Oct. 3, 2022

The Downfall of Wirecard with Dan McCrum (Part Two)

This week, the second of two episodes with Dan McCrum of the Financial Times about his investigative reporting into the massive fraud at the German financial firm Wirecard.

This week, the second of two episodes with Dan McCrum of the Financial Times about his investigative reporting into the massive fraud at the German financial firm Wirecard.


Richard Kramer: Welcome to Bubble Trouble conversations between the independent analyst Richard Kramer; that's myself, and the economist and author Will Page, where we lay out some inconvenient truths about how financial markets really work. This week we have the inestimable Dan McCrum from the Financial Times, whose diligent work single-handedly exposed one of the great frauds of recent years, the German payment processing company Wirecard, captured in a jaw-dropping new book, Money Men: A Hot Startup, a Billion Dollar Fraud, a Fight for the Truth, and also the subject of a fantastic new Netflix documentary: Scandal.

Over this two part episode with Dan will delve into bursting of bubbles, how companies tried to throw journalists off the trail, and how Dan persevered to single-handedly bring down a $30 billion dollar market cap company and expose the German establishment being more inclined to protect his reputation than except that one of his favorite sons was a total fraud. More in a moment. Welcome back to Bubble Trouble with the esteemed author, Dan McCrum, who has taken a huge scalp with the exposure of the fraud known as Wirecard. I've got loads more questions for Dan. But let me hand that over to Will, who wants to start off.

Will Page: Sure. And it just brings you straight back to All the President's Men. It's another scene in the movie, not ratchets and restaurants. But when the editors are debating, "Do we stand by our boys..." to quote Ben Bradlee, "Or do we just give in and write about the latest voting for the Republican leadership party." And it was the, the strength of Ben Bradlee to stand by Woodward Bernstein, that got that story to the point where it could take down the president of the United States. In the face of adversity, he'd never let go of his journalist. And I think we've got to give you the chance to tell the story of how important the editors were in this story, was there a sign that they were gonna buckle; were they steadfast and believing in your mission to bring this company down?

Dan McCrum: Well, that's a very kind comparison. And editors are very important, were absolutely central to this story. So the two in particular, so there's Paul Murphy, who is a proper old-school news hound, his weapon of choice is that long lunch, and-

Will Page: Measured in days, not hours.

Dan McCrum: You can't have lunch in just hours, I mean, what are we talking about here?

Will Page: [laughs].

Richard Kramer: And segues into dinner.

Dan McCrum: And Murphy has all these tremendous sort of... He calls them bandits, all sort of bankers, rich businessmen, who are all sort of addicted to stock market gossip and bread betting. And it from the very first day, he just said, "Dan, follow your nose." So I was sitting there scratching my head, going, "What's this funny little company?" And he's like, "Well, just get on the plane and go knock on the door." So I rush off to Bahrain and have this little adventure, searching around the streets there for this business, which didn't really seem to exist. And he was terrific, because he was with it every step of the way. And we'd have these meetings, that would be me, the lawyer, and Nigel Hansen, who were sort of, in a- all the story meetings with us, because we couldn't do anything without the lawyer signing off on it, and he kept us out of trouble.

And then the paper's main editor Lionel Barber, and sort of whenever we hit a roadblock, or anything like that, sort of Paul would sort of go, "Hang on a second. What are we talking about here?" We know we're dealing with a criminal company. And he would just sort of push it through, and sort of would do all the fighting and sort of make sure I had cover to just keep on going on the story. But we were also incredibly lucky that we had sort of Lionel Barber who... he was the editor f- of the FT for 14 years, and we got him right at the end of his reign-

Will Page: Yeah.

Dan McCrum: ... when he wanted stories that were gonna hurt the powerful that we're going to sort of expose secrets. And because he knew what we've been through, and he trusted Paul, you know, he was really with us in this, and he's a terrific character in the documentary, sort of brooding over the London skyline. And yeah, without his commitment, other editors might have bout in the face of legal threats, the mounting legal battle, which I mean by the end of it that ran to hundreds of thousands of rounds, and yet so to do any sort of sort of like that you need an editor who's gonna commit and stay with you.

Will Page: Hmm, and this lawyers work in referrals beforehand you back to Richard, did... you wanna just name check lawyers you're up against just so our audience knows who know [inaudible 00:04:34]-

Dan McCrum: Oh, I always love to name check the-

Will Page: [laughs].

Dan McCrum: ... lawyers.

Will Page: [inaudible 00:04:37] got some reviews from you, I believe.

Dan McCrum: So, uh, Shillings sent us a lot of angry letters on behalf of Wirecard.

Will Page: [inaudible 00:04:45].

Dan McCrum: Yeah, Shillings, uh, an old favorite, Herbert Smith Freehills, the Silver Circle Law Firm. Um-

Will Page: They've got slogan, my mission is your commission, right?

Dan McCrum: [laughs], they got in on the act and, uh, Jones Day, there's a... what I expect will be another very good book from David Enrich coming out soon called Servants of The Damned, all about Jones Day.

Will Page: Hmm.

Dan McCrum: But they have a small cameo in the Wirecard affair.

Will Page: They get six stars and Trustpilot, I believe.

Dan McCrum: [laughs].

Will Page: [inaudible 00:05:11]. Yeah, Richard.

Richard Kramer: Yeah, I wanna get back to a couple of topics that are near and dear to our hearts on Bubble Trouble, because it's animus towards short sellers. And I know let's separate short only firms that only go short on companies or do investigative research only with companies who would have a long short fund so they will be buying some stocks and selling others. But at the heart of it, is it that every company believes they have a right to a rising stock price?

Every company believes they have a right to be the only one who speaks on their own behalf. I know that what happens we have another Bubble Trouble episode called the charade of the earnings call, which not only is... has descended into the sycophants, and stenographers, but the fact is that most companies select the analysts who are allowed to ask questions on their earnings calls, that might not be well-known by journalists and others in the market. So they pre-select and sometimes pre-screen the questions that they're going to get asked. So is part of the problem here that everybody who lists their company just believes that they have a God-given right that their stock should only rise and people should only say nice things about them? Do you get a pushback whenever you sort of start to probe a little bit, even the reputable companies a little bit with that critical needle that you use?

Dan McCrum: I think it's always a bad look, if a chief executive is standing up and attacking short sellers, then that is a big red flag that something is going wrong here, because decent companies don't do that. They just fall back on "Well, people will talk and hear let me explain it. It's quite simple."

Richard Kramer: Right.

Dan McCrum: But if they're saying, "Oh, no, those nasty short sellers, don't believe them. They're just trying to manipulate their share price." Well, [laughs] it's quite an easy way to rebut short sellers, is to carry on with running the business well and/or simply answer the question.

Richard Kramer: Hmm.

Dan McCrum: And, you know, there's a great example, which happened at the same time as work [inaudible 00:07:18] NMC Health, sort of a-

Richard Kramer: Yeah.

Dan McCrum: ... FTSE 100, um, listed chain of hospitals in the Middle East, which went bust amid fraud allegation about six months before Wirecard. And actually, some of my colleagues, Rob Smith and Cynthia O'Murchu, wrote a great story about how NMC Health seemed to be hiding some of its debt, and the company responded by saying, "Well, the FT is clearly in league with short sellers trying to manipulate the share price." And then about a month later it went bust. So [laughs] maybe if you're falling back on that sort of argument, then it means you don't really have anything left.

Richard Kramer: Well, and it's also fascinating to me listening to you here and on other podcasts, you can distinguish the one hand that the Carson Blacks of the world who have a business model, or had previously that said, "I'm gonna go short a stock, I'm already taking a position myself, and then I'm going to issue all of this damning research, be it correct or not." And that is, I think, there are some ethical questions around that, and there's a clear conflict of interest. But the notion that you, Dan McCrum, or the FT as a corporate entity would have a short position in Wirecard or be in cahoots or somehow profit from those who do have a short position. I mean, that seems crazy, but what's amazing is that people seem to believe it.

Did people think you were personally benefiting financially from the demise of Wirecard? Was the FT thought to in its pension fund have, have bought a lot of Wirecard puts before they ran the story? I mean, how did people make that link between the short sellers who have separate businesses and the FT? Is that... Were you receiving planted stories? Is that... Was that the link?

Dan McCrum: I mean, there were a lot of people on... Well, I say a lot of people, there were a lot of Twitter accounts, quite a lot of them were bots, it turned out-

Richard Kramer: [laughs], yeah.

Dan McCrum: ... who was saying things like, " Uh, Danny Boy McCrum, you're going to jail and all the rest of that."

Richard Kramer: [laughs].

Dan McCrum: They'd also [inaudible 00:09:17] Wirecard talking point.

Richard Kramer: Yeah.

Dan McCrum: A surprising number of people seem to think that the Financial Times are given over its front page to this rogue reporter who was currently being paid by speculators and short sellers.

Richard Kramer: Right.

Dan McCrum: And in some respects, we were lucky. Because once Wirecard and its minions had called the reputation of the Financial Times into question, there was no way that we could back away from the story. It's one of the great ironies. Had when we wrote that first story about this fraud in Singapore Wirecard come out and said, "Yeah, you got us. That's it. Good story, guys. We're gonna clean house."

Richard Kramer: Yeah.

Dan McCrum: "It's all true." Then we might have declared victory, "Brilliant, look at what we did, great story." But because they were like, "No, no, none of this is true, and you're also corrupt. This is... You're just trying to get us." That meant that we couldn't get away from it, we had to prove to the world that the Financial Times wasn't corrupt. And so they sort of killed this off slightly because I mean, they were criminals. They just couldn't th- they couldn't think how to operate like a normal company.

Richard Kramer: Hmm. Before I hand it over to Will, I wanna take that the next step further, because I have a WTF moment with the German establishment [inaudible 00:10:32]-

Dan McCrum: [laughs].

Richard Kramer: ... the Munich prosecutors, the BaFin, which clearly was woefully negligent. Deutsche Bank, who which was a major counterparty of Wirecard, and the connections between these pillars of the German economy and establishment and this company that even in the most benign circumstances, well, let's just say, it was a major payment processor for gambling and porn, which, um, are legitimate businesses, fine. But, uh, where are or have you received any mea culpas on the part of the German establishment? Do you believe there is some change on the basis of the failings that you so, so brilliantly exposed?

Dan McCrum: So I think there was a lot of complacency inside Germany. One of the best explanations for how Wirecard got away with it for so long, is simply that too many people didn't think it could happen there. "Oh, no, this wouldn't happen in Germany." But you can... So once you can fault them for sort of getting a lot of things wrong, you can also congratulate Germany in the way in which it has responded, it had a full parliamentary inquiry.

Richard Kramer: Hmm.

Dan McCrum: They've reformed accounting regulation. They've reformed the way boards are structured. They've reformed the financial regulator, BaFin. So if you talk to FinTechs in Germany, now, they all complain about how aggressive BaFin is being. So, contrast that with the UK where we haven't had a successful prosecution fraud for a long time. We've had some enormous collapses, whereas the inquiry into Karelian, or Greensil, or an old favorite of mine, Quindell, which was a smaller-

Richard Kramer: Yeah.

Dan McCrum: ... dubious tech company that went bust, [inaudible 00:12:16], almost. And you can sort of say, "Okay, Germany was very much embarrassed," but it does seem to have to try to learn from what happened.

Will Page: On those UK examples, I always get my acronyms mixed up. Richard, what does the acronym FCA stand for, again?

Richard Kramer: Financial Conduct Authority, Will.

Will Page: But is there a variation on the scene?

Richard Kramer: Well, if you read Private Eye, they would call it the fundamentally complicit authority-

Will Page: [laughs].

Richard Kramer: ... because if they are seen by some observers, as are the Accounting Standards Board having waved through some rather egregious behavior on the part of auditors and bankers, and in the case of auditors, we have been waiting for the foxes to rearrange the chicken coop for a very long time. But we are still waiting for the prudential regulator and others in the UK to finalize that accounting reform, long overdue post Greensil, Karelian, NMC and the many other examples that, that Dan mentioned.

Will Page: So let's press pause on this blockbuster for a second, and, uh, we'll be back in part two with more from Dan McCrum. But two more questions before we pass the duty over to Dan for smoke signals. But the first one is what's gonna be on my TV tonight, and the second one is what I saw on stage at Kenwood House last weekend. But when I think about this documentary that's coming out in de- Netflix, do we call it a documentary or is it a biopic? It's got acting, but it's got real people on-

Dan McCrum: No, no, there's no, there's no acting in it. It's a feature documentary.

Will Page: A featured documentary.

Dan McCrum: A limited acting. The- there's a few bits where I sort of, uh, of B-roll where I stare pensively into, um-

Will Page: Right.

Dan McCrum: ... a computer screen or chew my pencil.

Will Page: [laughs].

Dan McCrum: But [laughs], no, we... actually what we did instead of dramatic reconstruction, what I think works really well is we have sort of comic strips-

Will Page: Hmm.

Dan McCrum: ... sort of illustrating what was happening-

Will Page: Nice.

Dan McCrum: at that moment rather than having hammy acting scenes.

Will Page: Though, before I watch it tonight with Pringles at the ready, I just want to ask you about two documentaries, which will be compared to contrast with, one is, Theranos Out for Blood, and the second one is The Smartest Guys in the Room. Obviously, a lot of years have passed between the two. But when you look at those documentaries, were they inspirations for the story when you first heard of Enron, did that make you think, "I wanna be an investigative journalist"? I mean, that... it's gonna be obvious, it's gonna be a gold, silver, bronze comparison here when I watch it tonight, but I just love to hear what you thought about those two dots.

Dan McCrum: And what... I think one of the reviews I saw said it was sort of a cross between all the King's Man and The Big Short. So I mean, just to be compared in the same breath as some of those other films-

Will Page: Yeah.

Dan McCrum: ... I would be absolutely delighted by because they're all brilliant.

Will Page: Yeah.

Dan McCrum: And what I hope we've done is we've taken this sort of slightly complicated, but also completely bizarre and fascinating tale and sort of given it the Netflix action thriller, twist, so it races along. And so you're learning a bunch of stuff about nasty goings on in the financial system and all of that, but really, it's like, "Oh, you can't sit there and munch popcorn," because it's like, "This is totally unbelievable. Did this really happen?"

Will Page: Yeah. And that- that's... so if, if I go back to my favorite of that pack of movies, which is the smartest guys in the room, I just love how Andy Fastow can stand on stage today holding two things. One CFO of the year in corporate America, and two, a six year prison sentence and he asked, "How can it be possible I was given these two things within six months of each other?" If things fall they fall fast. So as Richard Kramer loves to say-

Dan McCrum: Hmm.

Will Page: ... "You know what happens when you stop falls by 90%? It fell by 80% and a half."

Dan McCrum: [laughs].

Will Page: [laughs], [inaudible 00:16:08], well, Arsene Wenger says, "You climb a mountain, but you come down on escalator." So it's gonna be interesting to see that. The second question I have for you just goes back to the FT [inaudible 00:16:17]. Well, I'm not sure if this is professional to do here. But I want to quote somebody from the audience who honestly raised a question to you, but made a point and disagree with you on, but I don't know if this person was a crank or a veteran GCHQ. But you said, what your work really exposed... So, I'm paraphrasing here, was a link between Germany and Russia with regards to how business is done. Basically, saying that Germany is always in cahoots with Russia, a former chancellor sits on the board of Gazprom, said that he was giving a lecture on this in Cambridge didn't mention his name, you may know him. But I wonder whether when people watch the documentary and finish your book, that's gonna be a recurring theme of the link, not obvious link, but the link between how Germans like to do business with Russia.

Dan McCrum: So without giving too much away, one of the stranger aspects of the story is, as we start to do, we start to realize there are Russian links here. I mentioned how the main bad guy his name's Jan Marsalek, by the way. Um, I still got his wanted poster over my shoulder because he is-

Will Page: [inaudible 00:17:20] top producer. He's on our show next week, we got him.

Dan McCrum: [laughs], brilliant, excellent. He, uh, he disappeared, and, um, is currently thought to be living quite happily on the outskirts of Moscow. And it's one of the amazing things. But as recent events are starting to lead us to believe with the war, that you would slightly be di- dismissed as a crank. If you had said, "Well the Russian government seems to be manipulating senior executives at German financial institutions to do its bidding," but then here we are, and suddenly, that seems quite plausible, after all.

Richard Kramer: Now, Dan, we need to move to our final signature section of Bubble Trouble, which we call smoke signals, and that's where we ask our guests to do a little smoking with us and point out the kinds of things that really give you pause. I think you already gave us one talking about how, when senior management's are very defensive about short seller arguments or critical arguments about their companies, rather than deflect the arguments directly, they blame the messenger, so to speak. But what are a couple of things from your obviously incisive, investigative rain, the, the, the kind of things that make you go, "Uh-uh, something's wrong here"? The kind of things that you would suggest people look out for as evidence that there might be a bubble brewing or, or deep trouble underneath?

Dan McCrum: So I'll give you two things. One is a favorite saying of mine from the American short seller Mark Cohodes, who says, "There is never just one cockroach in the kitchen."

Will Page: [laughs], oh-

Dan McCrum: So-

Will Page: ... we just got a title for our podcast.

Richard Kramer: Yeah. Yeah.

Will Page: [laughs].

Dan McCrum: ... if you find companies lying about one thing, they're definitely lying about something else. And-

Richard Kramer: Yeah.

Dan McCrum: ... you can boil down a lot of my job simply to that, just checking.

Richard Kramer: Right.

Dan McCrum: "Is that real? Did that really happen? Are you lying about something?" Because nobody ever checks.

Richard Kramer: Hmm.

Dan McCrum: And the other thing, okay, so this is a very general comment, but, uh, if anybody ever says the words distributed ledger to you, run a mile.

Richard Kramer: [laughs].

Will Page: [laughs].

Richard Kramer: Well, you might have listened to our, our, uh, NFTs not for me podcast because I think we, we pointed out, Will's simple confusion about having someone run up to him at South by Southwest and show him some unique animation on his smartphone that he had just paid for, led us down a rabbit hole of realizing this was definitely not going to end well, and then then going on to explain the concept of a washed trade, when, uh, when two people decide to trade back and forth with one another to increase the value of something, and no real money changes hands. And if you take a look at the value of OpenSea right now, it has pretty much imploded as the leading place where you are going to use distributed ledger technology to-

Will Page: [laughs].

Richard Kramer: ... trade non-fungible tokens.

Dan McCrum: Th- there is no trading in NFTs. I mean, we marvel about this.

Richard Kramer: Of course. Of course.

Dan McCrum: If you can look up the most traded ones, and it is practically nothing changing hands. But I mean, y- but you know, I don't like to generalize, except when it comes to crypto, the entire industry is one Ponzi scheme on top of another, [laughs], and I would run as far away from possible as anything to do with it as you can.

Will Page: Ditto, ditto. Before handing you to Richard to close the show out, there's just one thing that's bugging me out, which is how did you say, you know something's up when you ask the CEO a question and they responded with another question. It, uh, just made me think of a certain recent president of the United States who would do that-

Dan McCrum: [laughs].

Will Page: ... [inaudible 00:21:07] unscripted press conference. But just to throw a little bit of trivia in there, there was an other former president called Ronald Reagan in United States. And do you know how they made sure that he didn't get any... asked any awkward questions? They would only allow the journalist asked him questions when he was boarding a helicopter with Nancy, the point being the helicopter makes so much noise, he couldn't hear an answer back, clever. And they got away with that for seven years.

Dan McCrum: [laughs].

Richard Kramer: I wanna thank Dan McCrum, because we are huge fans of the FT of his reporting-

Will Page: Yes. Yes.

Richard Kramer: ... and honestly, he has delivered one of the most amazing miraculous stories for any journalists who have stumbled into, and at great personal cost and distress no doubt, followed it through to a conclusion that is, in the end, the right outcome for investors and the markets and the right outcome to see companies like this flushed out and brought into the open. Hopefully, it's a cautionary tale for a lot of other FinTechs out there that have, uh, dubious business model. When Dan comes calling, you ought to come clean at the beginning, I think was the lesson. Thanks again, Dan, and thanks, Will, and we'll see you next week on Bubble Trouble.

Dan McCrum: Thank you.

Will Page: If you're new to Bubble Trouble, we hope that you will follow the show wherever you listen to your podcasts. Bubble Trouble is produced by Eric Nuzum, Jesse Baker, and Julia [inaudible 00:22:31] at Magnificent Noise. You can learn more at bubbletroublepodcast.com, until next time, I'm Will Page.