Why we trust fraudsters
From Enron to Wirecard, elaborate scams can remain undetected long after the warning signs appear. What are investors missing?
In March 2020, the star English fund manager Alexander Darwall spoke admiringly to the chief executive at one of the largest investments in his award-winning portfolio.
“The last set of numbers are fantastic,” he gushed, adding: “This is a crazy situation. People should be looking at your company and saying ‘wow’. I’m delighted, I’m delighted to be a shareholder.” Seated in a swivel chair at his personal conference table, Markus Braun sounded relaxed. The billionaire technologist was dressed all in black, a turtleneck under his suit like some distant Austrian cousin of the late Steve Jobs, and he had little to say about swirling allegations the company had faked its profits for years.
“I am very optimistic,” he offered, when Darwall voiced his hope that the controversy would amount to nothing more than growing pains at a fast expanding company.
“I haven’t sold a single share,” Darwall assured him, doing most of the talking, while also acknowledging how precarious the situation was. The Financial Times had reported in October 2019 that large portions of Wirecard’s sales and profits were fraudulent, and published internal company documents stuffed with the names of fake clients. A six-month “special audit” by the accounting firm KPMG was approaching completion. “If it shows anything that senior people misled, that would be a disaster,” Darwall said.
His assessment proved correct. Three months later the company collapsed like a house of cards, punctuated by a final lie: that €1.9bn of its cash was “missing”.
In fact, the money never existed and Wirecard had for years relied on a fraud that was almost farcical in its simplicity: a few friends of the company claimed to manage huge amounts of business for Wirecard, with all the vast profits from these partners said to be collected in special bank accounts overseen by a Manila-based lawyer with a YouTube following. Braun, who claims to be a victim of a protégé with security services connections who masterminded the scheme and then absconded to Belarus, faces a trial this autumn alongside two subordinates that will examine how the final years of the fraud were accomplished.
Left behind in the ashes, however, is a much larger question, one which haunts all victims of such scams: how on earth did they get away with it for so long?
Wirecard faces serious questions about the integrity of its accounts since at least 2010. Estimates for losses run to more than €20bn, never mind the reputation of Frankfurt as a financial centre. Why did so many inside and outside the company — a long list of investors, bankers, regulators, prosecutors, auditors and analysts — look at the evidence that Wirecard was too good to be true and decide to trust Braun?
In 2019 I worked with whistleblowers to expose Wirecard, using internal documents to show the true source of its spellbinding growth in sales and profit. As I faced Twitter vitriol and accusations I was corrupt, the retired American short-seller Marc Cohodes regularly rang me from wine country on the US west coast to deliver pep talks and describe his own attempts to persuade German journalists to see Wirecard’s true colours. “Keep going Dan. I always say, ‘there’s never just one cockroach in the kitchen’.” He was right on that point: find one lie and another soon follows. But short-sellers who search for overvalued companies to bet against are unusual, because they go looking for fraud and skulduggery. Most investors are not prosecutors fitting facts into a pattern of guilt: they don’t see a cockroach at all.
Think of Elizabeth Holmes, another aficionado of the black turtleneck, who persuaded a group of experts and well-known investors to back or advise her company, Theranos, based on the claim it had technology able to deliver medical results from an improbably small pinprick of blood. The involvement of reputable people and institutions — including retired general James Mattis, former secretary of state Henry Kissinger and former Wells Fargo chief executive Richard Kovacevich as board members — seemed to confirm that all was well. Another problem is that complex frauds have a dark magic that is different to, say, “Count” Victor Lustig personally persuading two scrap metal dealers he could sell them a decaying Eiffel Tower in 1925. As Dan Davies wrote in his history of financial scams, Lying for Money, “the way in which most white-collar crime works is by manipulating institutional psychology. That means creating something that looks as much as possible like a normal set of transactions. The drama comes much later, when it all unwinds.” To doubt them was to doubt the entire structure, which is what makes their impact so insidious; frauds degrade faith in the whole system
What such frauds exploit is the highly valuable character of trust in modern economies. We go through life assuming the businesses we encounter are real, confident that there are institutions and processes in place to check that food standards are met or accounts are prepared correctly. Horse meat smugglers, Enron and Wirecard all abused trust in complex systems as a whole. To doubt them was to doubt the entire structure, which is what makes their impact so insidious; frauds degrade faith in the whole system. Trust means not wasting time on pointless checks. Most deceptions would generally have been caught early on by basic due diligence, “but nobody does confirm the facts.
There are just too bloody many of them”, wrote Davies. It makes as much sense for a banker to visit every outpost of a company requiring a loan as it would for the buyer of a pint of milk to inquire after the health of the cow. For instance, by the time John Paulson, one of the world’s most famous and successful hedge fund managers, became the largest shareholder in Canadian-listed Sino Forest, its shares had traded for 15 years. Until the group’s 2011 collapse, few thought of travelling to China to see if its woodlands were there. Yet what stands out in the case of Wirecard are the many attempts to check the actual facts.
In 2015 a young American investigator, Susannah Kroeber, tried to knock on the doors at several remote Wirecard locations. Between 2010 and 2015 the company claimed to have grown in a series of leaps and bounds by buying businesses all over Asia for tens of millions of euros apiece. In Laos she found nothing at all, in Cambodia only traces. Wirecard’s reception area in Vietnam was like a school lunchroom; the only furniture was a picnic table for six and an open bicycle lock hung from one of the internal doors, a common security measure usually removed at a business expecting visitors.
The inside was dim, with only a handful of people visible and many desks empty. She knew something wasn’t right, but she also told me that while she went half mad looking for non-existent addresses on heat-baked Southeast Asian dirt roads, she had an epiphany: “Who in their right mind would go to these lengths just to check out a stock investment?” Even when Kroeber’s snapshots of empty offices were gathered into a report for her employer, J Capital Research, and presented to Wirecard investors, the response reflected preconceived expectations: these are reputable people, EY is a good auditor, why would they be lying?
The short seller Leo Perry described attending an investor meeting where the report was discussed. A French fund manager responded by reporting his own due diligence. He’d asked his secretary to call Wirecard’s Singapore office, the site of its Asian headquarters, and could happily report that someone there had picked up the phone.
The shareholders reacted at an emotional level, showing how fraud exploits human behaviour. “When you’re invested in the success of something, you want to see it be the best it can be, you don’t pay attention to the finer details that are inconsistent”, says Martina Dove, author of The Psychology of Fraud, Persuasion and Scam Techniques. She adds that social proof and deference to authority, such as expert accounting firms, were powerful forces when used to spread the lies of crooks: “If a friend recommends a builder, you trust that builder because you trust your friend.”
Wirecard’s response, in addition to taking analysts on a tour of hastily well-staffed offices in Asia, was to drape itself in complexity. Like WeWork, the office space provider that presented itself as a technology company (and which wasn’t accused of fraud), Wirecard waved a wand of innovation to make an ordinary business appear extraordinary. At heart, Wirecard’s legitimate operations processed credit and debit card payments for retailers all over the world. It was a competitive field with many rivals, but Wirecard claimed to have become a European PayPal and more, outpacing the competition with profit margins few could match.
Wirecard was “a technology company with a bank as a daughter”, Braun said, one using artificial intelligence and cutting-edge security. As the share price rose, so did Braun’s standing as a technologist who heralded the arrival of a cashless society. Who were mere investors to suggest that the results of this whirligig, with operations in 40 countries, were too good to be true?
It seems to me Wirecard used a similar tactic to the founder of software group Autonomy, Mike Lynch, who charged that critics simply didn’t understand the business. (Lynch has lost a civil fraud trial relating to the $11bn sale of the group, denied any wrongdoing, said he will appeal, and is fighting extradition to the US to face fraud charges.
Autonomy’s former CFO was convicted of fraud in separate American proceedings.) When this publication presented internal documents describing a book cooking operation in Singapore, Wirecard focused on the amounts at stake, which were initially small, rather than the unpunished practices of forgery and money laundering, which were damning.
Then there was the thrall of German officials. Three times, in 2008, 2017, and 2019, the financial market regulator BaFin publicly investigated critics of Wirecard, taken by observers as a signal of support. Indeed, BaFin fell for the big lie when faced with an unenviable choice of circumstances: either foreign journalists and speculators were conspiring to attack Germany’s new technology champion using the pages of a prominent newspaper; or senior executives at a DAX 30 company were lying to prosecutors, as well as some of Germany’s most prestigious banks and investment houses.
Acting on a claim by Wirecard that traders knew about an FT story before publication, regulators suspended short selling of the stock to protect the integrity of financial markets. Proximity to the subject won out, but the German authorities were hardly the first to fail in this way. Their US counterparts ignored the urging of Harry Markopolos to investigate the Ponzi schemer Bernard Madoff, a former chairman of the Nasdaq whose imaginary $65bn fund sent out account statements run off a dot matrix printer.
For some long-term investors, to doubt Wirecard was surely to doubt themselves. Darwall first invested in 2007, when the share price was around €9. As it rose more than tenfold, his investment prowess was recognised accordingly, attracting money to the funds he ran for Jupiter Asset Management, and fame. He knew the Wirecard staff, they had provided advice on taking payments for his wife’s holiday rental. Naturally he trusted Braun. Darwall did not respond to requests for comment made to his firm, Devon Equity Management. In the buildings beyond the shades of Braun’s office, staff rationalised what didn’t fit. Wirecard was a tech company, yet in early 2016 it suffered a tech disaster.
On a quiet Saturday afternoon, running down a list of routine maintenance, a tech guy made a typo. He entered the wrong command when decommissioning a Linux server. Instead of taking out the one machine, he watched with rising panic as it killed all of them, pulling the plug on almost the entire company’s operations without warning. Customers were in the dark, as email was offline and Wirecard had no weekend helpline, and it took days for services to recover. Following the incident, a small but notable proportion of clients left and new business was put on hold as teams placated those they already had, staff recalled.
Yet the pace of growth in the published numbers remained strong. Martin Osterloh, a salesman at Wirecard for 15 years, put the mismatch between claims and capabilities down to spin. Only after the fall was the extent of Wirecard’s hackers, private detectives, intimidation and legal threats exposed to the light. Haphazard lines of communication, disorganisation and poor record keeping created excuses for middle-ranking Wirecard staff and its supervisory board, stories to tell themselves about a failure to integrate and start-up’s culture of experimentation.
It was perhaps not as hard to believe as we might think. Facebook, which has probed the legal boundaries of surveillance capitalism, famously encouraged staff to “move fast and break things”. Business questions often shade grey before they turn black. As Andrew Fastow said of his own career as a fraudster, “I wasn’t the chief finance officer at Enron, I was the chief loophole officer.” Braun’s protégé was chief operating officer Jan Marsalek, a mercurial Austrian who constantly travelled and struck deals, with no real team to speak of.
Boasting that he only slept “in the air”, he would appear at headquarters from one flight with a copy of Sun-Tzu’s The Art of War tucked under an arm, then leave a few hours later for the next. Questions were met with a shrug, that strange arrangements reflected Marsalek’s “chaotic genius”. As scrutiny intensified in the final 18 months, the fraudulent imitation shifted to problem solving, allowing board members and staff to think they were engaged in procedures to improve governance.
After the collapse I shared pretzels with Osterloh on a snowy day in Munich and he seemed embarrassed by events. He and thousands of others had worked on a real business, until they were summarily fired and learned it lost money hand over fist. Osterloh spoke for many when he said: “I’m like the idiot guy in a movie, I got to meet all these guys. The question arises, why were we so naive? And I can’t really answer that question.”
Dan McCrum’s ‘Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth’ is published by Penguin on June 16
The former presidential candidate on negotiating with Putin, the ‘prophet’ Margaret Atwood — and why the Democrats need to rein in the radical left
Lunching with Hillary Clinton is no routine affair. When I arrive at Washington’s sleek Park Hyatt hotel, the somewhat jittery manager steers me to a discreet side door to await her arrival.
After several minutes of awkward small talk, it turns out Clinton already came through the front entrance and has been seated for some minutes. They whisk me past her secret service detail to a semi-enclosed dining area of the Blue Duck Tavern, the hotel’s Michelin-starred, locally sourced restaurant. Clinton is chatting with Nick Merrill, her longtime aide, who stayed on with her after she stepped down as secretary of state in 2013. Our engagement has taken a while to germinate.
Partly this is because Clinton is so often on the road. She has just come back from the UK, where she spoke at the Hay literary festival and met an American who helped to organise the Queen’s jubilee celebrations. “The team were so nervous,” she says. “But it went off without a hitch, right?” This encounter also took some coaxing because Clinton, to put it mildly, does not exactly adore the media. I point out that for all my columns criticising her ill-fated 2016 campaign, I never told her what to wear or when to smile — unsolicited advice in which many male pundits seemed to revel. “That puts you in a small minority,” she says, laughing. It is thus with studied indifference that I describe Clinton as wearing a trademark grey pantsuit and a substantial silver and pearl necklace.
She seems to have no trouble smiling. I consider it my goal to get Clinton to remove the mask she dons for interactions with people like me. Mutual friends say that in private she is funny and can be bitingly sarcastic. American media colleagues have a very different take on a woman with whom they have been feuding for decades.
She has faced a generation of fruitless inquiries, starting with the 1990s probe into the Clintons’ Whitewater real estate investments that culminated in Kenneth Starr’s report on her husband’s sexual indiscretions, then the Benghazi hearings into the killing of a US ambassador and three other Americans under her watch in 2012, and most recently — this very day, in fact — the acquittal of a Clinton campaign legal adviser on the charge that he improperly influenced the FBI to investigate links between Donald Trump’s campaign and the Kremlin.
Clinton has described herself as “the most investigated innocent person in America”. She is also a doyenne of practised legalese, which could smother this lunch before it gets going.
A glass of wine would make sense, though. “Oh, I really like wine, but not today,” says Clinton. “But I am a happy observer of other people’s drinking, so you go ahead.” Merrill and I simultaneously agree and each order a glass of Sancerre. Clinton goes for iced tea. She asks the waitress whether the chilled summer green soup is cream-based or puréed. I note that one of her most recent meals was fish and chips at a traditional chippy in England’s Tyneside after she had delivered a lecture nearby.
“I have to confess I thought chips were kind of fancy potato chips,” she says. “I thought they were with round cuts of potatoes. You call them chips but they’re fries.” We’re still divided by a common language, I suggest. One state — ‘and this is hard even to speak about’, she says — would require the woman to get the permission of her rapist before aborting This prompts Clinton to talk about her paternal genealogy from the gritty mining towns of north-east England.
Her great-grandfather, Jonathan Rodham, was a coal miner recruited to cross the Atlantic with his family in the 1880s. They settled in Scranton, Pennsylvania. He quickly switched to a job at a lace-making factory. Clinton is puzzled why people are so nostalgic about the mining life. “Whether they were from West Virginia or Tyneside, their lives were so grim and disease-prone and unhygienic — but the nostalgia for those days. I don’t know,” she says, trailing off.
Some people blame Clinton’s 2016 loss on her remarks about putting coal mines out of business (Trump promised a mining boom). But identifying one culprit for her 2016 defeat is like Murder on the Orient Express — the dagger is covered with fingerprints. In her memoir of that campaign, What Happened, Clinton takes the primary blame and also points to the FBI’s investigation into her home server emails, her gaffe about half of Trump’s base being “deplorables” and his skill at giving the media a “new rabbit every day [knowing] they’d never catch any of them”.
Having been told it is cream-based, Clinton skips the soup and goes for the jumbo lump crab cake with salad, which I duplicate. I tell Clinton that on learning of her defeat in 2016 my then nine-year-old daughter stopped taking my word as gospel. I had somewhat rashly reassured her that Trump would not win. “It’s really remarkable how often I’m told stories like that and how often I’m reading something like a work of fiction set in modern times and 2016 is a traumatic event — it’s almost eschatological,” Clinton says. “It is a break in history. It’s such a piece of unfinished business.”
With an eye on the likely coming reversal of Roe vs Wade, the 1973 Supreme Court ruling that enshrined women’s right to abortion, I ask Clinton how far such unfinished business is likely to go. “If you go down the rabbit hole of far right intellectuals, you see that birth control, gay marriage — all of it is at risk,” she replies. What is the Christian right’s endgame, I ask. Presumably they would not be able to create the theological dystopia depicted in Margaret Atwood’s 1985 novel The Handmaid’s Tale?
My question triggers a passionate response. Clinton speaks about how some states will make it illegal to abort after rape and incest if Roe vs Wade is overturned. One state — “and this is hard even to speak about”, she says — would require the woman to get the permission of her rapist before aborting. Others plan to criminalise women who have the procedure in states where it is legal.
The level of insidious rulemaking to further oppress women almost knows no end,” Clinton says. “You look at this and how could you not but think that Margaret Atwood was a prophet?
She’s not just a brilliant writer, she was a prophet.” Clinton adds that when she was a senator, she voted against the confirmation of Samuel Alito, one of this court’s most conservative judges. “I found Alito was the kind of young man who when he was at Princeton railed against coeducation, railed against letting women into the eating clubs, and that was all in the background that I read,” she recalls. “He honestly struck me as one of those very self-righteous types seeking to remake society.”
Menu Blue Duck Tavern Park Hyatt Washington 1201 24th St NW, Washington DC 20037
Jumbo lump crab cake x 3 $132
Still water $9 Sparkling water $9
Apple pie à la mode $31
Espresso x 2 $14 Glass
of Sancerre x 2 $40 Black iced tea x 2 $14
Total inc tax and service $338.90
Clinton asks for extra salad with her crab cakes and more iced tea. “You guys should have more wine,” she says, which we both reluctantly decline. I ask whether things would have turned out differently had Clinton, not Trump, won in 2016. Her answer makes it clear she thinks the January 6 2021 storming of Capitol Hill to stop Joe Biden’s certification would simply have happened four years earlier.
“Literally within hours of the polls closing in 2016, we had so much evidence pouring in about voters being turned away in Milwaukee and not being able to vote in Detroit,” she replies. “These states were run by Republicans so there was no way to find out the truth about any of them. I also believe in peaceful succession and transition and all of that.” At that point she says she was unaware of Cambridge Analytica and the role of social-media algorithms — “all of the stuff that was convincing people that I was a murderer or a child trafficker”. She reminds me that she won the popular vote by nearly 3mn but lost the electoral college by 78,000 votes.
Biden won the popular vote by more than 7mn but barely scraped the electoral college by 43,000 votes. “That tells you everything you need to know about Republican strategy for 2024. Even in his reptilian brain, Trump has to know that he lost this time. He refuses to accept it because it wasn’t supposed to happen.” Does she think Trump will run in 2024? “I think if he can he’s going to run again,” Clinton replies. “Follow the money with Trump — he’s raised about $130mn sitting in his bank account that he used to travel around, to fund organising against elections . . . I don’t know who will challenge him in the Republican primary.” Could you imagine running again, I ask. “No, out of the question,” Clinton replies. “First of all, I expect Biden to run. He certainly intends to run. It would be very disruptive to challenge that.”
The fact that Biden will be 81 at the next election is nevertheless a source of rising angst among some Democrats — and speculation about whether he might step down. Clinton does not get around to her second point about why she will not seek high office again. The first seems final enough. We had agreed to share the restaurant’s signature apple pie but it is so gigantic that Clinton balks at the sight. “Oh wow. I’m done. Serve him and then yourself,” Clinton suggests to Merrill. Clinton’s bowl of berries never arrives. Even in his reptilian brain, Trump has to know that he lost this time. He refuses to accept it because it wasn’t supposed to happen She knows these lunches are meant to be conversational and fires off several questions.
The most relevant of these is how I would compare Henry Kissinger, who recently turned 99, with the late Zbigniew Brzezinski, Kissinger’s life-long rival and friend, whose biography I am researching. I discern a subtext to her question. Kissinger recently said that Ukraine might have to concede territory to Putin to bring the war to an end. I say that on balance Brzezinski had a keener grasp of the Soviet Union’s weaknesses. “I fully agree,” says Clinton. “You’ve got to give Kissinger credit for longevity if nothing else. He just keeps going. I never thought Brzezinski had a romantic view of the Russians the way Kissinger did. He values his relationship with Putin so much.”
It seems like a good moment to ask Clinton about Russia’s leader, whom she once quipped had “no soul”. Though Clinton talks about today’s situation in Ukraine, she keeps referring back to Putin’s role in America’s 2016 election, which she believes was in revenge for an “anodyne” statement she had made as secretary of state in 2012 in support of the pro-democracy protests against his return to Russia’s presidency. She relates an anecdote about a restaurant dinner in London several years ago, where the guests debated the wisdom of Nato’s post-cold war expansion.
After a while, the waiter interrupted: “‘Before I take your order, I am from Poland and I have one thing to say: never trust the Russians,’” Clinton recalls approvingly. She adds: “I always believed in expanding Nato and I find the arguments against that to be naive at best, because what we have seen is proof positive of why it was necessary.”
Putin once said of Clinton: “It’s better not to argue with women.” Was Putin as scathing towards Clinton in private as he was in public, I ask. Clinton draws a breath. “Yes, he was very sexist towards me. We had some interesting, even helpful, interactions in private and then the press would be invited in and he would say something insulting about America.
He would then manspread for effect.” In her view, Putin’s only realistic path to victory in Ukraine would be Trump’s re-election in 2024. “If Trump had won in 2020 he would have pulled out of Nato — I have no doubt about that,” she says. My espresso has arrived. Clinton asks for more iced tea. I cannot allow the lunch to end without questioning the direction of her party. I say that Democrats seem to be going out of their way to lose elections by elevating activist causes, notably the transgender debate, which are relevant only to a small minority. What sense does it make to depict JK Rowling as a fascist?
To my surprise, Clinton shares the premise of my question. “We are standing on the precipice of losing our democracy, and everything that everybody else cares about then goes out the window,” she says. “Look, the most important thing is to win the next election. The alternative is so frightening that whatever does not help you win should not be a priority.” Another instance is the “defund the police” campaign, she adds. “You need accountable measures. But you also need policing. It doesn’t even pass the common-sense politics test not to believe that. Some positions are so extreme on both the right and the left that they retreat to their corners . . . Politics should be the art of addition not subtraction.”
It has been an intensive 100 minutes but I am not sure I have persuaded Clinton to take off her proverbial mask. As we stride across the busy restaurant floor — Clinton waves gamely and returns a barrage of shouted greetings — I notice that she did not bring an actual one, an omission still viewed askance in some circles. You should take that glass of wine next time, I suggest as we walk to her mini-motorcade.
“I can happily agree to that,” she says. Then she vanishes behind tinted glass.
Edward Luce is the FT’s US national editor