$600M Fraud Case Rocks Soccer World & Is Starbucks Broken?

This episode discusses a massive fraud case involving a Miami-based investment firm, 777 Partners, attempting to buy Everton, a Premier League team, and the recent struggles of Starbucks.

1. The Scandal: 777 Partners, embroiled in a $600M fraud case, faces accusations of using nonexistent assets as collateral.
2. Impact on Soccer: The scandal threatens the financial stability of soccer clubs globally, revealing the interconnected nature of sports and finance.
3. Starbucks' Struggle: Starbucks experiences a significant drop in customer traffic, prompting a critical review of its business strategies.
4. Corporate Misconduct: The episode highlights how corporate mismanagement and unethical practices can lead to widespread disruption.
5. Resilience and Recovery: It underscores the importance of transparency, ethical leadership, and customer focus in corporate recovery efforts.

1: Introduction

Hosts discuss the setup for today's episode, touching on the soccer fraud case and Starbucks' issues. Neil Freiman: "Today we explore a major scandal in the soccer world and Starbucks' recent struggles."

2: The Soccer Fraud Case

Detailed analysis of the fraud allegations against 777 Partners and its impact on the soccer industry. Toby Howell: "The scandal has revealed a giant shell game, impacting clubs globally."

3: Starbucks' Downfall

Discussion on Starbucks' declining performance and public critique by former CEO Howard Schultz. Neil Freiman: "Starbucks faces a crucial juncture, needing to revamp its strategy to regain consumer trust."

4: Broader Implications

Exploration of the broader impacts on the private equity sector and retail industry. Toby Howell: "This situation could reshape how private equity firms interact with the industries they invest in."

1. Ethical Investment: Ensure transparency and ethical practices in your investments.
2. Customer Focus: Prioritize customer experience to drive business success.
3. Crisis Management: Develop robust crisis management strategies for handling scandals.
4. Adaptation: Be adaptable in business strategies to respond to market changes.
5. Community Engagement: Engage with your community and stakeholders to maintain trust.

Episode 317: Neal and Toby dive into the latest fraud scandal where 777 Partners is alleged to use customers’ money to buy sports teams. Then, is it possible that the U.S. Social Security could run out of money? How it got so big and how it could be dwindling. Next, Starbucks has been struggling to reclaim its throne as the coffee chain king due to its futile attempts to take off in the Chinese market. Then, Toby shares his trend of a sweet candy that’s taking over TikTok. Also, Equinox promises longer life…that’ll cost you $40,000 a year. Finally, recapping the Met Gala that came with a gown-length of controversies.

People

Neil Freiman, Toby Howell

Companies

777 Partners, Starbucks

Books

None

Guest Name(s):

None

Content Warnings:

None

A
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That's robinhood.com dot disclosures investing involves risk. Other fees may apply. Robinhood Financial, LLC, member SIPC is a registered broker dealer. Good morning, Brew daily Show. I'm Neil Freiman.

Toby Howell
And I'm Toby Howell. Today you'll hear about the scandal that erupted when an american investment firm tried to buy a Premier League team. Then the Met gala was last night. We'll break down the confusing theme, how much tickets cost and why Mercedes Sprinter vans were everywhere. It's Tuesday, May 7.

Let's ride.

Neal. It's May 7, aka five seven. So I just want to start today's show by wishing you a happy height day. Thank you. Yeah, I'm expecting my Facebook wall to be filled up later.

Neil Freiman
I honestly thought I was five eight my entire life, but I went to the doctors last year. Turns out I'm five 7.4. So I'm going to round down this is a podcast that is full of radical transparency. So yes, I'm five seven. Today is five seven.

It is my height day. I appreciate that honesty. I have to wait until June till my height day. Happy height day. Well, you know what?

I'm going to be working for you and everyone whose height day is in June because there's a study in the Journal of Applied Psychology, someone who is 6ft tall earns on average nearly $166,000 more during a 30 year career than someone who is 5ft five inches, even when controlling for gender, age and weight. So just tall people are more successful. I am going to spend my extra $166,000 on, I don't know yet, maybe a new bike or a new training plan for my biking career. And now let's take a moment to hear about the bundle of goodness that is the Wendy's cinnabon pull apart. So, I know this is a podcast, an audio medium, but we have to start the show today by describing the smell of this dish.

Toby Howell
To me. It brings back childhood memories of being in the mall with my parents and getting a whiff of cinnabon. It's life changing. Maybe top ten best smells out there. Actually, scratch that.

Neil Freiman
It's probably top three smells. And Wendy Cinnabon pull apart more than backs up the olfactory punch it packs. I don't know who the mad genius that decided to stick all the middles of the cinnabon bun together, but I tip my cap to you, you get the best part in every single bite, because the best part is all the parts. Well, now I'm hungry. And if you're hungry, head to Wendy's dot Morningbrew to try the Wendy's Cinnabon pull apart.

When the Miami based investment firm 777 partners announced last fall it was planning to buy Everton, it was seen as a lifeline for the English Premier League team struggling financially and on the pitch. Fast forward to today, and it is a complete debacle. This deal has snowballed into a massive scandal with major ramifications for international soccer and the private equity industry. Because 777, which no one had heard of before it planned to buy Everton, might be a house of cards. A lender sued the firm on Friday, accusing it of perpetrating a $600 million fraud.

According to the lawsuit, some $350 million in assets that 777 used as collateral for the loan were either pledged to someone else or didn't exist at all. The lender claimed 777 was operating, quote, a giant shell game at best and an outright Ponzi scheme at worst. This was the biggest legal blow against 777. But oh, far from the first. The firm faces 16 different lawsuits over unpaid debts totaling more than $130 million.

Everyone from the Boca beach club, where it held its retreat, to American Express, where it has huge credit card balance, is knocking down seven seven seven stores looking for their money. Toby, it seems like this attempted purchase of Everton revealed hampers worth of dirty laundry, right? Choose whatever descriptor you want to call seven. Seven house of Cards, Ponzi scheme, dirty laundry hamper. It kind of fits here, because the most immediate fallout for this is that there's probably no way that 777 is going to end up buying Everton.

Toby Howell
Yes, the club is in a very bad spot, but it still needs outside investors to help save it. But the Premier League has not approved the sale. And as you said, as these legal proceedings continue and more and more comes out about this company, it looks increasingly likely that Everton is not going to have them as an owner. But you also have to zoom out to the broader world of soccer because 777 has gone on a buying spree recently. They have, they own parts of teams in Brazil, Germany, Australia, Italy, Belgium.

The list goes on. And so as this kind of situation evolves, all these other clubs are looking at it saying, all right, are they going to be able to help pay the bills, the wages of the players? So in terms of contagion, it will have ripple effects across the entire world of soccer. Yeah. So where did they get this money to buy all of these investments in the soccer team?

Neil Freiman
And this is where this story takes a turn to the global private equity industry and is really the. There, there. This is the meat of this story, basically. 777 has an affiliated insurance company and it used customer funds, your premiums for life insurance, what people pay in to this company to fund all of its purchases. And it's not just soccer teams, it's an aircraft leasing company.

It's a south american streaming company. So they made all of these bets, all of these investments from the pot of money that they got from their insurance company. And this is actually a playbook that was begun ten years ago by Apollo Global Management, one of the biggest private equity firms out there. All these private equity firms now saw what Apollo did. They are buying insurance companies, life insurance companies based in Bermuda, and they're using all of that money from life insurance, which is a huge pot of money.

It's what, you know, Warren Buffett does. You get this float. It's why insurance is such an amazing business, because you get all this money upfront. Typically, life insurance companies are regulated by us states, the federal government, to park that money, that it should be safe in government bonds or safe assets. But when these private equity companies have come into this space, this insurance space, they're using that money to fund ever riskier bets.

They're doing a bunch of financial engineering and it's been so lucrative for them. So they fear that the scrutiny of 777 is going to bring down this entire business model that has become super booming. It's one of the hottest corners of Wall street in the past few years. Right? You're supposed to invest customer funds conservatively enough, so you can ensure that you pay out future claims.

Toby Howell
Cause again, that is part of the reason why we have insurance to begin with. And so, yes, 777 partners, it's not a bug, it's a feature in their investor deck. They said, we are going to be more aggressive with investing customer funds. We're going to put them into high return, proprietary investment, as they called it. But you're right, it is kind of this revolution in the insurance, specifically life insurance industry, where people are just investing customer funds a lot more aggressively in things, in illiquid things like soccer teams, like south american streamers and the jet leasing.

Right? But we should say that 777 denies any wrongdoing, but there is a reported DOJ criminal probe ongoing. All of these private equity companies are saying, can you just not do this? We do not want any scrutiny of this business model of all of our insurance holdings in Beermudo, where there's a lot less regulation. So yesterday afternoon, Neil and I were a little nervous prepping for today's show because we knew a big report was on the way that would give some insight as to how long it will be until Social Security runs out of funds.

And we should have looked on the bright side, because it turns out the board of trustees annual report contain better news than expected. Social Security is now expected to run short of funds in 2035, one year later than previously projected. Now, granted, ideally Social Security should not be running out of funds, but it's just a reality of how much the program pays out versus how much it brings in right now. As for the slightly sunnier outlook painted by this report, the surprising resilience of the economy is to thank low unemployment and high jobs and wage growth means more people are contributing to the program, giving it a little bit more juice before things start to run dry. This report only comes out once a year, so a lot can change between now and next year's, or even that 2035 date.

But still, Neil, it's always promising to see Social Security have more left in the tank than previously anticipated. Yeah, Social Security running out in 2034, Medicare running out in 2035. I guess you could look on the bright side. But this, to me, shows just how important the election is and next year's fiscal discussions. Our big social programs here, because when you're talking about the federal budget, you look at things like education, military, those discretionary items.

Neil Freiman
That's basically like choosing a medium coffee over a large coffee to save money. They are almost inconsequential. Those discretionary items, all those things that we assume are a big part of the federal budget, account for less than a third of the total budget. The nearly half of the total budget of $6 trillion is these big federal government spending programs like Social Security, Medicare and veterans benefits. Those are $2.9 trillion worth.

Those are where you have to make the big decisions about how we make a fiscally healthy country. So next year, this is why the election is so important, is because these 2017 tax cuts from Trump are going to expire. And Biden and Trump obviously have very different plans about where they're going to go with taxes. But for Medicare and Social Security to, say, solvent, one of these things have to happen. You either have to cut benefits, which is a political third rail.

No one would ever do it. It's so toxic. Trump floated it one time and then he backed away from it hours later because of the outrage, or you have to raise taxes there. You have to find a way to fund these programs. So it just shows, goes to show just how important next year is for these huge fiscal discussions that are ongoing.

Toby Howell
Right? And so this new projected depletion date definitely shows that there is a tiny bit more wiggle room for lawmakers, but clearly not out of the woods yet, because you do need to address Social Security and Medicare sooner rather than later. It's just really important to a lot of people. About 40% of families who are 65 and older rely on Social Security for at least half of their income, and about 20% of families rely on it for all of their income. So you're right, it is just a hot button issue because it affects millions and millions of Americans.

And it's, it is untouchable in a certain sense. So one of those two things has to, has to change. Meanwhile, demographics are not in our favor because as we've talked about endlessly, the american population is aging. More than 11,000 Americans will turn 65 every day between 2024 and 2027. And we need new people in the workforce to pay taxes and fund the people that are going to be retiring.

Neil Freiman
And, yeah, you just can't do any, you can raise the retirement age. But we saw what happened in France when they tried to do it. They burned Paris to the ground when they realized that their, their pension fund was being depleted. So, yeah, this just goes to show just how important these major fiscal congress discussions are going to be next year and what's going to happen with those Trump era tax cuts from 2017, when they expire in 2025. It's never a good sign when a company's former CEO goes on LinkedIn and body slams its current CEO in public for overseeing a major slide in the business.

The setting of this cage fight? Your local Starbucks. On Sunday night, longtime Starbucks boss Howard Schultz posted a part pump up, part come to Jesus speech after the coffee chain posted a horrific quarter last week. Schultz said Starbucks was suffering a fall from grace and that certain strategies needed to be overhauled. While the brand is incredibly resilient, he wrote, it's clearly not business as usual.

He's referencing last Tuesday's miserable earnings report, which showed that traffic at Starbucks us stores fell 7% and dropped even more in the key chinese market. Investors were spooked Starbucks shares plunged 17%, which, for context, was about the same drop as when COVID shut down all of its stores in March 2020. So if you trust the market, this seems like something of an emergency. Schultz has a few ideas for a turnaround, of course, because this is LinkedIn we're talking about. He told current leadership to get back to basics, prioritize the customer experience over everything else, spend more time with baristas on the ground, and revamp the mobile app.

But don't do it all at once, Schultz said. There are no quick fixes. Howard Schultz cannot escape Starbucks. The man has been CEO three separate times, most recently back in 2022, 2023 as interim. And, I mean, it makes sense.

Toby Howell
It's his baby is struggling. He wants to put forth his ideas on how to fix it. And right now, the current leadership plan, it's not, he's not very bullish on it. First of all, they are calling it their transformation plan, the triple shot reinvention with two pumps. Red flag right there.

Red flag right there. You can't be saying those string of words on an investor call. But yeah, currently the company wants to up. It's similar to what Schultz is suggesting. They want to update their app, make its mobile payment offerings best in class again.

And they also want to improve those service times. Remember, there's crazy amounts of people just abandoning their orders in the mornings because of overcrowding at Starbucks. They also want to roll out new items to bring customers back in. But that's where Schultz does differ. The new items that the current leadership wants to do are these spicy drinks.

Howard Souls is like, let's get back to the basics. Let's be a coffee Ford brand, a best in class, almost luxury brand that focuses on coffee. None of this other spicy drink madness that Starbucks is trying to experiment with right now. Reading between the lines, it seems like Starbucks has too many people in the morning and so much so that it can't fulfill all of the demand. And then it has nobody in the afternoon or late at night.

Neil Freiman
So, like, when people come into the morning, come into Starbucks in the morning, one in eight mobile order customers are opting not to buy a menu item after they put it in the cart because they won't get it in time and there's too long of a wait. Meanwhile, from 05:00 p.m. To 05:00 a.m. Is a complete dead zone at Starbucks. So they did roll out a pilot program for over for these overnight hours.

They saw that revenue doubled at the stores where they tried this out from 05:00 p.m. To 05:00 a.m. So they might want to start spreading the love out, you know, to get those afternoon orders where the Dunkin and the McDonald's of the worlds are really thriving. But there's a, there's just so much competition in coffee now. I mean, forget about the US market.

Look at the chinese market, where luckin coffee now has more than double the stores of Starbucks. This was not the case a few years ago. It opened more stores last year than Starbucks has entirely across the country. And coffee market in China. I mean, Howard Schultz says the chinese market is the most important market for Starbucks right now, and it's facing increased competition.

So I know Schultz is saying that focus on us stores, but it's getting lapped in China, like a lot of american brands right now due to local domestic competition. Up next, I have a trend I cannot wait to tell you guys about.

D
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Neil Freiman
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That's what you get when you combine german engineering with the world's most trusted name in hearing care. Sounds like a winning combo to me. See if you qualify for a 45 day, no risk trial of the award winning horizon ix@hear.com. Brew that's hear.com brew.

Toby Howell
Walgreens has struggled to find its mojo in recent years, struggling with everything from labor shortages, executive turnover and lots of competition. But an unlikely savior has emerged for the chain, and that savior is what I'm talking about on this week's edition of Toby's trends, where I go scuba diving through the Internet to emerge with a trend that should be on your radar. So what is this mysterious Walgreens savior? Peelable mango candy. Walgreens store brand gummy mangoes have gone so viral on TikTok that Walgreens has started limiting online sales to one bag per customer.

What makes these sweet treats so special? For starters, they are interactive. When I call them peelable, that doesn't just mean a wrapper. There's actually an edible, hard, but still pliable skin like shell surrounding a much softer, chewier mango nugget inside. The Inspo for this type of treat came from a Walgreens vendor observing canning trends over in Asia and bringing them back to America.

And TikTok has done the rest. One of the first videos went viral back in January, and it's been almost impossible to keep them in stock since. Neil, I am buying stock in these candies. They look delicious. And apparently a banana version is also in the works, too.

Neil Freiman
I am not an artificial banana flavor, but I will try this mango thing. I mean, this is a broader trend in the snack and the candy market is these fruit flavored gummies. People are turning away from chocolate and turning more towards these. These gummies. They increased 12.1%, the overall market for, to reach $19.2 billion.

They account for more than 30% of all confectionery sales in the country. So that ties into the broader trend of people really loving these fruit candies. And also, it was, this was this private label from Walgreens. I don't know if anyone's walked into a Walgreens and seen it. It's called nice.

And I didn't. Wasn't thinking about nice until this story. And then I was like, oh, my God, their trail mix is so good. They have so much chocolate content in their trail mix. So I was like, oh, I remember buying this, you know, before going on a hike or just wanting to get some trail mix.

So this is another boon to the private label industry that a bunch of these retailers are rolling out because it's huge profit margins for them. So really, this couldn't. This is just the best of all worlds for Walgreens. Right. It is a confluence of a lot of trends that we've talked about, private label people moving away from chocolate into these gummy candies.

Toby Howell
Also, it is a big savior for Walgreens because, as you said, Walgreens hasn't been doing great over the last twelve months, its stock is down 50%. And also their front end of the drugstore is a lot more profitable than the back end of the drugstore. Front end, that's the stuff where the candy, the snacks, all the fun stuff, your trail mix is located. The back end is where that prescription dispensing business is. And that is not as profitable as the front part of the store.

So whenever you can nail something, especially if it's private label, in the front end, then Walgreens is going to be very happy. They're planning to roll out this candy. They started it in just 2500 stores. They're going to bring it out to all 8000 stores going forward. It just looks so good.

I highly recommend if you can get your hands on it. I didn't. I tried to, but I only live near CVS's, so. CV's, let's roll out a competitor here. I need to get in the mango.

Neil Freiman
Oh, I mean, that is like the most sure bet in the world that every single retailer is going to roll out this type of candy. And I think they should just go to any asian grocery store and look at all of the candy options, all the gummy options, because they are wild. I remember during COVID I lived near an H mart, which is an east asian grocery store. You'd walk through the candy aisle and it was literally like walking through a Willy Wonka factory because of all the crazy innovations that they're doing. And you're like, I've never seen anything like this before.

So every single day I would just try something else. And so I'm sure every retailer is looking at what's happening with these peelable gummies and they should just go to an H Mart and look at every single thing that they're doing and copy all of these gummies because I really think this is going to be one of the most booming markets in the candy industry. Equinox, the high end gym you love to rag on but secretly wish you belong to, wants to help you live longer through a new wellness subscription. The catch? It costs $40,000 a year.

Yesterday, Equinox launched one of the most expensive gym memberships in existence. A year program to help people with fu money increase their health and longevity. Is it worth the cost of an Audi a three? You tell me. The membership kicks off with initial tests of over 100 fitness metrics, including heart health, vo, two max and movement range, after which a concierge will design a personalized plan for you.

Then you get 360 minutes training sessions per week and dedicated time with a nutrition coach, sleep coach, and massage therapist. In all, the program amounts to 16 hours a month of coaching and training, Equinox says. And it's not a mystery what's going on here. The business of increasing your lifespan is booming, with wealthy people trying all sorts of biohacks, from iv drips to infrared therapy, to make 90 the new 50. Equinox and other gyms are hoping to grab a slice of the market with a growing focus on that buzzword, wellness.

Toby Howell
Wellness is hot. You basically become a professional athlete. I mean, getting a trainer, a nutrition coach, a sleep coach, a massage therapist. That's what I mean. LeBron.

That's the entourage that he's rolling with. So it is interesting to see people taking a much more holistic approach to health. A lot of these companies are saying, listen, you're not going to live to 100 by being in the doctor's office. It takes a lot more than just your monthly checkup. It is this holistic look at everything from your vo two max to how you're sleeping to what you're eating.

So this trend is only going to get bigger. Obviously. Equinox makes a splash with that really gaudy $40,000 number. It doesn't even include an Equinox gym membership in. Ironically, that's the funniest part of all.

So I think that this trend is only going to grow hotter, especially when you see headlines like this. Right. But Equinox is not the only gym that's doing this lifetime. It has opening a longevity and concierge medicine clinic. In its, uh, in its gyms, exponential fitness is doing the same thing.

Neil Freiman
And for gyms, that really comes down to a few words. Revenue per square foot. How do I have this gym? How do I increase the profitability of this space that I'm renting or that I own? And they're looking at what's going on in the wellness and longevity markets, where people are especially really rich.

People are paying so much for these experimental treatments that doctors are somewhat pushing back on and saying, we don't really know whether this is going to increase your life, but the interest in increasing your lifespan is so big right now that gyms are saying, hey, we're a logical place where you're trying to get more in shape here. Why don't we, you know, tailor this to switch up our value prop a little bit to say, come and work out, but not only just to get fit, but to live a little bit longer. You want a $40,000 longevity plan in one sentence from me, it is do a lot of zone two, low heart rate training and lift some, some heavy weights, you will live longer than most of the population. And that was free right there. A free podcast, not $40,000.

The funny part about all this. Yeah. Is the there is actual science linking just going to the gym with living longer. There's a study published in the British Journal of Sports Medicine that found that strength training and aerobic training leads to a lower risk of mortality. All right, so you mean a gym.

Okay. The Met gala was last night, and I can tell you one thing. For the second consecutive year, our invitations were lost in the mail. The Met is always the biggest party in town based on sheer concentration of celeb power and artfully arranged fabric in one place. Anna Wintour, the editor in chief of Vogue, is in charge of throwing the massive fundraising gala every year at the Met in New York.

Toby Howell
It always has a theme. Last year was an ode to the controversial fashion icon Karl Lagerfield with starl Jared Leto dress up as a full size cat. This year, the theme was kind of confusing. It was Sleeping Beauty's reawakening fashion. But the dress code for the red carpet was the garden of time, which is the name of a dystopian story written back in 1962 by a british author that sees a rich count and his wife overrun by a, quote, rabble of working class people where they try to escape by picking thyme flowers from their garden.

The story ends in ruin for them. Which is why this makes for a good, albeit ironic, theme that comments on cycles of creation and destruction and the aristocratic classes eventual demise. Definitely on the nose for our current times. But, Neil, lots to talk about this year, and I haven't even mentioned any of the outfits yet. No, I don't know whether they fit the theme or not.

Neil Freiman
I'll leave you to comment on that. You're a resident fashion expert, but this is just such a social media behemoth we have. We don't have the numbers for this year, but last year, the Met gala generated 12.3 billion impressions for Vogue's channels under the hashtag met Gala. So everyone is just tuning into social media, seeing who. What?

Who wore what? Yes. You know, everyone. You know, I guess people are interested in the theme, but really, the only thing anyone cares about is what people were wearing. And there does seem to be an interesting AI component this year, because you saw some people, some people's outfits get flashed across social media, and then you look and you're like, wait, they didn't even go, yeah.

So Katy Perry was, you know, Katy Perry. There was an AI generated image of her that went around saying she was at the Met Gala, and she was like, no, I am not there. She later reposted that on Instagram, saying, well, actually, I've been working hard. I couldn't go to the Met Gala. But it does seem like we're in a new era where all these eyeballs are on social media, and you don't really know what's real and what's not.

Toby Howell
Yeah, and I also want to talk about one other angle of this year's event, which was the presence sprinter vans. There it is. An interesting thing, the rebrand that sprinter vans have gone through. They kind of first became popularized in the Real Housewives series, where a lot of scenes are filmed inside them. But now all these celebrities are pulling up to the Met Gala in Spinner vans because they do a lot of things well.

One, they're very tall, so you can kind of stand up in your ridiculous costume outfits in there. Uh, two, they also are kind of low key, so you're not rolling up in a Rolls Royce. You're kind of avoiding some of that, uh, paparazzi attention. So they fit right in, in the luxury element as well. Some of these models can go as much as $350 to $450,000 if they're customized.

So that was just an interesting wrinkle, finally, on the outfits that we haven't even really talked about yet, my favorite look and my favorite piece actually was from Camilla Cabello. She had an ice clutch, like a purse made out of an ice block that thawed as the event went on to reveal a rose. And again, if the theme is this re emerging and this reawakening of fashion, having a purse that literally thaws to bring a rose to life, I thought that was the coolest thing. Very cold, though, and very. I wouldn't want to hold.

Yeah, but I thought that was pretty cool. All right, let's wrap it up there. Thanks so much for listening and have a wonderful Tuesday. For any and all feedback, reach out to our email morningbrew daily@morningbrew.com let's roll the credits. Raymond Liu is our producer.

Neil Freiman
Olivia Graham is our associate producer. Uchenawa Ogu is our technical director. Billy Menino is on audio. Hair and makeup is still recovering from the Met Gala. Devin Emery is our chief content officer, and our show is a production of Morning Brew.

Toby Howell
Great show today, Neil. Let's run it back tomorrow.

E
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