Power to Truth: A Conversation with Fahmi Quadir and Anat Admati

In this episode of the Power to Truth web series, notable investor and short-selling advocate Fahmi Quadir joined Anat Admati, professor of finance and economics at Stanford Graduate School of Business and co-faculty director of CASI, to discuss the pivotal role of short selling in financial markets. Quadir is the Chief Investment Officer of Safkhet Capital, a short-only hedge fund focused on fraud identification and deep forensic research.

Fahmi Quadir began by stating that short selling is a necessary and important component of price discovery in financial markets.  She emphasized that while internal and external auditors serve as traditional safeguards against fraud, their effectiveness can be limited.

"They are essentially hired by companies to check all the boxes," she said.

Quadir highlighted the unique position of market activists and journalists, whose motivations align with uncovering truths. "Journalists can hit it big if they’re able to expose a corporate scandal. Short sellers, like me, are financially incentivized to expose this information whether it’s accounting fraud or predatory activity, anything that will result in price discovery."

The conversation turned to one of Quadir’s most famous and lucrative shorts involving Wirecard AG, the German financial service provider that imploded in 2020 after the Financial Times uncovered major accounting discrepancies. The scandal triggered legal actions across multiple countries, and Wirecard's former CEO Markus Braun still awaits trial.

Quadir shared insights into her strategic approach, which involves a meticulous review of a company's historical interactions with short sellers and media scrutiny. Regarding Wirecard, she noted, "Wherever there’s smoke, there’s probably some fire. Problems arise when a company can continually evade justice, and that grows into a mentality within management where they think they can get away with everything."

She underscored the inevitability of failure for businesses engaged in sustained deceit. "You can’t go on committing fraud indefinitely. Something has to give at some point."

Quadir highlighted the patience required in short selling. She had been following Wirecard over the years, but in 2017, her firm revisited the company after Wirecard acquired a prepaid card business in the US that attracted more regulatory attention and raised concerns. Her team's persistence eventually led them to become pivotal witnesses in the governmental case against some of the perpetrators.

Turning to her most recent short, Quadir discussed Adtalem Global Education, the corporate successor to DeVry University. She emphasized that her firm focuses on sectors where there is a great potential for consumer abuse.

“Throughout the history of our fund, we’ve been short lots of payday lenders, a lot of the buy-now-pay-later players, anything that involves a regulatory gray area where there might some level of federal laws, but there’s also state-level laws. These are issues where other investors might not be taking into consideration.” 

In February, her firm made public a report about Adtalem and denounced it for misusing federal funds on ineffective educational programs. Her findings revealed that a significant portion of Adtalem’s revenue derives from federal student aid, with distressingly low graduation rates at its institutions. More than 70% of Adtalem’s revenue comes from federal student aid dollars. Despite Adtalem's relatively smaller scale, its significant financial implications prompted her to take action.

Admati praised the societal impact of astute short sellers, stating, “If people from the public are interested in a story like this, then policymakers have to respond. It’s really amazing how a shrewd short seller can make the world a better place.”

Fahmi concluded by reflecting on the motivations that sustain her in the high-risk world of short selling: “You really need to find some motivation beyond just the money that’s there to be made.”