Who is Responsible for Fraud?

Who is Responsible for Fraud?

Over the CNY holiday, I received a few recommendations to watch a documentary about the Fyre Festival on Netflix.  The Fyre Festival was billed as a once-in-a-lifetime weekend of music, fun, and debauchery in the Bahamas on a private island.  Sadly for all of those involved, the final result did not reach anything close to the promised level of excellence in execution.  Many guests were left stranded without adequate amounts of food and water and weren’t able to return to their ports of origin for one or two days.  It looked like a mess, to put it mildly.

The fact that the event was poorly planned and even more poorly executed is disappointing. The truly sad, perplexing, and maddening part of the movie for me was that the founder and organizer of the event misled investors. He forged bank transfer documents and wire documents.  Criminal in mindset and in behavior, such actions landed him in prison for six years.  He’s currently serving his sentence.

While there is so much more to the (fascinating) story behind it all, it caused me to wonder: How do we judge other people’s character and trustworthiness?  Is it even possible to get an accurate assessment?  In the documentary, interviewee after interviewee reported: “These other people trusted him. I trusted him. Now we found out he’s a complete fraud.”

I don’t know to what extend as the reader you’ve experienced a person or situation like this before.  While I hope that you have not, it is not surprising if you have.  Personally, I’ve encountered similar people nearly everywhere I’ve been. Each time, I found myself wondering, “What motivated them to do such a thing?”  Someone I know in Shanghai planned to open a restaurant and trusted a long-time friend to support in arranging the details.  The friend took money from the first person to settle the opening of the restaurant site.  Delay after delay after delay, and nine months later, the restaurant was still not open. In fact, the lease had never been signed and contact never made with the original landlord. More frighteningly, employees had been completely fabricated. Fake emails and phone numbers, false LinkedIn profiles, and even more twisted forms of hiding the truth.  In the aftermath, I found myself questioning, “What motivated them to do such a thing?”

After viewing these documentaries about Fyre Fest and Billy McFarland, I found myself wondering, “What motivated him to do such a thing?”

Recently, I’ve also finished a super fascinating book about Theranos and Elizabeth Holmes, Bad Blood.   The summary is Elizabeth Holmes, a Stanford drop-out, created a billion-dollar company. The catch is that she defrauded investors along the way. Big oops. The product was supposed to take a drop of blood from a finger prick and analyze it for 100+ blood tests. It would then send results wirelessly to doctors or labs, and all do so from the home of the patient. The problem is that after 10 years, the machine was a phantom. It never existed.

I couldn’t help but notice some similarities between Holmes and McFarland. (Though to put McFarland’s fraud in the same sentence to Holmes’ is overly-complimentary to him, in a twisted sort of way).  Holmes's deception was more sophisticated than doctoring financial statements and making empty promises.  Holmes falsified and hid information from the FDA, the Department of Defense, and Fortune 500 Companies.

But there were an odd degree of similarities:

  • Both quickly fired people from senior management if they disagreed with them in front of other people (or in some cases, in private).
  • Both submitted fraudulent financial documents to investors. (McFarland edited with Photoshop while Holmes had her number two, Sonny, do the dirty work here).
  • Both falsified projected and true revenues to investors (Similar in both cases - true numbers and projections were so far out of whack).
  • Both promised something they did not yet have and sold it to people. (I actually can empathize with this, maybe in an odd way - I think that’s a core responsibility of an entrepreneur. The way in which they went about this was wrong, though. Both created false marketing collateral which they knew were not correct at the time of release. I think there’s a palpable difference between ’selling a dream for the future,’ and ’wrapping dog poop in a golden wrapping paper.’)
  • Both did not work with CFOs, share numbers with senior staff, or work with outside auditors on true financials. (McFarland took control of it all himself. Holmes fired Mosely within the first few years of the company and ran without a CFO for the next near-decade.)
  • Both represented ‘deals’ with larger organizations as completed when they were not. (Both used phrases like, ‘deal pending’ on investor reports when this was a wild exaggeration.)
  • Both did not communicate reasons for people leaving the company. (After senior executives left, there was no mention of it or refusal to discuss the topic.)
  • Both managed to tap channel marketing and sales talent into the zeitgeist of their ‘customers.' (In McFarland’s case, the Instagram generation of influencers. For Holmes, the want of VC’s to support the first woman in Silicon Valley to start a ‘Unicorn’ business.)
  • Both managed to ingratiate themselves with celebrities and politicians. (In Holmes’s case, Henry Kissinger and James Mattis sat on her board. She dined with Obama at the White House. For McFarland, a mid-west politician and entrepreneur provided him with seed money for his first venture. He also had celebrities on speed dial.)

Well - it seems pretty clear! Holmes and McFarland defrauded investors, employees, and the SEC (Securities and Exchange Commission).  Case closed.  Throw ‘em in jail.

Agreed. But also - not so fast. I feel like there’s another layer that needs to get pulled back in this story of fraud. It might help us answer the question, ‘What motivated them to do such a thing?’

Media played an enormous role in the temporary success of both Fyre and Theranos.  As a consumer I also feel compelled to hold media somewhat accountable for the rise of these enterprises.  Let me explain, starting with Fyre Festival.

The event’s promotional media was conducted by a company previously known as ‘F*ckJerry.' Interestingly, since the Fyre Festival has re-branded as Jerry Media...  In watching the Netflix special, I was struck by what light treatment the media/promotion company supporting the festival got.  After all, they were publishing all the content. They must have known (and did in fact know) much of the information was not true.  One might say it is a marketing company’s job to make things look better than they are.  Fair enough, I suppose.  Looking deeper, I found it pretty shocking that the Netflix documentary is also produced by Jerry Media.

Imagine running an event that is a complete failure. Then, since you own all of the media of the event, you can spin it however you want. That is exactly what Jerry Media is doing in this situation.  They know their customers. They are aware that the majority of people interested in learning about ’the truth’ behind Fyre are millennials. These millennials also happen to subscribe to Netflix and will watch this documentary.  This is the best chance possible they have to re-write the narrative of who was responsible for what at every step along the way.

In the Hulu documentary, there is a far greater emphasis on the role that Jerry Media played in the Fyre Festival’s demise. Not necessarily with the operations of the festival itself, but with the communications with fans/consumers.  For example, all negative social media posts about the event were simply deleted.  Eventually the Instagram account for the festival did not accept posts.  In ongoing lawsuits, Jerry Media sticks by the line: “All actions taken by Jerry Media were done at the direction of the Fyre Festival.”

Further, Jerry Media published ethical challenges to Hulu's film. They claimed that interviewing McFarland for their documentary was unethical. This is because he defrauded consumers, investors, and the people of the Bahamas.  Before reading more and seeing the documentaries, I had heard this and even parroted this to other people, agreeing with the statement.  Little did I know that Jerry Media and Netflix also sought to arrange an interview with McFarland.  Only, for their interview, he failed to show up.  Jerry Media then parlayed this into the ‘ethics claim’ against Hulu because they didn’t have the primary interview from McFarland.  I still agree it would have been wrong to pay McFarland for his piece. But I also think it’s messed up that Jerry Media didn’t admit that they had also arranged an interview with McFarland.  This is just another example of Jerry Media controlling the narrative of the role that they played in the entire episode. They aer refusing to acknowledge the responsibility that they may owe.

In the case of Theranos, it is similarly impossible to ignore the role that mainstream media played in the darling rise of Holmes and her company.  Editorials, press releases, and interview transcripts published between 2006 - 2016 highlight nothing but success.  The Wall Street Journal at one point was unable to get an interview with Holmes herself. The paper wanted to dig deeper into allegations of the company misrepresenting its products. And yet, the paper published an op-ed by Holmes herself declaring how excellent the company was doing the very same week!

Why might companies, including the WSJ or Fortune, act in this way? Revenue!  Many publications generate considerable revenue from annual or semi-annual conferences. The Wall Street Journal Tech Conference is one such example.  Companies may fork over tremendous amounts of money to have their CEOs interviewed on stage in front of a national audience. The interviews are then written up all over the world.  In this case, there are no incentives for media companies to pry deeply into the inner workings of companies. To test and try their theses or to expose what might look like weaknesses in the armor would be counter-productive.  Why do such a thing when your revenue is on the line?  If you’re known as the conference who exposes weak CEOs, will anyone want to sit on stage with your reporters.  For example, TechCrunch notoriously throw up softballs to their interviewees under the guise of it being ‘a tough question.’

The role that marketers and reporters played in the rise of Theranos is undeniable.  Going back and reading the New Yorker’s 2014 profile of Holmes today is laughable.  Wikipedia alone documents 133 articles about Theranos, with only a handful of negative press releases.  For the journalists who wrote about the amazing science behind Theranos’s rise, where is the responsibility to check the facts?

You all know that I love DRIs.  The idea that if multiple people are responsible for something, then no one truly is responsible for it.  I think not having DRIs is the fastest way to not achieving results. It's also the fastest way to create interpersonal discord and general confusion and malaise at a company.  In the case of fraud, the buck stops with the CEO, undoubtedly.  What’s happening in the organization is ultimately approved and overseen by the leader with the most authority.  This is triply true if they are the one who is committing the fraudulent action.

The role of media in these two stories helps me understand a bit more how to answer the question from above. 'What motivated them to do such a thing?’

From the start, transgressing ethics and laws are wrong. Though after considering the media's effect, it's more understandable to me how this feeds into confirmation bias. What is happening that achieves this positive press must be right. And there's where I think it's so easy to go wrong.

It’s often said that true salespeople find no greater dopamine hit than the completion of a sale.  With entrepreneurs, perhaps it’s the ’sale of the idea’ that generates that desired effect.

After all of this, I don’t have a single answer - only further questions: What role does media play in fraud? Generating trust? Who is ultimately responsible for it?  Were Holmes and McFarland classic 'Silicon Valley visionaries' who weren’t able to execute? Or were they run-of-the-mill hucksters and liars?  Does the wreckage left behind matter to them, or are they able to shrug it off as collateral damage?  Did it feel like fraud?  Or just ‘pitching’ the future?

Do we not trust anyone anymore?  How extreme do we take the mindset of ‘trust but verify’?  Do we only focus our experiences on repeated games? Does that even matter?  How many reference checks is enough?  How do we really judge another person’s character and trustworthiness?

It’s enough to make anyone’s head spin.