The Downfall of Wirecard with Dan McCrum

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 handily 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, Skandal.

Over this two part episode with Dan, we'll delve into bursting of bubbles, how companies try to throw journalist off the trail, and how Dan persevered to single handily bring down a $30 billion Market Cap company and expose the German establishment be more inclined to protect its reputation than accept that one of its favorite sons was a total fraud. More in a moment. This week we have a terrific special guest, Dan McCrum, from the Financial Times. So buckle up. The story is a phenomenal one and we want to dig into the different ways that Wirecard reflects the bubble trouble we see in the market and equally that gap between perception and reality that Dan had to work so hard to uncover. Dan, welcome.

Dan McCrum: Well, thank you very much for having me on.

Will Page: Well, we'll like to start the podcast by giving you the microphone to introduce yourself, your work, the book, the movie, but really important is how our audience can find you. And just to be absolutely clear, full disclosure, Our audience does include dodgy private detectives employed by the German state and they really want to find you now. So if you want to just introduce yourself and how we can follow your work.

Dan McCrum: Absolutely, I will do. And I think the private detectives already know where I live. So my name is Dan McCrum. I'm an investigative journalist and I write about companies that are up to no good for the Financial Times. And you can find me on Twitter @FD. My book, which you very kindly introduced then, is Money Men: A Hot Startup, a Billion Dollar Fraud, a Fight for the Truth. And quite incredibly I still pinch myself that this is actually happening, the documentary movie on Netflix has gone live. And if you click on to the Netflix screen you might see my face looking back at you which is a very strange thing to experience, but it's also incredible to share the story with the world.

Will Page: The demand for Pringles has gone up 40% for tonight alone, so it's going to be a big one.

Dan McCrum: And that one is called Skandal, the German spelling, Bringing Down Wirecard. Which is really what the whole thing is about, this funny little tech company which became one of the biggest most exciting tech giants in Europe and then was finally exposed as being a hollow, empty, criminal enterprise.

Will Page: Wow. Well, the way I want to get into this conversation is to just be fully open about my favorite film of all time is All The Presidents Men. On IMDB I've got a well known list called All The Presidents Movies, to which I've just added Skandal even though I'm yet to see it. Looking forward to watching it tonight. But if I go back to my favorite movie, there's a great scene in there where the two journalists, Bob Woodward, Carl Bernstein, realize they're onto something a bit bigger. And the editor's looking and thinking, this isn't local, this is national. I'm going to give this to some top political writers.

And the editor that's backing these two journalists up, in this case the Paul Murphy of your story, says, come on, these guys have worked their butt off for this. To which the boss says, well, what they have done to date, rat shit in restaurants? And I think the line is, well, he got a few closed down. I just love that because it gives the personalities of the movie a background prior to taking down Richard Nixon. Now, I'd like to know what you were doing before you took down Wirecard. I presume it was something a bit more exotic than taking down rat shit in restaurants stories. But I'm assuming you've never tackled anything this big. So give us the Dan McCrum story before you stumbled on this story.

Dan McCrum: So I've been a journalist for about 15 years now. I worked briefly in finance like a lot of people, tried it, didn't literally like it and decided I'll be a reporter instead.

Will Page: You had a life.

Dan McCrum: Well, of course. And finding stories is just a fascinating fun thing, you know. I don't really have to work for a living. And I started writing about, you know, lots of companies and then, you know, part of my job was writing about investors, you know, the big hedge fund guys. And as I was doing that, I started to get to know about this funny sort of characters in finance called short sellers. And what they do is quite unusual. They're different to, you know, most people in finance and business who are all trying to find the next big thing. You know, what's exciting? What's going to make us loads of money? Well these guys are the cynics. They look for the companies who are going to go bust, or who are overvalued, or maybe up to no good. And they kind of make for interesting characters and I thought, well, there are probably some stories here, right.

So I started writing about what the short sellers were up to and some of the companies they were looking at. And, you know, so I wrote about a bunch of different sort of accounting frauds. It's slightly hard to name them because the UK has not got a very good track record of actually prosecuting any of these people. There's a number of them which were under investigation for some time. But so I wrote about a series of stories like that. And then I'm chatting to this Australian hedge fund manager one day and he says to me, "Hey Dan, would you be interested in some German gangster?"

Will Page: I've got goosebumps just listening to this.

Dan McCrum: And that was my introduction to this funny little European tech company called Wirecard. And it was, it called itself the European paper and it did something to do with moving money around, helping process credit card payments. And it turned out there were two theories about it, one was it's a little bit fraudy and the other was, well hey, it moves money around so it seems like maybe it's moving money for every kind of shady business that you might imagine online. And that was how it all started.

Richard Kramer: Before we get into the detail of Wirecard, I want to step back because some of our previous podcasts, really when we came up with this idea of doing Bubble Trouble, we had episodes drawn from my own experience about equity analyst and I call them sycophants and sonography. You know, congratulations on a great quarter and how should we think about payments in Europe and the future market? You know, that they are really there, they're paid promotional agents of the companies. And so what I'd like to ask you to think about is, you know, the how did you overcome all of these conflicted agents that are working on behalf of the company, the 20 analysts that had buy ratings on Wirecard versus the two that had sell ratings, the PR companies that were there to put the story out directly out to investors about how innovative this company was, I mean, how much were you simply just fighting against the conflicts of interest and equally the number of investors, and there's some cringe-worthy videos out there, who were promoting in particular funds that Wirecard was precisely the kind of company they were looking for and as an example of a stock-picking prowess, how much is this really about the conflicts in a market from these paid promoters?

Dan McCrum: Well, I've got a bit of sympathy for equity research because I worked in the research department of a bank for a while, at Citigroup, and that gave me a little bit of insight into how the industry works, how the sausage is made. And I think you have to understand that it's not really in the interests of stock market analysts to ask questions. Their job there is to you, know know, assess which companies are worth buying and by extension the ones which aren't really worth buying. But they want to be friends to management, their banks want to sell stock or bonds or, you know, do deals with these company's. So there's no point annoying them.

But I also remember talking to there was a terrific analyst at Citi called Tim Allen who had this shock if prematurely gray hair and had very strong opinions about most things. And I remember him saying to me there is absolutely no point if you get a job as a analyst writing a big sell note, certainly not as your sort of flagship first piece of research to say, "Hey, look at me," because nobody cares. Even if you're right and you save them money, they're not going to thank you because first you got to tell them that they're wrong. You know, why did you buy that company you idiot? You shouldn't be holding it. And I think that little bit of human nature is right at the heart of the problem here. Everyone in finance has an incentive for stocks to go up. Management, lawyers, bankers, analysts, traders, investors, they all fundamentally want the same thing. And this is how we get bubbles, right, because everybody gets carried away and so there are very few people who actually have, you know, a clear unfiltered interest in finding out the things that aren't going so well.

Will Page: We're going to take a break and come back with Dan McCrum for part two. Back in a moment.

Richard Kramer: Welcome back to the second part of bubble Trouble with the esteemed author Dan McCrum who has taken a huge scalp with the exposure of the fraud known as Wirecard. As someone who has run in a panel research company for 22 years and has written many sell notes and oftentimes out of 40 plus analysts been the only sell on a stock that went down 40% in the day, it can be very gratifying, but I would say a couple things and see what your reaction is. First of all, I think the phenomenon you describe is summed up in the famous quote by Upton Sinclair, never expect a man to understand something when his job depends on not understanding it.

And I think that something we've talked about in multiple Bubble Trouble podcasts, indeed the one we did with your colleague Brooke Masters, is how for analysts their job is almost certainly not to enlightened their clients. The last thing they want is a highly informed client who knows the value of something. It makes it much harder to make money. And better to obfuscate, and be dup;licisous, or just not to know too much. Now the interesting thing about short sellers is I think that discussion ought to be broadened out because, frankly, half the stocks on the market underperform. They are the half that don't come up as much or go down when the other ones go up more or go down by less.

And really the job of an analyst or anyone with integrity in the industry has to accept that and say, just like every fund does, "I can't every stock. I have to pick the ones I think are going to go up more than the other ones." And I guess what I'm trying to get to is in your experience you certainly would have interacted with analysts, they would have read your stories, weren't they cognizant that they should question themselves that they might be on the wrong path, and if not, what do you think blinded them? Was it that they realized that their job depended on promoting these companies or that they just simply didn't want to know the truth that you might have been uncovering?

Dan McCrum: Well, let me give you the most egregious example. So in late 2018 this little company, Wirecard, has become quite a big deal. Enters the DAX-30 Index of Germany's largest listed companies. You know, it's chief executive is strutting around on stages in a black turtleneck like he's some kind of Steve Jobs, making all these pronouncements about the cashless society and how Wirecard is going to be huge and exciting and amazing. While this is all going on a whistle blower gets in touch with me and basically hands over a truck load of documents. And it's amazing. Finally the truth about what's really going on inside the company or at least a little bit of it. And so I work away for months, go through all the documents, and come out with this story, there's fraud going on in Wirecard's Singapore office. So the headline goes out. Within a day or two we've knocked 8 billion Euros of the value of the company.

Will Page: Jesus.

Dan McCrum: And you're thinking, "Wow. Okay, people have often wondered about the company. We're really cutting through." But the day after this story this research note from Commerzbank appears written by this analyst, Heike Pauls. And it literally says the FT story is fake news. You know, that old Trumpian epithet. From that usual suspect Dan McCrum, there's clear indications of market manipulation. And when I first saw that I generally thought it was a hoax.

Will Page: [inaudible 00:13:51] the first of April.

Dan McCrum: Yeah. I mean, so I called her up to let her know there's this sort of hoax bit of research going around with her name on it. And she says to me, no, that's mine. I'm like, what? So there's evidence of market manipulation. Like, what's all that about? And all she would say was, well if it walks like a duck, it normally is a duck. And basically hung up. And I was like, well, that was strange. And I mean, and you know, I'm not giving too much away here to say the amazing thing is that sort of large parts of Germany, including the establishment, kind of bought this lie from Wirecard that I was corruptly working with speculators.

And I ended up being investigated by the German police and all sort of things went on. But you know, what was going on with Heike Pauls? And the best guess that I have is, you know, this was lion being fed by Wirecard. And if you've been mates with the chief executive for eight years, you've spoken to them all the time, and they start spinning you this story then maybe you believe it. You know. But again, that was I think the most extreme example I've ever come across of just black is white because that's what the chief executive said.

Richard Kramer: And I guess one of the things I wanted to dig into because I think it's so fascinating and difficult, it's hard for you as a journalist, it's hard for me as a research analyst, but there's always an information asymmetry. The company's always have more information. They hold the cards, they know what's really going on, and you're trying to unpeel layers of the onion so to speak. But was fascinating to me reading your book was the way that they were constantly running these misdirection schemes. Oh, the fraud in the Singapore office is only a small amount. Oh, well that was one bad apple in the management team and we got rid of him. Oh, that's you know, that's just a bunch of speculators and market manipulators. They were so adept at getting agents of misdirection to carry their water for them. Did you ever get a formal apology from Handelsblad, the respected German newspaper, for having accused you of having the temerity to suggest that anything might be wrong at Wirecard when it turned out there was there?

Dan McCrum: Well, Handelsblad just won an award for their podcast series all about Wirecard.

Richard Kramer: Oh. Was that a self reflection by Handelsblad? Because they were on the other side. They simply were part of the scheme to misdirect investors away from your reporting.

Dan McCrum: I think that's a little harsh. I mean, I sat there scratching my head wondering what on earth was going on with Handelsblad, because the German business newspaper of records seemed uninterested in the question of whether Wirecard was a fraud and seemed content to sit on the sidelines munching popcorn because this fight with the Financial Times, which was maybe corrupt, was so fascinating and made for great copying. So I don't think they did a very good job, but I wouldn't say they were complicity part of the scheme on purpose.

Richard Kramer: So as a reporter, you're always faced with these information asymmetries. The company's know all the facts and you're trying to unpick a few of them. What gives you the intuition that, "Hey, I think there's really something here?" Other than in the case of Wirecard clearly the visit to the offices that didn't work all the shady characters that you encountered in your reporting. How do you decide that indeed we need to get behind this information asymmetry, we need to prize out some extra data because something here doesn't add up?

Dan McCrum: So I had a couple of formative experiences as a journalist. One of which was the Global Financial Crisis. So I was working in New York for the FT when that happened and one of the big lessons that we all learnt from that was things really should make sense. You know, finance is sometimes complicated but when you boil it down someone should be able to take you step-by-step through what is really happening here. And one of the big mistakes of the crisis was there were all these financial derivatives, weapons of mass destruction, that sort of thing which people didn't understand. And you know, but one of my overriding memories of that whole crisis was the world had been going mad for a couple of months. We were talking about were the cash machines going to stop working? Banks were collapsing. The stock market was going completely crazy.

So this all happened when Lehman Brothers goes bust in September 2008. Two months later we're all exhausted. You're kind of, what is going to happen next? And suddenly we start hearing these stories that the firm of Bernie Madoff can't meet withdrawals And then suddenly this thing is a fraud. And you're suddenly like, hang on, wait a second, a 60 billion dollar hedge fund is a total fraud? And it turned out this guy was out of Wall Street royalty and everyone thought Bernie Madoff was amazing when it turned out the entire thing was this enormous ponzi scheme. And I remember at that moment thinking, well, we're through the looking glass here. Literally it felt like anything could happen, but then it turns out that was sort of the peak of the madness for me and lots of other people.

But then I was left with this lesson that things can look incredibly important and prestigious and successful, whilst in reality just being completely empty. And you discover that, you know, there were a lot of rich people who thought they had very large sums of money looked after by this investing genius Bernie Madoff. And every month they would get their account statements which were literally printed off a 1990s dot matrix printer. And the ability of the human mind to disconnect those two things never ceases to amaze me so.

Will Page: So we have Transatlantic fraud stories here. Now Richard talked about how you peeled back the layers to the story, and I want to be fully respectful for people who need to read the book and definitely watch the Netflix drama tonight, but how many layers would you like to peel back from your story to wet the appetite of our audience? Because when I watched you on stage at the FT weekend festival this thing's got twists and turns to it. But let me give you the microphone to decide how much you want to lean into the wind in terms of giving away the conclusions.

Dan McCrum: So what was amazing about Wirecard and what really convinced us that something was wrong was every interaction with the company was strange. So I write some stories about it and then we start to realize there's a bunch of hackers trying to break into our email, and coincidentally they also seem to be trying to break into the emails of other people who have been critical of Wirecard, and then I get start getting followed around by private detectives.

Will Page: Ouch, ouch, ouch.

Dan McCrum: And there's this moment early on where I actually get to speak to the chief executive, Marcus Brown. And one of the great things about being a journalist is you get to ask people some very rude questions. So I ask him flat out, are you a fraudster? What's going on with all these dodgy deals you're doing? And his words were sort of angry, you know. He said that's bullshit. But he did a couple of things which liars do like he answered with a question. Why would I do these things? Why would I risk my reputation? You know, look at all the analysts who think we're great, look at the very highly reputed auditing firm Ernst & Young who sign off on our accounts. Surely they wouldn't be involved?

Will Page: A recent president of the United States had that technique as well.

Dan McCrum: And what really struck me though was the tone. It was like he got asked if he was a crook every day and he's like, "Oh gosh, yeah, no, I get this question all the time. Here, let me explain why I'm not." And that was just really weird for me. That isn't even a taste of the madness because, you know, my boss got offered a bribe to make the stories go away, and then we start getting investigated by the German police. And then we start to realize that, well, the main guy whose behind all of this seems to have a bit of a James Bond complex and he's hanging out with Russian mercenaries and Liberian militia leaders. And it's at that point that you really start to think we're going completely mad, this can be true.

Richard Kramer: I think at that point, again, in my close to 30 years experience as an analyst, you deal with companies and you understand normal corporate governance, and you kind of understand the comms department or the PR side or the investor relations department and their role, and you understand the board and the structure and all that. But I guess there's one of the things that at the apex of the collapse was the moment where there was no there or there. There was no money in the bank accounts. And up till that point that dot matrix printer had kept spitting out a bank statement that said here's 1.9 billion dollars or Euros or whatever it was.

So were there points in that process where you doubted yourself? Where you said, well, we've hit the end of the line, the company keeps providing these statements, obviously there was some bank account, completely falsified of course, that showed they had some assets even if all their volumes were going through these three bizarre companies, were there points in which you doubted yourself, okay, this corporate governance might not be normal, but maybe this is just the new way of doing things? Were you forced to question yourself the way you were asking everyone else who was a believer in the company to question themselves?

Dan McCrum: So I always knew there was something up about this company. But like I said, there were these two theories about it. Is it money laundering? Is it fraud? And so, that creates a lot of ambiguity. And I think it was a very useful ambiguity for Wirecard because there were lots of serious professional investors who looked at this and I think told themself it probably operates in some gray areas and it's probably very profitable, so maybe that's why it doesn't want to talk about the details of its business too much.

But what I tried to do particularly with the book was bring out the human side of this because even though I was convinced, I basically at one point gave up any hope of convincing other people. So halfway through, 2017, I was actually supposed to be doing a different job. I was writing about market for the FT. Not particularly well it turned out and I was getting distracted because sort of in the middle of the book I've sort of done everything I can to try and draw attention to Wirecard.

And the accountant signed off again so everything's fine, the German authorities announce that they are going to investigate some the short sellers who've criticized Wirecard, and the stock starts going to the moon. And meanwhile I haven't been doing a great job at my writing about markets and exciting to make debt issuance. And I basically get demoted and I sort of have to go and concentrate on trying to resurrect my career and not getting fired. And I kind of assume, well, there were other stories out there that were easier, I'll just have to give up on Wirecard. And then it was only when this sort of miraculous thing, the whistle blower gets in touch and says, "Hey, I've got something for you." And holy mackerel, they did.

Will Page: And that's when you need your Ben Bradley, your editor to stand by you and we'll come to that in part two. Before we close out part one, there's one story that you told on the stage at the FT weekend festival which I think we need to wrap up part one with, which is when you went to Southeast Asia to see the giant payment processing system that was Wirecard. Can you just walk us through approaching that door and finding out what was inside?

Dan McCrum: So what we discover is that the heart of Wirecard's business are basically these three partner companies of Wirecard.

Will Page: With IOUs.

Dan McCrum: And it turns out the story they've been telling everyone internally is, "Okay, so any like payments processing business which is too hot to handle for Wirecard, we'll send it over to our friends at these companies and they'll do the really nasty business. Our name won't be associated with it and they'll just send us back a big fat commission." And this was really good business. They were making a lot of money. And I haven't told the outside world about it, but thanks to my whistle blower we had started to realize what was going on. So we sent my colleagues to [inaudible 00:27:12] to go an investigate. And she's going to knock on the door and we don't know what she's going to find. So she drives sort of two hours north of [inaudible 00:27:20]. We don't want her to go alone, I mean, amongst the gangsters there.

Will Page: There's a thriller in [inaudible 00:27:24].

Dan McCrum: And so she goes with a photographer and a fixer. And she goes to the address which on its website says this is a big international payments processing company. And the door opens into a courtyard and the first thing she sees are two men with a pomeranian on a table.

Will Page: A pomeranian?

Dan McCrum: And they're giving it a haircut. And there is no evidence of payment processing going on anywhere.

Will Page: See, I told you there's a human side and a canine side to this.

Dan McCrum: [Laughs].

Will Page: I love it. I love it. Well, in part two I want to come back to that Ben Bradley story of just how the editor stood by you. So that wraps up part on with Dan McCrum and we'll be back next week with the climax to the story in Dans fight for the truth. If you are new to Bubble Trouble we hope that you will follow the show wherever you listen to your podcast. Bubble Trouble is produced by Eric [inaudible 00:28:26], Jesse Baker and Julian [inaudible 00:28:28]. You can learn more @bubbletroublepodcast.com. Until next time, I'm Will Page.