A few months ago, I wrote that “one of the main problems in finance is the principal-agent problem, and one of the main forms that it takes is steak dinners.” You know the deal. You want something from a company or government agency, but you negotiate with that company or agency in the form of a person, some particular executive or official who decides whether to give you the thing. The company or agency has purposes of its own, but the person is a person, and he enjoys a steak dinner. If you discuss your issue with him over a nice steak dinner that you pay for, he might be grateful to you personally and give you what you want. Ordinarily I use feminine pronouns for generic hypothetical people but here, for reasons that will soon become apparent, our hypothetical agent is a man.

When I wrote about this, I was describing the modern, and perhaps somewhat euphemistic, form of the problem. Within living memory, I could easily have written that “one of the main problems in finance is the principal-agent problem, and one of the main forms that it takes is visits to the strip club.” You know the deal! The agent whose favor you want might like steak, but he might also like lap dances, particularly after his fourth martini at the steakhouse. If you buy him a steak, he might be vaguely grateful to you. But if you buy him a lap dance, he will be grateful to you and also afraid of you. You are not merely friendly business acquaintances; you are seedy co-conspirators. You have seen him do stuff that he would not want his boss or his wife to know about. He’d better give you that contract.

That’s not any sort of advice! Hoo boy. And my sense of the financial industry in the US in 2025 is that vanishingly few deals get sealed at the strip club. That is from the bad old days; it is not current best practices. (Current best practices are steak and golf and also, like, the sauna?)

But there is one industry in which the strip-club form of the principal-agent problem is apparently alive and well. Can you guess what it is? It’s the strip club industry. Come on with this!

New York Attorney General Letitia James [yesterday] announced the indictments of top executives of RCI Hospitality Holdings, Inc. (RCI), a company that owns and operates strip clubs throughout the country, for their roles in a major, multimillion dollar criminal tax fraud and bribery scheme. An investigation by the Office of the Attorney General (OAG) revealed that RCI executives bribed an auditor with the New York Department of Taxation and Finance (DTF) to avoid paying over $8 million in sales taxes to New York City and the state from 2010 to 2024. ...

The OAG’s investigation revealed that RCI and its top executives bribed a former DTF auditor and supervisor, in exchange for favorable treatment during at least six different sales tax audits spanning over a decade. The auditor received at least 13 complimentary multi-day trips to Florida where he was given up to $5,000 per day for private dances at RCI-owned strip clubs, including Tootsie’s Cabaret in Miami. RCI executives paid for the auditor’s hotels and restaurant visits during these trips as well. Additionally, on at least 10 occasions since 2010, Timothy Winata, RCI’s controller and accountant, traveled to Manhattan from Texas to provide the auditor with illegal bribes at RCI’s three Manhattan clubs, Rick’s Cabaret, Vivid Cabaret, and Hoops Cabaret and Sports Bar.

Here is the indictment, which alleges that the bribes both concerned, and were paid in, “Dance Dollars.” The Dance Dollars are what they sound like; New York takes the position that they are subject to sales tax, but allegedly RCI didn’t collect enough tax on them:

At all relevant times, the RCI New York Strip Clubs sold “Dance Dollars” to their customers. Dance Dollars are and were redeemable at the RCI New York Strip Clubs for entertainment and amusement and for use of the facilities, including private dances. The RCI New York Strip Clubs also charged their customers a service charge of 20 to 25 percent in addition to the face value of the Dance Dollars. As such, both the sale of Dance Dollars and the service charge imposed by RCI qualified as an “admission charge” to a “place of amusement” and were subject to a combined sales tax rate of 8.875 percent for the City and State of New York and the Metropolitan Commuter Transportation District surcharge. The conspirators willfully failed to and caused the RCI New York Strip Clubs to fail to collect from their customers and pay to the State of New York sales tax on such sales despite being aware that the collection and payment of such taxes were legally required.

So an auditor from the New York Department of Taxation and Finance (who has since retired, and whose name is redacted in the indictment) came to the clubs to check up on whether RCI was properly paying taxes on its sales. RCI’s first thought about this was apparently that they should keep the auditor out of the clubs as much as possible, presumably because the more time he spent in the club, the more taxable transactions he would witness and the worse that would be for their audit. So, steak dinners:

On June 15, 2016, Winata texted [RCI director of operations Ahmed] Anakar: “Ed, can i have $300 payouts? I plan to take him out for dinner after this to minimize time in club.”

On second thought, though, RCI apparently realized that the more time he spent in the club, the more lap dances he would witness and the better that would be for their audit. So they allegedly started spending more time with him in the club:

On June 15, 2017, Winata texted Anakar: “Ed, we are at Rick’s, just finished prelimimary discussions on audit scope and lunch. They said they would work with me, but at the same time, gave me copies of court rulings??? He has his staff with him. He had to play tough, I guess. He would stay after his staff left. We may need to pamper him more this time.” …

On April 10, 2018, Winata texted Anakar: “Ed, good evening! I made a mistake informing [the auditor] that I got here today so I am here at Rick’s with him. Would you approve $1000 for tonight? I will try not to use it all. Whatever leftover, I will use it tomorrow.” …

The auditor apparently got used to this sort of treatment. I feel like tax auditors and the companies they audit are normally somewhat antagonistic, but when RCI settled an audit, the auditor started making plans to celebrate with them:

On December 12, 2018, [the auditor] texted Winata: “Congratulations to you my friend, you have done a wonderful job. Thanks for your consent and today we received your down payment check. That’s the way people do business in this country. Everyone is happy. You deserve a promotion .. keep the good work and we will Clebbrate in Florida early next year. Thanks for your cooperation.” 

One gets the sense that the RCI executives did not particularly want to … celebrate the settlement of a tax audit … with their tax auditor … but I suppose a deal is a deal:

On February 13, 2019, Winata texted [RCI Chief Executive Officer Eric] Langan: “Eric, [the auditor] (NY sales tax auditor) asked if we can go to FL at end of month. He reminded me that I have been too quiet after the settlement. I told him I have been busy with K and Q. Is it OK? Please inform.”

On February 13, 2019, Langan texted Winata: “Whatever you think is fine.”

On February 16, 2019, Winata rented and paid for hotel rooms for himself and [the auditor] in Hollywood, Florida for February 26, 2019, to March 1, 2019. ...

On February 27, 2019, [the auditor] texted Winata: “I am back from dancing . I need some more dancing dollars.”

This continued for years!

On February 23, 2022, [the auditor] texted Winata, in part: “This was the best trip I had in Florida. The girls were very beautiful and nice. On Thursday night there so many beautiful women. That’s why I do many lap dances instead of going to the room. I hope we can have another trip before the Summer. Thanks again for making making the trip great and better before.”

RCI was allegedly doing all of this to save money on sales taxes, but it’s pretty clear that they did not enjoy any of it:

On June 15, 2018, [Rick’s manager Shaun] Kevlin texted Anakar: “Hopefully he really makes something happen” and “So many sketchy people in the public sector.” ...

On or about September 1, 2023, at 6:44 p.m., [RCI Chief Financial Officer Bradley] Chhay emailed Langan and Anakar with the subject line “Fwd: NY Sales Tax Audit” and wrote: “Wow. Tim is clutch. But it did come with conditions. I’ll tell you when I talk to you. Tim asked if this can be his last one. No more dealing with this type.”

On or about September 1, 2023, at 6:44 p.m., Chhay texted Langan and Anakar: “Tim got the guy to $47k in vivid New York. But owes him a couple trips ed. And he said he has to keep his word. I’ll update ya.”

Yeah one problem is that if you bribe your auditor with trips to the strip club, that seems like a crime. But another problem is that you have to go to the strip club with your auditor.

The Dallas Morning News is “Texas’ leading daily newspaper with an excellent journalistic reputation, intense regional focus and close community ties.” It is also a public company, DallasNews Corp., with an equity market capitalization of about $85 million. [1] It has dual-class stock and is controlled by its founder’s family. In this case, Robert Decherd — a newspaper guy and the great-grandson of the founder — owns 12.5% of the economic interest in the company, but controls 55% of the votes.

This arrangement is pretty common in media companies, and it is normally framed as a way to insulate the journalists from the pressures of the market. The New York Times and News Corp. have similar structures, and the Times explains:

Central to our governance is our dual-class capital structure that includes Class A stock, which is publicly traded, and Class B stock, which is controlled by the Ochs-Sulzberger family trust. The primary objective of this trust is to maintain the editorial independence and the integrity of The New York Times and to perpetuate it “as an independent newspaper, entirely fearless, free of ulterior influence and unselfishly devoted to the public welfare.”

In 2022, Elon Musk, the world’s richest man, decided he wanted more control over public discourse, so he lobbed in an offer to buy Twitter Inc. at a premium. Twitter’s management and employees had some doubts about what Musk would do to their product, but those doubts had absolutely no weight: Twitter’s board considered only whether Musk’s offer was a good deal for shareholders, decided that it was, and signed a deal. The shareholders enthusiastically agreed that Musk’s deal was better for them than remaining independent, and about 99% of them voted in favor of the merger. [2] And now Musk owns Twitter, and gets to do what he wants with it, and does. 

He paid about $44 billion for Twitter. The market capitalization of the Times is only about $9.5 billion. If he wanted further control over public discourse, the Times would be a relatively cheap target. But he can’t buy the Times: The whole point of the dual-class structure is to prevent that. The point is that, if some bidder offered to buy the Times at a large premium, the Ochs-Sulzbergers could say no, even if it was a good deal for shareholders, even if all the other shareholders wanted to sell. The family trust can vote down any merger it doesn’t like, and in making its decision it can — and has said it will — consider mainly “the editorial independence and the integrity of The New York Times,” not shareholder value maximization.

Same with the Dallas Morning News, except that the Dallas Morning News is actually in the middle of a takeover battle. Not with Elon Musk. But late last year, DallasNews’s board of directors started thinking about selling the company. [3]  Pretty much the first thing they did was talk to Decherd, who “indicated that he would support a sale transaction only if he believed that the Company’s commitment to distinguished journalism would continue under new ownership.”

So they went out and talked to a few potential buyers, including Hearst Newspapers and “a high net worth individual, Party A, whom Mr. Decherd believed had journalistic values similar to those of the Company.” Eventually they reached a deal with Hearst, and in July they announced the merger. The price was $14 per share in cash, “a premium of 219% based on the closing price of DallasNews’ common stock of $4.39 per share on July 9, 2025,” and more importantly:

Robert W. Decherd, DallasNews Corporation’s former board chairman, president and chief executive officer during a career spanning 50 years, and current owner of a majority of the voting power of DallasNews Corporation stock, said, “The News’ 140-year commitment to distinguished journalism has been extraordinarily important to the evolution of Dallas as one of America’s greatest cities. We have generations of News employees to thank for this. I’m confident that the path forward with Hearst Newspapers assures The News’ ability to continue informing and strengthening North Texas for many years to come.”

Two weeks later, MediaNews Group, a newspaper company owned by Alden Global Capital, lobbed in a bid at $16.50. Which is more than $14. But Alden has a … certain reputation. The Times said at the time:

MediaNews Group is a subsidiary of Alden Global Capital, an investment firm that has bought dozens of newspapers around the country, often cutting costs by shrinking newsrooms through layoffs.

“A Secretive Hedge Fund Is Gutting Newsrooms: Inside Alden Global Capital” is an Atlantic headline from 2021. MediaNews said nice things about preserving the Dallas Morning News, but Decherd wasn’t buying it. From the merger proxy:

On July 25, 2025, Mr. Decherd delivered a letter to the Board stating, among other things, that (i) from his perspective, the terms and conditions of the [Hearst] Merger are superior to any alternative scenario he can envision, (ii) he plans to honor the agreement he made to vote in favor of the Merger and looks forward to the Merger being consummated at the soonest possible time and (iii) there are no circumstances under which he would vote for or support the Alden Proposal. Mr. Decherd indicated that he is focused on the well-being of The Dallas Morning News, the quality of its journalism, and The News’ role in the city of Dallas.

The board went back to Hearst and got some more money out of them, but it brushed off Alden:

In reaching its determination to reject the Alden Proposal, the Board noted that because the transaction contemplated by the Alden Proposal could not be consummated without Mr. Decherd’s support, and Mr. Decherd had stated that there was no scenario in which he would vote in favor of a sale of the Company to Alden, the Alden Proposal was not reasonably likely to be consummated and, as a result, the Alden Proposal did not constitute a Superior Proposal and was not reasonably likely to lead to a Superior Proposal. In addition, the Board recognized its ability to consider other factors under Texas law and additionally determined to reject the Alden Proposal because of its belief that, based on Alden’s history of acquiring and operating other newspapers across the United States, a sale to Alden or an affiliate of Alden would harm both the Company and the Dallas-Fort Worth and North Texas communities, as the Company would be unable to maintain the traditions of journalistic excellence that it has upheld over its 140-year history.

Since then, both sides have raised their bids again. The Hearst deal is currently at $16.50, and yesterday Alden raised its bid to $20, saying:

Our proposal speaks for itself with a whopping approximately 21% premium to Hearst’s “best and final” proposal. The path to maximizing value and preserving the future of The Dallas Morning News is clear, and there is no further reason for delay. …

As the largest private newspaper company in the United States, we understand the unique role of The Dallas Morning News in North Texas, and we remain committed to maintaining the print edition and protecting the paper’s editorial freedom so this iconic institution continues to serve its community with independence and integrity.

But the basic situation hasn’t changed. The Alden deal would clearly be better for shareholder value — $20 is more than $16.50 — but Decherd thinks it would be worse for journalism, and he gets to say no. “Having retired from the Board in September 2023 and having had no formal role related to the Company since then, I have no fiduciary responsibility,” he told the board: He doesn’t have to maximize shareholder value. [4]  He’s a yes on Hearst and a no on Alden, so there’s no Alden deal.

That doesn’t necessarily mean there’s a Hearst deal. The awkward fact is that, to get any merger done, the company needs the approval of two-thirds of the regular, low-voting shares; Decherd only owns 1.6% of those. Presumably most of the public shareholders care more about the extra $3.50 than they do about Decherd’s journalistic preferences. They don’t get to vote on the $20 Alden deal; they only get to vote on the $16.50 Hearst one. They could vote against it, but DallasNews has said that, if the Hearst deal is voted down, then there’s no deal: “If the Hearst Merger is not approved by shareholders, we will continue to operate DallasNews as an independent organization.”

You don’t have to believe that; you might bet that, if the shareholders vote no on Hearst, the board might go back to Alden. But that seems like a risky bet. “To be clear,” says the company, “Mr. Decherd has stated that there is no scenario involving Alden or its affiliates as a buyer for DallasNews which he would support.” Glass Lewis, the proxy advisory firm, also recommended that shareholders vote for the Hearst deal, saying that  “rejection here would functionally be a matter of principle, and would not chart a particularly clear path to securing greater value from Hearst or any other party, including Alden.” The stock is trading below $16, suggesting that nobody expects to do better than the Hearst deal. The shareholders know that shareholder value is not all that’s important here.

In general it is good to invest in a hot initial public offering. If a hot tech startup goes public and prices its IPO at, say, $40 a share, it will probably trade up when it opens for trading the next day. (This is called an “IPO pop.”) If you buy shares at the IPO price ($40), you can sell them the next day at a higher price (say, $45) and make a quick profit. This is not a risk-free profit — some IPOs trade down — but it usually works.

The problem, for you, is how to get shares of the hot IPO. The shares of the hot IPO are allocated (by the tech company and its bankers) to favored investors. What investors are favored? Traditionally, hot IPO shares go mostly to institutional investors, though that is changing, as we have discussed, because retail investors are becoming more important. As we have also discussed, traditionally hot IPO shares go mostly to long-term investors, asset managers who plan to hold the shares for years and be long-term partners for the company. If you’re a hedge fund and you’re like “my business is to get IPO shares and flip them the next day for a quick profit,” you’re not going to get a lot of IPO shares. [5]

What can you do if you don’t get a call from the bankers? Well, you can invest in professionally managed mutual funds, because they are the sorts of long-term institutional investors who get allocations in hot IPOs. Or for that matter you can invest in exchange-traded funds. For instance, Cathie Wood runs ARK Invest, an exchange-traded-fund firm, and is a popular celebrity investment manager; she seems to be able to get allocations of hot IPOs for her ETFs. You can buy an ARK ETF — like ARK Innovation, the flagship fund (ticker ARKK), or ARK Fintech Innovation (ARKF), a smaller and more specialized fund — and participate in the IPO upside.

That is not a perfect solution, though, as the ARK funds mostly own other stuff, besides the hot IPOs, and, uh, they do not have an unmixed record of picking only stocks that go up. If you buy shares of an ARK fund ahead of a hot IPO, you get, like, 1% exposure to that hot IPO and 99% exposure to other stuff that you might not want.

The ARK ETF’s holdings are public, though, which suggests a trade. Buy $100 of an ARK ETF ahead of a hot IPO, sell $100 worth of the underlying assets, and you are left with only the ETF’s exposure to the hot IPO. Then, the day after the IPO prices, the ETF will go up by just a bit more than the other underlying assets, [6]  because now the ETF will hold the old underlying assets plus a bit of the hot IPO, which will probably trade up. And then you reverse the trade: You sell the ARK ETF and buy back the underlying assets, leaving you with just a synthetic form of the IPO pop.

This seems like a lot of trouble to go to. Here’s a more efficient version. ETFs generally allow investors to create new shares in-kind: If you deliver $100 worth of the ETF’s underlying assets, the ETF will hand you back $100 worth of its shares. And vice versa for redemptions: If you deliver $100 of ETF shares, you can get back $100 of underlying assets. (ETFs do this directly only for certain “authorized participants,” big market makers like banks and proprietary trading firms, so it helps if you are an AP; if not, maybe an AP will intermediate this trade for you.)

So let’s say that an ARK fund — say ARKF, the fintech one — has $1 billion of assets under management. (The actual number is about $1.3 billion as of this morning.) You think that it will get a $20 million allocation in a hot fintech IPO, representing about 2% of assets under management. You call up ARKF [7] a couple of days before the IPO and say “hey, I will give you $1 billion of your underlying assets in exchange for $1 billion of new shares.” ARKF says “sure” — that’s life in the ETF business — and you do the trade. Now ARKF has $2 billion of assets ($1 billion from before, $1 billion from you) and you own 50% of it.

Where did you get that $1 billion of underlying assets? Well one possibility is that you spent $1 billion buying them, but it seems like there should be a better answer. The better answer is: You borrowed them. You went to the securities lending market, posted $1 billion of cash collateral, and borrowed $1 billion of fintech stocks to deliver to ARKF. You are effectively short selling those fintech stocks to ARKF, only instead of getting back cash (as you would if you sold them) you are getting back ARKF shares.

This is a better answer for two reasons. One is that you don’t have to buy any stocks, so you don’t push up the prices: You get your stock in the stock lending market, not in the stock market. The other is that you’re not long any stocks: You don’t own the $1 billion of fintech stocks; you just borrowed them for a bit.

Then the IPO happens, ARKF gets $20 million of IPO shares, [8] and the shares double on their first day. That leaves ARKF with $2.02 billion of assets (the $2 billion it had already, plus $20 million of gains on the IPO pop). Your shares are now worth $1.01 billion. You go back to ARKF the next day and redeem your $1.01 billion of shares for $1.01 billion of underlying stuff (including $20 million of hot IPO shares). You deliver $1 billion of underlying stuff back to your securities lenders, [9] leaving you with a $10 million profit. 

(This process of creating a bunch of shares of the ETF, only to redeem them a day or so later, is sometimes called a “ heartbeat,” and is normally done to defer taxes on the ETF’s own trading. Here, though, there’s a different purpose.)

If ARKF’s other trades went wrong in those few days, that doesn’t affect you. If the underlying stuff fell 10%, then your shares are only worth $910 million ($1 billion minus 10% plus that IPO profit), but you only have to deliver back $900 million of underlying stuff, so you still have your profits. You are exposed only to the IPO — to the risk of ARKF getting an allocation, and to the risk of the IPO going down rather than up — and not to the rest of ARKF’s assets. You are perfectly hedged, because you borrowed ARKF’s assets.

This seems to be a real trade now. At the Financial Times, Robin Wigglesworth and Costas Mourselas reported last week:

ARK Invest’s flagship fund has abruptly ballooned by $3.5bn ahead of the initial public offering of payments company Klarna, echoing a similar phenomenon around last month’s flotation of cryptocurrency exchange Bullish.

The assets of the ARK Innovation ETF — an exchange traded fund managed by the investment manager’s head Cathie Wood — have jumped from $7.3bn at the start of the week to $10.8bn at the end of Thursday, according to Bloomberg data. …

Traders said the moves appear to be tied to the long-awaited IPO of Klarna on Wednesday, with one or several investors jumping into the ARK ETF on the hopes of securing some of the resulting windfall before likely exiting again in the coming days. The payments company’s shares rose almost 15 per cent on their debut.

“This ETF trade is one of the sharpest, bare-knuckled trades I’ve seen,” said Victor Haghani, the founder and chief investment officer of Elm Wealth, which sponsors the Elm Market Navigator ETF. “Non-professional active investors should be in no doubt about the smarts and sophistication of who is likely doing the other side of their trade.”

Wigglesworth also discussed the Bullish trade at FT Alphaville last month [10] :

It looks like someone in practice managed to finagle a large synthetic allocation to the Bullish IPO by aggressively creating shares in ARKK. And once the windfall materialised they immediately redeemed those shares to crystallise the gain, sending ARKK back to earth.

By the way. The very purest form of this trade would be to leave out the borrowing. Like:

1. G