The Garrulous Jay – Bloody Fraud

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I have just finished reading John Carreyrou’s gripping book, Bad Blood, which documents the rise and fall of blood-testing company Theranos. It has much in common with its predecessor, The Smartest Guys In The Room, which came out in 2004 and told the sorry tale of Enron.

I read these books partly because they are spell-binding stories in their own right: examples of fact being stranger than fiction. As you read them you have a sense that if the tales of these two companies were presented as fictitious movie scripts, the writers would be sent packing with instructions to make the plots more realistic.

I’m also looking for lessons that can be learnt as I turn the pages. It is easy, of course, to see all the warning signs with the benefit of hindsight. But if they had been obvious at the time employees, customers, regulators, politicians and investors alike would not have been taken in by these castles built on sand.

So the more useful question to ask is what were those warning signs and did they distinguish these organisations from their genuinely successful peers?

Here are a few defining features that I think Enron and Theranos share…

Evangelical and autocratic leaders: Enron had Kenneth Lay and Jeff Skilling; for Theranos it was Elizabeth Holmes and Sunny Balwani.

Grandiose visions: Enron effectively claimed to have reinvented the US energy trading market. Theranos was going to do for blood-testing what the iPhone did for mobile telephony.

Complexity: both companies’ business models, products and/or services were complex and therefore hard to understand.

High profile connections: Enron was rated “the most innovative large company in America” in Fortune’s Most Admired Companies survey in 2000, and had close links to the Bush family. Theranos had the support of Henry Kissinger and Jim ‘Mad Dog’ Mattis among others.

Financial opacity: trying to dig into the numbers for Enron proved deeply challenging, even for Wall Street research analysts. Theranos’ determination to remain private was in itself telling.

One might level the criticism that many of my points above could also have been applied to Apple or Tesla, for example, but I would draw at least two distinctions.

First, both these companies’ products – mobile phones and cars – are actually quite simple to understand.

Secondly, however brilliant Apple’s CEOs may be, they are always cheerleaders for the products rather than obsessive self-promoters. The same cannot be said of Elon Musk, however nor can it be argued that he courts credibility through his own behaviour or his connections. In fact, the opposite is arguably the case.

Despite these stories having much in common from which we ought to be able to learn, I am completely confident there will be another Enron or Theranos… It may already be trading on a stock exchange near you. You may even own it!

So perhaps the biggest lesson is the simplest one: always diversify your investments. Rupert Murdoch could afford to lose $125 million on Theranos: most of us can’t.