Under CEO Jack Welch GE always hit earnings estimates. Dead on. Or they beat estimates. By a penny. That doesn’t just happen, it’s suspicious. Indeed years after Welch’s departure GE settled accounting fraud charges with the SEC. Underfunding re-insurance reserves allowed GE to inflate earnings.
Starwood Preferred Guests pays hotels a lot more on award nights when properties are fully booked. So the Parker Meridien hotels were sued alleging they had inflated occupany numbers to bilk SPG out of $1 million.
I generally believe there’s a lot more fraud in the economy than comes to light. It hides in plain site until it isn’t hiding anymore. Most of it is pretty bald faced, but people are lazy and don’t question what they’re told and don’t want to look stupid asking questions of others who are presumed to know what they’re talking about. Less than 2/3rds of CFOs, CEOs, and COOs can correctly finish a test of financial literacy. (HT: Tyler Cowen)
So this tale of a Dubai luxury hotel that’s landed in Los Angeles court serves as a microcosm for me of what’s likely replicating itself — not everywhere, but far more broadly than most people suspect — because no one is minding the store and instead simply believing whatever numbers they’re given as gospel.
“Investigations by two respected accounting firms into the operations of the hotel have revealed fraudulent accountings, breach of trust, self-dealing, doctored invoices, phony budgets, unapproved budget overruns, and concealment of mismanagement by Viceroy Dubai,” Five Holdings said in the complaint.
Credit: FIVE Palm Jumeirah Dubai
The owners of the property contend that in retribution Viceroy “told dozens of travel agencies that it was deemed by a Dubai court to be the rightful manager of the hotel and that they could be fined or imprisoned if they booked rooms at the resort.”
And they claim to have lost over $100 million as a result. Expedia, for instance, “refused to book the hotel until its legal team has evaluated whether Viceroy’s claims were true.”
The entire legal status of the property is unclear as a result of 3 overlapping lawsuits in Dubai. And by the way the hotel was funded by a Chinese construction enterprise. In the case of the Baha Mar resort project in the Caribbean Chinese financing led to self-dealing which played a role in its bankruptcy and completion delays. The developer has a checkered past as well,
In 2009, the businessman spent 140 days in jail before the Dubai Land Department cleared him of fraud and embezzlement charges brought in the wake of the collapse of the local real estate market.
Stories like these, if they’re indeed more common and popularly realized, make me wonder if there are more bubbles to pop in the economy, whether we aren’t as wealthy as we think we are, and whether this is in part a cause of long-term secular stagnation. On the other hand, I have to approach this question with humility — asking myself if indeed there’s so much fraud out there why it hasn’t been discovered yet and whether it ever actually will be?