June 29 2020

The right to a jury trial has been described, most recently this May, as “a fundamental right. It goes back centuries in our history, and it will never be removed at all.” (For the U.K. government’s latest proposals attacking this right and why they are not a good idea see here.)

Despite this, juries have not always been loved, especially by some in the legal establishment, including some judges, those who think that the law is far too important and complicated an issue for ordinary persons, who are simply not clever enough to understand. It uses the complexity beloved by lawyers to justify keeping the whole process within this charmed, closed circle, a legal elite. It is an argument often heard in relation to fraud trials, conveniently forgetting that sniffing out dishonesty does not need a degree, that it is often some of the apparently cleverest people – formally anyway – who fall for some of the biggest conmen around.

If you need convincing, look no further than the story of Wirecard, summarised by the Financial Times here.  It is a cautionary tale, one we have seen before, time and again. Remember Enron?Or Polly Peck? Or Theranos? It makes it all the more baffling why clever people fall for it over and over again.

The essential elements are usually the same:-

• A new, often disruptive, entrant into the market or the repackaging of a boring staid company.
• A charismatic CEO with ambitious expansion plans, an attractive story to tell and a talent for PR.
• A novel way of providing a basic service, presented as a simplification, and which could be categorised into the “too good to be true” category. No-one is able to explain why, if it is so simple, others have not done this.
• The use of some wonderful new technology. Everyone wants to be associated with this, even if the number of people keen on it is vastly greater than those who really understand it.
• The use of complicated corporate structures and inter-company transactions, often in a variety of offshore jurisdictions, making scrutiny of the individual transactions and the company’s overall position much more difficult.
• When critical or difficult questions are raised, responding aggressively with action from lawyers and PR specialists. Protection of reputation is apparently more important than responding to the substance of any criticism.
• Rapid high growth, sustained year after year.
• Becoming the latest “darling” of the stock market, investors and governments.

In all these cases, any number of highly expert advisors: analysts, accountants, auditors, bankers, lawyers and others seemed oblivious to what was going on. Did they choose to turn a blind eye? Or were their critical faculties simply dazzled by the fees to be earned?

What is perhaps different – and troubling – about the Wirecard story is the way regulators, in this case, the BaFin, seem to have abandoned its critical faculties, its willingness to probe behind the facade (surely an essential task for any regulator) and the need to listen to those voices who raised questions (from as far back as 2008) about the company.

Worse: not only did the BaFin not listen to those voices (investors, hedge funds, whistleblowers and journalists), it tried to take action against them, to shut them down, to prosecute them. The regulator abandoned its role as a disinterested supervisor and acted as if its interests were no different than that of the company.

How could so many apparently clever people be taken in? For the oldest reason of all: they believed what they wanted to be true, what they hoped was true. They formed an opinion then ignored any facts that did not fit. They ignored troubling messages or concerns because they came from the “wrong” sort of people: hedge funds and short sellers (boo! hiss!), foreign journalists doing down a national champion (double boo!) and so on. Shooting the messenger is so much easier than listening to an uncomfortable message.

Clever people are not immune from making these basic mistakes. Being clever does not necessarily make you clear-sighted. It does not necessarily make you courageous. Nor does it automatically make you curious.

There is an inestimable value in having an ordinary person’s view, in having people prepared to ask obvious, even stupid questions, in benefiting from the collective experiences, perspectives and opinions of a random group of 12 strangers, the wisdom of a small crowd, unencumbered by the sort of “groupthink” which can afflict those working closely together with the same types of people with largely similar perspectives.

Remember this when the lack of expertise of jurors is cited as a reason why they should not be involved in fraud trials. If expert and experienced people are so easily taken in, perhaps that expertise is not that valuable at assessing dishonesty and bluster and spin. If experts fail to ask obvious questions or fail to follow up on concerns raised, what value – really – does their expertise have?

Photo by Jon Tyson on Unsplash

March 31 2019

In the week in which Lyft, a company which has never made a profit, whose losses rose by 32% to nearly one billion in 2018 and which, according to its management, will not make a profit in the near-term, was listed with an initial valuation of $2.3 billion with its shares rising by 8.7% on the first day (giving it a market capitalisation of $22.4 billion, almost as much as Chrysler), we learnt a bit more about two other former stars of the business world.

First, London Capital & Finance (LCF).  Perhaps not a star but starry enough – at least superficially – to persuade about 12,000 unsophisticated ordinary savers to put £230 million of their savings into fixed-rate bonds (which they thought eligible for ISAs) providing returns well above those available elsewhere. In reality, the bonds were high risk and not eligible for ISAs, were not regulated investments and the money went into a number of ventures run by persons connected to those behind LCF.  The administrators are now, inevitably, probing what happened and where the money went. But this week investors were told that the administrators were having difficulty locating the assets allegedly acquired with the money, the chances of there being any recovery were low and, to add insult to injury, while investors lost money “through no fault of their own”, there was no basis for any compensation from either the FCA or the FSCS.  The investors fell into the gaps between firms regulated to provide financial advice, which LCF was, and firms regulated to sell bonds, which LCF was not.

The moral of this sad story is an old one: if something looks too good to be true, stay away.  

Still, those savers might well wonder what one of the FCA’s statutory objectives – protecting consumers – actually means when LCF was able to operate in the way it did in full view of the regulators without anyone taking any effective action to protect those consumers.  The plethora of inquiries now taking place – by administrators, the SFO, the National Audit Office and possibly also the Financial Reporting Council – are not likely to provide those savers with much comfort.

Now to Theranos– a company which no longer exists but which is having a lucrative after-life in a book, documentary, podcast and rumoured Hollywood film.  Its story is now well-known: a student leaves Stanford with a brilliant idea which will revolutionize health care (no more nasty needles taking blood – just a teeny pinprick), raises oodles and oodles of money, has a Board consisting of the great and the good (Dr Kissinger, George Schultz), appears on stage with Bill Clinton, is co-opted onto an advisory panel by President Obama, and is fêted as one of the first and youngest and prettiest female Silicon Valley billionaires. What could possibly go wrong?

Well, pretty much the most important thing: the product Theranos was selling did not work. Having an idea is great.  Selling an idea knowing that the reality does not match it: not so great.  Criminal charges have been laid.  We will see whether this was self-delusion and a failed business or something very much worse.  Still, one of the striking facts which has come out is that a lot of very experienced, very rich business people – people as far removed from ordinary savers as it is possible to be – failed to do the most elementary due diligence or ask basic questions, not even for an audited financial statement.

Maybe they were happy to take a risk without more.  Or maybe, like those hopeful savers putting their money and hopes into LCF, they believed in what they hoped would be true, they believed the story, ignored the facts and/or didn’t ask obvious questions.  Any similarities to investors in Lyft are, one hopes, purely coincidental.

Photo by Raul Cacho Oses on Unsplash