I’m a corporate fraud investigator. You wouldn’t believe the hubris of the super-rich
While the fraudsters I’ve encountered are often cunning, sooner or later they get carried away
FTX’s HQ, we now know, was not your typical one. CEO Sam Bankman-Fried ran his business from a $40m Bahamian penthouse named the Orchid, complete with Venetian plaster walls and a grand piano. The lot was nestled beside a championship golf course and a mega-yacht marina. Since Amazon doesn’t deliver to the Bahamas, private jets did the job instead.
It wasn’t your typical corporate HQ – but then, FTX is not your typical corporation. It’s bankrupt, dragged down by its own financial abuses, with its chief executive facing prison. Yet while FTX has made headlines, its tale is not as unusual as you might think.
I work in corporate investigation, and it’s my job to spot fraud and corruption. Sometimes it’s as subtle as manipulating your free cash flow. Sometimes it’s as shameless as photoshopping your bank statements.
The job is varied. Generally, I’m looking for red flags: accounting abuses, yes, but also egregious business practices, such as failure to pay suppliers. We want to answer the question: is the business doing what it says it’s doing, to the standard it should be? And if not, can that company really be worth what the market believes it is?
I use a number of methods to do this. Some you might expect – financial reports, local filings, data sets – but others you might not, including social media. Recently I was deep in the Instagram account of a CEO whose company we believe is a house of cards. I gazed for a long time at a snap of a family member, posing on the steps of a private jet with champagne and a gun. If I had to paint a portrait called “hubris”, it would look something like that.
Corruption and its consequence, fraud, have many origins. Sometimes the executives like their jets and yachts a little too much. Or they might have connections with the mafia or drug cartels. Or they might just make big promises they can’t deliver. Far from being an easy way out, fraud is a high-wire act, the rewards high, the penalties higher. Companies therefore go to great pains to conceal it, making death threats to whistleblowers or putting tracking devices in short-sellers’ cars.
But while the fraudsters I’ve encountered are generally clever – or at least cunning – sooner or later something interesting happens: they get carried away. Drunk on their own genius, they concoct grander schemes, more flamboyant methods. They give large contracts to family members, who are themselves shareholders in the company. They fire their top-tier auditor and bring in a no-name firm. In the case of Sam Bankman-Fried, they allegedly participate in a Signal group chat entitled “Wirefraud”.
The consequences of this hubris can be catastrophic. Investors risk losing money, of course, but people also risk losing their lives, perhaps because the company has made savage cuts in lifesaving equipment they use or sell, or through cheating their own emissions tests (Volkswagen), or pretending they can monitor cancer from blood samples (Theranos).
There is something unique to our era that encourages the charlatan. As well as investigating corporations, I am also a novelist, and I think we live in the age of the corporate fairy-tale: a magical land of unicorns and eternal growth. “What’s the story?” investors like to ask about the latest hot start-up, willing the narrative to be true even as they live the myth of their own absolute rationality.
Elon Musk once said: “Brand is just a perception, and perception will match reality over time.” Put another way, if the emperor believes he is wearing wonderful clothes, others will start to believe it too. When I was researching my debut novel, in which a tyrant’s wife stands trial for her husband’s corruption, I found someone else making an eerily similar point to Musk. It wasn’t from another business leader; it was Imelda Marcos. “Perception is real,” the wife of the former Philippines dictator said. “And the truth is not.”
One of my contacts met with Theranos’s Elizabeth Holmes at a time when investors were falling over themselves to give her money. He couldn’t see how Theranos’s work was possible, he said. His company didn’t invest, but he was sidelined internally for missing out on the hot new thing. By the time the company collapsed, vindicating his decision, he’d left the firm.
In another case, I spoke with a whistleblower who was subjected to silent phone calls and phishing attacks. He also believed he was being followed. Just before he was fired, they tried to send him on a business trip to a developing nation. He called his manager, who knew about his whistleblowing. “He said if I went, I wouldn’t come back.”
This kind of behaviour is only possible when those in power are allowed to run unchecked. “Never in my career have I seen such a complete failure of corporate controls,” John Ray III, the new CEO of FTX, wrote in a bankruptcy court filing, while the Ethereum co-founder Vitalik Buterin accused the company of acting like “1930s dictators”. A dictator is in some ways a country’s CEO, and as the Silicon Valley cult of personality has swollen and spread, the CEO has become dictator.
Markus Braun, former chief executive of Wirecard, Germany’s answer to PayPal, was a self-styled visionary whose company collapsed spectacularly in 2020. He is on trial, while his COO is on Interpol’s most wanted list. In 2019, the Renault Nissan CEO Carlos Ghosn fled charges he was facing in Japan by smuggling himself out in a musical instrument case. I used to be a business reporter at Reuters and bankers would speak glowingly to me of his strongman tactics, of how the company would collapse without him. The trouble is, all too often these emperors turn out to have nothing on.
That is not to say that fraud always begins deliberately. You fall slightly short one quarter, so you massage the numbers a bit, just to tide things over. The next quarter you fall short again. You amend the numbers again, but because a hole has already opened, you have to do so a little more. Before you know it, you’re in too deep. You can’t come clean, because that would be to confess past sins. Your only choice is to keep going, down, down the rabbit hole. People think numbers can’t lie, but a company’s accounts are no more or less than a story wrought in figures. Margins are inflated, funds round-tripped. Black holes disappear.
Once you set along this road, it’s hard to stop. You need something to distract people, and stop them asking unwelcome questions. The tools for this are often simpler than you think: we are all susceptible to charm and its ugly sister, bullshit. Image, for example, is key. Theranos’s Holmes and Wirecard’s Braun both favored a black polo neck: the Steve Jobs echoes were deliberate. As Musk says, perception will match reality over time.
Except, of course, that’s not the way the world works. Only a child or a madman believes that the fantasies in his head can come true. And such delusions are so easily punctured, if only exposed to the right interrogation. Around the time that Enron began selling weather futures, an analyst set out to answer an absurdly simple question: “How does Enron make its money?”
But it’s difficult to ask so-called stupid questions. I have lost count of the times that I’ve listened to executives bamboozle their own stakeholders with complex or subtly nonsensical language. It takes strength to push back. “Excuse me,” a gruff Scottish accent interrupted on one earnings call, amid a sea of smooth American tones. “But nothing you’re saying makes any sense.” I wanted to cheer.
Is corporate wrongdoing on the rise? Statistics certainly suggest so. The US Securities and Exchange Commission’s latest annual report on its whistleblower program showed a record 12,210 tips were provided in 2021 – a 76% increase against 2020, itself a record-breaker. The commission also made more financial awards to whistleblowers than in all previous years combined – in other words, the information given was real and significant enough to lead to real consequences.
In the last few years, low interest rates have brought about an economic tide that has lifted all boats, no matter how leaky. But post-Covid, the macro environment is changing, and it’s human nature that it is losses, rather than gains, which spur us to ask questions. FTX may be a spectacular example, but it will not be the last. As Warren Buffet once said: “It’s only when the tide goes out that you see who’s been swimming naked.”
Freya Berry’s debut novel, The Dictator’s Wife, (Headline Review) is available 2 February in paperback, ebook and audio download