Monday, August 1, 2022

Ruling against Visa for monetizing child porn; Elon Musk's sealed countersuit against Twitter; More redwoods and driving the Oregon coast

By Whitney Tilson


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1) I have written numerous times (summarized in my June 18, 2021 e-mail) about how two of my friends – New York Times columnist Nicholas Kristof and hedge fund titan Bill Ackman – have fought against the sexual abuse and exploitation of minors (mostly girls), especially via porn websites.

I've chosen to discuss this issue in my daily e-mails in part because I cover things I care about... and – perhaps because I have three daughters – this definitely qualifies.

But this is also big business – an estimated 8% of all web traffic is to porn sites – and now has ensnared the 12th and 19th most valuable companies in the world, Visa (V) and Mastercard (MC).

Kristof explains why (for context, read his original story published in December 2020: The Children of Pornhub): Holding Pornhub Accountable for Monetizing Child Rapes. Excerpt:

A federal judge in California has issued a landmark decision [click here to read it] to allow a lawsuit to proceed against Pornhub and against Visa for together monetizing videos of child rapes...

Judge [Cormac] Carney also seemed contemptuous of Visa's arguments that it was an innocent party and should not be implicated:

Plaintiff's case focuses on the monetization of child porn after it was made and posted to MindGeek's sites, which, if what Plaintiff alleges is true, Visa knowingly took part in. Plaintiff is suing MindGeek for – again in the words of section 1591 – "benefit[ting] financially" from the child porn featuring Plaintiff, knowing or in reckless disregard of the fact that Plaintiff was a minor when such videos were produced, in violation of section 1591(a)(2). That is where Visa enters the picture in full view...

Why would MindGeek allow Plaintiff's first video to be posted despite its title clearly indicating Plaintiff was well below 18 years old? Why would MindGeek stall before removing the video, which Plaintiff alleges had advertisements running alongside it? Why would MindGeek take the video and upload it to its other porn websites? Why, after being alerted by Plaintiff that the video was child porn, would it allow the video to be reuploaded, whereafter advertisements were again featured alongside the reuploaded videos? And why did Plaintiff have to fight for years to have her videos removed from MindGeek's sites? Plaintiff claims that MindGeek did these things for money, and Visa knowingly offered up its payment network so that MindGeek could satisfy that goal.

Political commentator David French also wrote about this case: A Crucial Court Case Exposes the Darkness of America's Worst Industry. Excerpt:

I'll give you one more fact – one that should shock the conscience of every decent American. After Kristof's report, Visa temporarily suspended its business with MindGeek, and MindGeek responded by removing "over 10 million unverified videos from its [sites], constituting over 80% of its content."

Sit with that for a moment. Over 80% of MindGeek's content was suspect enough to remove.

But Visa soon went back into business with Pornhub and restored its services for both MindGeek's paid sites and its advertising for all sites. [The plaintiff] is now attempting to hold Visa at least partly accountable for her ordeal.

Finally, Ackman published this thread on Twitter:

Yesterday, a Federal judge rendered a decision that no one has likely read. You should. The lawsuit is against MindGeek, the largest internet porn company in the world, and Visa. Both are culpable. Visa's conduct here is inexcusable, likely to cause the company incalculable financial and reputational damage and create serious Caremark personal liability and potential criminal liability for the board.

The decision summarizes the life destruction of a 13-year-old girl due to a sex video she was pressured to make by her then boyfriend, which in turn was uploaded to one of MindGeek's sites. I learned about the story originally from The Children of Pornhub, which I shared on Twitter. In real time I attempted to contact Visa's and Mastercard CEOs.

I was successful in reaching the CEO of MC who took my concern seriously. Within 5 days, MC had shut down the site. Five days later Visa followed suit. Within a day or so, MindGeek removed >10m illegal videos, 80% of its content.

Without Visa/MC, MindGeek was toast as PayPal (PYPL) had shut them down a year earlier and American Express (AXP) does not do porn. Quietly, however, a few weeks later, both Visa and MC reauthorized MindGeek, but no longer allowed bitcoin payments on the free "tube" sites where anyone can upload content.

Instead, they continued to allow their cards to be used for B2B business, that is, the purchase of ads on these same tube sites and for subscriptions to "premium" content, together about 90% of the business. Hours later, MindGeek began restoring its illegal content library.

The only age verification MindGeek now uses before accepting a video is checking the ID and age of the uploader, often the perpetrator of the crime.

In its defense, Visa claims it has no liability, protested that the payments industry would collapse if it did, and attempted to dismiss the suit taking comfort in its statement, "Maintaining a neutral stance under the law is vital for the free flow of commerce."

The judge, in a carefully reasoned decision, disagrees:

Visa is being kept in this case because it is alleged to have continued to recognize as a merchant an immense, well known, and highly visible business that it knew used its websites to host and monetize child porn.

Moreover, Visa allegedly had considerable sway over that business's decision-making, a conclusion amply supported by [the] allegation that MindGeek removed 80% of its content when Visa suspended its business with MindGeek.

Visa is not being asked to police the billions of individual transactions it processes each year. [Visa's argument] It is simply being asked to refrain from offering the tool with which a known alleged criminal entity performs its crimes. That is not a tall order and does not spell out an existential threat to the financial industry.

At this early stage of the proceedings, before Plaintiff has had any discovery from which to derive Visa's state of mind, the Court can comfortably infer that Visa intended to help MindGeek monetize child porn from the very fact that Visa continued to provide MindGeek the means to do so and knew MindGeek was indeed doing so. Put yet another way, Visa is not alleged to have simply created an incentive to commit a crime, it is alleged to have knowingly provided the tool used to complete the crime.

Visa is a Delaware Corp. and Caremark liability applies. In short, directors can be held personally liable if the company's product or service causes harm and the board has provided inadequate oversight to monitor the potential for harm. The harm here is enormous.

Think 10m++ videos of child porn and the destruction to the untold number of lives this has caused.

The TVPRA [The Trafficking Victims Protection Reauthorization Act of 2008] Federal criminal child sex trafficking statute applies to "whoever knowingly benefits, financially or by receiving anything of value, from participation in a venture which has engaged in [child sex trafficking]" or anyone who conspires with any such person.

Alfred Kelly, Visa's CEO, waxes eloquent in his annual letter about Visa's "noble" purpose, commitment to an "inclusive economy" and "economic opportunity for all." He then trumpets the hiring of a Chief Diversity Officer in May 2021 reporting directly to him.

Mr. Kelly should know that the majority of child trafficking victims are from lower-income families including Black and Brown families. I would recommend that Visa's board, and separately Mr. Kelly, should hire independent white collar and criminal counsel.

They might also review Visa's ESG policies.

Et tu, Mastercard?

My take: Cheers to Kristof and Ackman, and jeers to MindGeek and its enablers, Visa and Mastercard!


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2) Another story I've been following closely is Elon Musk's attempt to weasel his way out of acquiring Twitter (TWTR) for $54.20 per share, as he agreed to do earlier this year. (Click here for a PDF of my previous writings about this.)

On Friday, Musk filed a 164-page countersuit, but it hasn't been made public yet. In a Twitter thread, user PlainSite explains what's going on:

It's not under seal. It's a confidential filing. There's a difference. Delaware does this a lot.

Here's what is going to happen. Next week-ish a Public Version will be posted to the docket. It will have a bunch of redactions. They will probably be related to Twitter's confidential methodology of handling fake accounts, as Elon is doubling down on his losing strategy.

Elon and his proxies... have already made clear that they think airing Twitter's procedure for managing fake accounts is a brilliant strategy. So Musk actually wants this stuff in the open, but he's contractually obligated not to make it public.

Yawn. Who cares.

Twitter is not the platform with the real fake account problem. Facebook $FB $META is.

Could $TWTR do a better job with managing account safety? Absolutely. No one is going to argue with that. But it's a completely different problem and one that has absolutely nothing to do with the fact that Elon Musk signed a contract to buy Twitter, Inc. at $54.20 per share.

3) On Friday, I wrapped up my five-day, 1,100-mile trip in southern Oregon and northern California...

I started in Eugene (G on the map below), visited Crater Lake National Park (A) on Monday, climbed Mount Shasta (B) on Tuesday, visited Lassen Volcanic National Park (C and D) on Wednesday, saw the magnificent redwood trees in Redwood National and State Parks (E) on Thursday and Friday, and then drove up the scenic Oregon coast (F) back to Eugene. From there, I caught an evening flight to San Francisco, where I spent the weekend seeing family and friends before flying home today.

Below are some pictures from Friday, which started with a very cool drive winding through the redwood trees (video here) to the trailhead of a five-mile round-trip hike to see the remarkable Boy Scout Tree, which is two trees fused together with a combined width of 23 feet.

I then drove another few minutes and walked the 1.5-mile Stout Grove Loop Trail, which had more beautiful redwoods, plus a quick diversion to a river where I took a refreshing dip.

I then drove five hours along the coast back to Eugene, stopping occasionally to take pictures of the stunning coastline.

Best regards,

Whitney

P.S. I welcome your feedback at [email protected].

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Empire Financial Research

Whitney Tilson

Empire Financial Research founder and CEO Whitney Tilson is the editor of the Empire Investment Report, a monthly investment advisory that focuses on cheap, high-quality stock ideas.

Whitney graduated with honors from Harvard University and Harvard Business School, where he earned an MBA and was named a Baker Scholar. Whitney spent nearly 20 years on Wall Street, during which time he founded and ran Kase Capital Management, growing assets under management from $1 million at inception to a peak of $200 million.

Once dubbed "The Prophet" by CNBC, Whitney predicted the dot-com crash, the housing bust, the 2009 stock bottom, and more. Now, he's sharing his secrets and strategies with followers of his latest endeavor, Empire Financial Research.

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