How to Spot a Fraud When Everyone's Against You

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, what do you think the most famous apocryphal quote about markets is?

Joe Weisenthal (0:23)

I guess it would have to be the one about markets staying solvent, or markets staying irrational longer than you could stay solvent, or something like that, right? That's gotta be it.

Tracy Alloway (0:34)

I'm so glad you said that one, because that was exactly what I had in mind.

Joe Weisenthal (0:39)

Is that really apocryphal? Does no one really know who actually said that, or what?

Tracy Alloway (0:43)

I think it gets attributed to Keynes, but there's some debate about whether or not he actually said it. You'll also see different versions of it. The market can remain irrational longer than you can remain solvent, or the market can stay irrational, whatever.

But it's a situation I think that everyone is familiar with, where you look at something and you go, this is absolutely insane, and yet it keeps rising in value, or people keep pouring money into it, and you feel like you're going crazy because no one else seems to see the thing that you see.

Joe Weisenthal (1:19)

Yeah, you see this phenomenon a lot. Someone either calls something right, but they're way before other people, they don't make money on it. If they're short, they get stopped out of their trade long before the market sort of repriced to normal.

And it seems really tough because A, you're like, if you're in the investment side, you're losing money, or you're losing reputation, or as you put it, you just like start to feel like you're the one who's going crazy.

Tracy Alloway (1:48)

Yeah, so today, I am very, very pleased to say that we are going to be diving into maybe the ultimate example of this phenomenon, but we're gonna be talking about Wirecard. Do you remember that company?

Joe Weisenthal (2:01)

Yeah, but I never really understood what they did. And so for no other reason, I'm excited about this happening, because I'm gonna finally understand what Wirecard did, or didn't do, or maybe didn't do.

Tracy Alloway (2:11)

Well, all you need to know is that it was supposed to be this fancy fintech company. I think at some point it had like a market valuation of almost $30 billion or something crazy like that. And it was this big, like up and coming rising star in Europe and particularly in Germany. And of course, it turned out to be a massive fraud. And now, you know, speaking of going crazy, speaking of reputational damage, I'm gonna go ahead and say this episode comes with a big disclaimer, which is there is going to be a lot of media navel gazing ahead.

Yeah, I think in this instance it works because we're gonna be talking to the journalists who actually covered Wirecard and, you know, doggedly investigated this company and basically kept saying it's a fraud, there's evidence of fraud, and no one listened, almost no one listened, and meanwhile, it feels like all of finance from the accountants to the sell side to the German regulators were really fighting against the truth about this company actually coming out.

Joe Weisenthal (3:21)

It's wild that like this, it's even possible. Like you think the question is like, does the company have the business it claims to have? Does the company have the money it claims to have?

And yet, even these things which should be sort of like independently verifiably, yes or no, it could take a long time for the truth to come out.

Tracy Alloway (3:39)

Yeah, and I'm always personally interested in the sort of, what do you call it? Like the inflection points between everyone going, okay, this is fine, and then suddenly everyone going, oh, actually there's billions of dollars or billions of euros missing from this company. It's not so fine.

So, all right, without further ado, I am very pleased to say we're going to be speaking with Dan McCrum. He's an investigations correspondent at the Financial Times, and also the author of a new book all about Wirecard. It's called Money Men, a Hot Startup, A Billion Dollar Fraud, A Fight for the Truth. And we're also gonna be speaking with Paul Murphy. He is the FT's head of investigations. Also my former boss at FT Alphaville and a veteran at at lunching the right way. I would put it that way.

All right, Dan and Paul, thank you so much for coming on Odd Lots.

Dan McCrum (4:31)

Thanks for having us.

Paul Murphy (4:32)

Yes, hi there.