Terry Rozier, corruption in sports gambling, and the "ick" factor

One of my (increasingly few!) hobbies is I’m pretty big NBA fan¹. I try to watch a couple of games a week, my podcast rotation has a heavy sampling of NBA podcasts, and once a year I’ve got a group of friends who get together to travel to a Pelicans game for a fun weekend.

So when my phone started blowing up this morning with news that Terry Rozier (a guard for the Miami Heat) and Chauncey Billups (NBA legend and current coach of the Portland Trailblazers) had been arrested, my heart obviously started racing a bit. It’s a very juicy scandal, and, while we’ve known for months that Terry Rozier might be involved in a gambling issue, the Billups piece is completely new (at least to me!). Heck, I’d guess it had to be a surprise to the NBA too; I watched the Pelicans opener on NBA League Pass last night, and I distinctly remember one of the halftime promos featured a clip of Chauncey coaching / talking to his team. I’d have to guess the NBA would have pulled that ad if they knew a gambling charge was coming!!!!

The charges just dropped this morning, so I’m sure there’s plenty more to learn…. but one thing that jumped out to me is just the seeming small scale of the bets here versus what Billups / Rozier were earning on the court. Terry Rozier has earned ~$160m in career earnings and is in the final year of a 4 year, ~$96m contract; that’s ~$300k/game. If you look at one of the initial articles on the investigation into Rozier, it mentions $13,759 in suspicious bets, meaning that (if the reports and allegations are correct), Rozier is facing jail time and flushed his career down the drain for a handful of bets that came out to barely more than Rozier earned per minute on the basketball court². And those lost on-the-court earnings of course ignore off the court earnings / benefits (advertising, licensing, etc.) as well as the small benefit of not being in jail. I honestly just can’t believe someone would even consider getting involved in something illicit over this small a payoff (and remember, payoffs generally need to be split, so, even if that ~$13k of bets won, Rozier’s share would be less than the winnings!), but I particularly can’t believe an athlete making this much money would be involved in something that paid literal peanuts compared to their main gig!

I’m sure the math isn’t much better for Billups; he made over $100m in his career and his initial coaching contract (which had been extended and almost certainly raised over the summer) paid him $2m/season. All gone if the allegations prove correct.

As gambling and prediction markets get more pervasive, it’s going to raise some very thorny questions for regulators, sports leagues, and companies. If an athlete making hundreds of millions can be corrupted for thousands in bets, you have to imagine there’s the potential for some insane corruption at the lower levels. College sports obviously come to mind given how many athletes there are (and how much less they’re making than Terry Rozier), but prediction markets offer particular potential for shenanigans here. You can bet on what an announcer will say during a game, or even what Jerome Powell will say at a press conference. You could imagine all sorts of ways those types of bets would be way easier to manipulate than needing to go to a professional athlete making millions and having them risk their career to tilt a bet; for example, you could win the Jerome Powell bet just by betting on AI and having a low level staffer slip a line in about AI. Not saying that is either legal or ethical, but you could see how that would be much easier and harder to detect (and how the staffer might be much easier to incentivize!) than getting a pro athlete to toss a game.

Anyway, I mention this all because it reminds me something about investing. In order to generate alpha, you generally need to understand something that the market is missing. Sometimes that “something” is as simple as “Google is the best business the world has ever seen and is going to grow at enormous rates for years” when Google IPO’d. But often times that “something” comes from seeing a company that has some “ick” factor to it and understanding the “ick” is no where near as big as a deal as the market thinks.

An “ick” factor can be anything. For example, perhaps the ick factor comes because you’re looking at a coal factory and the market is questioning the terminal value of the company. Maybe the company announced a disastrous acquisition, and you think the market has penalized the company too harshly. Or maybe something crazier is happening; the world is a wild place, and thick tails abound. Perhaps the world’s richest man has agreed to buy your company and now has cold feet, or maybe a boat went off course, dragged an anchor through your company’s pipeline, and caused a massive oil spill through no fault of the company! Again, the world is wild; anything could happen.

But often the “ick” factor will be something more greed related. Perhaps the company has a bunch of related party deals. Or maybe the company has an external management agreement that incentivizes the manager to grow at any cost. It could even be something as simple as a poorly aligned bonus structure that encourages management to chase some goals that will get them a bonus despite destroying shareholder value, or a board that owns no shares in a company and is thus incentivized to chase negative EV lottery tickets in order to justify their continued board fees (as I discussed extensively in my zombie / busted biotech series). Again, world is a crazy place; the “ick” could be anything!

I talk to a lot of investors, and often they’ll have an idea that sounds good but has one of those greed related “ick” factor that jumps off the page as a red flag. When I ask them about it, they’ll often say something like, “management is a bunch of good guys; they wouldn’t do that to shareholders” or “yes, the related party deal is weird, but it’s really small peanuts compared to the upside if they execute.” And sometimes the investors are right; the related party deal really is small peanuts, or the management team really is a bunch of good actors, and the stock will work beautifully.

But remember that Terry Rozier just (allegedly) threw his career away for a literal rounding error. People are strange, and greed is a funny thing. Those related party deals are red flags for a reason; often they involve a lot bigger payoff than what Terry Rozier got, and for managers who are making much less.

And I will tell you my history suggests that greed related “ick” factors, on the whole, tend to work out much, much worse for shareholders than any other factor.

Caveot emptor!

1. And yes, I am so excited for this season to start! I watched most of the Pels game last night and the Thunder game Tuesday night, and I’ll try to get some Nuggets in tonight and check out Wemby tmr!

2. $96m over four seasons, 82 games in a season, 48 minutes in a game = ~$6.1k/minute.