Forget the golden age of fraud, the billionaire investor who shorted Enron warns we might be in the ‘diamond or platinum level’ amid the AI boom

• Billionaire investor Jim Chanos, who predicted and profited from the collapse of Enron, warned financial fraud is already on the rise as a result of the AI boom. He holds the theory that a cycle of fraud follows a cycle of financial success and expects more companies to break promises to investors about the capabilities of AI.

In 2020, billionaire short-seller Jim Chanos told the Financial Times we were in the “golden age of fraud,” the result, in part, of Silicon Valley’s “fake it till you make it” attitude and a surge in eager retail investing as a result of the pandemic.

About five years later, as the AI boom balloons larger than the dotcom bubble of nearly 30 years ago, “we might be moving on to the diamond or platinum level” of fraud, he said.

Chanos—who made part of his fortune as a short-seller of Enron, an energy company investigated by Fortune for its widespread fraudulent practices—warned that as the AI bubble continues to inflate, financial fraud is bound to accompany the sector’s success.

“I haven’t spent a lot of time on the technical side of AI-driven fraud—like deepfakes and similar tools—but it’s pretty clear it’s going to get worse,” Chanos said in an interview this week with nonprofit think tank Institute for New Economic Thinking.

“When it comes to financial fraud specifically, there’s no question we’re seeing more of it—especially riding the wave of the current AI-driven market boom,” he added.

The S&P 500 is up 10% year to date, with most of its growth fueled by the Magnificent Seven. The spending of tech giants on AI and its infrastructure was so massive it added 0.5% to U.S. GDP growth, according to Pantheon Macroeconomics.

But amid increased concern over an AI bubble, investors’ confidence in the sustainability of AI-powered growth is wavering. An MIT report released last week found that because of the rush to integrate AI into the workplace, only about 5% of AI pilot programs generated immediate revenue. For the other 95% of projects, implementation fell short.

And earlier this week, though Nvidia reported $46.7 billion in second-quarter revenue, marking a 56% year-over-year sales boost, exceeding expectations, shares fell on a data-center revenue miss, marking a potential vibe shift in investor optimism.

Chanos’s framework for predicting the rise of fraud is that it is precipitated by periods of mass financial growth. The AI boom is no exception.

“It’s one of my long-held views that the fraud cycle always follows the financial cycle with a lag. And we’re definitely seeing that now,” Chanos said. “I think we’ll see even more of it, as companies do everything they can to hype themselves to unsuspecting investors by claiming they’re AI companies or touting some big technology breakthrough that sounds exciting but doesn’t happen to be true.”