Interesting Facts From Lying For Money

This is going to be a long one

The chapter “Paddington Buys A Share” in the book Paddington at Work is an excellent introduction to securities promotion fraud.

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The author is sad that we can't dig up the USSR's findings about how to manage things without price signals. He thinks this would be a boon to modern capitalist industry, since corporations don’t have internal price signals.

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Fraud is a man's game. Throughout history, women weren't usually allowed to own property, so women who did own property were extraordinary and iron-willed. Therefore, they were unlikely to commit fraud, as most fraudsters suck.

The most common fraud for women, throughout history, is pretending to be a princess. This continues to be popular right up until the present day.

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In most of the Icelandic sagas, the answer to "who owns this thing" is "the person who has it in their possession, right now, or had it until two days ago when you came in with some swords and took it.”

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Archimedes’ discovery of the principle of displacement ended a previously extremely popular form of fraud: passing off silver-gold alloys as gold.

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Shipping is very risky and has many principal-agent problems, which meant that shipping historically had the most sophisticated financial system of any industry. Shipowners formed the first companies, invented insurance, and typically developed every form of fraud before anyone else did. They also invented the limited-liability loan: "bottomry", a loan that didn't have to be repaid if the ship sank. The word "risk" comes from shipping jargon for "the commodity being bought and sold at insurance markets.”

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From 1720 to 1825, corporations were illegal in England. You needed an Act of Parliament to found one.

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The Victorians trusted companies which had famous and influential people on the boards. In addition to "just lying", popular options for padding your board included "paying a member of the House of Lords a guinea per meeting to claim to be on the board of directors and not show up at any meetings" and "getting some people with the same name as a famous person to join your board."

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In 1888, the Financial Times was founded with the promise that it would NOT allow its columnists to take bribes and was NOT owned by stock promoters.

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The amount of money loaned in the form of companies doing invoices and delivering goods on credit, instead of demanding cash for goods and services immediately every time, is about nine times as large as the amount of money loaned in the form of bank loans.

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Etymologically, the term “long firm”—which refers to frauds where you get a lot of goods on credit and then disappear—comes from the Anglo-Saxon “galang” (fraudulent) and the Latin “firma” (signature). It has nothing to do with length or firms.

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Long firm fraudsters try to acquire businesses at cheap prices to take advantage of their credibility. They pay on the installment plan, so the original owner appears to still be involved in the business. The fraudster can also refuse to show to the final board meeting that formalizes the transfer of title, so the selling owner technically still owns it.

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The memoir of fraudster Leslie Payne includes a last chapter coauthored with a lawyer in which Payne unconvincingly explains that crimes are bad and no one should do crimes. The chapter would probably come off as more sincere if the other chapters didn’t include helpful letter templates for people who wanted to go into the fraud business.

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The Kray brothers kept detailed records of all their crimes in their account books—“bribe to Dalston police— £40”, “Protection from club in Walthamstow—£30”—therefore making them one of the many people who are better at keeping accounts than Sam Bankman-Fried.

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“Golden Boos”, one of history’s most famous female scammers, traveled around the Alps carrying a large trunk full of valuables that she insisted must be locked up overnight in the safest room in the hotel. She would live in the best room, eat the best food, and run up an enormous bill. The hotel manager assumed she was good for it—after all, look at that trunk! Then she would disappear and her trunk would be discovered to be empty. It turned out that it contained a child or little person (accounts differ) who, on Golden Boos’ last night, would steal all of the valuables in the room.

This scam (minus the little people) is popular enough that, even today, Boston hotels have a sign informing clients that it is illegal to “make a show of leaving baggage in order to acquire credit.”

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Normally, on online dark markets like the Silk Road, you pay “in escrow”: you pay when you make an order, but the dealer is only paid when you receive the product, so you can get a reflund. Large dealers with a reputation for reliability tend to ask to be paid “finalize early” (that is, you pay them before you get the goods). Bitcoin is incredibly volatile, so if a dealer is paid after the goods are received Bitcoin fluctuations can wipe out their entire profit. A common fraud in online dark markets is for a company to do a big sale, take a lot of “finalize early” orders, and then disappear. Scammers often hang around dark market online forums, apologizing to their friends and explaining that they want to get out of the drug business. In some cases, it seems to have been a deliberate attempt by an addict in recovery to keep from doing drugs again.

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Darknet bloggers are the banking consultants and market brokers of the dark market world. They do their own research in exchange for payment or to promote their own escrow services or markets.

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In the middle of the twentieth century, the soybean oil trade with Spain was controlled by Opus Dei.

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I’m pretty sure if you wrote a novel about a massive fraud committed by a company called Other People's Money, your editor would make you change that for being too on-the-nose, and yet OPM existed. It was originally called the Leasing Services Division before they noticed the acronym. The founders were devout Orthodox Jews who quoted from the Tanakh during meetings. One took a break from fraud in order to fight in the war against Egypt.

OPM’s business model was simple: they bribed people to lease computers from them, then sold the lease to an investor who wanted a stream of lease payments. (Or, because of who OPM was as people, selling them to multiple investors.)

At the end of the lease, the computer would still exist and have “residual value”; OPM could sell it to someone else. In the long run, of course, it’s important to estimate residual value accurately. In the short run, you can overestimate it, undercut everyone else, and get a lot of revenue. Unfortunately for OPM, our old friend Moore’s Law fucked their business. They wound up claiming to their bankers that the old computers were worth a lot of money because IBM couldn’t deliver new computers on time and anyway it would be a pain in the ass to take one mainframe out and move another one in.

OPM’s founders forged documents by tracing signatures using a glass coffeetable which one of them crawled under in order to sign a flashlight up. When OPM got in trouble for selling the same loan to multiple people, their major client, Rockwell Industries, gave them some letterhead and told them to sort it out. Naturally, OPM responded by signing leases for $20,000 to Rockwell and using the letterhead to claim to investors that it was a $50,000 lease. Inexplicably, people kept doing business with OPM, even after one of the founders was arrested for using a bank he bought to write bad checks. One company's lawyer actually got a confession from an OPM founder and then decided it was covered under attorney/client privilege.

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Medicare fraud is simple: you bill Medicare for things you didn’t do. In the 1980s and 1990s, about 25-30% of Medicare payments were fraudulent.

There are two schools of thought on Medicare fraud. Some people don’t bother to have patients, because there are no irritating sick people and you have a lower chance of whistleblowing. You set up a fake clinic, send out bills for common ailments that Medicare won’t check up on, and then disappear. Other people have patients, because if you have patients and get caught you can claim that you did it on accident. You have real patients and charge for things you didn’t do.

Perhaps the most sophisticated form of Medicare fraud is “shotgun, then rifle.” You create a bunch of fake clinics in order to experiment about which claims get rejected (the shotgun). Once you’ve settled on a strategy, you set up a long-term clinic and exploit it (the rifle).

Medicare fraudsters prize dementia patients, because they’re easily confused and likely to agree that they had treatment they didn’t have.

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One chain of blood-analysis labs realized they could charge Medicare for unnecessary tests and wound up paying homeless people to give them blood that they could run tests on. This was caught when some of the homeless people went to the ER for anemia.

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Pyramid schemes are inherently self-terminating, which is nice for the criminal, because it is hard to trace back who founded the thing.

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Pyramid schemes don't work on anyone mathematically literate enough to realize that the world's population isn't infinite. The most frequent victims are dementia patients and churchgoers in poor communities. There are actually sermon guides for preachers to preach about not participating in pyramid schemes.

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Charles Ponzi, of Ponzi scheme fame, hired a psychic to read his mind and prove he was honest.

At the height of Ponzi’s scheme, his deposits were more than the amount of cash the banks had on hand, so Ponzi could shut down attempts to investigate him by threatening a bank run.

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Arlen Galbraith, the Pigeon King of Canada, did a Ponzi scheme about racing pigeons. He profited little and seems to have primarily benefited by having a decade to investigate his theories about pigeon breeding.

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The story of Bayou Capital “reads as if a Hollywood studio had commissioned a script for ‘The Bernard Madoff Story’, and then handed it to Quentin Tarantino with instructions to punch it up a bit.” Bayou Capital had three major innovations:

1. Their chief operating officer was named Dan Marino, which made him nearly impossible to investigate because you would only get results about the quarterback.

2. They sent their account books to their brokers late Friday afternoon, in the hopes that they would be buried under a pile of stuff that arrived over the weekend and not get any real scrutiny Monday morning.

3. They realized that hedge funds don’t have to give people their money back. If you choose overworked institutional investors who have fraud checks you can figure out how to pass, then they’ll go “that seems profitable” and keep their money in your hedge fund. (You don’t want to take money from rich people. Rich people have bored children who might investigate.)

I am not going to tell you the whole story of Bayou Capital. Buy the book.

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There's a common conspiracy theory that the Federal Reserve is bankrupt since the collapse of the gold standard and therefore the Fed is beholden to a small group of wealthy families. “Prime bank securities" are how the Federal Reserve manipulates the money supply by selling bonds to wealthy families at a small fraction of their true worth. Many prime bank securities fraudsters seem to genuinely believe the conspiracy theory and are trying to use the money from their investors to break into the real prime bank securities market.

The actual structure of the Federal Reserve is an infohazard. If you examine it too closely you are likely to become a victim of prime bank securities fraud.

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Bawdy joke of the 19th century: A Bostonian woman sees another woman walking the streets in the red light district and asks her why she's doing it. The other says "why, it was this or dip into capital!"

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In 1925, Artur Virgilio Alves dos Reis counterfeited money which amounted to 1% of Portugeuse GDP. It caused significant inflation, which the Portugeuse government attributed to enemy action by foreign governments. He almost got away with it by taking over the Bank of Portugal. However, hostile-takeover-related investigations uncovered the fraud by coincidence: an investigator found two bills right next to each other with the same serial number. dos Reis’s fraud set off a chain of events which wound up with former economics professor Antonio Salazar as dictator of Portugal.

I am not going to tell you how he did his fraud even though it’s great. Buy the book.

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Drug counterfeiting was implicated in the death of Prince: a manufacturer replaced codeine with fentanyl.

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One drug manufacturer used substandard ingredients and manufacturing processes, then faked test results by submitting its competitors’ product instead. Inexplicably, this manufacturer still exists and produces drugs today, although under new management.

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Stratton Oakmont was a brokerage house that specialized in fraudulent IPOs. One time this resulted in a functional company, Steve Madden Shoes. Apparently there was a lot of demand for Steve Madden shoes! A lot of hedge funds lost money on Steve Madden Shoes because they had a habit of shorting any Stratton Oakmont IPO.

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At one point, Enron reported all the revenues they hoped they would get from a contract with Blockbuster as revenue. When the contract was broken, they reported all the revenues they would get from not having to share their cool idea with Blockbuster as revenue.

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A "straddle" is a trade where, if something costs $20,000, you sell X the right to buy it at $19,500 and Y the right to sell it at $20,500. It's a hedge against big price swings. A "Brazilian straddle" is where you sell as many people as possible the right to sell a thing at $19,500 and buy a plane ticket to Brazil.

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Savings and Loans were a kind of small bank that took deposits and made loans. They operated by the 3-6-3 rule: three percent interest on deposits, six percent interest on loans, and be on the golf course by 3pm. When the government raised interest rates, S&Ls had to raise the interest rates they paid on their savings accounts to keep up. Thus the 12-6-12 rule: if you pay 12% on savings accounts but still charge 6% for loans you'll be bankrupt in twelve months. This created a setup for frauds.

Charles Keating, the architect of the Savings and Loan frauds. He hated porn. he founded Citizens for Decent Literature, commissioned the documentary film Perversion for Profit, served on the Presidential Commission on Obscenity, and campaigned to get teenage girls to stop wearing shorts so that they wouldn't distract motorists. At one point, he tried to convince regulators that a competing bank's fraud examiners were part of a gay conspiracy against him for being a homophobe. Keating made so many political donations that no fewer than five senators intervened on his behalf when people started questioning his businesses. When his fraud fell apart, Keating blamed the failure of his businesses on Communism, immorality, and porn.

No, I’m not going to tell you how Keating did his fraud either.

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A useful method for doing crimes is to create a crimogenic environment in your company, watch as other people do crimes, take the profit, and then when it all blows up insist that you made honest mistakes and you just thought that your business was profitable. This is very common today but the people involved generally do not get arrested and so the author didn’t naming names for fear of libel suits.

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Because the banks responsible for the Payment Protection Insurance scandal had to pay compensation, and it happened at the same time as the 2008 financial crisis, being deceived by a bank into buying insurance you didn’t need was one of the best investments you could have made.

“What is the Payment Protection Insurance scandal,” you ask? B U Y T H E B O O K

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Rollo Reuschel covered fraud in London for a German-language newspaper. A fraudster complained about Reuschel’s articles. Reuschel was like "molon labe, bitches, if you think my stories are wrong sue me for libel.” The fraudster did, because if there is one thing I know about early twentieth century Britain it is that people are constantly suing each other for libel about being accused of things they totally in fact did.¹

The fraudster made some errors. He encouraged his coconspirators to also sue for libel, so Reuschel could use all of the information about their frauds as evidence. He concluded that Reuschel was another fraudster who was professionally jealous, so he called a bunch of his fellow fraudsters as witnesses; the other fraudsters were like "yeah actually this guy does so much fraud.” And most seriously, he thought that Reuschel was broke and Reuschel is like "I am both extremely rich and willing to fund this entire court case. Fuck you."

Reuschel's barrister showed up with over a thousand pieces of correspondence and the jury found that Reuschel was not guilty before the barrister had finished reading three of them.

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Fraudster Bradley Birkenfield opened the windows of his chalet in the Alps, turned to his Brazilian supermodel girlfriend, and said, "Does it make you Matter-horny, baby?"

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For a while, HSBC’s Mexican subsidiary had altered its windows in order to better fit the metal briefcases which the drug cartels used for carrying cash.

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All right, I will tell you the whole story of one fraud.

In 1822, an Indian tribe asked war hero and minor nobleman Sir Gregor MacGregor to be the king of Poyais. Poyais was a utopian country. The rivers ran with gold. The soil was so fertile that it took four plantings of other crops before it would be impoverished enough for sugar cane. The local Native Americans wanted nothing in the world more than to work on sugar plantations, and preferred to be paid in textiles rather than cash. It sounded too good to be true, but it was credible. MacGregor was a general. Official documents showed that MacGregor owned the land. And he had already received two bonds from the London bond market.

Unfortunately for the colonists, the beautiful city of St. Joseph, which decorated all the marketing materials, was actually a swamp. The soldiers wouldn't take up their officers' commissions in the army of Poyais. The musicians wouldn't direct the national opera of Poyais. The cobblers would never be shoemakers to the princess of Poyais. And the agricultural colonists who had looked forward to enslaving Native Americans to run their sugar plantations discovered that this would require significantly more work than planned. Fortunately, the money was valuable—to the children of the Native Americans, who liked the pretty pictures.

While Sir Gregor MacGregor was a genuine MacGregor and related to Scottish nobility, his war titles were bogus. He had fought in Spain’s South American colonies’ wars of independence in order to find his fortune, and had failed to find any fortune. He was a general, but only because commanders of independence-fighting armies tended to give out promotions when they didn’t have any pay. A local Native American had sold him the land while they were drunk, and had absolutely no intention of following through.

MacGregor’s second bond had been taken because he had, inexplicably, spent so much money on helping colonists go to Poyais and on advances on nonexistent wages that he lost money on the fraud. It was surprisingly easy to get bonds, because at the time many countries raising money on the London bond market did not, technically, per se, exist. The revolutionary governments of many rebellious colonies took out loans, which were given to them by speculators who expected most of the countries to go bust but that the surviving countries would earn them a lot of money.

Sir Gregor MacGregor got away with it by suing people for libel² and writing pamphlets condemning the people who had rescued his victims as robbers who destroyed the thriving settlement of Poyais.

Lying for Money: How Legendary Frauds Reveal the Workings of Our World. By Dan Davies. Published 2018. 321 pages. $14.

1. Other notable instances include Oscar Wilde, Maud Allan, and Emidio Recchioni, who actually managed to win the suit about how he super did not attempt to assassinate Mussolini.

2. An early adopter of the practice of suing people for libel for things you actually totally did.