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Caleb Newquist: Hello and welcome to My Fraud, a true crime podcast where the rich get richer. But there is an occasional clawback. I'm Caleb Newquist. Today on the show Erik Lie. [00:00:30] He is the department executive officer, Amelia Tippee, chair in finance and professor at Iowa University's Tippie School of Business. It's a mouthful. Um, but you also might be thinking, okay, who is this guy? And I'll tell you first, he has a new book, and that book is called Catching Cheats Every Day Forensics to Unmask Business Fraud. It is out now from Barrett Kohler. And wherever you get books, you should [00:01:00] be able to find it. Anyway, yes, he's plugging a book. But also, professor Lie has a very fascinating story of his own to tell, and it is that he wrote this paper in the mid 2000, 2005, to be precise, that questioned the timing of stock option awards for CEOs and other corporate executives. And we, we we talk about the whole story. So I don't want to spoil anything, but, um, we had a very nice [00:01:30] conversation and it's it, uh, it'll all become clear very soon. Um, if you don't already know the story, because it was obviously, you know, 20 years ago anyway. How about a couple of quick reviews and we'll get right into it. All right. Um, here we go. Uh, I have a couple of actually, I'm going to read a couple of from a couple of reviews from our episode with Becca Lasky of the Corporate Gossip podcast, and the first one comes from the earmark app.

Caleb Newquist: Rebecca [00:02:00] gave it five stars and writes, while the format was a bit more conversational than standard episodes, I found it very interesting. Also, the scorned CPA commentary kept me laughing. Yeah, Rebecca, I would say the Rebecca episode was pretty unique in the sense that we were just shooting the breeze quite a bit, and because we didn't know each other, we we had never met, uh, aside from just exchanging email. I'd say that we are kindred [00:02:30] spirits, Becca and I. And so we were just getting to know each other and kind of, you know, just having fun. So I'm glad you liked it. Um, not everybody liked it. In fact, uh, here's a comment from our YouTube channel on that episode. Evidently, this was a Caleb who wrote this one, and he said, I'm sorry I wasted my one free earmark CPE per week on this because I'm halfway through it, and all I've heard is two people just rant about politics. I thought this was about corporate T. If I wanted politics, [00:03:00] I'd listen to a political podcast. Sorry, Caleb, I just want fraud CPE for my CF signed fellow Caleb. But then he followed up with another comment and he said one hour, seven minutes, 14 seconds. Hey, she actually had some good personal advice. And hey, uh, fellow Caleb, you hung in there. So I'm proud of you. And yes, Becca had great advice. And if you want to hear that advice, you should go listen.

Caleb Newquist: But also, if you want corporate [00:03:30] T, you should go listen to Becca's podcast, The corporate, uh, The Corporate Gossip Podcast, because, uh, it's a great podcast. And her and her brother have this great dynamic, and they, they, they have some they they do great. They do great episodes on companies that we really don't cover here. Anyway, thanks to everyone who rates the show, writes, reviews, writes in emails, comments on YouTube, wherever you're doing it. Uh, Instagram. I've seen a couple comments on Instagram since we've [00:04:00] been posting there again, so all that stuff is fun and appreciated. And that does remind me if you do like YouTube, if you do like Instagram and want to check us out there, that's where, you know, the Instagram is just like reels and whatnot, you know? And uh, but the full episodes are on YouTube if you want to do them on YouTube. So anyway, um, also, if you need a keynote speaker for a conference or a webinar or something like that on [00:04:30] fraud or ethics email, oh my fraud at CPE. Com to get more information on pricing and availability and we can talk about that. Anyway, Doctor Erik Lie of Iowa University, that's my guest. His new book, Catching Cheats Everyday Forensics to Unmask Business Fraud, is out now. And we had a nice conversation, so I hope you enjoy it and let's get into it. Here's me and Erik Lie. [00:05:00]

Caleb Newquist: You grew up in Norway, correct?

Erik Lie: That's. That's right. I had my whole childhood there.

Caleb Newquist: All right. And so how was that?

Erik Lie: Oh, it was a great childhood. Uh, amazing. I was I was very happy, uh, doing all the things that Norwegian kids do that is, uh, go outside a lot. Play, uh, play in the in the summertime, play in the in the wintertime. Uh, we were close to water, as most people [00:05:30] are, uh, with a long coastline. So I spent a lot of time by the water and, uh. Yeah, getting up in the mountains in the winter, time to go skiing and all that kind of stuff.

Caleb Newquist: Oh, wonderful. Yeah, I live in Denver, and so, um, but I've been an avid skier. I've been an avid skier since I was pretty young. I think I first went when I was ten, but my kids are getting a super early start, like they're I mean, they're gonna be flying by me any minute. So, um. That was wonderful.

Erik Lie: Yeah.

Caleb Newquist: That's great. So then, um, tell [00:06:00] me about, like, your early interests, like, was finance something that you gravitated towards, uh, quick or early on, or was it something that your parents were interested in? Like how did how did how did your interest develop when you were younger? Yeah.

Erik Lie: Yeah. That's a that's a very good question. And I've sometimes, uh, reflected on that myself and I'm not sure really. I mean, my dad, he was an engineer, construction engineer. So for a while I was thinking I was going into engineering, and he was very good at math as well. So so I inherited his, [00:06:30] uh, his, uh, skills, or at least his interest and talent with with math and numbers. My mom was a yeah, until she retired, was a children's librarian. So she was sort of on the other side of that spectrum. Um, but I gravitated towards, uh, this number oriented, uh, topics and fields, uh, but, uh, in high school in Norway, you have to specialize a little. And then I just sort of ended up in some of these more econ [00:07:00] oriented classes and, uh, and then it's just a set of somewhat random decisions and occurrences after that that, uh, that lead you to where you are. And sometimes, again, you wonder, how did I get here? Yeah. And you can sort of pinpoint these people that you met who made some suggestions and so on, and you realize that, uh, yeah. That's really what made it.

Caleb Newquist: Yeah. Yeah. It's true. And so was there something specific that. So because then you came to the US for, for [00:07:30] your undergraduate, is that correct? Yeah. And what do you remember how that came about?

Erik Lie: Uh, yeah. Uh, well, uh, I had, uh, siblings who both were exchange students when they were in, uh, in high school. Uh, so one my brother, he was in Pittsburgh and my sister, she was in Mexico City and so I didn't have the experience, so I thought I had to go outside also to sort of be, uh, a little bit more global. And so that was [00:08:00] that was my jump into to that world. Uh, and at the time and still is the case, uh, education in Norway is higher education in Norway is free. Uh, I mean, you still have to pay for room and boarding and all that kind of stuff, but, uh, but the additional tuition payment and they also said that if you go abroad to make it fair, given that this is taxpayer money. Yeah, we will pay for tuition as well. So and then the Norwegian government had made a list of about 20 schools in the US [00:08:30] that they said they would fully fund. If you go there. So you can probably get funding from other schools as well, but you don't have to go through the additional bureaucracy of fixing this yourself. Yeah. And on that list was Oregon. I didn't know anything about Oregon at the time. Yeah. And and this was before the internet too. So I can just look it up and look at all the pictures and all that.

Caleb Newquist: Sure.

Erik Lie: But I chose actually. I applied to several schools. I applied to Oregon, I applied to Michigan. Uh, and I think I applied to Colorado as well. Okay. Yeah. And [00:09:00] I think I would submit to several of these. And, uh, then again, it was a random choice. I didn't know, for example, that Michigan has a better academic reputation than an organ. Sure. So I had no idea. And, uh, but then I end up at Oregon, and there were quite a few other Norwegians there as well. So it was a nice, nice international community there. It was a splendid place to be. And then, oh my.

Caleb Newquist: Gosh, Eugene. Eugene is amazing. It's so nice.

Erik Lie: There. Amazing. It fit me perfectly. You see a lot of the same nature. Uh, the same, [00:09:30] uh, the same type of trees, uh, little hilly around there. As long as you get away from the valley. Yep. And, uh, close to the water. Uh, it was it was an amazing place to be. Great. And, uh, that's where I started to meet some people also. I mean, I, I was happy with my classes. And there was one particular piece student who was teaching in the investments class, a guy called Scott Lee. He's, uh, he's retired now, and, uh, he, I guess, recognized [00:10:00] some of my talent and asked me to do some work for him for his, uh, PhD defense or for his PhD dissertation. Really? And, uh, so I did that very happily, got to know him a little better. Started to play squash with him also.

Caleb Newquist: Oh, yeah. Okay.

Erik Lie: Yeah. I'm not a morning guy. He liked to play squash in the morning, so I had to get up early to play squash with this guy. Uh, but, uh, still, I felt honored to to sort of establish these networks and so on, and. Yeah, and then he kind [00:10:30] of nudged me along and said, hey, Erik, you know, I'm in this program and, uh, I think you should do it as well. And so that's, again, one of these chance encounters and discussions that lead me to discussions that I don't think I had the confidence to think of myself as as a future faculty member, professor at the time. So, yeah. So, yeah.

Caleb Newquist: So that so the interest in academia that, that, that, that [00:11:00] came to you early on?

Erik Lie: Yeah, it came to me from from other people. I loved academic environment. I had to say. I mean, being being at the organ and being on campus here and, and in those old buildings, going to the old library there. The Knight Library, uh, loved it, loved it. The smell of that old wood there. Yeah. All that was great. Yeah. So I loved I loved the academic setting. And that day of actually being able to be part of that for life, that was that [00:11:30] was pretty enticing.

Caleb Newquist: So there was nothing. So. So when you're sitting in your finance classes and they're talking about, you know, you know, banking and all these career possibilities, like, was that did that ever appeal to you as a young person?

Erik Lie: Yeah, I like I like the finance classes a lot. Yeah, but it wasn't, uh, it wasn't really anything more than that. I mean, I, I hear students now who sort of have this, this, this, uh, vision for the whole career.

Caleb Newquist: Yes.

Erik Lie: And [00:12:00] know what they're going to do? Even people who apply to a PhD program and say, ah, yeah, I'm interested in this and I'm going to study this or that, I had no idea. I just liked the classes, I liked the topic, and I applied and I just, uh, I just, uh, like to ride that wave, and and I saw where that took me. So I was I was sort of just curious, taking it all in and, uh, without having that sort of clear path.

Caleb Newquist: Yeah. Any any topics in particular that you remember, [00:12:30] um, that were attractive to you in those days? Like what? You had some early interest that kind of were like, oh, I could dive deep into this topic or that topic.

Erik Lie: Yeah. Well, we had, several faculty members at Oregon in those days who were including the PhD student, Scott Lee, um, um, who were very interested in corporate finance topics. So we got quite a bit of exposure to even some of their research. So [00:13:00] it was more on payer policy, uh, and some of these recapitalizations where companies restructure. And I also bumped into some of these, uh, agency conflicts. The idea that you have these managers with separate interests who might be doing something that's not in the interest of shareholders. So seeing some of that tension come, come, come to light was interesting. Yeah. Yeah.

Caleb Newquist: All right. Very good. And so. Okay. [00:13:30] So then, uh, you're you're going down the academic path. And my guess is lots of our listeners don't necessarily, um, have a ton of experience with what that's like. So You. You do the master's program at Oregon, right? And then eventually you you go on to, uh, to obtain a PhD. And just as briefly as you can, like, how does how do how does somebody make that transition? Do they have to have like, do you have to have an idea going [00:14:00] into that? It's like, oh, this is something I really want to specialize in. Or and this is something that I'm really interested in studying about or gathering data about, like, what is that like?

Erik Lie: Well, I didn't I didn't have any idea. I just, I just thought that I was I was curious. It was my curiosity that was driving me, but it wasn't for a particular topic at the time. So I was just going to some of the faculty members at Oregon and asking for advice, and they gave me a list of schools that I should apply to that sort of seemed to fit sort of what maybe I [00:14:30] might want to, uh, want to study. And, uh, then I went with that, and then I went back to serve in the Norwegian Navy for a year. And at the same time, I was taking some of these standardized tests that that you need while taking some element earlier. But I hadn't really put in the effort. So now I need to put in some more effort to be admitted to some of the better programs out there. Yep. And so yeah. So that that was me. Uh, but as I said earlier, there are other people who come in with, uh, [00:15:00] with some idea of what they want to do. But what I oftentimes tell them is just, you know, forget about what you already know in the first couple of years in the PhD program.

Erik Lie: Just soak up knowledge, read papers, will discuss papers together. Because out of those discussions, you all sort of get to the edge of where we are in terms of our research, and you'll get some ideas of what you can do. Because if you think that, you know, before you enter the PhD program, what is useful to study? Well, [00:15:30] you don't, you don't. So just forget all of it. It's sort of like, yeah, when I first played ping pong, uh, as a kid, uh, Yeah. Showing up the very first time that the coach said, ah, who has played ping pong already, and some of them were raising their hands and saying, yeah, I have. And they said, well, too bad, too bad. Um, because I want to start from scratch. So we get all the habits in place, hold the racket properly, and so on. I think the same thing applies [00:16:00] to the PC program. It's okay if you just sort of have this basic, uh, knowledge about statistics and finance and we'll, we'll take care of things from there.

Caleb Newquist: Okay. Very interesting. And ultimately, what did you and so then what did you, uh, what was your dissertation when you got to that stage?

Erik Lie: Yeah, my dissertation was on, uh, on share repurchases. Okay. And there was, it was influenced by, uh, we had a speaker from Ohio State came [00:16:30] in with a theoretical paper, and I was just sitting there and thinking, I had some ideas of how I could test this empirically. And so that's how I start to do this. And I start to gather data. I start to read proxy statements and all these things and, and that's that's how I got going. And I didn't really have, again, a clear path. I had some ideas for what I was going to test, but for the most part, at that point, I just sort of started to become an expert or I started to educate myself, to put [00:17:00] it that way.

Caleb Newquist: Okay. And so then do in terms of like transfer or excuse me, um, kind of evolving from the pH. D program into, um, looking for professor jobs, like what happened there, like what happened at that at that point?

Erik Lie: Yeah. No, it's it's an interesting market. Uh, you just, uh, uh, there's a market that opens up where we have a couple of academic conferences where everyone's showing up. [00:17:30] In the old days, it was everyone showing up physically. And then you conduct interviews in the hotel rooms and these sometimes small hotel rooms, and sometimes you're stuck sitting on the bed or something. So it's kind of awkward, but uh, but, uh, that's, uh, that's that's a process. Uh, so you apply to all these positions, you have this initial round of talent use, and then you're invited to campus, maybe, and then you get to see that and you present it to all the faculty. You get to present your research, [00:18:00] which is really your job. Pitch your research. That's all people care about. Uh, I tell my students, uh, that, uh, you know, the PhD students that I'm going to give you grade in this class, but no one could care less. No one's going to look at your grade ever again. Yeah. The only thing that people care about is, uh, is your research and how you present yourself.

Caleb Newquist: Yeah. Okay. Well, that that's that's excellent advice. I mean, it's it's good advice. That's good advice for pretty. Well [00:18:30] I mean, not necessarily the research. Not everybody does research for a living, but, um, how you present yourself is definitely, uh. It counts for a lot. Yeah. So. Okay.

Erik Lie: So very good to be curious. You know, instead of.

Caleb Newquist: Focusing on.

Erik Lie: Doing well in classes, you can just sit back and you can think freely and, and and think about what it is that you want.

Caleb Newquist: I remember that that that takes me back to even my own college days where I had an auditing professor, I studied accounting. Um, and then I got away from accounting, but I had an auditing [00:19:00] professor in my undergrad program, um, who said, if you don't learn anything in here? He said, that's fine. My job is to teach you how to think. And like, I, I've, I, you know, I've been carrying that ever since. And he only said it like once or twice and I don't know, it just landed with me. He's like, my job is to teach you how to think. And, um. Yeah. And he. And he was tough, like, he he taught intermediate accounting. So he, he had to weed out the people who he didn't think were ready. [00:19:30] So, um, so interesting. Okay. And then, so you end up in Iowa right away, is that right?

Erik Lie: No. I went to to the College of William and Mary first. That was my first.

Caleb Newquist: Okay. Very good. In Virginia.

Erik Lie: And. Yeah. Yeah. And then, uh, after spending eight years here. Great. Years. Yeah. I was reaching out and getting to an institution that, uh, is, uh, uh, I guess the difference between William and Mary here is that they focus a little bit more on research here. Uh, they [00:20:00] have a little higher expectations for their research that you do. And they also have a PhD program, which is very nice. Right? Especially as you age and your energy goes down and you need that constant input and and and so on. And so to be able to sort of be surrounded by students, PhD students. Right, is a nice benefit.

Caleb Newquist: Yeah. Excellent. Okay. So thanks for all that. Uh, thanks for indulging me. Um, but so, um, [00:20:30] so I, we want people to buy the book, but also we also want to hear your version of of I guess, you know, your whistleblower story. This is something that, you know, you write about it in the book and this is how you kind of became, uh, kind of, uh, well known. And although it's so interesting because it's it's it was over 20 years ago now or about 20 years ago now. So I'm wondering if you can take us back to that time, those early 2000 or around the time that, [00:21:00] uh, backdating was something that, you know, was it something again? When did that when did that particular topic or area of interest, when did that kind of first, um, emerge for you?

Erik Lie: Yeah, I guess it was again, uh, like other things in my life, which it sort of comes to me and this matter of seizing those opportunities. And, uh, at the time, uh, people started to look more at the executive compensation issues and, uh, we had, uh, acquired [00:21:30] a database. All its executive compensation data comes from either proxy statements, which companies have to to send out to the shareholders. It's essentially the invitation to the shareholder meeting. And in there they say, ah, these are the board members, and these are the people who will be nominated for the board. And here's some information about them. And by the way, here's also our executive team and here's how they're being compensated and so on. And some of this information has to be disclosed by law. Um, so then there are companies that [00:22:00] will go out there and gather that information. Back in the days it would be all by hand. These days you can scrape it I guess. Yep. And so we bought this database, uh, with, with this information from, uh, the largest 500 companies in the US. And so then I my initial thing was, again, tied to some of the stuff that I talked about earlier with share repurchases and corporate financial policy and so on. I was thinking that, you know, when you give these executives some incentives, how's it going [00:22:30] to change the behavior, and how is it going to play out in the firm? Um, so and there were several other papers that did similar things back then. So that was my initial thing. So as part of that. Yeah. Go ahead.

Caleb Newquist: Oh, I just wanted to ask you at this point in time was was equity compensation like was that historically has that always been a been a big part of like corporate executives about compensation, or did it really start amping up in like the 1990s and the 2000? Did it really get turbocharged [00:23:00] at that time, or was it always kind of a big part of it?

Erik Lie: Yeah, I think it's one of the things that always come up here and there and that of course we hear about executives being paid a lot.

Caleb Newquist: Yes.

Erik Lie: And we all discuss it by that. And if you go back to the early 90s, the politicians were also periodically disgusted by this. And so at some point back in 1993, they said, okay, you guys, the firms that is you guys can pay your executives well, but you're not going to be able to get tax deductions for everything [00:23:30] that you pay them. Right. That's that's essentially a subsidy from the taxpayers. Right. But then I had a little loophole that said if it's performance based, which we are okay with. Meaning if you give them some stock or some options on stock up, then then we're okay with it and then you can deduct that. So what happened. Then of course is that the executives were saying, hey, yeah, let's just move some of our compensation towards some of these performance based stuff.

Caleb Newquist: Yeah.

Erik Lie: So that was the politicians doing. So [00:24:00] yeah, there was attention to it then. And then people started to use options more frequently. So it's so yeah, it's I guess probably going back to the early days, uh, we've had some fascination for it. We love to focus on, on some of the wealthier people in society and how much they make and so on. Uh, so, yeah.

Caleb Newquist: It is it is kind of a it is kind of a, uh, it is kind of like a palace intrigue or kind [00:24:30] of some kind of fascination. But by the same token, it is accountable. It is. It does hold rich and powerful people accountable in a way that, um, you know, that fascination kind of, uh, leads to is like, oh, is this is is is this fair or is making these comparisons like the comparison of, like what the median, uh, worker at a corporation makes versus the top executives? And so those things are those things. I think they kind [00:25:00] of serve as an area of fascination, but as an area of accountability, too.

Erik Lie: Yeah. And that's interesting that that ratio that you talked about now. Yeah, that uh, that is actually now, uh, there has to be disclosed in the proxy statement. Right. And only for the last several years, what we call a pay ratio. And whenever these pay ratios come out, of course, the media is going to be on top of it and say, look at this guy's pay ratios in the hundreds or whatever. And, and at the same time, the companies are trying to do what they can to tweak the [00:25:30] number for the median compensation within a within the company. Do we count these people? Can we include some of these delivery people and so on? Yeah. Or should we exclude them because they paid so little so that yeah. So there are games being played. Uh, because because of the media attention. So yeah. Um, yeah. So, uh, yeah, the fascination has always been there.

Caleb Newquist: All right. Okay. So you have this data set and you're starting to look at the and you and like you said, you're trying to understand [00:26:00] how this form of compensation does it manifest in any kind of interesting behavior one way or another. Right.

Erik Lie: Yeah. Yeah. Exactly. So for example, if you give people options. Yeah. I'm not sure how much you know about these stock options, but they essentially they give you the, the, the opportunity to buy stock in the future at a certain price. And that price, uh, at which you can buy in the future. It's usually said to be the the the mark price of the stock. On [00:26:30] the day that you get that option's right. And and one thing that is interesting about this is that you have this, this, uh, kinky payoff. That is you're only going to be paid off if the stock price goes up, right? Uh, if it goes down, it doesn't matter how much it goes down, because you couldn't care less. It's they're already out of the money. You're already lost, so that's fine. So that that is symmetry there. It gives, uh, the incentive to pump up the volatility of the stock. You [00:27:00] know, you don't want the stock price to be constant because then they're not going to pay off. Right. You want it to be, uh, a wild ride in the stock price. That's going to make your options more worthwhile.

Erik Lie: So my thinking in the fields thinking at the time was you give these people options, they're going to be more volatile than the behavior. They're going to do crazy things for the firm. And so we should be able to see that. So yeah. But as part of that exercise, I look to see what happened to the stock price around the grant itself. [00:27:30] Yep. And and uh, I wasn't the first one to do that. Uh, a guy at NYU, David Yermack, had done that about a decade earlier and published that in a very, very nice article in the Journal of Finance. But he had used data that, uh, that, uh, was from the early 90s. And, uh, while there was some action then in terms of backdating, it was never pronounced. So what he found was that the stock price increases a little after these grants. So [00:28:00] what he said was that it appears as if these executives are granting themselves options before they think the stock is going to increase in value. So yeah, it was it was kind of it was interesting. It got the attention but it wasn't explosive.

Caleb Newquist: Right.

Erik Lie: So so I so I essentially just did exactly what he did with more recent data, data from the late 90s and the beginning of our current century. Uh, and, [00:28:30] and I saw that whatever pattern he had, it had intensified. It was crazy strong. You see, the stock price during the month beforehand, on average, go down by about 4%. And then right on the grant date, it turns and it goes up 4% afterward on average again. So this is crazy to find something like this. I said, what is going on here?

Caleb Newquist: What is going so like just to level set for the audience the the likelihood because like the likelihood that [00:29:00] all these corporate managers were just extraordinarily lucky or they, they had they had perfect timing. Like the likelihood of that being is almost zero, right? Like the odds of that happening are just infinitesimally small. You said that this the The concentration of this is far too great for this to be a coincidence, correct?

Erik Lie: Yeah.

Caleb Newquist: Yeah, yeah.

Erik Lie: Okay, well, several things. Uh, one was, [00:29:30] uh, um, Max Payne was concentrated to the period afterward. And so then you can sort of conceivably say that, okay, it wasn't a coincidence, but what's happening is that they just kind of can foretell the future to some extent.

Caleb Newquist: Right.

Erik Lie: And so okay, we'll give them that. Uh, but, uh, what I found was that it's, um, it's it's it's a very strong after beforehand. And, and this is important not only see it in the stocks themselves, you also see it in the whole marketplace. [00:30:00] So the whole market is moving in that same direction. And you ask yourself, how could these guys predict the market?

Caleb Newquist: Yeah.

Erik Lie: And how come how come they're not working for a hedge fund in that case, instead of for a company out there in the Midwest? So so this is this this wasn't adding up.

Caleb Newquist: Right?

Erik Lie: Okay. Yeah.

Caleb Newquist: Okay. And so you you have the data, and so then you write the paper. And so if I don't, I don't want to tell your story. So you you [00:30:30] submit it to a journal and and and they, they, they enthusiastically they're like amazing. You're a genius. Is that what happened or what was what when you submitted the paper? What what happened?

Erik Lie: Well, uh, I mean, to be fair to the whole process, uh, when you submit a paper, you get feedback, you oftentimes try the top journals, you get feedback, and then it makes you think about things and you market it differently, and you think with the results and you try to pitch it differently. And that was a process [00:31:00] where I sort of got more and more certain about how to pitch it and what was going on, so that the referee process really helped me, uh, sort of, um, create the product that was sellable. And, uh, I got that out to a good journal. Um, Uh, and then then, uh, nothing really happened. Uh, it was accepted. Uh, clearly someone thought it was interesting, uh, and, uh, and [00:31:30] and then nothing happened. You know, people will not read these academic journals for the most part. Right, right. Yeah. I think they're better these days. But for the most part, uh, no one cares about these things. So I have.

Caleb Newquist: I have oh, I just have to. You'll appreciate that. I have a friend who's an economist and went through this whole process, and she and I have, I don't know, I was always fascinated by her experience, you know, and she would say, you know, there's all these people out there writing these papers that nobody's going to read. And and it's [00:32:00] just it's just part of it's just it's just it's just the cost of doing business. And so, so, so the fact that it didn't get any attention out of the gate didn't surprise you at all.

Erik Lie: Oh, no. Oh no, I didn't expect everyone to come to me and say, hey, what's going on there? No, I didn't expect that at all. Right? This is this is the the normal for me and for people in academia that that nothing happens. Yeah. But, uh, so it wasn't until I saw an article, uh, in the [00:32:30] journal in the Wall Street Journal talking about what the SEC was doing, and SEC was going after some company for what they thought was, uh, um, story, which we now call spring loading this idea that they, they essentially granting themselves options before the stock price is going to go up.

Caleb Newquist: Yep.

Erik Lie: And so I contacted SEC. And this is not normal for me either. Uh, right. You should stay in my bubble. But, uh, something compelled me to contact [00:33:00] SEC and just say, hey, I think you're on the wrong path here. I think that this is much more explosive. I think the story is different. I think that what's happening is not that these executives are dating. What's going to happen in the future. I think that what they do is they wait until much later, and then they're able to look back, because at the time, you didn't have to disclose this information until much later. Yeah. These proxy statements, incidentally, they come out three, four months [00:33:30] into the next fiscal year.

Caleb Newquist: Yeah.

Erik Lie: So they have they they can essentially stand in, in, in March of, of a year and say, hey, we've got some grants, uh, last year didn't we. Uh, and let's just pick a date to make that official date. And look at that. June 7th had a very low price. So we'll pick that one and we'll alert our shareholders. Now, in the proxy statement, that was my story. And it was so simple. Uh, but at the same [00:34:00] time so crazy. So yeah. Yeah. So that was the story that, uh, that I, uh, I pitched in my paper and I told the SEC, and they got curious. That was nice, because you hear about other stories where the SEC is not paying attention to you. I mean, in the Madoff story, I mean, there were all kinds of people who came to the SEC all the time and said, hey, that's right. I got all the data here. This guy is is playing with your money.

Caleb Newquist: Yeah. He's running a Ponzi scheme. It's. [00:34:30] Yeah. It's so funny because around that time, keep me honest here, but I believe Harry Markopolos, like he was, he was he was sending letters to the SEC around the same time that you were. And he couldn't get anyone to talk to him?

Erik Lie: Yeah, I think he even had meetings with them, but they didn't quite understand it.

Caleb Newquist: Okay.

Erik Lie: Yeah, yeah.

Caleb Newquist: So. But in your case, they. So their interest was piqued at the SEC when you.

Erik Lie: There was one lady. One lady at least, who called me up and asked me and [00:35:00] then she asked me for some of the data. So you know, what I report and what we always report in these research studies are what's happening at the aggregate level. Yeah. But I could actually look at individual stocks to see which were seeming to be the culprits or some some repeated this pattern more than others. So I sent her some spreadsheets, and then she thanked me, and then she said she would look into it and she she had some [00:35:30] follow up conversations also. But that was about it because it's very much a one way conversation. Sure. Don't hear you don't hear what they're doing. Um, but I got the sense that they were doing something and, and then, uh, and then eventually, uh, one of the investigations led to something, and that was disclosed in the media. And, uh, at that time, I jumped to a second paper to sort of seal the deal, because what I discovered along the way was that, uh, Sarbanes-Oxley, [00:36:00] uh, required executives to file these transactions within a couple of days. Yep. This this goes back to Ken Lay and so on. Because Ken Lay when when Enron was in trouble. Uh, he would he would, uh, dump his shares. And people were saying afterward, should we know, uh, in a timely manner that is dumping shares.

Caleb Newquist: Right.

Erik Lie: So let's let's make sure that all its executives, whenever they do this kind of stuff, that they alert everyone else within a couple of days. And let's make that the case for options [00:36:30] as well. Right. And so so that was.

Caleb Newquist: And so yeah. So can I just I just want you to clarify one thing, uh, for the audience. And so, so yeah, what's what's the what is the harm I guess is the word I'll use. But what is the harm about, um, going back and just picking, um, a grant date kind of willy nilly? Like, what is the harm that's being done?

Erik Lie: Yeah, well, it's, uh, as a very, very good question. [00:37:00] Uh, well. The fact that they don't talk about it or disclose that anywhere, that in itself makes us fishy, right?

Caleb Newquist: Of course. Right. Yeah.

Erik Lie: Suspicious about what? How come? How come it's so secretive about this? How come you're not telling anyone?

Caleb Newquist: How come it's not a big deal? Why not? Just. Yeah. If it's not a big deal, then why don't we just tell everybody, right?

Erik Lie: Yeah, yeah. No, actually, several reasons for that. One is that the shows themselves, they can go after the company and say, hey, they got screwed. They didn't know [00:37:30] this wasn't part. This is not the spirit of the compensation agreement that we have in place. Yeah, because the compensation agreement says that. Yeah, the grant should be made. And the price, uh, in that agreement should be the price on the day of the grant. So this is not the spirit of that agreement at all. So the shareholders can be mad and therefore they can file suits against the company. Uh, then you have, uh, I told you about the earlier that 1993 law that says that only performance based compensation [00:38:00] can be deducted for tax purposes above a certain level. Um, um, while in order for it to be deemed performance based when it's the option pay. You cannot grant the options in the money because then they've already been sort of given some value, that is, that you have to fight, you have to earn the money by, uh, by causing the price to increase.

Caleb Newquist: Yeah. Your your riches are kind of baked in to the, to the offering or to the grant. Excuse me. Right, right, right. [00:38:30] Okay.

Erik Lie: So so then it becomes a tax issue. Then it's tax.

Caleb Newquist: Rate. Sure. Um, because they get to deduct that from their revenues and they have a lower net income and they pay lower tax on lower net income.

Erik Lie: Yeah. Exactly. Exactly.

Caleb Newquist: Okay.

Erik Lie: Uh, and on top of that, uh, you also have some other accounting things. Yeah. This was, uh, you might remember that this was the.com bubble period leading up to the turn of the century. [00:39:00] So a lot of these tech companies and so on, and they didn't have money. So they would give, uh, the executives a lot of options. And, uh, and, uh, the accountants, uh, at the time, they had this rule that, uh, for earnings purposes, you could put down the compensation as essentially the difference in value between the stock price and that exercise price of the options on the day of the grant, which is zero zero. Right. Of course, we know to have value, but the accounting value is zero. [00:39:30] And so that was very nice for these companies because they can they can give all the executives all these options. And they can claim to people that, uh, that it's not going to cause a drop in the earnings at all.

Caleb Newquist: Right. It doesn't cost.

Erik Lie: Us an accounting scheme. Yeah. So the accountants will come on board and say, ah, this is again, not in the spirit of what we were thinking about with our laws.

Caleb Newquist: Right.

Erik Lie: So, uh, yeah, you add up all these things and it's pretty clear that, uh, and I think just in general also, I think that it's pretty clear that, uh, that they were trying to, uh, fool [00:40:00] all these constituents, all the shareholders and so on. They, they're paying themselves some money on the side. It's very clear.

Caleb Newquist: Yeah. Okay, so the SEC is interested. You send them some data, but like you say, it's a one way conversation. So kind of what happens next.

Erik Lie: Well, uh, so, uh, that, uh, one, uh, investigation is SEC investigations. They continue. And the [00:40:30] companies do not necessarily have to disclose anything about it. So it can be investigated as a company. It's not in the public domain. And the company can choose as to whether they want disclose the investigation and what's going on. So it came to the surface, uh, that, uh, one of these companies were investigated and the Wall Street Journal wrote about it, and this was a story written by Mark Maremont, uh, one of their really senior excellent, uh, reporters out of the Boston office. And, uh, and [00:41:00] so it was just a story about that one company. And at the time, I teamed up with an old friend of mine, an old colleague that I got to know at Purdue. Uh, Randy Herron. And we had been working on a subsequent study, uh, where I told Randy that, hey, uh, we need to seal the deal here, because now that the the the filing lag has been tightened to two days. Yeah, we shouldn't see that much backing anymore because we can't backdate.

Erik Lie: They have to do it within two days. So if they [00:41:30] comply with this law, which a lot of them didn't. But if they do, we should see this pattern that we, that I uncovered earlier, which is they disappear. And that would be the final nail in the coffin that that's what's going on. Yep. And, and, uh, Randy was on board and we got the data, uh, and we showed that indeed, those who complied with the law was no pattern, uh, for the others who were still there. And so, uh, so, uh, we reached out to then, uh, [00:42:00] it was actually Randy who at the time, uh, at that time it was more eager and more on top of it. He was the one who wrote up the email on behalf of us to, uh, Mark and, uh, his team, and then Mark comes back to me and, uh, I guess maybe because I'd written more of the papers at the time and, and, uh, then he gets very interested and I said, there's a whole lot more here.

Caleb Newquist: And, [00:42:30] and journalists, journalists love it when you have a lot. They're like, how many stories can I get out of this?

Erik Lie: Yeah, yeah, yeah. So he asked for some data as well.

Caleb Newquist: Yeah.

Erik Lie: Well, first he wrote up a story about what the research was about what we had found in academia. Uh, and then you follow up and say, hey, now, let's dig into the data. What data do you have for us? And so I sent them a spreadsheet again. [00:43:00] Uh, this was actually where Randy was a little a little bit more cautious, he said. I'm not sure if we should do this. Yeah, well, no, no, I'm going to do it. I'm going to.

Caleb Newquist: So, so so I'm curious. So what? And this is, this is something I've been waiting to ask you about. But like at this point, being a whistleblower is that does that even that, is that even occurring to you like that, that that's what you're doing because you guys are just you guys are just academics [00:43:30] looking at data and trying to find interesting things. At what point does it does it ever dawn on you that you're like, that you are that you are a someone blowing the whistle on inappropriate business behavior?

Erik Lie: Yeah, yeah, I wasn't I wasn't thinking of it quite that way. I was thinking that it's really cool that our research actually makes a difference, right? I mean, we we had another paper on poison pills which are used in takeovers. [00:44:00] Uh, and we actually came to the conclusion that it's poison pills, which have a very bad rep on the street. And the name kind of gives it away to, uh, yeah.

Caleb Newquist: Yeah.

Erik Lie: Because they actually called shareholder rights plans. But on the street they call poison pills. And so when companies would adopt that, uh, they would sometimes refer to Randy and my research on this showing that the poison pills aren't all bad. They can be used effectively to, to raise the price when you're being acquired. And so they would they [00:44:30] would adopt the pill and they would cite us and Randy, now we see this in the proxy statements and we say, hey, this is so cool. We're sitting in the office and this big shot companies are citing our work. We actually have an influence, right? So it's that feeling of of, uh, making a difference in this world. Um, so it was it was more that that was was really nice to see that people cared about what we're doing. Right. And, uh, yeah. So Mark was, was very.

Caleb Newquist: So then let me just ask you about [00:45:00] your your your research partner, Randy P. Now, this is the first time he had expressed any reluctance about sharing some of the information. Do you do you recall like what? What what was he worried about?

Erik Lie: Um, yeah, I think uh uh, yeah. So he wasn't involved when I first shared this with SEC. Um, I think I think that he was more concerned about, uh, safety issues.

Caleb Newquist: Okay.

Erik Lie: Um, so personal [00:45:30] safety issues. Sure. Someone would get very upset, and something's going to come back to us.

Caleb Newquist: Yeah. Right.

Erik Lie: Okay. I think maybe that's where our cultures differ. Also, coming from Norway, where any celebrity can go around in the street or go to take the bus or whatever.

Caleb Newquist: Um, yeah.

Erik Lie: That's right. Yeah. What's going to happen to me? Yeah. Right. So I, I didn't really have that concern at all. I was I wasn't scared at all. I just thought it was a whole lot of fun.

Caleb Newquist: Yeah. Like. Yeah. A fascinating [00:46:00] a fascinating kind of, um, uh, revelation of business behavior.

Erik Lie: Yeah. Again, Randy was the one who alerted Mark the first time. Right? Sure. Right. He was. He was in on it, too. He just. He didn't want to maybe take it that far. He didn't want to. He didn't want to be us. Uh, he would not want to have us to be the ones who are actually pointing the fingers at individual companies.

Caleb Newquist: And that's never, if I understand you correctly. Like, from what I read in the book and what I've read elsewhere is, like, that was never [00:46:30] the point for you. It was never about like making examples out of companies or anything. It's just like, this is just what we are finding in the data. This these are this is this is the phenomenon we've discovered. Yeah.

Erik Lie: Yeah, yeah. And of course, with the hope that once we've discovered it, let's find a way to to make it cease to happen.

Caleb Newquist: Right, right, right.

Erik Lie: Some easy regulation or something, uh, which they eventually instituted.

Caleb Newquist: Yeah. And so, so, uh, Mark Maremont at the Wall Street Journal. Like, do you do you recall [00:47:00] how many, how many stories did he end up writing about this, and when did it really start to pick up? When did it really start to pick up steam?

Erik Lie: Uh, they worked on that for a long time. He gathered a team I didn't know at the time. He gathered a team of around him, and, uh, and, uh, I think they must have had that data for quite a few months. Yep. And I know that during that time, they not only looked at the data, they also gathered some [00:47:30] of their own data and then reached out to several of the companies that appear to be outliers, uh, within the data. And, uh, and of course, all of them, uh, would tell them that they had done nothing of the sort.

Caleb Newquist: Right.

Erik Lie: Uh, and then they wrote up, uh, an article in it was in the Weekend Journal. Uh, so it was one of these, uh, additional sections to the journal. It was on the front page of that section. It was a nice big graphics and so [00:48:00] on. So it was about the march. Uh, so, um, I, I think it was one spring break. It was a nice day here in Iowa. Saw that land on on on my, uh, in the mailbox. Uh, lots of pretty colors and graphs and all that. And they singled out a handful of companies with graphs for each of them, showing whether what the stock prices were when the grants occurred among those stock prices, and then highlighting that time and time again, [00:48:30] these grants occurred right at the time when the when the price was at its lowest and then talked about also having contact these companies and what they said and, and so on, and that that got the wheel going. And then they smelled blood even more. And then they had the team just continue on these stories, because I think they realized that this is big, this, uh, this could give them some recognition as as a media outlet.

Caleb Newquist: Right. And I mean, I think what's interesting is that [00:49:00] at each phase, each phase is, is the intensity kind of just grows, right? Like for you guys, you're looking at the data, you're writing the papers and you're drawing conclusions and you're saying, okay, wow, this is really some cool stuff there. Journalists, they kind of have they look at it through a different lens, right where they say, oh, this is a story that people to know, people need to know. Yeah. And then whether or not whether or not something is illegal or not, journalists, when they're doing their work, [00:49:30] I guess, uh, as, um, as as as as, uh, I don't want to say objectively, but their job is just to report what they find and say, okay, is based on what we found. Is a law being broken or is a norm being broken, or is this just something that we think needs to be, uh, the story that needs to be told in the best interest of the public. And then the next phase is you have prosecutors who decide, we've decided that someone has broken the law [00:50:00] here. And so then that's because based on these articles that we've read in the Wall Street Journal or whatever, and there's there's wrongdoing here, and we're going to hold people criminally accountable. Um, um, that that in and of itself is yet another phase.

Erik Lie: Yeah. No, it was it was a fun period because, uh, the journal essentially started the crowd there and, uh, and so they could focus in on the companies that they already looked at. They start to see some of these, uh, these companies do something about it. Internal [00:50:30] investigations. In one case, uh, one executive was, uh, he fled the country very quickly. Yes. Some money. And then he took off and was like, I think I think it's pretty clear that something is going on.

Caleb Newquist: Yeah. You don't flee the country if things are, you know, if if things, you know, everything's by the book. So yeah. And then the, the SEC is doing investigations at this time as well. Too. Right? Yep.

Erik Lie: Yeah.

Caleb Newquist: Okay.

Erik Lie: Yeah. So? So everything was hand in hand at that point and, uh. Yeah. Yeah. One story after another. [00:51:00] And there was. And they could just go down the list, uh, of other companies that were further down and that, uh, were also clearly involved in this. And, uh, again, they can make some of the human stories of these executives in the background and actually how they did it, how it was accomplished in practice because it varied in practice, how they actually did it. So all that was very interesting and I didn't know how was actually pulled off, how they did it in practice, what the lookback period they used and, and whether they had sort [00:51:30] of institutionalized that and who was involved and so on. So, so that was very curious and interesting to me.

Caleb Newquist: And, um, just kind of moving ahead a little bit. Ultimately, when prosecutors were bringing criminal charges against some of these executives, it was kind of a mixed bag, right? Like there were some people where they said, yeah, there was, you know, there there was criminal. There was there was criminal intent here and criminal behavior. And they secured convictions. But then there were cases where they was there were there [00:52:00] were their full acquittals because it was just based on the context and the circumstances of a particular company where they're like, oh, this there was no criminal intent here. So and juries found some of those executives, um, not guilty, is that right?

Erik Lie: Yeah. I haven't, uh, followed very closely the federal criminal cases on this. Um, but, uh, they were all kind of handicapped in that, you know, I had I had all these observations, and that's kind of what the book is about. Also, this [00:52:30] idea that with enough data, you can you can see these patterns, but if you narrow it down to one data point, you can't you can't see what's happening in that context. Uh, a few other companies, uh, if they were repeat offenders granting options at the lowest price, say, five years in a row, it's like, yeah, you're giving away body. I mean, it's pretty clear that you're doing it. Yeah, some of them would actually. And this came out later. Uh, some of them would intentionally not pick the lowest [00:53:00] because it would seem so obvious.

Caleb Newquist: Right? Sure.

Erik Lie: And so when, uh, executives are starting to think ahead, that not only are we going to try to to steal some money here, we're going to try to, uh, not incriminate ourselves, and we can cover up the evidence and so on. Then then it's harder for outsiders to prove that they actually did something. Because what you have then is, uh, is, uh, a few cases where they got, uh, pretty good timing, but they're going to come back and [00:53:30] say, hey, yeah, yeah, we got lucky. What can we say? We got lucky. There's a lot of companies out there. There's thousands of companies out there. You look at all of them. There's bound to be some that got lucky. And we got. We got lucky.

Caleb Newquist: In this case, we were one of the lucky ones. Yeah. Right.

Erik Lie: Yeah, yeah. So they had a pretty good defense, Uh, I would say that, uh, in a lot of these lawsuits, they would sell because they didn't want that to to surface. Right. Uh, and, uh, and, uh, some of these lawsuits also had some other [00:54:00] incriminating evidence. Or you could, you could see that, uh, there were connections across the board of, of various companies that were that were involved in this. So there was, uh, so you put all this together, but yeah, I think I think, uh, uh, the federal authorities, they had a challenge ahead in getting some of these executives, uh, to, to count.

Caleb Newquist: Right. And remind me around, uh, when the, when the prosecutions started to happen. About what year was this when those started [00:54:30] happening?

Erik Lie: Oh, so this, uh, so my, uh, first study was published in 2005. The The perfect payday, uh, article came out in March 2006. Okay. And then it sort of started after that. Um, I don't I know some of the lawsuits started shortly thereafter. I mean, there's a lot of plaintiff lawyers who are. Yep. You can call them ambulance chasers or whatever. But at the higher level, uh, very.

Caleb Newquist: Yeah. Corporate ambulance chasers, which is a whole nother deal. [00:55:00] Yeah, yeah, yeah.

Erik Lie: So they are trying to figure out who the guys are and. Yeah. And so all this stuff is happening at the same time. And I think the feeding off of each other also. Sure. For example, the SEC is going to launch a suit and then the fed will have their own criminal case. And so you have a civil suit. And then on top of that uh, that that's going to, that's going to attract the attention of others. So uh, and I didn't have a good, uh, hey, I was sitting here in my office and.

Caleb Newquist: You were in Iowa City. [00:55:30] That's right. Yeah.

Erik Lie: I was reading the media. I was talking to some people, but I couldn't see everything that was happening.

Caleb Newquist: Right. And so I have to ask you, did you did you experience any pushback from the corporate world. So for example, did companies was there and he's like, well, we're not sending recruiters to the University of Iowa because that's where Erik Lie is. And he, he, he he did these studies on back dating. And it's making us all look like crooks and this and that. Was there anything like [00:56:00] that happening? Um, in the wake of all those of all of of everything.

Erik Lie: Uh, no. Nothing like that. I think I think the university at the time sort of celebrated also. I mean, they get some attention to themselves. Uh, it's not like. I mean, uh, we had Caitlin Clark, of course, uh, recently in generating a lot more attention to, to the university, but, uh, but it gave them a little bit of attention. So that was all good. And I think that, uh, the attention was possible [00:56:30] and that we fighting crooks here. So. So, no, uh, I suspect that to the extent that that happened and it might very well and we have, for example, UnitedHealth, uh, up the street in Minnesota Soda. And there were a big sinner in this regard. Um, and it's very possible that some of the recruiters got mad and therefore didn't hire any of our students, but in that case, we wouldn't hear about it.

Caleb Newquist: Right. Yeah. Okay. Very good. That's good to know. So [00:57:00] I want to ask you about. I guess I guess the easiest way to kind of frame this is the use of data. Like data is everywhere now and it's everywhere in the media. It's everywhere in our lives. It's everywhere in, in, in our work. And I think I work for a technology company. And so everyone's always talking about data and what's the data say and this and that and whatever. As, as someone who's [00:57:30] been working with data for a very long time and, you know, I think you were coming at it from an academic point of view. But do you ever worry or do you ever see, do you see it being manipulated in kind of this particular era in a way that worries you, that it's that people kind of lose faith in things like data, because ultimately what you were able to do is you were able to use data to show it's like, hey, here's something that's happening and it's hurting people [00:58:00] and or it's unfair and it's not very transparent, and we should do something about that. Do you ever worry that that's kind of getting lost where people have less trust in it or any other concerns?

Erik Lie: Oh, yeah. That's a that's a big question. Uh, big question. And in some sense, uh, uh, some part of my book is about disclosing people giving bad data, right?

Caleb Newquist: Yeah.

Erik Lie: Yeah. I mean, that's what earnings management is about. So showing that that clearly the data that they provide uh, [00:58:30] it can't it can't be true. Um, but I, we now live in a world where transparency and opacity is, uh, is always in conflict. Uh, we have, uh, we have, uh, Bureau of Labor Statistics that when they come up with information that they have been working very hard on, people want to leave, and then they're being politicized.

Caleb Newquist: Yeah.

Erik Lie: So, uh, and we've seen that in other countries also. I remember stories of people working [00:59:00] for the official statistics, uh, agencies in Greece. They got fired one after another because they didn't provide the statistics that the politicians liked. Right. So. So statistics, uh, they can have a bad rep, and they sometimes deserve that. So it's about making sure that the statistics are are correct. So I think we, for the most part are pretty good about that. And, and academia and we pay a lot of attention to each other. [00:59:30] And to the extent to some extent the referee process about that. Uh, these days, uh, uh, we asked uh, often times to supply the data, the underlying data, so they can be verified. So the statistics can be verified. They oftentimes ask for the code so the code can be verified. They can run the same code and based on the same data and get the same results. And they'll ask all kinds of other questions about, uh, various tests that you might run or should have [01:00:00] run and so on to, to make sure that the statistics really hold up to that scrutiny. So I think we're very much aware of it, and we know that statistics can be used to lie and so on. So yeah, it's but it's a huge question. And a lot of, uh, people pay attention to that.

Caleb Newquist: Yeah. And it's kind of old hat in academia, actually, because it's, as you say, like it. So much of it is, especially the empirical nature of it. Um, you know, manipulating it, you know, for, [01:00:30] for your own purposes to kind of show a result, you know, that confirms your bias or whatever, whatever it is. Um, you know, that's been around for a while. And as you I think, I don't know if you said this before we started recording, but, um, you know, the insularity of kind of academia, uh, those, those kinds of stories haven't really, really come to the kind of the public's attention in until somewhat recently, I'm [01:01:00] thinking of, um, uh, like Dan Ariely, for example, the the story. Yeah, that's a big one, right. And it was.

Erik Lie: Yeah.

Caleb Newquist: Right. But as you pointed out, as you pointed out, it was other academics who pointed out the, the, the problems they saw with those data. And so the I so it, it it I, I, I think the what I've read some people say is like, hey, this is how it's supposed to work, this is how academia [01:01:30] is supposed to work. And others, people say, oh, you know, this is this is this is evidence of how academia is broken. And so there's quite a debate. Uh, and it's so it's not surprising that it's contentious, really, wherever the debate is happening, whether it's in academia or whether it's in the public sphere, uh, that, um, that there's, there's contention around it.

Erik Lie: So, yeah, I.

Caleb Newquist: Think it's.

Erik Lie: Interesting, those examples that you mentioned also there with, uh, Dan Ariely and, and so on, that it's not only about statistics themselves because I think [01:02:00] they were accurate. I think it was underlying data. Right. Uh, that that was flawed. And, and uh, in those cases also, uh, the data was generated by themselves or, and. Yes. And one of the experiments that, uh, that Ariely had, it was supposedly getting the insurance data from, from an outlier. But it turned out that the insurance company said, no, no, no, no, this is not the data we provided. So somehow he generates some own data. But but that whole sector where they run experiments on students and so [01:02:30] on, you can you can do whatever you want and essentially and you can get you can get the stats you want. So you're not really changing the statistics, but you're changing the responses underlying responses. So I think we need to do some cleaning on that side. That's not so much happening in finance. Again. We now, for the most part have to disclose the data. Uh, but we also use a data sources that come from places that other people can also use to verify. Well, I even [01:03:00] back when I got my dissertation, my dissertation chair, he said, I don't believe a result until I've seen it a second time.

Caleb Newquist: Ah yeah. Right. Replication problem.

Erik Lie: Yeah. Of course, a problem in academia is that we don't necessarily get to see the second time. That's right. Especially if it deviates from the first time. Right. Because, uh, because, uh, then then you have to prove somehow that the first one was incorrect. And you can't do that unless you have access to all the data and all the methods and so on that they had. So, so, yeah, [01:03:30] replication and the replication crisis in certain parts of our Fields. Um, yeah. That's, uh, that's, uh, serious.

Caleb Newquist: Yeah. Oh, man. Yeah. That's like you say, that's a that's a big question. Um.

Erik Lie: So you got another episode at least right there.

Caleb Newquist: Oh, man. Okay, so then the last thing I wanted to ask you about, um, you have a new book. It's. It came out. We're recording. We're recording this on October 9th, and I believe this just came out two days ago. Right? Yeah.

Erik Lie: That's right.

Caleb Newquist: So that's. And [01:04:00] but you've written books before. This isn't your first book. Is that right?

Erik Lie: Yeah, I've written other books, but, uh, the other books have been more toward the pure academic market. At least the first one was a very, very academic. The second one, uh, is a wealth management book that was written essentially for when I taught wealth management. First time I realized that there wasn't a good book for these MBA students who were taking that class. So I just essentially took all my notes, and I tried to, uh, to to flesh them out a little and made it into a book with some illustrations [01:04:30] and so on. So, so that was and I was thinking that this is not going to be useful for the MBA students. It's going to be useful for the whole marketplace. But that's that's a tough market to deal with. And I didn't have a big marketing campaign or anything like that. Right. Um, so this, this book that I have now, the publisher is more keen on on getting or making some, uh, it's a nonprofit. Uh, very cool. Uh, yeah. There's a mission driven company, but at the same time, they have to make money on the products to, to [01:05:00] to be able to even survive in this cutthroat. Right. So. So, uh. Yeah. So, so therefore, uh, I'm hoping to generate some more sales as a result of that.

Caleb Newquist: Yeah. And, well, I have to say, what's that?

Erik Lie: I feel I feel this obligation, you know, in the past, it's only about myself. I mean, you write these papers, they don't succeed. And it's like, yeah, you you take the fall entirely on your own. Right? In this case, there are other people is are bet on your [01:05:30] horse. And I feel like okay, I owe it to them now, right? To show up on these places and mark the book and make it.

Caleb Newquist: So I have to tell you, I'm I'm. I didn't quite finish it. I'm in the Libor chapter, but, um, you you have a very easy writing style. As someone who has been writing for a long time now and, and, and pays attention to these things, um, it's a very pleasurable read. Very easy. You you explained, I think, in the, the part about Enron that when you explained Spvs and Spes, [01:06:00] um, that your explanation was about as concise and as clear as anything I've ever read about that. So I, I highly recommend it for that alone. So, um.

Erik Lie: Yeah.

Caleb Newquist: Kudos.

Erik Lie: To you. I mean, I tested on people who didn't know finance, so.

Caleb Newquist: There you go. Okay. Yeah. Very good. So yeah, you knew you were you were doing research on your own audience. So then so I have to ask because my producer Zach and I, we were talking about this a little bit, but like, there's lots of books out here that are similar to yours in [01:06:30] the sense of oh, this is how you notice when things are fishy, fishy, or financial true crime. I mean, we do a podcast about it. Yeah. So I'm just curious, like who who is the intended audience for a book like this? Like, who do you hope picks this up and reads it and learns something from it?

Erik Lie: Yeah, I, I sort of consider it to be a pop science book. Yeah, right. So, so I think it sort of falls in the same category as Freakonomics, where you have a blend of research with stories that are appealing to people. So and that was [01:07:00] my vision for this book from the get go. It wasn't only about telling stories. So, for example, the story about, uh, LIBOR, it's not only about telling the story of Libor, which has been told before, but it's also about supplementing with some data. Uh, so there's always some graphs or some data that that shows that you could see this in the aggregate. And so it's sort of pulling together the storytelling with some, some data and every single case. And [01:07:30] then I also think that there are some stories that have been told at all. Like in my salami slicing chapter that NASA paper, uh, or chapter that to me is a super fascinating case that I don't think people are aware of it all. So the more stories there are unknown stories, but it's always mixing that, that, uh, that with some, some, some clear data where you can see for yourself what's going on. Yeah. You know, we talked about, uh, Enron earlier. It's not only about [01:08:00] telling about Enron, it's about showing some of these graphs. Yes. Like the earnings distributions and so on, showing that clearly these companies are doing something fishy and aggregate, uh, especially in China. I mean, the graph, which is just out of this world, we see that, uh, that no company in China, uh, is, uh, in the red. How can it be, you know, lots of them at zero. What? No one. No one is failing.

Caleb Newquist: You know, as [01:08:30] someone who is partial to words as opposed to graphs, that but that graph about the Chinese companies, I was just like, oh gosh, that looks. It it is, it is, it is stick. It just sticks out like a sore thumb. And and the Luckin Coffee story is if people don't know that one, it's a fairly recent one, but it's also it's also just a fascinating story. But I was surprised, you know, what I learned reading is like, I did not realize that they had emerged from bankruptcy, that they had successfully reorganized. So anyway, they.

Erik Lie: Actually started a business [01:09:00] here, and I think they opened up some shops in New York now. So they're trying to conquer this market. So with with the low prices. Yeah. Starbucks. Uh watch out. I mean, they, they've taken over the Chinese market. Uh, and now they're coming here.

Caleb Newquist: Yeah. It's so weird though, but it's like Chinese. Chinese culture isn't known for coffee. And I'm just surprised that they were able to, like, they were able to take out, um, that they were able to have so much success with a with a tea culture. It's like trying to sell coffee in Britain, [01:09:30] trying to sell coffee in Britain. It's like you can but it's you're not going to make you're not going to make a fortune anyway.

Erik Lie: You know, I think, I think it's while they both provide that, that boss and that, that caffeine that we all need. Yes. In all fairness, I just think that, you know, I can choose coffee or tea and I've had access to both growing up. I just have a preference, taste wise, for coffee. And I think that that's what it comes down to eventually.

Caleb Newquist: Yep. I think that's probably right. Um, yeah. I mean, I've been I've [01:10:00] been enjoying the book and, um, I wish you the best of luck, uh, with it. Um, I wanted to also ask you before we wrap. So you ended up, uh, if people haven't had a chance to look into you yet, uh, you ended up as one of the time, uh, influential. The time 100 influential, I think. Was it 2007?

Erik Lie: Yeah.

Caleb Newquist: And that must have been a surreal thing to have happen to you. Like. That's crazy. Like, do you get. Did you get a phone call? Did [01:10:30] you get an email? Like how does does like is it, is it some intern in the Time Warner building that just said, hi doctor ly is that your like how was. I'm just curious. What. Yeah. What that was like.

Erik Lie: Um, yeah. Uh, I can't, I think I got a phone call first. Okay. Um, and, um. But I do remember I [01:11:00] got a very official invitation to a party. Uh oh. That is what stands out the most because, uh, they bring all these people to New York for big event, and they they they make this a flashy event, and they take pictures and they use the pictures for their magazine and all kind of stuff. Yeah. Uh, and then they bring in all kinds of other celebrities also, and they also bring in sponsors. So they have these for this this event. They have a table with a mix of [01:11:30] these influential people and their sponsors. So it's all sort of a marketing gig there.

Caleb Newquist: It's definitely I mean, that sounds like publishing to me as somebody who's worked in media, that sounds like, yeah, that's definitely a publishing gimmick for sure.

Erik Lie: Yeah, but it was it was interesting. Uh, probably.

Caleb Newquist: A great party, though.

Erik Lie: Yeah, I didn't know. First, you know, whether I should go and people are saying, no, you should go. You should go here. Uh, yeah. Okay. And, uh, I went and, uh, I went [01:12:00] and met a lot of interesting people and obviously a lot of celebrities. Uh, sure. I mean, you look around and one after another, not only all the people on the list, but as I said, also other people, uh, in I think they used it again to bring the sponsors there, but also to give it more visibility. They would bring in the typical guest who, like Martha Stewart at the time, who was.

Caleb Newquist: Yeah, right.

Erik Lie: Yeah, it was in the limelight. Uh, very much uh, at that time, uh, [01:12:30] people like that, uh, to bring it, uh, more visibility. And then they had some musical guests and different things. Yeah.

Caleb Newquist: So was Eliot Spitzer there?

Erik Lie: He wasn't.

Caleb Newquist: He wasn't, man. And he wrote your blurb, but you didn't even get to meet him. Uh, did you end up meeting? Did you end up meeting him?

Erik Lie: I've never met him.

Caleb Newquist: Oh, wow.

Erik Lie: How funny. And then he got his own problems. And then.

Caleb Newquist: Oh, yes. Well, you you recount that in the book. I was living in New York at the time. Yeah. And I just that you talk about a media firestorm [01:13:00] like it was just in New York. It was just unreal. It was. That was a that was that was a crazy time in New York. I mean, because then the crisis happened just shortly after that.

Erik Lie: So I think sort of the most curious thing that happened at that event was, uh, John John Myers was, uh, John Mayer. Sorry, John Mayer.

Caleb Newquist: Oh, yeah.

Erik Lie: Uh, was, uh, one of the musical guests. And, uh, I was I was standing there looking at the crowd, and he was a little further over. He looked really cool. Had a different [01:13:30] type of, uh, tuxedo on.

Caleb Newquist: Right, right.

Erik Lie: And I thought myself it's something familiar with it, and I thought, he looks a little lost here. Should I just go over to him and chat with him? Yeah. Yeah. So? So. Yeah, but I never did, and I sort of.

Caleb Newquist: Oh, no.

Erik Lie: Yeah. I regret not doing that because I could have had this coolest conversation with no one else caring about the two of us.

Caleb Newquist: He's very good. He's a very good guitar player. He's a very good guitar player.

Erik Lie: Yeah. And some of his music, uh, is, uh, is really good. I [01:14:00] mean, he got a song, uh, uh, a couple of years ago called New Light, which is really a favorite of mine.

Caleb Newquist: Oh, wow. Yeah, I've only seen him because. Because he's subbed for Jerry Garcia in these in in the Dead end company. Yeah, that's when I've seen him. Well, uh, doctor Erik Lie, thank you so much for talking to me. This has been this has been fun. I hope you had fun. Um, it was good.

Erik Lie: Yeah. It's great.

Caleb Newquist: Best of best of luck with the book.

Erik Lie: Oh, thank you so much. I appreciate that. [01:14:30] I appreciate the plug so much.

Caleb Newquist: Oh, yeah.

Erik Lie: You bet.

Caleb Newquist: Okay. There you go. Doctor. Erik Lie, what a nice guy. I bet he's a great professor. Again, one more time. The book is Catching Cheats Everyday forensics to unmask business fraud. I enjoyed it, I got a few pages left. Um, but pick it up wherever you get books. A couple of things that we didn't get to. First, I think, you know, something [01:15:00] that was pitched to us and we didn't. Erik and I didn't really talk about it, but the role of journalists and academics in the reporting of fraud, and we've talked about this in prior episodes. And I think the first time we ever really discussed it was with Professor Dan Taylor of the Wharton School. It's like episode 12 or something like that, and I put it in the show notes, but he referred to it as the privatization of enforcement. And it's this idea that people like journalists and short sellers [01:15:30] and academics like Dan and Erik, they help root out fraud because, you know, our federal, state and local governments, the enforcement, the enforcement mechanism within our governments can't possibly pursue every case, right? They can't follow up on every tip. You know, they can't they can't. They just can't do it all. They're they're constrained resource wise. And so when somebody like Erik puts something in their lap, law enforcement [01:16:00] has a much easier time. They essentially have a roadmap for a particular issue. In this case it was backdating of stock options. And it's you know, it's not perfect. Obviously, you heard Erik and I talking about Harry Markopolos trying to tell the SEC about Bernie Madoff.

Caleb Newquist: And for a lot of, you know, for a multitude of reasons, the SEC did not look into Bernie Madoff and did not pursue it until it was far too late. And that, you know, went badly. And, [01:16:30] you know, it's just one of those things where the the I guess if you think about this privatization of enforcement, it's not easy. Like these academics and journalists and short sellers, you know, they're essentially whistleblowers from outside of the company, right? They call attention to stuff they think is wrong or illegal. And they these people are not celebrated, okay. They are not heralded as heroes when they first come out. They are relentlessly criticized and undermined [01:17:00] by the company and their executives and their, you know, their their legal and PR teams that they just throw, you know, throw at them. They have legions of these professionals who attack them. And so that they can continue on, you know, doing whatever it is that they're doing until the shit hits the fan. So, like in the case of Madoff or Enron or FTX or Theranos, whatever, it's just too late. You know, people are already hurt. They're devastated. Some sometimes people [01:17:30] even die. It's terrible. So I think in Erik's case, I think it was interesting and also good to hear that he kind of as far as I mean, he's not a traditional whistleblower, right? Like he was an academic, found something interesting, contacted the SEC, and that kind of got the ball rolling. So he was kind of unscathed.

Caleb Newquist: You know, he wasn't people weren't threatening his life or, you know, threatening his well-being or or, you know, you know, people weren't saying, don't go to the University of [01:18:00] Iowa because, you know, that Doctor Lie is there. You know, none of that was happening, which I was pleased to hear. And his work, you know, had a pretty big impact. I don't know, I don't think we mentioned it, but more than 130 companies were ultimately investigated and 70 executives lost their jobs, and The Wall Street Journal won a Pulitzer Prize for Public Service for their series on all this stuff. And so, like, that's that's a big deal. [01:18:30] You know, there's definitely an impact there. And you might be saying, okay, you're listening to me, and you're being like, well, what about what about the corporate executives that lost their jobs and didn't deserve to? And okay, I mean, that doesn't change the fact I would say that it doesn't change the fact that a these are rich and powerful people, executives at public companies. And they we should want those people to be accountable for their actions. I mean, I don't know what kind of society you want to live in, [01:19:00] but I'm not really interested in letting those people just get away with whatever they want. Okay. And I think if, if nothing else, even though like the, the criminal aspect of it. The criminal prosecution of it was a mixed bag, right? It brought transparency to a practice that even if it wasn't strictly illegal in every instance, it was being concealed.

Caleb Newquist: Right. And Erik talked about that, too. He's like, if this is all if this is all harmless, [01:19:30] then why not just do it out in the open, right? And so it took his work and his his co-researchers work and, you know, further work from the reporters at the Journal and elsewhere where they said, hey, this is going on, and it's not happening in plain sight. Maybe it should happen in plain sight, or maybe it shouldn't happen at all. And I guess if you're okay with that, then you're probably also okay with some other things [01:20:00] that I don't know. I guess I would have some questions about. So maybe you need to talk to someone. Maybe you need a friend. That's what I'm trying to say. Maybe you need some friends. Anyway, that's it for this episode. And remember, if your stock options always seem perfectly timed, then either the calendar is your coconspirator or your Biff Tannen. Email us. Comments, complaints, story ideas, whatever you got, email us at fraud [01:20:30] at CPE. Com o my fraud is created, written, produced and hosted by me Caleb Newquist. Zach Frank is my co producer, audio engineer and music supervisor. Laura Hobbs designed our logo. Rate review and subscribe to the show wherever you get podcasts. If you listen on your mark, get some CPE while you're doing that listening there. If you listen on earmark, you can earn CPE. Join us next time for more avarice, swindlers and scams from stories that will make you say oh my fraud.