'Markets can stay irrational for longer than you can stay solvent' is a classic maxim for investors, but it holds true for journalists too. In this episode, we speak with the Financial Times's Dan McCrum and Paul Murphy (Tracy's old boss) about their multi-year effort to expose fraud at Wirecard, a German payments giant that went spectacularly belly-up after billions of dollars were found to have gone missing. Dan, who's just written a book about his experience called "Money Men," explains how he first spotted problems at what was once described as "Europe's greatest fintech," and how hard it was to convince others of the truth. Rather than going after Wirecard itself, German authorities went after the journalists and short-sellers who were warning of the scheme. Transcripts have been lightly-edited for clarity.
Points of interest in the pod:
What was Wirecard’s business? — 5:35
What Wirecard’s accounting fraud looked like? — 8:48
Wirecard’s response to allegations of fraud — 12:40
Why do frauds keep happening in Germany — 19:38
Best practices for handling tips from short sellers — 27:24
Did short sellers make money from Wirecard? — 31:20
Where were Wirecard’s auditors? — 33:22
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Tracy Alloway: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:15)
And I'm Joe Weisenthal.
Tracy: (00:16)
Joe, what do you think the most famous apocryphal quote about markets is?
Joe: (00:23)
I guess it would have to be the one about market staying solvent or rather, the market staying irrational longer than you could stay solvent or something like that. Right. That's gotta be it.
Tracy: (00:34)
I'm so glad you said that one because that was exactly what I had in mind.
Joe: (00:38)
Is that really apocryphal? Does no one really know who actually said that or what?
Tracy: (00:43)
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. So 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 kind of familiar with where you look at something and you go, ‘this is absolutely insane.’ And yet, you know, 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: (01:19)
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 reprices to normal. And it seems really tough because A) you know, if you're on 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: (01:48)
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 going to be talking about Wirecard. Do you remember that company?
Joe: (02:01)
Yeah, but I never really understood what they did and so for no other reason, I'm excited about this episode because I'm going to finally understand what Wirecard did or didn't or maybe didn't do well,
Tracy: (02:12)
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 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 going to 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.
Joe: (2:49)
That's okay. That's allowed.
Tracy: (2:50)
Yeah, I think in this instance, it works because we're going to 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: (03:21)
It's so wild that this it's even possible. Like you think the question is, ‘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 should be sort of like independently-verifiable -- yes or no. It could take a long time for the truth to come out.
Tracy: (03:39)
Yeah. And I'm always personally interested in the sort of, what do you call them? 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 are 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 going to be speaking with Paul Murphy. He is the FT’s head of investigations. Also my former boss at FT Alphaville and a veteran at lunching the right way, I would put it that way. All rright. Dan and Paul, thank you so much for coming on Odd Lots!
Dan McCrum: (04:30)
Thanks for having us.
Paul Murphy:
Yes. Hi there.
Tracy: (04:34)
So maybe just to begin with, shall we -- let's start at the beginning. So what exactly piqued your interest in Wirecard, Dan?
Dan: (04:43)
So this was eight years ago and I was having a conversation with quite a well-known Australian hedge fund manager called John Hempton. And he just said to me, ‘Hey Dan, would you be interested in some German gangsters?’ And that was the start.
I jotted down the name of this funny little company called Wirecard and the best description of it then was sort of a European PayPal. It did something to do with payments and it was worth about $4 billion. And yeah, I didn't think much more of it then. I mean, I looked at its business. It didn't really make much sense to me. And then this other short seller, a guy called Leo Perry got in touch and we went and met for coffee and he laid out in front of me, these sort of really close-written sheets of this theory that hang on a second, this Wirecard is a big accounting fraud.
Joe: (05:35)
So what was the ostensible business -- before we get to sort of the gap between what was going on in what actually was going on? What was the ostensible business? What did they claim to be doing? What was the product? And did it have people actually using the service?
Dan: (05:51)
So it had this real business and it's a pretty simple business. It processes credit and debit card payments. So if you have like an online shop selling, I dunno, flip flops, then it would help you get money from customers who wanted to buy your flip flops. It's as simple as that. Lots of businesses do this, but the thing about Wirecard was, it was growing way faster than everyone else. And it was also really profitable, quite unusually profitable. And that's the key, right? You can't normally do both of those things.
Tracy: (06:24)
So one of the things that you wrote about very early on was Wirecard’s, I mean basically a roll-up strategy, where with they would buy all these smaller payment processors in far-flung places and they would buy them in kind of a weird way. Could you talk about that a little bit?
Dan: (06:41)
Yeah. So what Wirecard had done was it'd spent about five years buying up these little businesses all over Asia, you know, sort of a few tens of million here, a few tens of million there. And it said this was part of its big growth strategy. And every time it bought it, it was this big acceleration in the business. But what happened when I went and looked at those businesses as actually bought, you could see in sort of local filings or, you know, local press releases, that the numbers didn't match what Wirecard was claiming for them. And then you had a closer look and you're like, actually these businesses [are] in really bad shape, you know, the auditors would say there's a risk this is a going concern. And what it added up to was there was this mismatch between what the company was claiming and what it was doing on the ground. And you could see little transactions, you know, which seemed like money was maybe going out the side door. And it looked to me like there was accounting fraud. They were just using these acquisitions to, you know, play some tricks with the accounting as they bought them.
Joe: (07:51)
You know, it's funny going back to, you mentioned that the original catalyst for this was a conversation with John Hempton. We had John on the podcast, I think maybe last October or maybe it was actually the middle of last summer. And I remember he made a point that was like, anytime you see a financial firm growing fast period, that's like a good red flag to begin with. Like finance is kind of boring. And so if you see any sort of company in finance making a lot of progress and of course, what was that other company? Oh yeah, Greensill was the other one that he was, I think that was actually what we were talking about on the podcast. And of course that also was a fast growing finance company that imploded, what did it look like though? You know, when you say, okay, there seemed to be some gap between numbers here and numbers there. Like, can you give a little bit more detail onto what these discrepancies looked like from your perspective?
Dan: (08:48)
So Wirecard would do funny things like it would say, ‘Hey, we're buying this company in December.’ And it would actually announce the deal and agree it then, and then it would make a big down payment. So it would say, ‘Hey, we haven't actually signed the documents to take ownership of the assets yet. But because we're, you know, we're heading towards a takeover, we'll make a kind of a deposit, like a down payment.’ And they claimed to send a bunch of cash out the door. So say 10 million euros out of a 40 million euro deal, which they would send out before the year end finished. And what that looked like to me was, the thing about accounting fraud is your profit looks great. But when the auditors walk in at the start of the year to, you know, do the audit, the first thing they're going to say is, can we see the bank balances?
And they're going to expect them to be full of cash, because you've just had this really profitable year. So what it looked like was this trick to go, ‘oh, the cash is going to be short. We'll pretend we've sent it out to these guys and that will hide the fraud.’ And so every year the deals got bigger because when you do an accounting fraud, the numbers get bigger every year. And, you know, the mechanics of that were quite complex. But one of the things you can look at with these companies is yeah, if they're growing really fast, maybe it's too good to be true. And the funny thing about Wirecard was it was growing really fast and claimed to be really profitable, but it kept raising money, kept going to shareholders and asking for them to inject some cash or, you know, it kept going to the banks and asking for more debt. And that was a big red flag.
Tracy: (10:34)
Paul, maybe this is a good place to bring you in, how did the rest of the world perceive Wirecard at that time?
Dan: (10:45)
To be frank, we didn't know much about it at all. It was an unlikely subject that Dan had picked up. I knew from my own experience that it's very difficult to tell a story like this of accounting fraud, of balance sheet manipulation. And so I was intrigued by it because I knew it was on a kind of quite a tough assignment, but, you know, I'm sometimes asked, you know, how do we choose a subject to investigate, to throw kind of resources at? The fact of the matter is that often, you know, the targets of our kind of investigative work just present themselves to us. And this was one of those because, you know, Dan started writing about it and the reaction of the company was odd to say the least. You know, it was out of kilter and that simply, you know, I could see it piqued Dan's interest and he was going deeper and deeper into this subject. But it also feeds my interest as well.
Tracy: (11:55)
So this is one of the, the crazier things about this entire story, which is the reaction that Dan got as he was writing these things. And suddenly it seemed like, I don't even know how to describe it, but I know you had people attacking you on Twitter. You had the regulators in Germany who eventually started a criminal investigation into you, the reporters at the FT for writing negative things against Wirecard. And then you also had at one point people that seemed to be spying on the FT. So could you talk a little bit more about that reaction, because it seems surreal and reading the book, it actually does read like a spy thriller in some respects because of the massive reaction you got.
Dan: (12:40)
Yeah. It was this kind of slow but steady escalation of weirdness. Like it almost had like a cat mouse quality where we would try and write one thing about them and then the reaction would be weird. And the longer we went on, the weirder it got, so it started with, you know, angry legal letters -- fairly standard approach. But one of the first times I sent Wirecard questions, they came back and went, ‘hang on a second. Are you in league with short sellers?’ Like either corruptly or, you know, am I just naively being used by them to attack this company? It's like, that's weird. We've hit a nerve here haven't we? And then we all started getting these phishing emails from hackers who were very persistently trying to get us to give away our passwords and not just a bunch of journalists at the FT, but you know, other people who could be identified as critics of Wirecard elsewhere. And then we realized private detectives were involved. And then, well this happened to you, didn't it Paul? You got offered $10 million.
Tracy: (13:43)
<Laughs> Were you tempted Paul?
Paul: (13:48)
Well, actually, I mean, I was so surprised by the approach, I wandered back into the FT newsroom and the news editor at that time as Peter Spiegel who's now in New York. And I said, you know, this has just happened, Peter, what do you think? How should we react? And he said, ‘I want some.’ You just assumed it was a setup. We already knew this was a very, very strange company. You know, aside from all the kind of, you know, the phishing emails, the kind of clown spying operation, we were also dealing with an avalanche of online abuse. You know, Dan was taking the brunt of it, but it was also any other journalist, other journalists on Alphaville, myself. The editor, of course. Everybody was accusing us of being corrupt in some way, which in itself was just kind of crazy, you know, at the time, this was kind of pre-Trump, it wasn't as though they were, you know, just copying what was happening in America. We gradually came to understand this was the Wirecard playbook.
Joe: (15:22)
Let's go back to the very beginning, Dan, because you mentioned that in your first conversation, and also I want to talk to about working, getting tips from short sellers and allegations of being in league with them. But before we get to that, you know, you mentioned that the first thing that John Hempton said is like something about gangsters. And we, so everybody, we talked about the accounting fraud, but who were the people when he said, ‘are you interested in gangsters?’ Here's this German company, what are we actually talking about? And what did he see in terms of the people that were involved with this payments company?
Dan: (15:56)
So there were two theories, like John looked at it and said, ‘yeah, this looks like an accounting fraud.’ There’s also this other side to Wirecard, because if you are processing international payments, well, then there's an awful lot of interesting things you could do with that if you are not worried about the laws. So the suspicion was that Wirecard was basically processing payments for every kind of nasty thing online that you might care to imagine. And those two theories sort of were going on for quite a long time. And in terms of the gangsters, I mean, I think he might have had in mind, the chief executive Marcus Braun, who was this sort of former KPMG management consultant who just sort of spoke in tech gobbledygook. But what we started to learn is, you know, the more we got into it, the real weird sort of gangster/spy behind it was this bizarre character, Jan Marselek. He’s kind of like an Austrian whiz kid, like speaks multiple languages, dropped out of high school to run a tech startup. And everyone goes on about how eloquent and charming, I mean, you [Paul] had lunch with him, right?
Paul (17:12):
I did. I did.
Dan: (17:13)
He's this sort of charismatic guy who was the heart of, you know, everything Wirecard was doing, but there's this weird other side to him. And, he comes across as someone who's like the consummate improviser. He's constantly getting into these scrapes and almost destroying the company, but then he's got this other side to him where even now we're not really sure whether he was a spy or did he have just some sort of James Bond fixation, where he's, you know, trying to hang out with Libya militia groups or, you know, for his holidays, he likes to go for a stroll around Syria with the Russian army.
Tracy: (17:51)
As one does, right? Paul, what was lunch like with him?
Paul: (17:56)
Well, the first lunch I had was quite a kind of stilted affair. This was the one where we thought there was a chance that he would offer me a bribe. And there were other people around the lunch table and it was just a very kind of stiff affair because he was obviously anxious about meeting me. You know, we were discussing the fact that I knew that his company was running a kind of black operation against the FT. Because he didn't offer a bribe on that occasion, we organized a second lunch together, which was just myself and Marsalek. And if I'm frank, he was actually, it was a kind of fascinating conversation, mainly discussing Telegram, the messaging gap, which at the time was planning a huge token offering. I mean, the guy was interesting.
Joe: (18:55)
Can I ask a sort of big question and it maybe a little more, I don't know if it's philosophical, but like, what's the deal with Germany? They opened a criminal investigation into people reporting on you, but also there are all these other things that go on with Germany. Therewas the car company with the big diesel scandal, and they're always having these trouble with the banks that seemed to lose a lot of money all that time. Is there some issue with like German corporate culture or the sort of connection between regulators in Germany and companies such that there isn't checks and balances or sort of domestic auditing? Like, why do these big scandals seem to occur there?
Paul: (19:38)
Well, you do have the odd scandal in the US, Joe. Yeah.
Joe: (19:41)
Oh, that's true. We've had a few, I guess.
Paul: (19:44)
No, Joe, it is something that fascinated us. Okay. So, you know, we couldn't, well, I personally could not understand why the German elite, the German establishment collectively decided that my colleague Dan McCrum was corrupt and that we were just kind of, the FT was just allowing Dan to kind of roll out these kind of, you know, defamatory kind of destructive articles about Wirecard. Why did they believe that? I think it's fair to, you know — obviously we're generalizing here about German business and political and financial society — but there has been over the years, a kind of, you know, a tendency for them to distrust what we would call kind of Anglosaxon capitalism. You know, there was the kind of hedge funds and locust, all those sort of examples.
Joe: (20:44)
Well, also it was the German banks that loaded up on all the garbage, like prior to the great financial crisis too. Like Greensville didn't they open up their own bank in Germany. It feels like, you know, I always have this sort of view of Germany as this sort of small ‘c’ conservative culture. And yet it seems like they're always running into trouble, particularly when it comes to finance.
Dan: (21:10)
Well, I think there's an interesting point here about how fraudsters exploit trust. So Germany is this very high functioning economy, right? Where most people aren't psychopaths. And you get a lot done that way. And it's very efficient, if you go about your life and your business assuming the person on the other side of the table isn't trying to rip you off. And that's a good thing — that saves us all a lot of time and effort, right? Checking things that we don't have to. And so there's an argument here that what Wirecard and what these big complex frauds exploit is that element of trust because people literally don't see it coming because it is so unusual. Now that doesn't explain everything, because once you start to go, ‘Hey, there's some serious evidence here, you know, look at this, we're printing documents that show there's a fraud and people are still going, nah, I think I'd be fine. Or I think the FT is corrupt. That's still weird. And you need a bit more of an explanation for it.
Tracy: (22:13)
The thing that amazed me at the time was also the German press really seemed to automatically sort of arrange themselves against the FT. And even, I remember one of our former colleagues at the FT who was then working at the Handelsblatt was they published an article — I can't remember what the exact headline was, but there was a picture of like a credit card. And the caption underneath the credit card was like, I'm an FT journalist, can I pay for that bribe with credit card? Like basically insinuating, not even insinuating, just stating outright that the FT was accepting bribes in exchange for coverage, which is just as, you know, as journalists and former colleagues, that just seems such a weird position to automatically take.
Paul: (23:02)
Yes, we were quite shocked. There was also the example of the Commerzbank analyst, putting out a note, you know, an actual, you know, research note saying, ‘oh, Dan's just a, you know, Dan’s corrupt. We've known that for years. Ignore what he's writing.’ I mean, you know that, as a young journalist, before the internet, I used to go to international press conferences, some of which were held in Germany. And one thing I remember is on the first occasion I went to one, was that the chief executive would do a presentation and the assembled German press would all applaud the chief executive and all the kind of British press would be standing there, kind of shaking their heads, saying ‘what the hell's going on here?’ You know, we're journalists, we're here to kick the tires, not to applaud the chief executive. And I think it's fair to say that there's, you know, there is a different relationship between, you know, the German financial press and the corporate world. It doesn't have, perhaps in areas, doesn't have the same combative relationship that you would see in New York or London.
Dan: (24:27)
There’s a funny aspect of — this is slightly media navel-gazing, but there's a funny aspect of German privacy law, which means that sort of the practice of quote approval, where you have a conversation with the journalist. And then instead of them just writing up what you said and putting it in the story, they then go back to you with, ‘here is everything you said, are you happy with it?’ And it's a small, subtle thing, but it's sort of completely routine in the German media, partly for reasons of media law. You then sort of have to have this very friendly relationship with your sources, you know? Respectful. It's quite hard to, you know, do a ‘got you!’ if you then have to go back to them and say, ‘did you definitely say this?’ I mean, I'm not saying all German press does this. And you know, some German outlets like Süddeutsche Zeitung properly did go after Wirecard.
But you've also got to credit the company with some pretty effective tactics. What they did is they turned it into a battle between the Financial Times and Wirecard. They cooked up this witness statement from a guy in a nightclub saying that he knew a story was coming and then go and give it to prosecutors and say, look, ‘FT journalists are corrupt. We've got the evidence.’ And that sort of allowed the German press to sort of sit back and go, well, this is very complicated, right? There's a lot of allegations flying around and let's just munch some popcorn and watch this battle unfold. It's also worth noting just to answer that, it's worth noting that because the German press reacted in that way. And because, you know, Bafin decided to launch, you know, kind of a criminal investigation into Dan himself and also into our colleague Stefania Palmer, that meant that the FT had to double down, you know, because the German establishment was questioning the integrity of the Financial Times. And so we were going to stay on that story. You know, we were not going to back away from it.
Joe: (26:29)
So their allegation is like, ‘oh, you're corrupt, you're in league with short sellers.’ And this happens in media, like anytime you write anything negative about a company at all people talk about, ‘oh, you're in league with the short sellers.’ But you were initially tipped off by two separate short sellers. So the idea that like, it's not corruption, but you know, for a lot of investigative journalists often that's sort of an initial tip or something like that. Can you talk about how you think — I mean, obviously, you probably hear from short sellers all the time and these days short sellers publish their own reports and stuff — but can you talk to just sort of us philosophically, or maybe in terms of journalist best practices about how you think about your responsibilities and reporting responsibilities when you get an initial tip from a short seller who presumably has some interest in seeing the company implode?
Dan: (27:24)
Yeah. So short sellers are fascinating sources and great sources. And, you know, I find them fascinating characters as well. And, I mean, there's a bunch of them in this story, some of whom are really quite interesting and extraordinary. But whenever you deal with any of these guys, you have to be aware of their financial interests. And that's true of pretty much anyone you talk to as a financial journalist. You know, the lawyers, the bankers, the management have got stock options. Every single person is either getting paid to talk to you or is talking their own book. So the idea that short sellers are somehow different in that regard, just because they're a bit more cynical than the other ones, you know, doesn't really carry much weight. And the reason why I started talking to short sellers was simply just because I found them interesting people.
Like I met Carson Block, one of the most famous ones. And, you know, I went to meet him and he was like completely like anyone else who I'd met in finance up until that point. I mean, he comes across in this, you know, almost slightly California Bro manner whilst also completely eviscerating fraudulent companies. And he had all these amazing stories of, you know, scuttlebutts, you know, the rumors that were floating around. Who's the, you know, who's the CFO of a tech company who's known to every maître d’ in San Francisco for splashing money around that sort of terrific little gossip. And I kind of thought, well, this seems journalistically interesting. And the thing is when the way I deal with them is, you know, if someone comes to me and says, ‘here, I've done a bunch of work and there's something up with this company. Then I basically say, ‘thank you very much,’ take that away and see what I think of it. And can I reproduce it? Is it solid? Can I go and find the documents myself? Is there other evidence? And there's nothing wrong with that. That's like lots of sources come and tell you things and then you deal with them. And then you just have to be careful about, you know, not then going back to them and saying, you know, you can't go, ‘thank you very much. That was amazing. We're going to publish a story on Tuesday.’ But we don't do that with other sources where, you know, there are price sensitive stories.
Paul: (29:48)
I'd added a couple of things to that. One, you know, it really is no different than talking to say, bid gossips — people speculating on mergers. What you have to be careful of is, you know, the flow of information. If it becomes a two-way flow, it starts to look suspicious. The other thing I'd say is that short sellers, certainly in my experience, they tend to do deep research. And that is part, at least partly because their downside for them is infinity. You know, you can buy a stock and the most you can lose is the money you put on the table. But if you're short a stock, that stock could go to the moon. And I actually sometimes wonder, you know, if Dan hadn't brought down Wirecard at the point, he did, you know what would've happened if Wirecard had become one of the memes stocks. What if, you know, it was the most shorted stock in Europe, major stark at the time, certainly in Germany. If that stock had been sent to the moon, it would still be there, I suspect.
Dan: (31:02)
They probably would've bought Deutsche Bank. Yes.
Tracy: (31:05)
<Laughs> That's right, because at one point their market value I think was higher than Deutsche Bank, which again is absolutely crazy. Did any of the short sellers make money on the stock that you're aware, of or did it just sort of drag on for too long?
Dan: (31:20)
So, I mean, you talked about how markets can be irrational much longer than you can stay solvent right at the beginning. And for some of these guys, they were losing money for years. I mean, I talked to them like, there's this very smart guy, Eduardo Marques, who's kind of like Brazilian, he's like central casting's idea of a hedge fund manager, you know, Brazilian. He lived in California for a long time. Surfer. When we were doing this, he had long black hair and we're sitting there talking, he literally plumbed every avenue that he could to try and expose Wirecard. And he's like, you know, I think we're going to have to catch the chief executive at some sort of dodgy party with Harvey Weinstein before anybody is even going to care because it was just so frustrating and they would, and they just kept losing money. But then right at the end, so there's this moment in June, 2020, where Wirecard comes out and says, ‘yeah, we, the auditors aren't going to sign our accounts because 1.9 billion euros is missing’ and everybody who'd been following it knew in that second, it wasn't missing. It had never existed and this company was toast.
But the weird thing was its share price didn't go to zero straight away. It sort of, you know, it dropped like 50% or 60% and then sort of hovered there because there were all these investors who became so caught up in the idea of Wirecard that they still thought maybe there was a way back. And that was the moment that all the short sellers took advantage of and sold every single share and put an option that they could get their hands of. And so it was that single one or two days after Wirecard announced it was all over, that they made back all the money and more, and actually made profits on this sort of years-long campaign.
Joe: (33:22)
So I was actually going to ask, where were the auditors? And when you started poking around and asking these questions and looking at the, you know, what you saw was early evidence of accounting fraud. You know, identifying like ‘is the money in an account or not?’, does not seem like it should be that hard of a thing for an auditor or any accountant to track down. Where were they the whole time until they finally came out and said, ‘the money's not there. We can't find it.’
Paul: (33:52)
Dan's best to talk on that. But I'd just say, you know, a kind of a base rule of financial journalism is never, ever, ever trust the auditors. No, just, you know, name me one major fraud that has been revealed by an auditor. Name me one.
Dan: (034:14)
So I think the best example of this is kind of like the last almost year of Wirecard's life, we published this story in October, 2019 saying, this is how they're committing fraud. Here are all the documents. Here are all the names of the fake clients. This isn't real. And so Wirecard launches this special audit to look into all of these allegations. You know, it's a company. It gets to investigate itself. So the auditors for a decade are EY [Ernst & Young] and they bring in this new lot from KPMG. And there are these sort of crazy moments where like they all fly to Manila and Wirecard has told them, ‘yes, we do have lots of cash. We've got this 1.9 billion euros of cash, but it's not in our bank accounts. It's in special bank accounts in the Philippines managed by a lawyer.’ So they all go to this lawyer's office and he walks in and he's a divorce lawyer who gives advice on YouTube.
Joe: (35:16)
<Laughs>
Dan: (35:17)
He's got like one of those sort of gold plaques on the wall saying he's got a hundred thousand subscribers.
Joe: (35:24)
That's incredible.
Dan: (35:24)
And he walks in and there's this whole speech about how like he's the friend of the president. And he went to the same fraternity as him at university. And he's a very important and powerful guy. And then they all go down into some cars to go to the banks where these special accounts are, and they've got some police motorcycle outriders. And this bizarre convoy sets off and they don't drive to the headquarters of the banks nearby. No, they drive 40 minutes to this little branch road where this tiny outpost to the bank ,where they can barely all fit in. It is supposedly looking after more than a billion dollars of Wirecard’s money and, you know, the lawyer explains he just does that because it's convenient for where he lives.
Tracy: (36:18)
This is in the book by the way. And it's amazing, this scene.
Dan: (36:22)
And, yeah, I mean, I'm just giving you like the very potted version of it here. And the thing that I think is really striking is that the auditors at this point have been sort of so desperate for information and so desperate to like sign off on things that they're almost relieved that there's something there. It's not like, ‘Hmm, there's nobody here.’ It's all completely weird and they seem to have convinced themselves that yes, Wirecard is this chaotic startup. It's grown so quickly. It doesn't have proper processes in place and a sort of group think sets in because they have been with it the whole way. And they've sort of understood and they've signed off on everything and they sort of agreed to this weird chaotic moneymaking magic that Wirecard generates its profits. They're kind of like, ‘okay, right, we get that this is a bit unusual, but you know, there's something there. We can put a little tick in our box.’
Tracy: (37:40)
Was there ever a moment where, you know, this had dragged on for quite some time, and I know, the FT as a newspaper and Lionel Barber, the former editor was very supportive of you, but there were times clearly where your career was probably strained by all of this. You had criminal charges against you. You had, you know, sell-side analysts, the accountants, the financial regulators in Germany, all saying that this company was fine. Was there ever a moment where you worried that, you know, the fraud would never come to light?
Dan: (38:20)
So there's this moment where Wirecard cooks up a conspiracy and it looks so bad that the Financial Times finally announces that, okay, we're going to conduct an internal investigation into me and Paul to clear the air. And I very clearly remember that phone call because Lionel called me up to tell me about it. And he'd always said he completely trusted us. He knew we weren't corrupt. And you know, he said it's obviously going to clear you. I'm not worried about that. But you know, this is just a tactic we have to do to get ahead of Wirecard. Otherwise, no one will pay attention to the story, which we knew we had, which was going to kill them. And even though I knew everything he's saying was right, it was sort of — you know, it was like I was hearing in his voice at a distance. And it was just sort of this moment of like everything collapsing in and it's like, holy sh*t, I think they're going to get away with it.
And it was also really worrying as well, because at this point, you know, we knew there were Russian spies maybe involved. There were some pretty nasty characters and I'd be like cycling home on my bike, worrying about, well, if I get knocked off by a bus or something here, that's going to be very convenient for everyone. You kind of tell yourself as a journalist, you get a certain protection because if that happens to you, that's quite a high profile thing and that's going to really attract the attention of the authorities more than a, you know, esoteric financial crime. But in that moment when you're like, okay, so even the FT’s investigating us, maybe we are corrupt? It's like, well, I feel quite exposed. And if this doesn't work out, my career is finished.
Joe: (40:07)
When did the tides turn? Like, what was the thing that, I mean, you mentioned in 2020 that the auditors came out and said, yeah, the money is missing. But what finally turned the tides to get this sort of rethink and suddenly you sort of realized that people started believing you?
Paul: (40:26)
The turning of the tide is related to the, as Dan was just saying, this point when we were investigated internally to check whether we were actually corrupt. We reached a point where we were essentially at kind of hand-to-hand combat with this company and both Dan and I were so infuriated that they'd managed to kind of, to stymie what we were trying to do. You know, the fact that we were investigated internally allowed Wirecard to raise, I think $1.4 billion in cash.
Tracy: (41:00)
Oh. We didn't even talk about Softbank’s involvement…
Dan: (41:08)
Softbank shows up and gives them a billion dollars.
Paul: (41:15)
Soft-in-the-head Bank, is what I always say. But, you know, kind of when we came out of, when we were cleared by the internal investigation, you know, Dan came out of that fighting fit. There was an absolute determination then that we had to, you know, put this matter to rest. We discussed it in depth at the time and how we would do that. And, you know, the argument was around we had, we knew that we had to put real, tangible evidence in front of people. And the way we did that was a decision to, you know, do a story, explaining how the customers were fake and therefore the cash was fake.
But also we made the decision to actually publish the documents. We had a key thing, an internal spreadsheet. I don't know, Dan, how many pages long? how many sheets long was that spreadsheet? It was very substantial. It was a sort of document that just couldn't be fabricated. And you also brought together all the chats and emails around that actual document. It was putting that kind of tangible evidence in front of the reader that killed it. That was done on October the 15th. I remember the day. 2019. We knew at that point that this business was dead. We knew it was a fraud. In actual fact, it took another kind of seven or eight months to disintegrate
Tracy: (42:39)
Just to wrap the whole thing up. What’s your top tip for spotting a potential fraud? What should people be looking for?
Dan: (42:48)
There's a famous American short seller called Marc Cohodes. He has this phrase I love, which is ‘there is never just one cockroach in the kitchen.’ So if you find one lie, you're going to find more of them, it’s as simple as that. If you find a company — like you can look for, you know, financial indicators, are they growing very quickly, but also taking on loads of debt? Are they growing really quickly and really profitable in a way that's too good to be true? Or, you know, all those sorts of like financial things. You know, have they got a big receivables balance, which is growing faster than their sales? But when it comes down to it, are they lying about something? Because if they're lying about anything, then they'll probably lie about a lot else.
Joe: (43:29)
That's a good one.
Tracy: (43:30)
All right. Well, Dan and Paul, it was so good to have you and do a bit of media navel-gazing. So thank you so much and congrats on, you know, bringing down Wirecard and also on the book.
Dan: (43:42)
Oh, thank you so much. It's been, terrific.
Joe: (43:44)
That was really fun. Thank you so much.
Tracy: (44:04)
So, Joe, obviously I found that conversation very enjoyable and I cannot imagine what Dan actually went through at various points in that entire odyssey. It just seems like honestly, the entire world was sort of arraigned against him.
Joe: (44:20)
Yeah. It's just so wild to me. And I think it's really telling, but it's so wild to me that you can have this company in which it's all made up and it takes so long for the truth to come out, even though you'd think it's like, ‘okay, someone go check to see if the money is there. Or if the customers are real.’ Yes, the money is there. Okay. It's real. No, the customers are real, whatever it is. You'd think like some of these things would be really binary and yet despite the binary, it could just like take forever for it to actually come out. That blows my mind. But I mean, I get how it works. It’s just you'd think these things would be faster.
Tracy: (44:58)
Well I think the other thing it shows is that the system, you know, there are a lot of safeguards built into the system, but those safeguards and the system itself only really works when everyone is sort of a good faith actor. And I think when you have a really audacious fraud like Wirecard, where you have a bunch of senior executives who, you know, are not only willing to go on the offensive and say like, ;oh, these journalists are in league with short sellers, you guys should be pursuing them, not us.’ And they're also quite willing to hire hackers and start their own, you know, criminal publicity campaign and things like that. I think the system doesn't work when you have those kinds of actors operating in it. And I think that's part of why they were able to get away with it for so long.
Also just thinking back to the auditors, you know, what kind of company like brings the auditors to the Philippines and goes like, ‘we're going to show you the money. And then they, they take them to this random bank and they're like, oh, see, it's here.’ That is just such a crazy thing to do. It feels like there's no, I mean, obviously the auditor should have been more suspicious of it, but at the same time, if you were an auditor, you'd probably be going like, well, why would you know, this is so strange. It kind of, maybe it is true?
Joe: (46:24)
Yeah. I think we're just not used to people outright lying. You know, you sort of have like a range of expectations for how people are going to behave. And I thought that was interesting. It's like, okay, by and large, corporate Germany is a fairly high trust, well functioning system. But then that creates the space for companies to just brazenly lie. And you just don't have your antenna, you don't have your radar up. I also think, you know, Canada sort of seems the same way, where by and large it’s sort of like high functioning, you know sort of like market system. And then you'll occasionally, you know, semi-regularly get these gigantic frauds. It seems to go hand in hand where it's like in the course of a day to day job, even if your job is to verify the truth on some level, which is auditors, you're sort of like not really prepared for pure lying.
Tracy: (47:25)
Yeah. I think that's right. I think those kinds of systems only really work when everyone's acting in good faith.
Joe: (47:31)
It blows my mind that it could take so long. You know, it's like some companies, the business model is unsustainable and thetr str short sellers [who are like] ‘this is an unsustainable business model,’ but it takes a while for whatever to happen. But the idea still that you can just like make up money or make up customers, and it takes so long for the company to be forced to admit it, kind of blows my mind. I mean, you could see how it drives journalists crazy.
Tracy: (47:57)
Markets can stay irrational longer than you can stay solvent. We've come full circle.
Joe: (48:03)
It’s a good quote. That's why it's persisted so long despite its dubious provenance, because it's so true.
You can follow Dan McCrum on Twitter at @FD and Paul Murphy at @murphyp.