“Crashes and panics often are precipitated by the revelation of some misfeasance, malfeasance, or malversation (the corruption of officials) that occurred during the mania. One inference is that swindles are a response to the appetite for wealth (or plain greed) stimulated by the boom; the Smiths wanted to keep up with the Joneses and some Smiths engage in fraudulent behavior to do so. As the monetary system gets stretched, institutions lose liquidity and as unsuccessful swindles seem about to be revealed, the temptation to take the money and run becomes virtually irresistible.” -Charles P. Kindleberger, Manias, Panics and Crashes
This quote was recently brought to mind as a result of the sheer volume of fraud that has been uncovered recently. It’s a testament to just how much greed has been stimulated by the boom and validates the fact we currently find ourselves in the midst of a mania. Most recently, I was struck by the blatantly fraudulent photo released by a space-focused company looking to cash in on the recent boom in speculative interest in that area of the stock market.
Oh my! Check out how a "capital raising rocket company" faked an Orion LAS delivery photo to pretend they had rocket hardware. t.co/QK82ChpUht
— Chris B – NSF (@NASASpaceflight) January 18, 2021
What is most remarkable about this, though, is how common this sort of behavior has now become. Nikola might be the most popular example.
Shares of electric-truck maker Nikola tumbled as much as 30% after founder Trevor Milton stepped down following fraud allegations by a Wall Street short-seller that have drawn interest from U.S. regulators t.co/Lmwnz1AL8a pic.twitter.com/KwgFA8U8gI
— Reuters (@Reuters) September 21, 2020
But it’s only become more prevalent after Elizabeth Holmes kicked off the trend more than 5 years ago.
A federal judge denied a bid by Theranos founder Elizabeth Holmes and a former top executive to dismiss the criminal charges they face in connection with the disgraced blood-testing startup, setting the stage for a March trial t.co/ych1dXIpnh
— The Wall Street Journal (@WSJ) October 13, 2020
And in addition to these product frauds we can add multiple cases of traditional accounting fraud. Wirecard is a prime example.
'EY failed for more than three years to request crucial account information from a Singapore bank where Wirecard claimed it had up to €1bn in cash — a routine audit procedure that could have uncovered the vast fraud at the German payments group.' t.co/zeimxOlRn6
— Jesse Felder (@jessefelder) June 26, 2020
Luckin Coffee is guilty of perpetuating similar financial shenanigans.
Nasdaq tells Luckin Coffee of plans to delist the stock after sales fraud t.co/uUeXZN1ke3
— CNBC (@CNBC) May 19, 2020
There is even an instance of fraud today at one of the most prominent independent fraud-reporting organizations on Wall Street.
— michelle celarier (@mcelarier) December 22, 2020
Finally, there is a very real possibility that one of the most popular trades in the markets today is being driven mainly by fraud.
'There’s a scene in The Big Short where Mike Baum meets a stripper who’s taken out mortgages on five properties. For me, that’s what talking to Bob represented: I’d seen what it felt like to be on the receiving end of crypto’s doomsday machine.' t.co/yP6fLZ05lF
— Jesse Felder (@jessefelder) January 16, 2021
This all begs the question, how much fraud is yet to be uncovered? It took the Dotcom bust to reveal Enron and Worldcom as frauds. It took the Great Financial Crisis to reveal rampant mortgage fraud and the Bernie Madoff fraud. I think we can be certain that these examples noted above are only the tip of the iceberg; we won’t know the full extent until the next major bear market arrives. However, I think it’s already clear that the level of greed stimulated during the current mania is, like many other things right now, unprecedented.