Fraud is becoming an increasing concern on Wall Street these days, especially after a recent survey highlighted just how big of a problem it really is. But while the problem may be worsening, this isn’t a new story. A similar survey conducted by the same group last summer had similar results—except the percentages are slightly larger this time around. Now a well-known investor is weighing in on the concerns about fraud on Wall Street.
Jim Chanos is well-known not only for being a brilliant investor, but also for being one of the first to detect the fraudulent practices of Enron. He sat down with AlterNet’s Lynn Stuart Parramore this week to discuss his own investment practices as a short-seller and how fraud detection plays a role in what he does. As a short-seller, Chanos researches companies carefully to look for any suspicious practices or signs of overvaluation.
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He said within the last two decades, he’s noticed a trend when it comes to shedding light on fraud. According to Chanos, it hasn’t been regulators, law enforcement or “the normal guardians of the marketplace” that have brought fraud to light. It has been whistleblowers on the inside, the media or short-sellers like him.
“Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing,” he said.
He also highlighted some surprising features that sometimes accompany fraud. For example, he said fraudulent companies are sometimes some of the most philanthropic ones. Also he pointed out that many times fraud is timed very specifically. He said fraud often increases “during and immediately after the biggest bull markets.” According to Jim Chanos, surveys indicate that about 10 to 15 percent of companies in the U.S. are fraudulent.
He was also asked about bubbles and how to tell the difference between “investor euphoria” and fraud. He pointed out that fraud involves the “intent to deceive,” which is quite difficult to prove. He brought to mind the Justice Department’s admission that it calculates how easy it will be to prosecute allegations of fraud before it actually moves forward with a case.
The admission of the DoJ sheds light on the government’s failings when it comes to regulating the markets. Jim Chanos also brought up the point of regulators who also work in companies where fraud may be occurring or may occur in the future.
“How tough are you going to be on industry that you oversee if you’re going to go back into that industry every for our eight years?” he asked.
Jim Chanos also said that the amount of cases being prosecuted depends largely on who’s in office and “the mood” around what’s happening.
Another big question lawmakers and investors have been discussing lately is whether the nation’s largest banks should be broken up. The banks say that they’re too big to fail, but Chanos says “too-big-to-fail is also too-big-to-jail.” He called for “equality under the law,” which he said isn’t happening because banks and other large companies which have fraudulent practices aren’t being prosecuted because it’s too difficult to do so.