Dan McCrum - the Financial Times journalist - has released a blockbuster finance book - the story of Wirecard.
The book is called Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth.
Wirecard is - I think - the biggest fraud by dollar value and scale ever conducted in Europe.
Whatever: just buy the book. It is really good fun. I do not agree with all of Dan's perspectives - or even some of the analysis - but it is a great story about bad accounting, worse sell side analysts and completely awful regulators.
It is also a story of Libyan and Austrian secret agents, guys who run night clubs, pornographers and fraud. Oh, and guys who turn up in Syria with the very best body armour money can buy only to be told by the cool heads that that body armour marks them as a high-value target and the snipers would shoot them dead so they better leave it behind.
Dan also tells a story about how he looked - for work - at several thousand porn sites - and how he even spent some of the Financial Times money using a credit card to buy porn.
And yes - this was a perfectly legitimate work activity. Not like when the SEC did it.
It is above all a story about how surprising (and often nasty) the world is.
Some background
I once thought of Wirecard as a simple fraud. This was about 2009-2013. What I saw was a payments processor with three red flags:
a. it was a reverse merger into a totally bullshit EASDAQ listed company.
b. It did "high risk" payments in the Philippines and other places, and
c. The accounts did not quite make sense.
I did one check - described below - and found that the acquisitions did not make sense.
High Risk Payments
High risk payments are payments that normal banks do not want to process. Some come with administrative troubles (eg lots of high cost charge backs). Some are likely magnets for stolen credit cards. Some come with the risk you will find yourself on the wrong side of a DOJ indictment.
Examples include:
- Porn sites that get your credit card and then systematically loot it by putting a recurring charge on. These obviously come with chargeback risk.
- Clearing money for online casinos - especially in jurisdictions such as the US where online gambling is illegal.
Even the porn sites, though legal, can get you into bad trouble. Nobody has found a foolproof way for instance to use a computer to separate legal pornography with actors over the age of 18 from child abuse material.
If a financial institution is found to clear payments for child abuse material and that is discovered by the DOJ then the CEO is unlikely to have a good day at the office. (Example - look what happened to Westpac - a large Australian bank - when it accidentally cleared a handful of payments involving child exploitation...)
The number one sin in the Visa/Mastercard network if you clear payments is mislabelling a payment. To take an extreme example - if you cleared payments for a porn site in Central Luzon and labelled it as a flower shop in London you may reasonably be thought of hiding something.
Anyway Wirecard did this. And yes - for work - I spent enough time looking at bad porn sites to work this out - and then I stopped - because I did not want to go there.
I also found out - via online gambling chat boards - that Wirecard cleared payments for online casinos.
That was enough hanging around bad websites for me. I never proved comprehensively that Wirecard did child abuse material - and I did not want to. Well actually I would have loved to have nailed the company - but I did not want to go down that rabbit hole.
But whatever - I thought there was enough to get them into really bad trouble.
Putting this business in a public company did not make sense
The idea of embedding high risk payments in a public company did not make sense to me.
There were two main reasons.
- public companies have more scrutiny and if you are doing that sort of thing it is best to be under-the-radar,
- If you are someone who is clearing high risk payments you are taking a real risk of prison - and in exchange you are getting paid really well - the cut is high. But there is no logical reason you would take all this risk and share the profits - but not the risk - with distant shareholders.
Bluntly being a mafioso is highly profitable and highly risky. You don't want to put it in a public company have lots of scrutiny and share the profits but not the risks with say CALPERS. Calpers do not deserve that.
But the accounts showed big profits
Back in 2014 the accounts showed quite a bit of cash generation - a margin considerably higher than I would expect.
It also showed acquisitions in markets that you might do high risk processing in - notably Dubai and South East Asia.
The acquired companies were also clearly very profitable - much more profitable than a simple merchant acquiring business should be. So - at best - they were other high risk processors.
Now the owners of high-risk processors are - for the reasons outlined above - likely to be mafioso. And lots and lots of money was being paid for them.
So I had two theories.
a). The profits were fake and the fake profits were used to by rubbery acquisitions or
b). You were going to find a lot of organised crime at the bottom of this.
To some degree I found both - and stopped looking. Why stir that hornets nest?
That said we did quietly look a little.
A trip to Jakarta
A friend of mine (now publicly disclosed to be Alex Turnbull) visited a company that Wirecard had acquired in Jakarta. Alex speaks the language. He winds up at a non-descript office up a dusty road full of what look like illegal enterprises controlled by the Indonesian military. There was no way this was worth what Wirecard claimed was paid for it.
We stopped looking. But we were pretty sure there was a lot of fraud here - and the company would blow up.
Alas it did not blow up. The stock went up and up some more.
In frustration I told other short sellers. And I told Dan McCrum.
I stopped looking at Wirecard - but maintained the short for years figuring that it would blow up eventually.
Long standing and big frauds
Sino Forest was a major fraud with billions of market capitalisation and billions of debt which ostensibly processed 30 million tonnes of woodchips per year. It was the bluest of Chinese blue chips.
It was very hard to see it was a fraud and it fooled lots of highly reputable fund managers.
However if you go back to the beginning it was pretty obviously a fraud. It owned a large amount of forest - but in the late 1990s the annual reports showed no property plant and equipment other than forests. The company did not own a truck, or a chainsaw, or a fire lookout tower. It was a blatantly obvious scam.
As time went on the scam got better and better - and eventually it took a really savvy operator (in this case Carson Block) to spot the fraud.
Well Wirecard was that on steroids. The people running Wirecard became seriously competent and experienced fraudsters. And they were not afraid to break laws and spend money in the investigation of their fraud.
In their last year they spent almost 50 million euro on lawyers to obstruct investigation, spies to follow their critics, even high-class hookers in Mayfair wine bars to entrap critical journalists. (I also think they broke into one critics house, installed a camera to spy on the computer and used that information to track other critics - though Dan does not take that line and even doubts the house was broken into.)
Against 50 million per annum in expenses, and a cluster of world class crooks was a small team of journalists led by Dan McCrum and Paul Murphy at the Financial Times.
It was a roughly even fight. And boy was it a brawl.
You learn that your conversation with a night-club owner might be bugged, and that the Financial Times is incompetent at filming something with a camera hidden in the button of a female journalist.
You find out that German regulators are stupid enough to criminally charge English journalists for telling the truth. (They also - but not in the book - blamed the Wirecard stories on an Anglo-Jewish conspiracy rather than on Austro-German dishonesty. It is a bad look when German regulators falsely accuse Jews of running global financial conspiracies.)
You learn that there are "shops" where thousands of fictional companies are manufactured in England, with people recruited from the local pub to be named as directors. And they front for porn companies and online casinos. And you learn the tricks journalists used to uncover this network.
You find yourself in the company of Russian agents, and people who clear money to pay mercenaries in Africa.
It is all amusingly improbable and real. Like a good spy novel except that it is true.
But the laughter turns to angst when someone (who happens to be a friend of mine) had her internet disabled at work, the local security cameras disabled and then was assaulted as a warning. That made it real.
This book is fun. But it is funny, strange and scary at the same time.
Just buy it.
John
PS. As advice for short-sellers: if you ever get this entrapped in a story like this you are doing it wrong. There are lots of ways to make money in the market - and being chased by ex-Libyan agents and guys who (plausibly) have the formula for
Novichok is one of the ways to make money - but it is not a very good one.
As a journalist however this is exactly the way to do things. This is the rollicking story of a lifetime. A journalist if they are lucky gets one story only half this good in their career.
PPS. People will ask where I disagree with Dan McCrum. Well I will give one example. Dan comments disapprovingly of Fraser Perring when Fraser was accused of market manipulation by South African regulators. His tone seemed to say that was a definitive judgement on Fraser's character. This was discombobulating at the end of a book where German regulators had falsely criminally charged the author with market manipulation. At the end of this it story it should have at least occurred to Dan that the South African regulators (and not Fraser) might have been wrong. (Disclosure: I think the South African regulators are wrong here.)
PPPS. I looked at my files. I did not save a single Wirecard Annual Report after 2014 - though I had them all from 2003 onwards. I had worked out it was a fraud and was just waiting for the denouement. This book explains why it took so long.