Folks, no lie: There are a whole lot of liars out there. Big ones, small ones, terrible ones, skilled ones. But only a few can pull off the sort of long-term, high-stakes swindles that become infamous. And in the "What's Up, Alison?" segment of this Motley Fool Answers podcast, Alison Southwick dives into the stories of Theranos founder Elizabeth Holmes and Fyre Festival entrepreneur Billy McFarland, both of whom managed to string a lot of smart and wealthy people along for longer than you'd expect before their frauds came tumbling down.
But, as she explains to co-host Robert Brokamp, there are some important lessons to be learned from them -- whether you'd like to give your own clever fraud a try (disclaimer: We are not recommending our listeners become master criminals) or simply spot the con artists before they take your hard-earned cash and trust.
A full transcript follows the video.
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This video was recorded on Feb. 5, 2019.
Robert Brokamp: So, what's up, Alison?
Alison Southwick: [laughs] Let's see how long I can just stare at you until you remember that was the one thing you need to say for the next six minutes. Well, Bro, I have been surrounded by fraud, lately. Both Netflix and Hulu have released documentaries about the Fyre Festival. There's a new podcast out called The Dropout. It's all about Elizabeth Holmes and Theranos, so I've got fraud on my mind.
It occurred to me that while both of these frauds are different, they're also very similar and there are some lessons to be learned so that you, at home, can commit your very own fraud! Or identify fraud when you're faced with it at work or life. Today I'm going to offer five lessons for committing fraud from the Elizabeth Holmes & Billy McFarland School for Deceptive Leadership.
Brokamp: How exciting!
Southwick: I know! As I talked about Theranos and Elizabeth Holmes in an earlier episode, you probably already know the gist, but basically Elizabeth Holmes lied about inventing a device that could test for many medical conditions using just a pinprick of blood. She took in millions -- hundreds of millions -- from VC investors and lied for over a decade that the technology existed when, in fact, it did not.
And then here's the background on the Fyre Festival. Bro, you don't know anything about it? Not really?
Brokamp: Ever, ever so little.
Southwick: OK, sit back. It's fun. So Ja Rule -- yes, Ja Rule, the rapper -- and a random guy from New Jersey named Billy McFarland were buddies. McFarland was a budding entrepreneur. He created a couple of companies, but his most recent company I guess you could describe as an Uber for booking celebrities. If you want to have Ariana Grande [but probably not someone as big as her] at your bar mitzvah, you go onto this app and you're like, "Here's who I want at my party."
Brokamp: Is it the same one that allows you to have Lou Ferrigno call you up on your birthday to say, "Happy Birthday?"
Southwick: I didn't know that was a thing.
Brokamp: It was this whole service where you could hire people who maybe are past their prime in terms of their careers to call up someone that you love and say, "Happy Birthday" to you.
Southwick: Did someone do that for you?
Brokamp: No, but I sent it to someone. Someone who's a Lou Ferrigno fan.
Southwick: OK! So like that but not Lou Ferrigno. I mean, maybe you could book him through this app. I don't know. So anyway, McFarland and Ja Rule got to talking while they were on a trip to the Bahamas, and they decided that they wanted to throw the most millennial, luxury music festival ever on a private island formerly belonging to Pablo Escobar. We all watch Narcos, right?
Yes, I want to party like Escobar where we feed snitches to hippos -- no! -- but there will be tons of supermodels; at least, that's what attendees were promised. A bunch of supermodels I've never heard of were paid to be part of a coordinated ad campaign on Instagram. To post pictures of themselves and yap about how amazing Balls of Fyre Festival was going to be.
The promotional video for the Fyre Festival showed footage of private planes and again, more models. Blue water. Yachts. It was described as, "an immersive music festival...two transformative weekends...on the boundaries of the impossible." The boundaries of the impossible! Foreshadowing!
The Fyre Festival was to take place just four months later in April. Tickets to attend were priced between $1,200 and $25,000, although you could easily spend over $100,000 on some of the VP add-ons like yachts and, I don't know. Whatever the kids like these days.
But what people got was far less luxurious and more like a post-apocalyptic struggle for survival. It was mass chaos. Instead of luxury, eco-friendly domes and villas, people were put up in FEMA tents [literally FEMA tents] that were soaking wet because there had been a ton of rainfall. You got a FEMA tent and a wet mattress.
They ate cold American cheese sandwiches. There was very little water. All of the music acts had bailed, and it didn't even end up being on the private Pablo Escobar island. The location ended up being just a rocky construction site on Exuma with a few port-o-pots. And there were no models -- just hundreds of really upset people.
Let's get into some leadership lessons for the fraudulently inclined.
Leadership Lesson No. 1: Tell a good story that people want to believe. And as someone in PR, I can tell you that this is a good idea whether you want to commit fraud or not. Just have your story straight, and have a good story, and people will follow you far and wide, and throw money at you, as you will learn.
But let's look at the story that Theranos created first; a Steve Jobs-esque wunderkind who's easy on the eyes and has found a way to conveniently diagnose people using minimal blood. It's going to change the world and save lives. As John Carreyrou highlighted in his book, "There was a yearning to see a female entrepreneur break out and succeed on the scale that all these men have: Mark Zuckerberg, Larry Page and Sergey Brin, Steve Jobs, and Bill Gates before them. As a young, conventionally attractive woman, Holmes was also able to charm many of the older men who eventually backed her."
And what was the story that the Fyre Festival created? You, too, can party like a celebrity with supermodels. Now, granted, the first story has a little bit more altruism to it than paying for the possibility of doing shots with someone called Bella Hadid on Pablo Escobar's private island, but still a good story. People believed because they wanted to believe, and when you really want to believe, you are less likely to listen to reason.
Leadership Lesson No. 2: When faced with a boatload of money, don't let something like a lack of experience get in the way. Yes, fake it till you make it. Yes, nothing ventured, nothing gained. Yes, man who said it can't be done shouldn't interrupt man who's doing, etc. But there is something to be said for knowing things.
Elizabeth Holmes dropped out of Stanford at 19 just before her sophomore year at college. In The Dropout podcast, a professor describes the "plucky" Holmes coming into her office and pitching her the idea for the Edison, and the professor explained to her why it wouldn't work. No matter.
McFarland and Ja Rule had no experience running a music festival. Not only that, they thought they could pull it off in just a few months of planning, and it's something that normally takes at least a year. The inexperience also extended to their pilot that we meet in the Netflix doc, Keith. Keith taught himself how to fly a plane using [the video game] Microsoft Flight Simulator.
Brokamp: Oh, my goodness gracious!
Southwick: Remember Keith. He's going to come up later.
Brokamp: All right.
Southwick: Nothing buys bad decisions time to really play out like good, old-fashioned heaps of money. In 2016 and 2017, McFarland raised approximately $7.9 million from at least 43 investors in Fyre Media offerings [that's his app company] and approximately $16.5 million from at least 59 investors into the Fyre Festival offerings. And, of course, Elizabeth Holmes raised upwards of $700 million for Theranos, which allowed her to keep the lights on for over a decade.
Leadership Lesson No. 3: Inspire a small, tight crew of people. A fawning pre-fall of Theranos in an Inc. article is titled 21 Surprising Facts about Elizabeth Holmes. No. 21 is that Holmes is notoriously secretive and while she's been criticized by industry peers as such, she insists she must protect her technology from the prying eyes of competitors. Yes, protect that nonexistent technology.
Holmes and her secret boyfriend/COO, Sunny Balwani, were all about secrets; not just about the relationship but also the truth about Theranos. Holmes arranged the company so that everyone was purposely siloed. Employees weren't even allowed to communicate with each other about what they were working on.
Brokamp: It's a cult!
Southwick: But they were inspired to change the world. It was like a cult!
Brokamp: Like a cult!
Southwick: Paul Saffo was quoted as saying, "There's one cardinal rule in Silicon Valley that most people never realize, and that is never breathe your own exhaust. This is someone who is so deeply self-deluded by her own optimism and faith in herself," he said, "and delusion is contagious."
Early on in the planning stages for the Fyre Festival, the team decided they needed more time and $50 million to pull it off, so they wanted to push it back a whole year. But as reported in New York Magazine, "A guy from the marketing team said, 'Let's just do it and be legends, man.'" So people working to make the Fyre Festival happen against all odds talked time and time again about how they believe in McFarland and they wanted to please him. He was infectious with his enthusiasm, but he was lying constantly to everyone, all the time, and he needed everyone who was in on it to lie, too.
McFarland had employees put charges for the festival on their personal credit cards.
When water for the festival was held up in customs, he asked an employee to basically seduce [the nice way of putting it] the customs official to get the water through customs.
Like if you want to make this happen, you've got to do this. And the guy was going to do it. He says in the documentary he went down to the customs official's office, and he was ready to do what he needed to do to save the Fyre Festival. Luckily it did not come to that.
Brokamp: That's good.
Southwick: To special hugs.
Leadership Lesson No. 4: If you can't inspire them, bully them into submission. In Theranos, if you weren't on board with perpetuating the lie about the Edison working well, you had lawyers sicced on you and more. Most of the bullying was done by Sunny Balwani; again, her COO and secret boyfriend. Their tactics actually drove their chief scientist to suicide.
It took more than a decade for someone [the someone specific was Tyler Schultz] to finally blow the whistle on Theranos after working there for seven months, and when he did [this is crazy], his own grandfather, former Secretary of State George Schultz, who was an investor and on the board, didn't believe him. He didn't believe his grandson, and essentially they stopped talking to each other.
Tyler Schultz was quoted as saying, "Fraud is not a trade secret." He hoped his grandfather would cut ties with Theranos once the company's practices became known. "I refused to allow bullying, intimidation, and threat of legal action to take away my First Amendment right to speak out against wrongdoing." [The parents of this poor kid] had to shell out $400,000 in legal fees because of him coming out about Theranos. It's crazy.
The same with the Fyre Festival. If you weren't 100% on board, you were gone. Remember Microsoft Flight Simulator Keith? Keith tells everyone that the deserted island doesn't have the infrastructure to support thousands of people -- toilets, mosquitoes, tents. These were all concerns. But they wouldn't hear it, and Keith was essentially forced out because of being such a Negative Nelly.
Over and over again, people who spoke up about how unfeasible the festival was were all ostracized, bullied, fired, or eventually got fed up and left. That's also a red flag, so for those of you who are studying how to notice fraud [not commit it], if you're seeing all the reasonable people leave, then you should probably follow their suit.
Leadership Lesson No. 5: Don't let something like basic human safety get in your way. The disregard for other people extended to employees, their investors, everyone. Yes, it's sad that a bunch of investors were misled, but what's really sad is that McFarland and Holmes had zero regard for the lives they were impacting. People were expecting the Edison to effectively diagnose serious medical conditions. A misdiagnosis could result in unnecessary treatment or no treatment.
And with the Fyre Festival -- not as bad as not getting diagnosed with cancer -- McFarland didn't care that there wasn't proper sanitation or housing or enough food. And it's a testament to the millennial generation that the scuffle for FEMA tents didn't become Altamont. Again, side note. Baby boomers -- you need to stop complaining about millennials and maybe ponder the mistakes of your youth. If you really want to commit a great fraud, you've got to check your conscience at the door and be willing to destroy lives.
One fun fact about McFarland. He lied to investors and the SEC about all his assets. He said he had $2.5 million in Facebook shares when he actually only had $1,500 in Facebook shares.
He claimed to own an $8 million island in the Bahamas. Here's one feel-good story, though. Local laborers and vendors for the Fyre Festival were never paid. That's not the feel-good part. One woman in the Netflix documentary brought in at the last minute to cater the festival sobbed on camera in the documentary because she lost her life savings. So someone created a GoFundMe site, and the account has raised $260,000 for her.
Brokamp: That's good.
Southwick: Isn't that nice?
Southwick: So, hey! Where are Holmes and McFarland now?
Brokamp: Good question!
Southwick: Fyre Festival attendees were awarded $5 million in damages after suing McFarland, but I'm not sure how he's going to pay them, since he was found guilty of wire fraud and will be in prison until 2023. Today Holmes is facing up to 20 years in prison and awaiting a criminal trial for charges of wire fraud and conspiracy to commit wire fraud, to which she has pleaded not guilty. So while McFarland and Holmes can give you some great advice on how to commit fraud, they can't tell you how to actually get away with it. Womp, womp. And that, Bro, is what's up.