Barron’s Interview with JAG CEO/CIO Norm Conley “Why Your Fund Manager Isn’t Looking for Fraud”

September 9, 2020 — For more than a decade, short sellers had questioned German payments processor Wirecard’s accounting—so much so that hedge fund manager Leo Perry of Ennismore Fund Management called the company’s suspect financials “the best documented fraud that we’ve ever come across.”

Yet mutual funds run by DWS Group, Artisan Partners, and Grandeur Peak Global Advisors continued to own Wirecard (ticker: WDI.Germany) shares almost up until the company filed for insolvency proceedings this June. Why didn’t they sell earlier? A less obvious question is: Given the millions of dollars managers are paid to do company research, why didn’t they spot the fraud and report to regulators?

There are two likely answers, both unpleasant. One is that most managers don’t have the forensic accounting skill set to detect such fraud. The other is perhaps they detected it, but didn’t care because—until recently—Wirecard shares continued to soar.

“I don’t know many people, other than at our fund, who still do accounting work, and look behind the numbers as their main source of research,” says manager Bob Olstein of Olstein All Cap Value (OFAVX). Olstein has specialized in forensic accounting for 52 years and is one of the few fund managers with this expertise.

“They’re different skill sets,” agrees money manager Norm Conley of JAG Capital Management. “The accounting world is substantively different from the world of finance in estimating the intrinsic value of a company.”

Instead of hiring forensic analysts, Conley almost always sells a stock any time “credible allegations arise of accounting improprieties.” In 2015, JAG did this with Valeant Pharmaceuticals —now known as Bausch Health (BHC)—around when Citron Research founder Andrew Left, a short seller, published claims that Valeant recorded false sales of products to specialty pharmacy Philidor Rx Services. In July, Bausch agreed to pay a $45 million settlement to the Securities and Exchange Commission, without admitting or denying guilt.

Barrons – Why Your Fund Manager Isn’t Looking for Fraud – 090520

Back to Insights