[Editor’s Note: The High Cost of Risky Business: Lessons in Vigilance from Enron, Wirecard, and Silicon Valley Bank was first published March 15, 2023 on ComplexDiscovery and is republished with permission.]
Vigilance is being watchful, alert, and attentive to avoid danger or difficulties. In investments and banking practices, vigilance refers to carefully monitoring financial activities, risk management strategies, and regulatory compliance to prevent potential problems, such as fraud or financial collapse. This involves maintaining a keen awareness of market conditions, the performance of investments, and the overall stability of financial institutions to ensure sound decision-making and minimize potential risks.
In this context, cybersecurity, information governance, and eDiscovery professionals can play a crucial role in maintaining vigilance. Cybersecurity experts can help safeguard sensitive financial data and protect institutions from cyber threats, ensuring that the integrity of financial systems is maintained. Information governance professionals can help develop and implement policies and procedures for managing financial information, ensuring compliance with regulations, and minimizing risks associated with data breaches or misuse. eDiscovery specialists can help streamline identifying, collecting, and preserving electronically stored information as part of audits and investigations or in the event of litigation or regulatory inquiries, mitigating potential legal and financial risks.
By working together, these professionals can help create a robust infrastructure that supports vigilance in financial institutions. Their expertise in cybersecurity, information governance, and eDiscovery enables organizations to proactively detect and address potential issues, maintain compliance with regulatory requirements, and make well-informed decisions that can ultimately contribute to the stability and success of the financial sector.Rob Robinson, ComplexDiscovery, Introducing this timely backgrounder
The High Cost of Risky Business: Lessons in Vigilance from Enron, Wirecard, and Silicon Valley Bank
In today’s dynamic financial ecosystem, understanding the importance of robust regulatory frameworks, oversight mechanisms, and risk management strategies is crucial for businesses, investors, and financial professionals. The Enron and Wirecard fraud cases and the recent closure of Silicon Valley Bank are stark reminders of the consequences of fraudulent and risky activities and the need for vigilance in monitoring and managing investments and banking practices, particularly when dealing with high-risk scenarios.
Remembering Enron and Wirecard Fraud Cases
The Enron Fraud Case: An Illusion of Financial Health
Enron, an American energy company, was once one of the world’s largest corporations. In 2001, it was revealed that the company had engaged in widespread accounting fraud, leading to the largest bankruptcy in U.S. history at the time. Enron used complex financial structures, known as Special Purpose Entities (SPEs), to hide billions of dollars in debt and inflate earnings, giving the illusion of financial health. The scandal led to the collapse of Enron, criminal charges against key executives, and the dissolution of Arthur Andersen, one of the world’s largest accounting firms. (1)
The Wirecard Fraud Case: Manipulations and Missing Money
Wirecard, a German payment processing company, was once regarded as a fintech success story. In 2020, the company declared insolvency after admitting that €1.9 billion was missing from its accounts. Investigations revealed that Wirecard had inflated its revenue and profits for years through fraudulent transactions, fake acquisitions, and other accounting manipulations. The scandal led to the arrest of several top executives, including the CEO, and significant losses for investors. (2)
A Recent Reminder in Silicon Valley
The Silicon Valley Bank Closure: Timely Communications Matter
The recent closure of Silicon Valley Bank (SVB), the nation’s 16th-largest bank and now the second-biggest bank failure in U.S. history, also reminds us of the need for vigilance and how cybersecurity, information governance, and eDiscovery experts may be able to support this vigilance.
The SVB closure has been attributed to a classic investing mistake. The bank borrowed money in the short term and invested in long-term Treasury bonds when interest rates were low. However, when the Federal Reserve raised interest rates to combat inflation, the bonds’ value plummeted, causing the bank’s collapse. (3)
SVB’s liquidity crisis was exacerbated when it attempted to sell equity, resulting in a loss of over $160 billion in value and sparking a run on the bank by depositors. The Federal Deposit Insurance Corporation (FDIC) intervened, taking control of the bank and guaranteeing insured deposits of up to $250,000. The FDIC then created a new entity, Silicon Valley Bank N.A., to transfer all deposits and ensure depositors could access their funds.
The recent closure underscores the importance of oversight mechanisms and frameworks to guard against potentially risky and exuberant investments. The closure also accentuates the need for timely communications and transparency as part of these mechanisms and frameworks.
The FDIC communicated the closure via a public announcement on March 10, 2023, (4) with a second public announcement on March 13, 2023. (5) However, the first communication from the newly created Silicon Valley Bridge Bank to its clients did not come until March 13, 2023, (6) followed shortly by an additional update to clients on March 14, 2023. (7) This time gap from the initial public announcement of the closure by the FDIC to private communications from the Silicon Valley Bridge Bank to impacted clients spotlights the need for clear, consistent, and timely communication in such situations to maintain stakeholder confidence, prevent unnecessary speculation and uninformed decisions, and ensure smooth transitions. The importance of timely communications is further underscored by the accelerative impact of social media sharing, which can quickly spread misinformation and exacerbate panic if not addressed promptly and effectively.
Considerations for Cybersecurity, Information Governance, and eDiscovery Professionals
All three cases highlight the need for and importance of cybersecurity, information governance, and eDiscovery professionals as supporting experts in organizational and financial oversight. By understanding these cases, these professionals can help:
- Develop strategies to detect and prevent fraudulent activities, such as implementing rigorous internal controls, independent audits, and monitoring systems.
- Enhance transparency and accountability within organizations, ensuring that financial and operational data is accurate and accessible.
- Utilize eDiscovery tools to identify, collect, and analyze electronic evidence during audits, investigations, and litigation, enabling efficient detection of irregularities and potential fraud.
Instructive for high-risk investments and banking practices, these cases also serve as cautionary tales for investors and financial institutions, illustrating the risks associated with exuberant investments and lax banking practices. Key lessons learned from these cases include:
- Conducting thorough due diligence when investing in or partnering with companies is essential to avoid exposure to fraudulent activities and financial losses.
- Organizations need strong corporate governance, transparency, and accountability to prevent fraudulent practices and protect stakeholders’ interests.
- Robust regulatory frameworks and oversight mechanisms are necessary to detect and deter fraudulent activities in the financial sector proactively.
Embracing Lessons Learned to Fortify the Future of Finance
The Enron and Wirecard fraud cases and the recent closure of Silicon Valley Bank emphasize the importance of vigilance in conducting thorough due diligence, implementing robust oversight mechanisms, and monitoring high-risk investments and banking practices. By learning from these events, cybersecurity, information governance, and eDiscovery professionals can better prepare and contribute to the prevention of future fraud and the protection of stakeholders’ interests. The experiences of Enron, Wirecard, and Silicon Valley Bank should serve as catalysts for reinforcing risk management strategies, enhancing transparency, and fostering a more secure financial landscape.
P.S. The SVB closure may catalyze increased vigilance in U.S. banking system monitoring. This heightened attention is evident as Moody’s Investors Service has placed six other banks on review for downgrade in the aftermath of Silicon Valley Bank’s collapse. This development suggests that the banking industry is taking the lessons from SVB’s failure seriously and working to prevent similar situations in the future. And it also indicates that the need for cybersecurity, information governance, and eDiscovery expertise in supporting increased vigilance may be growing. (8)
(1) Elson, Charles, and Michael Peregrine. “Twenty Years Later: The Lasting Lessons of Enron.” The Harvard Law School Forum on Corporate Governance, 2021. Harvard Law School. Accessed March 15, 2023. https://corpgov.law.harvard.edu/2021/04/05/twenty-years-later-the-lasting-lessons-of-enron/.
(2) Taub, Ben. “How the Biggest Fraud in German History Unravelled.” The New Yorker, 2023. Condé Nast. Accessed March 15, 2023. https://www.newyorker.com/magazine/2023/03/06/how-the-biggest-fraud-in-german-history-unravelled.
(3) Pandolfo, Chris. “Silicon Valley Bank Committed ‘One of the Most Elementary Errors in Banking,’ Larry Summers Says.” Fox Business. Fox Business, March 14, 2023. https://www.foxbusiness.com/markets/silicon-valley-bank-committed-elementary-errors-banking-larry-summers-says.
(4) Federal Deposit Insurance Corporation (FDIC). “FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California,” 2023. Accessed March 15, 2023. https://www.fdic.gov/news/press-releases/2023/pr23016.html.
(5) Federal Deposit Insurance Corporation (FDIC). “FDIC Acts to Protect All Depositors of the Former Silicon Valley Bank, Santa Clara, California,” 2023. Accessed March 15, 2023. https://www.fdic.gov/news/press-releases/2023/pr23019.html.
(6) “Silicon Valley Bank – Open for Business.” 2023.
(7)”Update from Silicon Valley Bridge Bank CEO.” 2023.
(8) Das, Basudha. “Silicon Valley Bank Collapse: 6 US Banks under Moody’s Review Lens.” Business Today, 2023. Accessed March 15, 2023. https://www.businesstoday.in/silicon-valley-bank/story/silicon-valley-bank-collapse-6-us-banks-under-moodys-review-lens-373285-2023-03-14.