had no leverage, cleaned up his website. In November, without any explanation, Ciolli’s name was dropped from the case. “Even a middling law student at an unaccredited law school could figure out within five minutes of research that under Section 230(c), Anthony had complete legal immunity,” said his lawyer, Marc Randazza of Altamonte Springs, Florida. Earlier this year, citing the toll the attacks have taken on him and his career, Ciolli sued the two women, along with Keker & Van Nest and ReputationDefender. Ciolli’s suit is still in its early stages in federal court in Philadelphia.

In court filings, Heller declared that the online torment caused her significant emotional distress and insomnia. She said her academic and extracurricular work deteriorated and that she’d isolated herself and had to take a leave from school. For her part, Iravani claimed to have grown suspicious of men and said she felt unsafe when alone. She stopped going to the gym for fear she’d be scrutinized or photographed. Wanting to sink back into obscurity, she stopped talking in class. The various sexual smears, she argued, had estranged her from her father and aunt, both Muslims.

Sickening their experiences undoubtedly were. But had anything anyone posted actually been illegal? A judge or jury might view some posts, like the specific calls to harass Iravani, as intentional infliction of emotional distress. But many other posts, however cruel, might not be seen as extreme or outrageous enough to lose their First Amendment protection. As for defamation, the overwhelming majority of the comments could be construed as opinions, which are protected. True, some statements, such as the ones claiming that the women had venereal diseases, were by definition libelous. But even here, context matters: Courts have held that given the juvenile and hyperbolic quality of chat-room rhetoric, online comments cannot be taken as seriously as those made in real life. Matt Zimmerman of the Electronic Frontier Foundation, which defends old-fashioned free-speech rights in the online world, called most of the plaintiffs’ claims “extraordinarily, extraordinarily weak.” Their argument, he said, amounted to liability by association: that simply by participating in chats theoretically containing some unprotected speech, all posters were thereby culpable. He called that claim “wrongheaded and dangerous.”

Even after the case had been filed, flamers like ak47 were fearless, or clueless, enough to effectively offer themselves up as additional defendants, of whom the number eventually totaled around 40. “Women named...Heide should be raped,” he said in one post, before launching a new thread he called “Inflicting emotional distress on cheerful girls named Heide.”

Now the challenge before the women was to smoke out the defendants’ identities. Twice, Keker & Van Nest posted notices on AutoAdmit asking posters to come forward and identify themselves; not surprisingly, this proved fruitless. And with the approval of Christopher Droney, the federal judge who is hearing the case, Keker subpoenaed a number of the internet service providers that had carried the offending comments to AutoAdmit. This too failed to yield much, in part because many posters had taken care to send their messages from internet cafés and other public computers.

But some of the defendants could easily be found through prior postings, and some emerged in other ways. One, Vincimus—whose description of Iravani in the gym was surely one of the most innocuous of the quotes at issue—even approached Iravani on campus to confess. He is a Yale law student named Kirk Cheney, a young father who graduated from Brigham Young University. (Cheney declined to comment.) Another poster, Pauliewalnuts, who helped run the online beauty contest, is a recent Seton Hall graduate named Douglas Phillibaum. And Whamo, who had suggested that Iravani had “the clap,” is a University of Iowa undergraduate named Joe Traw.

More than the others, Traw has made his anguish over what he’d done a matter of public record, continuing to post and veering between incredulity, defiance, contrition, and abject terror. “I didn’t mean to say anything bad,” he wrote importunately. “I don’t want to hurt anyone. What the fuck do I do when I hate myself this much?” Perhaps, he thought, he’d drop out of school and go fight in Iraq. At least there, he wrote, he could die for a far worthier cause than defending what he’d done. “What I said about her was absolutely terrible, and I deserve to have my life ruined,” he wrote. When I spoke with him months later, he was still emphatically rebuking himself. He said he’d shelved plans for law school and was indeed enlisting in the military. “I said something really stupid on the fucking internet, I typed for literally, like, 12 seconds, and it devastated my life,” he told me.

For Matthew Ryan—whose alter ego, :D, claimed that Heller had herpes—the lawsuit seems to pose little concern. According to what he subsequently wrote on the message board, he had no money or reputation to defend. “I’m giddy over meeting my cheerful, big-titted accuser in court,” he wrote. Ryan, a recent graduate of the University of Texas, is trying to get his case dismissed, but he’s fine with going to trial—“I’m not a fan of frivolous, abusive litigation,” he told me—especially since his parents’ homeowner’s policy seems to cover his defense. Lemley says the case against Ryan is the women’s strongest: “When we get to trial, the only question is going to be the amount of damages.”

AK47, the defendant who had said that women named Heide should be raped, was frantic over being sued. (His real name remains known only to the plaintiffs.) “I beg you to release me from this lawsuit,” he wrote the two women, in a letter that then became part of the court file. “AutoAdmit is a fantastic waste of time, and indeed ought to be shut down, lest this sort of thing happen again. That said, I cannot and will not be dragged into this huge mess simply because I made an inane, nonthreatening and certainly nonactionable comment on the site.” His posting was, he insisted, “a suggestion, not a threat.” He warned that he would lose his job if outed; he threatened to seek help online to corroborate all of the awful things said about the two women in order to defend himself.

Heller and Iravani indeed have a formidable weapon in their arsenal: The ability to wreak havoc in the lives and careers of anyone they identify. Faced with embarrassment or ruin, Cheney, Phillibaum, and Traw quietly caved, paying amounts somewhere in the low to mid four figures in exchange for promises from the plaintiffs not to publicize who they were. But Ryan Mariner, a student at Fordham Law School, took a different strategy. Posting as “a horse walks into a bar,” he had urged others to “get in line” for kinky sex with Iravani. Mariner insists he did nothing wrong in saying this, and that his subsequent remark about ice-cream sundaes was his attempt to turn an ugly conversation in a more benign direction. Instead of ponying up, he identified himself in a court filing and dug in, spending $10,000 in legal fees. In January, the plaintiffs dropped him from the case. Mariner’s lawyer, Anthony Collins of Atlanta, called the case “a stickup.” According to Collins, “They kept threatening to identify us—that was their only leverage—and we said, ‘We don’t give a shit.’ ”

By any standard, the plaintiffs’ catch has been meager. Even with one of the country’s top intellectual-property lawyers, backed by a super-elite law firm, going after them, most of the worst offenders got off scot-free. The fact that so few prey were netted could prompt calls to modify Section 230(c), if only to give victims of internet abuse more of a chance. Brian Leiter, the professor and vocal critic of AutoAdmit, sees it coming. He calls the free pass enjoyed by Google and other carriers “a disaster” and says change is inevitable. “The point at which some senator’s daughter becomes the target of this kind of campaign of online vilification and harassment on the next iteration of AutoAdmit—something’s going to happen,” predicted Leiter, who now teaches at the University of Chicago Law School.

But Heller and Iravani’s case has already made a difference. Things have calmed down on AutoAdmit, where, Cohen says, he’s driven away the worst actors and enlisted volunteer moderators. Some posters, moreover, have announced their “retirement”; any further self-expression, they’ve concluded, is clearly not worth the risk. Thanks to the case, casual defamers—those who take potshots for sport—may now refrain out of empathy for the plaintiffs, while the more malicious may have been intimidated into silence. The case may also have helped Heller and Iravani cleanse their Google pages, as the old slurs have fallen farther down the screen. And last spring, Cohen quietly removed the offending threads. He’d have done so sooner, he says, had he been asked more nicely.

Danielle Citron, a professor at the University of Maryland Law School who has written about cyber-bullying, considers Heller and Iravani heroes for fighting back rather than retreating offline, as so many women in their position have done. Professionally, at least, the two have emerged unscathed: When she graduates, Iravani will work at one of New York’s pickiest firms—Cleary, Gottlieb, Steen & Hamilton—while Heller is said to have been hired by the International Criminal Court in The Hague.

Cohen is still selling insurance, still running AutoAdmit, and is about to branch off into selling a soft drink he invented called Vivi Smart Soda. Of the principals, only Ciolli continues to pay a price. He now finds himself in a kind of legal exile, clerking first in Guam and now in the Virgin Islands. “Nothing that I may or may not have done even remotely excuses what has been done to me,” he says. He has passed the New York bar exam, but just as Gary Clinton of Penn predicted, he must now get past the state bar’s character-and-fitness committee, which heard his case in January. Among those testifying for him at the hearing was Clinton himself. “Out of naivete or misplaced principle, he made a couple of major mistakes,” Clinton says. “But I never thought he was a mean or malicious guy.”

Punk'd by the Web

Wed, 11 Feb 2009 13:00:00 GMT

In his Los Angeles production office, Ashton Kutcher, the star of Punk’d and That ’70s Show, is leaning over a coffee table doing algebra. It’s the day before his production company, Katalyst Media, will launch a game show called Opportunity Knocks, and Kutcher is trying to make a point: Just because he can’t spell his stepdaughter Tallulah’s name doesn’t mean he’s stupid.

“I didn’t name her!” exclaims Kutcher, who is married to Tallulah’s mom, Demi Moore. “It’s not like I sat down with the wife and went through 'Should we have two l’s or one l?' She’s my stepdaughter!... I was never a good speller,” he adds. “I’m a math person.”

Kutcher has a challenge. He’s a model turned actor turned camera pitchman turned successor to Bruce Willis in the Moore household. Getting people in the business world to take him seriously is no easy task. Though he has a track record in Hollywood, producing TV shows and films, he’s now venturing outside his comfort zone to Silicon Valley.

Among his projects: partially bankrolling SaysMe, a website that allows users to create their own advertisements, and helping found Ooma, a phone company. In 2008, he introduced Blah Girls, a website featuring three gossipy cartoon teens. Later this year, he plans to produce an online series with Slide, which makes widgets that work with social-networking sites.

Yet the going has been rough. Within a few months of its launch, Ooma lost key executives and was short on cash. Traffic on SaysMe has dropped noticeably since the presidential election. And when Kutcher unveiled Blah Girls at a conference for tech startups, he got hammered for offering little in the way of new technology. A writer for Inquisitr.com suggested that Blah Girls had been admitted to the conference only because it was backed by a “C-list celebrity.”

Now Kutcher is working to prove his tech bona fides by making Blah Girls a success. So far, his proof consists of a sponsorship by Vitamin Water. Instead of ads, viewers who go to the site or log on via MySpace will see the Blah Girls drinking megabottles of Vitamin Water. If the episodes catch on and travel throughout the Web to social-networking sites, they will generate new revenue with each viewing—a model that has potential, says YouTube founder Chad Hurley. Yet it’s unclear how much money Blah Girls is making since Kutcher declines to provide details. In terms of traffic, Blah Girls in mid-January ranked 103,796 out of almost 200 million sites on the Web, according to Alexa.com, which tracks Web traffic.

Blah Girls, which is centered on three celebrity-obsessed teenagers, may seem like an unusual project for Kutcher. His private life with Moore, Willis, and their children has been chronicled endlessly, often mercilessly, in the tabloids and on gossip sites like TMZ. Yet on Blah Girls, the teens skewer everyone from Kutcher’s peers, like Jennifer Aniston and John Mayer, to children of stars, like Suri Cruise. In one episode, the girls rate celebrities as “hot” or “homeless,” with actress Heidi Montag earning a “homeless” designation because she looks as if she is “made of plastic.”

Kutcher says he got the idea for the show while driving his stepdaughters to school. “Hearing this sort of ‘Oh my God, blah blah blah’ every morning was inspiration for the voices of the characters,” he says. Yet while the Blah Girls repeat some of the more inane tidbits that circulate about actors and actresses, they also poke fun at Hollywood. At one point, they decide to become paparazzi, and Britney, one of the Blah Girls, decks a photographer who blocks her shot of Jessica Simpson.

In the tech world, Kutcher’s willingness to make light of celebrity has cut both ways. While Kutcher was seeking funding, more than one big-name investor turned him down, dismissing him as a lightweight. Even those he didn’t approach, like LinkedIn CEO Reid Hoffman, were skeptical. “I invest in Silicon Valley, not Hollywood,” Hoffman says. But in the end, Kutcher’s red-carpet connections were useful. When he needed $10 million to fund this foray into tech, Kutcher landed his key angel at the 2007 premiere party of Die Hard IV—starring Bruce Willis.Related Links
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Preventing the Next Madoff

Wed, 11 Feb 2009 13:00:00 GMT

No doubt about it, this latest Wall Street scandal season has been lush and prolific. It began with the subprime meltdown in the spring, then brought the failures of Bear Stearns and then Lehman Brothers last fall, and has culminated with the $50 billion fraud of Bernie Madoff, a sort of long, dark winter.

And so it goes throughout time. “It’s a roughly 20-year cycle,” which basically coincides with market crashes, says John Steele Gordon, author of The Great Game, a history of Wall Street’s first three and a half centuries. Seven years before our current misery came Enron and the analyst scandals. Before them, Drexel Burnham Lambert and Michael Milken, which followed Equity Funding and other scandals in a series stretching back to the Dutch tulip mania of the 1630s and probably beyond.

If this sounds hopeless, it’s because that’s exactly what it has been. The accepted wisdom is that financial scandals are an inevitable by-product of greed and human frailty—or even the price we pay for a wide-open system that supposedly gives Wall Street its competitive edge over the rest of the world. “Greed will always be with us,” says Lee Kjelleren, CEO of the Museum of American Finance, in Lower Manhattan. “We’re not going to change that.”

Except that maybe we can. Instead of accepting the scandals with resignation, what’s needed is a radically new way of looking at the problem. No more endless cycle of scandals. As a start, Wall Street should no longer be viewed as a fundamentally sound institution that occasionally runs off the track. Instead, try thinking of it as a police department in which far too many officers are on the take.

Lawrence Sherman has been studying police corruption for most of his life. Sherman, a criminologist at Cambridge University and the University of Pennsylvania, is the author of a seminal 1978 study, Scandal and Reform, that looks at a period that was as dark for the nation’s law-enforcement community as the current moment is for Wall Street.

Like financial crime is now, police corruption was then everywhere: systemic, pervasive, and difficult to uproot. The New York City Police Department, for instance, suffered from a widely acknowledged 20-year cycle of scandal, fed by organized crime and an institutional culture that encouraged dishonesty. Sherman says that cycle was broken by a combination of factors, including public outrage and a city-government commitment, that resonate today with regard to Wall Street, largely because of their absence.

John Bogle, the founder of the Vanguard Group of mutual funds, is among those who think the comparison is apt. Indeed, Bogle goes one step further, blaming bankers and traders for partly causing Wall Street’s cycles to continue. “Not to draw an analogy that’s going to make me even less popular than I am,” Bogle says archly, “but the similarity between police corruption and stock-market corruption is drug dealers with unlimited money to spend. They can make their own law.”

Until recent years, systemic corruption was a persistent issue for police forces nationwide, with cops taking payoffs from drug dealers and gamblers. The corruption was organized and institutional. It seemed so ingrained that it could not possibly be fixed. But it was—in the cities that chose to address it.

Those cities approached their corrupt police forces not as a collection of “bad apples” but as organizations that had gone off the rails. Sherman calls those forces “deviant,” in that they bypass social norms and laws “in order to achieve societally legitimate organizational goals”—bending the rules, in other words, but doing so with decent intentions.

That’s about as good a clinical diagnosis of the problem on Wall Street as one can find. Think about the scandals of the past year—the buildup of leverage, subprime paper, questionable accounting—that doomed major Wall Street firms. Their goal was to achieve profits and bonuses, legitimate aims that our society encourages. But their means deviated from social norms: By disregarding the fundamental principles of risk management, or by ignoring the stretched finances of well-intentioned homeowners trying to buy a bigger house than they could afford, these companies endangered not only themselves but the financial system as a whole.

A second variety of organizational deviants identified by Sherman—the ones with “goals that are deviant from societal norms or laws”—is the group Madoff obviously belongs to, as do the deceitful boiler-room
subprime-lending operators that encouraged people to lie on their mortgage applications to get the deals done. Sam Antar, a convicted securities swindler, believes people like Madoff often don’t set out to become criminals. “He just started the scam and then it built on itself and he couldn’t get out,” suggests Antar, who served as chief financial officer of consumer-electronics retailer Crazy Eddie in the 1980s, when it was involved in several fraudulent schemes; now he lectures law enforcement on how to prevent white-collar crime.

Police corruption thrives when the watchdogs—the municipal government and the senior police officials—are indifferent or ineffective. Antar says the parallels with the Securities and Exchange Commission are compelling. The failures of its enforcement staff, starved for resources under chairman Christopher Cox, mirror the inability in past years to confront police corruption. Those failures were documented by Sherman and chronicled in such books as Robert Daley’s Prince of the City and Peter Maas’ Serpico, the story of a whistleblower (played by Al Pacino in the 1978 film) who fought NYPD corruption. Recently, the SEC’s handling of whistleblowers has also come under scrutiny because of the way it ignored Harry Markopolos, who had tried again and again since 2000 to call the agency’s attention to Madoff and his family.

These attitudes have parallels in the street code of cops to keep silent about corruption in their ranks and to ostracize “rats.” Cox’s famous pre-meltdown verdict on Bear Stearns—“We have a good deal of comfort about the capital cushions that these firms have been on,” he told Congress—seems mind-boggling in retrospect, but it is in keeping with a police chief defending the integrity of his officers. Antar, who spent his formative years cooking books two decades ago, told me that if Cox was on the job back then, “I would still be in business as the criminal CFO of Crazy Eddie today.”

No fight against police corruption has ever been successful without an unsparing examination of the problem. Currently, the details of what happened on Wall Street remain murky. The decision not to bail out Lehman Brothers is clouded in haze, with conflicting accounts leaking out of the U.S. Treasury Department and the Federal Reserve. What triggered the demise of Bear Stearns and Lehman continues to be disputed. The SEC’s only palpable response to the crisis was a crackdown on shorting—which Cox later called the biggest mistake of his tenure. The action, he said in December, was taken under pressure from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Over the years, 9/11-style commissions have been created to probe such issues and events as the John F. Kennedy assassination, the attack on Pearl Harbor, violence in America, and the Challenger space-shuttle explosion. Surely the banking and regulatory practices that threw the country into a recession deserve the same kind of analysis, probably from an agency with more teeth than the Bush-era SEC.

Launching just such an investigation would give President Obama an opportunity to prove that his campaign slogans about change also apply to the financial world. “Obama has everything to gain by appointing a commission that will propose bold restrictions on the business community,” Sherman says. But he concedes that “there’s a lot of competition out there for being the originator of proposals to introduce a reform package for Wall Street.”

In the 1970s, when municipalities were grappling with corruption that had been around for generations, it became apparent that merely punishing past corrupt acts didn’t work. What did work were policies and intelligence-gathering efforts that anticipated the corruption.

When it comes to Wall Street, the SEC and other regulators tend to address wrongdoing after the fact, sometimes years later. That was the agency’s defense in response to accusations that it did nothing to catch Madoff, and in a way, it had a point. The SEC is not set up to conduct investigations ahead of time. It comes in afterward and deals with securities-law transgressions, in most cases through “consent decrees” in which corporate or banker defendants pledge not to repeat offenses they didn’t admit to committing in the first place. The agency’s aim is to eliminate the need for costly litigation while still deterring other possible offenders.

The problem is that punishing people for financial crimes they’ve already committed doesn’t work. Ernest Poortinga, staff psychiatrist at the Michigan Center for Forsenic Psychiatry, tells me that an exhaustive study of white-collar crime found that “there’s absolutely no difference between white-collar criminals and common thieves, other than the opportunity.” The three-card-monte dealer in the park can’t start a Ponzi scheme—but only because he’s not running a Wall Street firm with a lot of naive investors eager to give him money. The law-enforcement approaches toward the two criminal types should be the same.

People like Madoff don’t think about punishment, much less the “threat” posed by an SEC bureaucrat finding out about them. “They don’t think they’re going to get caught,” Poortinga says. Ex-crook Antar says Madoff had no reason to think he would get caught, despite the examples provided by Ken Lay, Dennis Kozlowski, and others. “Once you take from Peter to pay Paul, there’s no way out; it keeps on pulling you back in and you’re stuck,” Antar says. And to actually pull off a scam like Madoff’s takes a degree of self-confidence that makes one heedless of the threat of consequences, he notes. “There is an arrogance to being a criminal that most people don’t possess,” Antar says. “That’s why criminals don’t think they’re going to get caught. It’s a bit like a speeding ticket. People see the cop and slow down, but then they speed up again.”

The SEC has recognized the need to be preemptive—on paper. In 2004, the agency established the Office of Risk Assessment, whose purpose was “to develop new ways to process and analyze information in order to properly assess market risks associated with an increasingly complex market environment.” The problem is that the office, which began with seven people, had withered to a grand total of one staff person by February 2008, when the SEC announced an “expansion.” Today, it again has seven employees, although they are part of a group of 37 people agencywide looking at preventing future crimes.

Financial firms need to suffer some harsh consequences for past, present, and future violations of the public order. Statistics have shown that effective police reform required that large numbers of corrupt police officers were quickly, and publicly, dismissed. Dealing with Wall Street, however, will require something a bit different. After all, many of the executives responsible have already lost their jobs (as have thousands of nice young kids with MBAs and student loans to repay). The worst of them will probably be prosecuted—but that doesn’t really matter, as we’ve seen that punishment does not deter financial wrongdoing. Jail sentences will no doubt be handed to the most egregious offenders in the subprime crowd and to Madoff, assuming he doesn’t somehow beat the rap.

We need to put in place an incentive that will change the way Wall Street behaves. Financial penalties should be increased so that the kind of pain we’ve experienced is shifted to the banks if they screw up again. When a bank or a hedge fund violates the public trust in a major way, fines should be expressed not in dollars but as a percentage of annual revenue or profit, on an escalating scale. If companies can’t afford to pay the fine, they can be nationalized, as has happened in Europe with far less provocation.

If anything can pull us out of the doldrums, perhaps it’s the fact that institutions far nobler than Wall Street have faced corruption for a very long time and still managed to put a stop to it. While Sherman was working on his book in Britain in the 1970s, firms involved in supplying the Royal Navy were prosecuted for kickbacks. “When the arrangements were researched,” he recalls, “it turned out that it had been going on since the 18th century.”