Q3 2020: Bullshit, Lies & Missing Billions
“The lines between charm, vision, bullshit, and fraud have become so narrow as to be one line” — Prof Galloway
As the lines between visionary storytelling and bullshit continue to blur, it is becoming ever more difficult to distinguish between the next hyper growth stock, and the next corporate accounting scandal. Jim Chanos, a renowned short seller, claims that we are living through “a golden age of fraud”, fuelled by a combination of: “fake it until you make it” capitalism; unprecedented levels of retail investor FOMO; and lax oversight from financial regulators. And that’s before we get to creative accounting tricks used to inflate the margins of unprofitable businesses. Anyone for a bit of Community Adjusted EBITDA?
So is Chanos right, or is he just a gloating cynic feasting on the recent failures of Wirecard and Luckin Coffee?
Missing Billions
Big scams make for great headlines and feed the imaginations of screenwriters. But the reality is that fraud has a very long tail, and it’s getting longer. The world is set to spend over $4.2 Trn online by the end of this year, of which 1.5% will be stolen through credit card scams, account takeovers, fake signups and voucher abuse. That amounts to $64bn — equivalent to the GDP of Luxembourg. Which is considerably more than the $1.9Bn looted by Markus Braun and his Wirecard heist squad, and close to par with Bernie Madoff’s gargantuan $65Bn pyramid scheme.
I am interested in these numbers, and the motivations that underlie them, because I myself have recently gotten into fraud. Not in a creative accounting, white collar crime kind of way, but by joining a fraud prevention startup called Fraugster.
In Memoriam
Our Berlin boardroom is named after Bernie Madoff — its size and grandeur in proportion to his loot. It sits across the hallway from Charles Ponzi and adjacent to Jordan Belfort a.k.a the Wolf of Wall Street. Victor Lustig, the man who sold the Eiffel Tower (twice) is a little further along.
Sarah Howe is tucked away in a quiet corner of the building and pays homage to the thousands of women she defrauded through her “Ladies’ Deposit Company” in the late 19th century.
These rooms personify the fraud we try to catch, and remind us that confidence tricks, returns that look too good to be true and the exploitation of weaknesses in a system are timeless tropes of fraudsters the world over.
Keeping with the times, I am actively lobbying for a Markus Braun room. I imagine Filipino beach motifs embossed on garish wallpaper, bags of fake cash bundled into bags emblazoned with the words “escrow accounts” and walls adorned with massive LCDs flashing transactions across the globe, in real time, powered by AI. Anyone who wants to contribute ideas is welcome to add them to my Pinterest board (link available upon enquiry).
Vorsprung Durch Fintech
Like many historical fraudsters, Braun was a persuasive storyteller who fed investors, BaFin (the German financial regulator) and institutional investors what they wanted to hear, all whilst fobbing off his hapless auditors with photocopies of forged cash accounts.
Quarter by quarter, year on year his company delivered steady revenue and Ebitda margin growth, and in the process became an unlikely German Fintech success story. I mean, Just. Look. At. That. Perfect. Upward. Trending. Curve.
Wirecard was made possible because Germany’s politicians and captains of industry desperately sought a tech success story to catalyse the transition from an old world, manufacturing led economy, to a modern tech enabled economy. BaFin, who carry much of the blame for this scandal, took the unprecedented step of banning short sellers, who it held in unjustified suspicion and labelled as “rapacious enemies” of German innovation. This removed a necessary check and balance within equity markets, and as the Economist correctly argued in the aftermath, sidelined a group of sceptics who “tend to do their homework because they have a lot at stake”.
To borrow a line from The Missing Cryptoqueen, another riveting story of greed, deceit, and herd madness about the $4bn OneCoin fraud: “Even smart and decent people can be very gullible in the right conditions […].and often it’s not really about evidence and logic, but faith, belief and hope”.
The absence of evidence and logic, traits that stand in opposition to the German national character, is why an obscure payments company, working mainly with porn and online gambling operators, was catapulted into the DAX 30 in under a decade and reached a valuation of €24Bn. It made a lot of people, including its share price obsessed founder, very rich in the process. It has since cost a lot of people more than their money.
Bullshitters & liars
I cannot wait for Wirecard, The Movie. In fact I hope it does significantly better than Enron, The Musical. In the time it will take to write the screenplay, complete casting and find the right beach in the Philippines to shoot Jan Marsalek’s (Wirecards ex-COO and prime suspect) last sighting , billions more will have been stolen from online merchants, and online shoppers. The long tail will continue to grow as the administrators pick over the wreckage of Wirecard. In parallel, retail investors will continue to buy into unlikely growth narratives, suspending sober judgement in the hope of outsized returns.
You have been warned, and it’s time to listen:
- If a growth curve looks too perfect to be true, it probably is.
- If short sellers are circling, listen up and hear their arguments (they will have conducted a more forensic analysis of a company’s balance sheet than you have).
- Question every word of a charming CEOs story, and search for substance behind the buzzwords. If you are willing to believe that a co-working space, whose only point of differentiation is free beer, is not a real estate company, but “a state of consciousness forming a generation of emotionally interconnected entrepreneurs” you are probably an incurable bullshitter yourself.
Despite our best attempts bullshitters and liars will continue to profit from tall tales; but it is critical that we mark the distinction between them. In his cult essay On Bullshit, Harry Frankfurt argues that “the liar knows what the truth is, and is trying to keep people away from the truth; which in itself shows a certain respect for the truth”. The bullshitter, on the other hand, doesn’t care what the truth is, which is why “there is a more insidious threat to truth in bullshit than in lying”.
Do we regard Braun, and others like him, as bullshitters or liars? We would all be wise to pause before answering. After all, liars are always found out, eventually. Bullshitters often live to fight another day.
