Posts Tagged ‘fraud’
“For the sake of the science, it might be time for scientists to start trusting each other a little less”*…
We’ve looked at methodical problems in scientific and medical research before (see here, here, and here). Let us turn now to outright dishonesty. The rising number of retracted research papers suggests that either medical research fraud is on the rise or that efforts to spot it are getting better. Either way, it’s a problem …
… Partly or entirely fabricated papers are being found in ever-larger numbers, thanks to sleuths like Dr Mol. Retraction Watch, an online database, lists nearly 19,000 papers on biomedical-science topics that have been retracted (see chart 1). In 2022 there were about 2,600 retractions in this area—more than twice the number in 2018. Some were the results of honest mistakes, but misconduct of one sort or another is involved in the vast majority of them…
… Yet journals can take years to retract, if they ever do so. Going by these numbers, roughly one in 1,000 papers gets retracted. That does not sound too bad. However, Ivan Oransky, one of Retraction Watch’s founders, reckons, based on various studies of the matter and reports from sleuths, that something more like one in 50 papers has results which are unreliable because of fabrication, plagiarism or serious errors…
… It is often asserted that science is self-correcting. And it is true that, if a claimed result is important enough, an inability to replicate it or of subsequent work to conform to it will eventually be noticed. In the short term, though, it is easy to hide in the shadows. Even co-authors of a data-fabricating scientist—those, in other words, who are closest to him or her—may not notice what the culprit is up to. In complex studies of a particular disease, several types of researchers will be involved, who are, by definition, not experts in each other’s fields. As Dr Bishop observes, “You just tend to take on trust the bits of data that somebody else has given you.”…
In the end, however, keeping fakes out of the scientific record depends on the willingness of publishers to stump up more resources. Statistical checks of clinical-trial papers often involve laborious manual work, such as typing up specific data in spreadsheets. This would require journals to hire dedicated staff, cutting into profits.
Many academics who have spent years trying to get fabricated papers retracted are pessimistic that better ways to detect fraud will, alone, make a big difference. Dr Roberts and Dr Mol want journals to be regulated in the way that social media and the news business are in some countries, with standards on what they publish. Peter Wilmshurst, a British cardiologist who has raised the alarm about numerous cases of research misconduct in his field, thinks there should be criminal penalties for those who fabricate data. Dr Gunsalus wants universities to make public the reports from their research-fraud investigations. And everyone agrees that publish or perish is a recipe for disaster.
None of these solutions will be quick or straightforward. But it is now clear that choosing to look the other way is causing palpable harm to patients…
“There is a worrying amount of fraud in medical research- and a worrying unwillingness to do anything about it,” from @TheEconomist.
* Stuart Ritchie, Science Fictions
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As we look harder, we might spare a thought for Alfred Habdank Skarbek Korzybski; he died on this date in 1950. Trained as an engineer, he developed a field called general semantics, which he viewed as both distinct from, and more encompassing than, the field of semantics. He argued that human knowledge of the world is limited both by the human nervous system and the languages humans have developed, and thus no one can have direct access to reality, given that the most we can know is that which is filtered through the brain’s responses to reality. (Korzybski assumed that the quest for knowledge was an authentic, honest one; that said, if “human nervous system” an be understood to extend to “human nature”…)
Korzybski was influential in fields across the sciences and humanities through the 1940s and 50s (perhaps most notably, gestalt therapists), and inspired science fiction writers (like Robery Heinlein and A.E. van Vogt) and philosophers like Alan Watts.
His best known dictum is “The map is not the territory.”
“Hard times arouse an instinctive desire for authenticity”*…
… but that authenticity can be hard to find…
In 2016, US retailer Target severed ties with textile manufacturer Welspun India after discovering that 750,000 sheets and pillowcases labelled Egyptian cotton were not 100% Egyptian after all.
Egypt has long been known for producing long- and extra-long-staple cotton, a variety of the crop with especially long threads that results in softer and more durable fabric – so products labelled Egyptian typically command a higher price. But the year after the Welspun incident, the Cotton Egypt Association estimated that 90% of global supplies of Egyptian cotton in 2016 were fake.
Egyptian cotton is not the only fabric that has fallen foul of mislabelling in recent years. In 2020, the Global Organic Textile Standard (Gots) said that 20,000 tonnes of Indian cotton had been incorrectly certified as organic – around a sixth of the country’s total production. In 2017, a Vietnamese silk brand admitted that half of its silk actually came from China. And in 2018, several British retailers had to withdraw “faux” fur products that turned out to be the real thing.
From choosing an organic cotton T-shirt to buying trainers made out of recycled plastic bottles, many of us opt to pay more in the hope that our purchase will be better quality, or help people or the planet. However, as the Welspun incident and others have shown, when it comes to textiles, we’re not always getting what we think we’ve paid for…
How can we tell if the clothes in our wardrobes really are what they claim to be? “Why fabric fraud is so easy to hide,” from @BBC_Future.
* Coco Chanel
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As we root around for the real, we might recall that it was on this date in 1938 that Howard Hawks’ comedy Bringing Up Baby premiered at the Golden Gate Theater in San Francisco. Featuring Cary Grant, Katherine Hepburn, and a leopard, the film earned good reviews but suffered at the box office. Indeed, Hepburn’s career fell into a slump– she was one of a group of actors labeled as “box office poison” by the Independent Theatre Owners of America– that she broke with The Philadelphia Story (again with Grant) in 1940.
As for Bringing Up Baby, the film did well when re-released in the 1940s, and grew further in popularity when it began to be shown on television in the 1950s. Today it is recognized as the authentic screwball classic that it is; it sits at 94% on Rotten Tomatoes, and ranks among “Top 100” on lists from the American Film Institute and the National Society of Film Critics.
“The opposite of knowledge is not ignorance, but deceit and fraud”*…
In follow-on to our last look at corporate fraud, a provocative piece by Byrne Hobart…
This paper has been getting some attention lately for its eye-catching estimates: 11% of publicly traded companies are committing securities fraud every year, with an annual cost of over $700bn…
[There follows an illuminating discussion of lessons that can be drawn for the follow-on to Arthur Andersen’s collapse after the implosion of Enron, the rules/regulations developed then to prevent similar public company frauds, and a consideration of whether corporate fraud has waned– at least among publicly-traded companies– and is perhaps a little less wide-spread than the paper argues…]
But since fraud is a human problem, and not purely a matter of better accounting standards, it’s not likely to have just gone away. But if the rate of accounting problems among big publicly-traded companies is lower than the 11% number cited in the paper, the question isn’t “why did it disappear?” but rather “where did it go?” And we can take our list of trends against fraud and invert them:
• Sarbanes-Oxley does apply to private companies, but only on the penalty side, not the disclosure side. But accounting frauds in private companies are often less visible; many investments go to zero, anyway, and it’s less embarrassing for everyone involved not to say why.
• There are no short-sellers in private markets. There have been efforts here, but they don’t work out because the market doesn’t clear (“everyone wanted to short Theranos, Dropbox and WeWork”). The closest you can get to shorting is to pass on a round and then brag about it later. Big deal: I didn’t invest in FTX, either.
• There’s less data available on private companies, though the rise of alternative data tools means it’s easier to get decent proxies.
• Startups are not expected to return capital. It’s a bad sign if they do. They’re often valued either based on strategic considerations or starting with a multiple of sales—a dollar of sales is much easier to fake than a dollar of earnings or cash flow, so the incentive to do so is strong.
• The idea market in startups is liquid when it comes to successes, but it would be pretty tacky for a VC to write a long blog post explaining why they passed on a live deal. (That memo may exist internally, but to the extent that it’s shared it’s in the form of a quick summary over Twitter DM or Signal.)
JPMorgan Chase’s writedown of their fintech acquisition Frank is a great case study in all of these forces. The NYT has a good story digging into the details: Frank’s founder is a serial exaggerator whose self-promotion veered into fraud (once again, if the rate of continuous improvement in public perception to be maintained exceeds what the fundamentals can deliver, compound interest works its ruthless magic). The company was valued at a high multiple of what turned out to be a flexible metric, total email addresses captured. And there were alternative datasets that could have pointed to problems: given the likely number of student aid applicants in the US, Frank’s numbers implied that it had reached near-dominant market share in the category with little marketing. Meanwhile, its monthly site traffic was not enough to have acquired that sizable a customer list over Frank’s entire existence. So it could have been caught, if the buyer had been looking for fraud. But one paradox of frauds and cheats in general is that lying is less than half the work—most of the effort is in appearing not to need to lie. The more impressive a company looks, the more embarrassing the basic due diligence questions are.
A down market and a series of high-profile failures might give private markets the same kind of natural experiment that Arthur Andersen’s failure did for public markets. Due diligence checklists will get longer and more thorough, and new funding rounds will feel more like a cross-examination and less like a party. One reason for a high base rate of fraud is that at least some of it stems from inattention rather than malice—the Arthur Andersen study finds that most of the frauds were fairly minor, and could be more the result of poor internal metrics than of intent to mislead. But either way, standards will get higher, and private companies will need to step up their efforts accordingly…
Has the primary locus of corporate fraud moved from public to private companies? “Where Fraud Lives and Why,” from @ByrneHobart.
[Image above: source]
* Jean Baudrillard
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As we do due diligence, we might recall that it was on this date in 2016 that the Centers for Medicare and Medicaid Services (CMS) sent a letter to Theranos after an inspection of its Newark, California, lab. The investigation, which took place in the fall of 2015, had found that the facility did not “comply with certificate requirements and performance standards” and caused “immediate jeopardy to patient health and safety.” This followed on three exposes on Theranos in the Wall Street Journal (in October [here and here] and December of 2015) and a critical FDA report. Things unraveled from there: in March, 2018, Thearnos, CEO Elizabeth Holmes, and President Sunny Balwani were charged by the FCC with fraud. Three month later, a federal grand jury indicted both Holmes and Balwani on two counts of conspiracy and nine counts of wire fraud, finding that the pair had “engaged in a multi-million dollar scheme to defraud investors, and a separate scheme to defraud doctors and patients.” Theranos closed in 2018. Holmes was convicted and sentenced to 11 years in prison for her crimes (a sentence she is appealing); Balwani, to 13 years.
Theranos was a private company, funded by investors including Henry Kissinger, Betsy DeVos, Carlos Slim, and Rupert Murdoch.
Elizabeth Holmes found guilty (source)
“Things gained through unjust fraud are never secure”*…
Mischief is cyclical—it is bred in good times and uncovered in bad times…
The bad news just keeps coming. Ten months after America’s stock market peaked, its big technology companies have suffered another rout. Hopes that the Federal Reserve might change course have been dashed; interest rates are set to rise by more than previously thought. The bond market is screaming recession. Could things get any worse? The answer is yes. Stock market booms of the sort that crested in January tend to engender fraud. Bad times like those that lie ahead reveal it.
“There is an inverse relationship between interest rates and dishonesty,” says Carson Block, a short-seller. Quite so. A decade of ultra-low borrowing costs has encouraged companies to load up on cheap debt. And debt can hide a lot of misdeeds. They are uncovered when credit dries up. The global financial crisis of 2007-09 exposed fraud and negligence in mortgage lending. The stockmarket bust of the early 2000s unmasked the deceptions of the dotcom bonanza and the book-cooking at Enron, Worldcom and Global Crossing. Those with longer memories in Britain will recall the Polly Peck and Maxwell scandals at the end of the go-go 1980s.
The next downturn seems likely to uncover a similar wave of corporate fraud…
The archetypal sin revealed by recession is accounting fraud. The big scandals play out like tragic dramas: when the plot twist arrives, it seems both surprising and inevitable. No simple formula exists to sort the number-fiddlers from the rest. But the field can be narrowed by searching within the “fraud triangle” of financial pressure, opportunity and rationalization…
As Warren Buffett has noted, “you don’t find out who’s been swimming naked until the tide goes out.” Read on for more from @TheEconomist, “A sleuth’s guide to the coming wave of corporate fraud” (a gift article: no paywall).
* Sophocles
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As we contemplate criminality, we might recall that it was on this date in 1997 that MCI and Worldcom announced what was then the largest merger in history, valued at $37 Billion, creating the second largest telecom company in the U.S. (after ATT).
Worldcom, the acquirer, completed the deal in 1998, then continued to grow via acquisition. MCI Worldcom (as then it was) filed for bankruptcy in 2002 (the Dot Com Bust) after an accounting scandal (as referenced above), in which several executives, including CEO Bernard Ebbers, were convicted of a scheme to inflate the company’s assets… which were ultimately acquired by Verizon.
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning”*…
In the past few decades, the Gini coefficient—a standard measure of income distribution across population segments—increased within most high-income economies. The United States remains the most unequal high-income economy in the world. The disparity reflects a surge in incomes for the richest population segments, along with sluggish or even falling incomes for the poorest, especially during bad economic times.
At the same time, the middle class is shrinking. The percent of Americans in the middle class has dropped since the 1970s, from 61 percent in 1971 to 51 percent in 2019. Some have moved up the income ladder, but an increasing number are also moving down. The middle class has also shrunk considerably in countries like Germany, Canada, and Sweden, but other advanced economies have generally experienced more modest declines.
From the introduction to the Petersen Institute for International Economics report “How to Fix Economic Inequality?”
Founded by Pete Petersen (Lehman Brothers Chair, Nixon’s Secretary of Commerce, and co-founder, with Trump supporter Stephen Scharzman, of investment giant Blackstone), and overseen by trustees who include Larry Summers, Alan Greenspan, and George Schultz, PIIE is hardly a “progressive” think tank. But they are worried: quite apart from its obvious humanitarian toll, inequality at the scales that have emerged is highly unlikely to be sustainable (even at the human cost that we’ve so far been willing to pay). Put more bluntly, it is ever more likely to torpedo the domestic (and large hunks of the global) economy and indeed to threaten the stability of democratic society.
Other sources suggest that they have very good reason for concern:
• Even as the stock market hits new highs, 26 million Americans are suffering food insecurity (See also: “The boom in US GDP does not match what’s happening to Americans’ wallets.”
• The distribution of assets in the US (and other developed economies, but most egregiously in the U.S.) is even more skewed than income: see data in the PIIE report and “The Asset Economy.”
• And lest we think that this issue is confined to the U.S., social democracies throughout the developed world are feeling the same pressures (albeit mostly less dramatically).
FWIW, your correspondent doesn’t have terrifically strong confidence in the remedies mooted in the PIIE report. Even as the authors recognize that the issues are deeply structural, they confine themselves to recommending (what seem to your correspondent) relatively timid and incremental steps– which, even if taken (and most require legislative or regulatory action) are more likely to slow the polarization underway than to reverse it.
But they are worth contemplating, if only to provoke us to more fundamental measures (e.g., here). And in any case, it’s telling– and one can only hope, encouraging– that determined champions of the very neoliberal economics that have gotten us here recognize, at least, that unless we change course, we’re speeding into a dead end.
* Warren Buffett
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As we agree that fair’s fair, we might recall that it was on this date in 2001 that Enron, once #7 in the Fortune 500, declared bankruptcy. Six months earlier, it’s stock had traded as high as $90; it closed November 30th at 26 cents, wiping out billions in wealth (a appreciable part of it disappearing from employees’ pension plans). At the time, Enron had $63.4 billion in assets, earning it the honor of being the nation’s largest bankruptcy to that date. (It would be surpassed by the WorldCom bankruptcy a year later.)
Jeff Skilling, Enron’s CEO served 11 years in prison on several counts of fraud; Andy Fastow, Enron’s CFO, would served about 5 years. Chairman Ken Lay was also found guilty, but died before his sentencing. Enron’s accounting firm, Arthur Andersen (at the time a leader among the “Big 5”), which at least “missed” the egregious fraudulent practices in their audits of Enron, was effectively forced to dissolve after the scandal.
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