In his latest interview on LiveWire, Jim Chanos discusses the ‘legal fraud’ that is undertaken by companies to mislead investors. Here’s an excerpt from the interview:
So I teach a course on the history of financial fraud at the two institutions over my shoulder. And one of the lessons… one of the models of fraud that we talked about came really out of the Enron story by my friend Bethany McLean.
It’s her concept of legal fraud, and it’s a really really important concept and Enron was the paragon of this idea of legal fraud, and what Bethany said and I teach is that in the financial markets today almost everything you see that is questionable is technically legal, it’s been vetted by the lawyers and the accountants, but yet there’s an intention to mislead.
If you take all of the legal games that Enron played, every single one of them was signed off by the fraud lawyers and the accountants. Enron was not prosecuted for accounting fraud even though the black hole was tens of billions of dollars once they went bankrupt, the insiders were basically convicted for lying to shareholders.
So it’s a really important concept that companies have a wide wide berth to show their results and present their results in a pro forma manner and what have you… but you have to be very very aware that the whole pattern can be to mislead you, to make you think that something is much better than it really is.
And I think that’s the really important lesson to take away from Enron because they they kind of wrote the book on that whole concept.
You can watch the entire interview here:
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