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

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 fraud 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 non-profit 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 as a result of the Magnificent 7. The spending of the tech giants on AI and its infrastructure was so massive it added 0.5% to U.S. GDP growth, according to Pantheon economics. 

But amid increased concern of 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, Nvidia reported $46.7 billion in second-quarter revenue, with a 56% year-over-year sales boost, exceeding expectations, yet shares fell on a data center revenue miss, marking a potential vibe shift in investor optimism.

Early signs of fraud in the AI era

Chanos’s framework of 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.”

Cracks in the industry have already started to emerge. In April, the U.S. Department of Justice accused shopping tech startup Nate of telling investors AI was helping shoppers in the checkout process, while in reality, it was human workers from the Philippines and Romania handling the transactions. Former Nate CEO Albert Saniger faces one count of securities fraud and one count of wire fraud. Nate did not immediately respond to Fortune’s request for comment.

Scrutiny about alleged false promises of AI also coincide with the technology being used for scams and cybersecurity breaches. Tianyi Zhang, general manager of risk management and cybersecurity at Singapore-based Ant International, told Fortune earlier this month, “In some markets, we have found that more than 70% of new enrollments [of clients and financial institutions] may be deepfake attempts. We’ve identified more than 150 types of deepfake attacks.”

Chanos has previously said fraud is exacerbated by lax regulations, but has posed the question of whether financial institutions and AI should be regulated by third parties or the free market.

“There’s no doubt that this financial cycle has likely surpassed the dotcom era in terms of enthusiasm, valuations, and capital markets activity,” Chanos said this week. “So now, we just have to see how it plays out.”