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Fraud When Trading or Investing in Stocks!

Fraud When Trading or Investing in Stocks!
Written by Andy

Same way Nick Leeson trashed Barings bank – one person who is not properly supervised can smash up even a very big old-established business. We still don’t really know what happened at Patisserie Valerie but that looked like a fraud instigated by one person which the supposedly star CEO was too stupid or self-confident to notice. In any business, whether small or large, internal audit systems and management supervision are essential or there will be fraud. I have been on the boards of two reasonably substantial businesses during my career, and was chair of one of them for a while. I asked a lot of questions and always insisted on seeing a cash flow report every month, without fail, and the actual bank statements with the quarterly report. As an investor I do look at P&Ls and balance sheets but the cash flow statement tells me most of what I want to know.

Ugly RNS from WANdisco (LON:WAND) today 09th March 2023:

WANdisco (LSE: WAND), the data activation platform, provides the following revision to its anticipated trading performance and financial position.

Following investigations undertaken by the CFO and CEO, and as reported to the Board of Directors of the Company (the “Board”), significant, sophisticated and potentially fraudulent irregularities with regard to received purchase orders and related revenue and bookings, as represented by one senior sales employee, have been discovered. These irregularities give rise to a potential material mis-statement of the Company’s financial position.

The identification of these irregularities will significantly impact the Company’s cash position and lead to a material uncertainty regarding its overall financial position and significant going concern issues. The Board now expects that anticipated FY22 revenue could be as low as USD 9 million and not USD 24 million as previously reported. In addition, the Company has no confidence in its announced FY22 bookings expectations.

As a result, the Company has requested that its shares be suspended from trading on AIM while it conducts an investigation with its external legal and professional advisers into the nature of this activity and its true financial position.

The Company will make further announcements in due course.”


Literally an unbelievable announcement – even the announcement makes no sense!

“The identification of these irregularities will significantly impact the Company’s cash position”

Huh – how can one sales guy cause carnage to cash position of a £1 billion cap company – completely ludicrous – what is the sales guy doing posting sales receipts unchecked and why no checks. Surely the board should be reporting themselves for incompetence.

That’s without stating the obvious that how can you not have procedures in your company to ensure that 2/3 of your booked sales are not real. I would say the same in my own business and we would never count future revenue without either a signed contract, or we would take part of it if we were in contract negotiation. And no one person ever handled that. Senior people would be (nicely) interrogated not through any suspicion but just basic rigour. As an investor I am outraged at this today even if I’m not a holder.

If a small company like WANdisco (LON:WAND) suddenly started winning major contracts, then the CEO & CFO would have been all over those deals. To suggest that a lone salesman cooked up a load of phoney deals that constituted almost two thirds of 2022 revenues, is not even remotely credible. So again how it could be that the fraud was perpetrated by one senior salesman acting alone? In small businesses like this you would expect the CEO and CFO to be taking part in all major sales negotiations (even add on sales). Big customers buying from small  companies need to see the CEO and CFO to do due diligence on the viability of the business from whom they are buying. These fraudulent sales would have tripled WANdisco (LON:WAND)’s  revenues. And the CFO didn’t check the validity of the orders? Were the CFO and CEO asleep at the wheel? Are they major fantasists? Or were they complicit? It’s impossible for me to imagine the CEO is not culpable, whether for fraud or the most extreme incompetence.

(LON:WAND) is a real wake up call to all Private Investors. What is so chilling is that on their Website they list Partners like Amazon Web Services, Microsoft Azure, Google Cloud Platform, and Customers like Daimler which makes for credibility.

The ‘fake it till you make it’ approach of too many tech entrepreneurs has a lot to answer for.

Unfortunately this comment didn’t go down well…David Richards, CEO and co-founder of WANDisco. Richards, who calls the numbers “ridiculous,” is flabbergasted at the amount of business WANDisco is suddenly generating. “It is bonkers what is going on right now with our company. I’ve never seen anything like it,” he says. “It was always sort of, this was what we said was going to happen. When it actually happens, you have to have the numbers to back it up.” Companies with manic CEOs who know how to ramp but don’t appear to understand the “numbers” and are “flabbergasted” by the growth in business are probably not the wisest companies to invest in IMO

The USA senior sales guy who committed the fraud must have a performance geared incentive scheme. Fraudulent reporting of revenue for short term gain, longer term imprisonment. This is so bad, that it’s probably game over, or not far off, for this share. Based on that announcement – Good luck if this opens at 300p let alone 1300p.

Wandisco Fraud

Perhaps the Professional Fund Managers Aren’t Much Better Than Us!

We are always told by some folks that you should follow the professional fund managers as they know what they are doing and we private investors are just mugs, Today (9th March 2023) there have been two enormous blow ups in the tech space. IQE (IQE) and Wandisco (WAND). Both have a big institutional backing as you can see below.  The main shareholders in WAND are big, shrewd funds & investors (like Richard Griffith for example).

At IQE 4 institutions own c46% between them with Invesco the biggest supporter owning 17.68%. At Wandisco 5 institutions own 43% with Richard Griffiths owning another 5.53%. In both cases there are a stack of other IIs with sub 3% holdings making up the bulk of the rest of the register Invesco is the third biggest holder with 7.58% here. One imagines that the tech specialists round at Invesco will need a stiff drink at the end of today.

Wandisco Institutional Holders

WANdisco Fraud Aftermath

The CEO’s position is untenable here. The CEO was in the City only last week, talking to investors, super-bullish, talking about a US listing, and expecting to achieve sales of c.$100m this year, rising to $500m fairly quickly.

Lots of personal investors appear to have been misled here.  This guy Richards (CEO of Wandisco) has some history, (there’s a Telegraph article out there from June 2016 about his behaviour with the company available online)

Below is from a tech blog called Blocks & Files only 4 days ago!!The penultimate paragraph is just laughable if it wasn’t so terrible:

In general, he suggests that in the live data movement market WANdisco has no competition: “We have 100 percent market share.”

The analysis and ML environment can vary with vertical markets and WANdisco’s 10-person salesforce is organized by vertical market. It has just hired Thomas Wirtz away from Databricks to be its Director for Automotive and Manufacturing segments.

Richards said: “Ten enterprise sales guys pulled in $127 million in bookings. We think we can get to a billion dollars of bookings with 20 salespeople, and be the most profitable company the world has ever seen.”

With much of its sales activity taking place in the USA, it’s been rumored that WANdisco could be considering adding a US listing alongside its UK AIM market listing. The company has just put out a statement saying: “As a dual UK and US headquartered technology company, WANdisco has long stated its intention to consider an additional listing of its ordinary shares in the United States. The company can confirm that it is in the early stages of proactively exploring this option.”

I remember the Equities First scandal of several years ago. It was advertised as a way for directors to pledge shares as collateral for loans. Shares were signed over to Equities First and then sold with the proceeds loaned to directors. It became a way for directors to sell shares without technically selling their holding as there was an intention to redeem the transferred shares at the end of the loan period (which rarely or never happened). Directors could be listed as having a substantial shareholding in companies where they owned no shares. The deals were non-recourse, so directors could walk away and not buy the shares back. Equity First also had substantial protection. Rob Terry at Quindell was a user of this facility as were several other directors at now-defunct and/or fraudulent companies (Cloudbuy, Igas [still exists but down 99%], etc.). This was years ago (2014-2015ish) and I assumed (I really don’t know why…) that the regulator had shut this sort of thing down.

Red Flag: Involvement with Equity First

Hindsight is what it is, but involvement with Equity First is another red flag to notice.

RNS 9.xi.21

WANdisco (LSE: WAND), the LiveData company, announces that David Richards, Chairman and CEO of the Company, entered into a transfer and repurchase agreement with Equities First Holdings (“EFH”) on 5 November 2021, a securities based capital provider of finance for private and institutional investors (the “Agreement”), in respect of 350,000 ordinary shares (the “Transferred Shares”) of his total shareholding of 2,157,264 ordinary shares in the Company, as security for a loan.

Under the terms of the Agreement, Mr. Richards has transferred the Transferred Shares to EFH for consideration to be determined by the average of the last sale price of the ordinary shares as reported on Bloomberg over the three trading days upon and following receipt of the Transferred Shares by EFH.

Mr. Richards is required to redeem the Transferred Shares at maturity when the loan is repaid at the end of the three year term. Under the terms of the Agreement, EFH is prohibited from short selling or voting the shares during the term of the loan.

Even experienced small cap trader Paul Scott was taken in by this fraud:

“I always made it clear in posts here that WAND had a terrible track record, as a serial disappointer, with false dawns in the past. But naturally, I took the huge order intake, and explanations of it being due to 5G at face value. As did lots of shrewd investors – unusually for a fraud, the shareholder base is mainly big investors, eg shrewdie Richard Griffiths (a wealthy shrewd investor) holds about £60m-worth, and was buying more recently. That impressive shareholder list was one of the things that gave me comfort.

I suppose the sensible thing to have done, would be to wait until the April 2023 trading update, to confirm that the high year end receivables had turned into cash. When I directly asked the CEO this question a while back, he pretty much said yes, or a form of words which led me to think it was a yes. Then he later back-tracked on this, saying that some was not yet due, as on 30 to 90 day invoices.

After the recent meeting, I had lunch with 3 other investors, and we discussed it. I mentioned that I’d picked up multiple negative body language signals from the CEO, and another investor said he won’t buy any more until he’s met the CFO too (it was always just the CEO doing the promotional meetings). But none of these hunches were strong enough to make me bail out. I took the view that if even half what the CEO was saying was true, then we’re onto a multibagger. We agreed that the worst case scenario was they miss targets due to delays, and it’s a 30% loss. We all agreed that the idea of it being a fraud was so far-fetched, that it could be ignored.

Looking back, I should have waited to see the very high year end receivables actually turn into cash. There again, if a company is repeatedly lying about contract wins, they would probably also lie about the cash having come in!

Maybe Liberum were being lined up to do another placing? But the story was that they would only need a small placing, in advance of a US listing.

I can see why lots of people wouldn’t have wanted to invest in WAND – it was speculative, and the valuation entirely based on the big new contract wins. Without that, it was just pure hope, and a very high valuation. But I never imagined the deals would turn out to be bogus.

A lot of the shareholders are American, and WAND operates in both the UK & USA. So let’s hope the perpetrators (it has to be more than just 1 person) are taken to court, and end up in prison. There needs to be proper punishment for white collar crime.”

The scale of fraud here has got to be mega, coming after they just talked up in the last few days  a USA joint listing and a new joint London broker.  All the deals were of a large size and talked up by the CEO – no way is this down to one person tucked away in the corner of the office.

I never looked seriously at Wandisco because I did not understand it. Warren Buffett famously said ” Never invest in a business you cannot understand” “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently” The Sage of Omaha is so often correct.

That’s a rule I’ve been following a couple of years now – stick with businesses that are easy to understand, predictable and with consistent long term track records. Of course this severely restricts what I can invest in and automatically rules out a lot of small caps, but can sleep a lot easier and pretty happy with my returns. Increasingly focused on mid & large caps and investment trusts these days.

How could a CEO and CFO not notice sales fraud?

There are several reasons why a CEO and CFO might not notice sales fraud in their company:

  1. Lack of Oversight: The CEO and CFO might not be closely monitoring the company’s sales operations, and therefore may not be aware of any fraudulent activities taking place.
  2. Inadequate Internal Controls: The company might have inadequate internal controls in place, which could make it easier for fraudulent activities to go unnoticed. If the company lacks proper policies and procedures to detect and prevent fraud, it could make it easier for fraudsters to manipulate the system.
  3. Complicity: In some cases, the CEO or CFO might be complicit in the fraud, either through active participation or by turning a blind eye to suspicious activities.
  4. Complexity of the Scheme: Some fraudulent schemes can be very complex and difficult to detect. For example, the fraudster might create fake sales invoices, inflate sales figures, or manipulate revenue recognition to make it appear as though sales are higher than they actually are.
  5. Lack of Resources: The company might lack the resources or expertise needed to identify and prevent fraud. For example, the company might not have a dedicated fraud prevention team or might not be using specialized software to detect fraud.
  6. Trust: The CEO and CFO might trust their employees and may not suspect any fraudulent activities. This trust could lead to a lack of oversight or a failure to detect warning signs.

It’s important for companies to have strong internal controls, policies, and procedures in place to prevent and detect fraud. Regular audits and employee training can also help to identify potential fraud risks and prevent fraudulent activities from occurring.

Personal speculation: Like everyone has said… how could the management not have took an interest in the salesperson and his performance?!!


How could one spot a company’s sales person conducting sales fraud?

There are several signs that might indicate a company’s salesperson is conducting sales fraud:

  1. Consistently Exceeding Sales Targets: If a salesperson is consistently exceeding their sales targets, it might be a sign that they are engaging in sales fraud. They may be inflating sales figures or manipulating sales data to make it appear as though they are performing better than they actually are.
  2. Lack of Documentation: If a salesperson is not providing adequate documentation to support their sales, it could be a sign of sales fraud. The salesperson may be fabricating sales orders or invoices, or not providing complete and accurate information about the sale.
  3. Customer Complaints: If customers are complaining about being pressured to purchase products or services they do not need or did not agree to buy, it could be a sign of sales fraud. The salesperson may be using high-pressure tactics to make sales and meet their targets.
  4. Inconsistent Sales Patterns: If a salesperson’s sales patterns are inconsistent with the company’s historical data or industry benchmarks, it could be a sign of sales fraud. For example, if the salesperson is consistently selling more than other salespeople in the company or the industry, it may be cause for concern.
  5. Unusual Sales Trends: If there are unusual sales trends, such as a significant increase in sales during a particular time period or a spike in sales to a particular customer, it could be a sign of sales fraud. The salesperson may be manipulating sales data to achieve their targets or receive bonuses.
  6. Refusal to Cooperate: If a salesperson is unwilling to cooperate with internal audits or provide information when requested, it could be a sign of sales fraud. The salesperson may be trying to hide fraudulent activities or may not want to be caught.

If you suspect a salesperson is engaging in sales fraud, it’s important to report your concerns to the appropriate person in your organization, such as a supervisor, compliance officer, or fraud prevention team.

It doesn’t matter how clever or switched on you are, everyone loves a good story, and when they start seeing £££ signs they drop their guard and can end up looking a total muppet. A good story with the promise of riches is one of the most powerful influence techniques, used by dodgy salesmen the world over. Some of the shrewdest business people on the planet got taken in by Elisabeth Holmes and the gigantic fraud that was Theranos, even Rupert Murdoch.

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