What the Tech Community Can Learn From the Scams at Enron and Theranos

Investors and business leaders are always drawn to the next big thing. While joining in on a project early is always exciting and may result in massive returns, there are still potential pitfalls to be aware of. 

With every thrilling venture, there are just as many (if not more) fraudulent companies. From Enron to the mortgage-backed security failures, to Theranos, and the massive ups and downs in the crypto market, hype, greed, and ignorance make it easier for investors to fall into schemes and scams.

Despite the FUD surrounding it, blockchain technology and crypto do have a viable, long-term future. So, how can investors steer clear of making a potentially bad investment in blockchain-based projects? 

 Yep, due diligence comes with the job

Theranos’s founder and CEO, Elizabeth Holmes, seemingly presented endless red flags throughout the existence of the Edison machine. The numbers weren’t adding up and she made empty promises with no viable value-added as time went on. Combine these initial red flags with the fact that - at the executive level - there was a total lack of relevant experience in the biotech fields, and we can see indicators of fraud, or at the very least, widespread misrepresentation. 

Sure, there is a fair share of crypto companies and projects either created or endorsed by celebrities, prominent political figures, or individuals who don’t actually have subject matter expertise wanting to take advantage of the current hype. There are also, many companies and projects founded by economists and technologists who are upfront with their expertise on the market.

It’s up to investors to examine the technology, use-case(s), organizational structure, and leadership of projects to best evaluate the future and determine if or how these projects can create value beyond speculative hype before any investments are promised or made. Look at the C-Suite, board of directors, and any existing investors – are the people who could, realistically, work on a project of this type and bring it to its true potential?  

Charisma is Charming Until it’s Not

Get rich quick promises and other forms of charisma are overwhelmingly enticing and seductive, but when there isn’t any value created over a period of years after investments are made, it’s hard to determine the exact sunk cost. Even worse, it’s equally just as hard to admit that fraud is taking place. When the first group of investors begins to ask questions it's usually far too late for the rest to get out.

As Enron grew to popularity in the 90s, investors and onlookers alike were dazzled by the charismatic leadership of Kenneth Lay and Jeffrey Skilling. They were seen as magnetic and effective leaders who transformed a Texas company into the seventh-largest organization in the world with a market capitalization beyond $60 billion. This charisma also created an environment of “corporate cultism” where leaders expected loyalty and questions were met with charming and vague answers. 

Despite its culture of knowledge, crypto is not immune to the seduction of charm. To ensure that you are making a sound investment, look beyond the alluring leadership and ask hard-hitting questions. Is the leadership saying anything of value through industry expertise and subject matter knowledge? Have they returned on initial investment either in the current company or in any previous ventures? 

Your hubris is showing

Hubris was a major contributor to the many issues surrounding the banks and mortgage-backed security failures of 2006 to 2008. These levels of self-confidence relied on banks believing they were too big to fail, having irrational amounts of leverage, and relying on misuse of trust between leadership and the public. 

When the Lehman Brothers released its financial report in 2008, it cited revenues of $60 billion and earnings of $4 billion. The report went on to list its achievements in great detail but failed to mention that they had closed BNC Mortgage and the Korea Central Mortgage business and that their share price had dropped. Rather, CEO Dick Fuld stated that they had “successfully navigated difficult markets before.” During that same year, cracks in the company’s hubris began to show. 

The Luna Terra/ UST scandal of 2022 can, mostly, be attributed to the hubris of leadership. While inner circles may claim crypto is not “too big to fail”, certain projects may certainly be “too good to be true.” 

Crypto isn’t a brand-new facet of technology, but the excitement around the community continues to grow each day. As we enter the current bear market it’s essential now, more than ever, to remain optimistically cautious by performing due diligence, looking beyond the charisma, and seeing through the hubris. 

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