Sep 9, 2021 - Economy

Why corporate fraud remains unchecked

A pink piggy bank with a blue eye mask

Illustration: Eniola Odetunde/Axios

As the first Theranos trial begins, there have never been fewer incentives to uncover or prosecute corporate fraud.

Why it matters: There was a brief crackdown on white-collar crime at the end of last year, as Republican prosecutors negotiated deals before a new administration was sworn in. Now, however, there's no such urgency.

The big picture: Hedge funds and other short sellers normally have a financial incentive to uncover fraud at companies. Nowadays, however, shorting is extremely dangerous even when the fundamentals are on your side.

  • Private companies, of course, can't be shorted at all. Given that most startups fail anyway, VCs also have little interest in worrying about fraud at their portfolio companies. If they do find it, they often have reputational reasons to want to cover it up rather than expose it.
  • Theranos was exposed by a journalist, John Carreyrou of the WSJ, and was exceptional in many ways — not only in the size and brazenness of the fraud, but also the sobering litany of real-world victims in the form of people who received dangerously erroneous lab reports. Anything smaller or less tragic might not have set Carreyrou on his multi-year Odyssey.

Context: That fraud is rampant is all but certain, given the exuberance of the markets in general and the crypto markets in particular. "During times of irrational exuberance," says Yale Law professor Jonathan Macey, "we see upticks in the success rate that people have in prying people from their money."

The bottom line: The current wealth effect — the optimism that people feel because they are richer than they've ever been — is magnified by an unknown quantum of fraud — what the great economist J.K. Galbraith called "the bezzle." Don't hold your breath waiting for it to be uncovered.

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