The Crooks Are Smarter Than We Are


By John Lohr


Bernie didn’t invent securities fraud. There is a lot of history before him (and after him). Let’s look at a brief history of securities fraud.

I can start in 300 A.D. and stop today, but I promise I won’t take up that much space (or time).

Scams, frauds and fat cat greed research is the name of our game. Enjoy.

Securities fraud has been around since the street named Wall was built in 1789. Bernie Madoff didn’t invent it, Gordon Gecko didn’t perfect the “Greed is Good” philosophy, the regulators won’t end it. In the investment world, scams, fraud and fat cat greed have been with us for millennia. When he was released from jail in 2010, the fictional Gecko said, “Once I said ‘Greed is good’. Now it seems it’s the way Wall Street does business”.

But, the Street called Wall didn’t invent it either. Let’s see some highlights (and lowlights).

A Brief History of Securities Fraud.

Our history of securities fraud starts in 300 B.C. A Greek merchant named Hegestratos took out a large insurance policy known as bottomry. When a merchant borrows money and agrees to pay it back with interest when the cargo is delivered, the merchant can insure the loss. His idea was to sink his empty boat, collect the insurance and bolt. He went down with the ship.

The South Sea Bubble

In 1711, the English government was wallowing in debt, so an enterprising group of merchants (read: crooks), calling themselves the South Sea Trading Company, bought a load of the debt and started hawking its shares on the market. Within months, the stock had soared from L100 to L1000, with no end in sight. The British government gave them exclusive trading rights to some ports Spain was allegedly willing to part with in Chile and Peru. They imagined piles of gold and sold their shares as the economic opportunity of a lifetime. But according to historians, “The Earl of Oxford declared that Spain would permit two ships, in addition to the annual ship, to carry out merchandise during the first year … but the first voyage of the annual ship was not made until 1717 [the deal had been made six years earlier] and in the following year the trade was suppressed by the rupture with Spain.” Unfortunately, nobody was listening; instead a rumor spread that trading was unlimited.

Investors went giddy, the Company made boatloads of cash from them, and imitators came and went quickly along with the investor’s money. Stock prices soared and the higher they went the more the investors fought to get in (kind of like Madoff, now that I think about it). The Company insisted profits were just around the corner, just like those lying bastards at Enron. The “bubble burst,” as all bubbles do, when nobody wanted to buy stocks anymore and those that had them couldn’t sell them.

According to historians, the now wealthy directors of the South Sea Trading Company told investors what great things the Company had done for England. Then they bolted with the money. (Sounds like Tyco or Enron.)

The First Insider Trading Scandal

It occurred in 1792 when Alexander Hamilton started a market by replacing Colonial Bonds with US Bank bonds. Prices fluctuated based on news (What a novel idea!). Bond investors scoured the crannies for information on what bonds Hamilton was going to issue.

Well, William Duer, Assistant Secretary of the Treasury knew. So, he decided it was the newly minted American Way to make some money on the information. Before tipping off his friends, he bought and sold for himself. When he left Treasury, he got some of his friends to invest in hot bonds and the stocks of banks that started popping up. Speculators flocked in and the market grew hotter. Duer figured his inside info would keep him ahead of the sheep, but it all corrected. Duer was left with worthless investments and huge debts. Hamilton propped up the market by buying up bonds like a lender of last resort. William Duer died in debtors’ prison in 1799.

Fraud Wipes Out Grant

In the 1880s, Ulysses S. Grant tried to help his son, Buck, in a Wall Street business. Buck’s partner was a guy named Ferdinand Ward. All Ward did was take the money and run. Grant lost his war memorabilia to pay off debt. Cornelius Vanderbilt, who lent Grant money, lost a bundle and the Marine National Bank tanked.

Ward was caught and served six years, but his claim to shame was almost single-handedly causing the Panic of 1884.

The stock manipulator Daniel Drew

Drew was a cattle person who practically invested the term “watered stock” (pumping up cattle with a lot of water the day before auction day to drive their weight up – kind of an early “pump and dump”) Basically he bought stocks, spread fake bad news about causing investors to short the stock. Lo and behold, when the investor had to cover the short, guess who had the only stock. Premiums abounded for Drew.

His other scheme was for him and his cronies to buy up a company stock quickly. Investors saw that and the run was on. Drew’s cronies dumped the stock and pocked a load.

He got into a stock corner feud with Vanderbilt who eventually outsmarted Drew. On the run for “watered stock” (Unknown whether this was cattle or companies), Drew died broke in 1879.

The Teapot Dome Scandal

When President Warren Harding gave Senator Albert B. Fall, his Secretary of the Interior, control of the Teapot Dome, Wyoming, oil fields in 1921, Fall promptly leased the Teapot Dome to his pal Harry Sinclair’s Mammoth Oil Company. In return, Fall received about $400,000 from the oil barons. He tried to keep it secret, but his new-found wealth caught attention. A committee of the U.S. Senate uncovered the crooked dealings and went public in 1924. Fall was the subject of criminal trials, hearings and so on, until finally he was found guilty of bribery in 1929, fined $100,000, and sentenced to one year in prison. Harry Sinclair, who refused to cooperate with the government investigators, was charged with contempt and received a short sentence for tampering with the jury. Overall, the Teapot Dome scandal came to represent the corruption of American politics, which has become more prevalent over the decades since the scandal. You have to start somewhere.

The Stock Pools

In the 1920s, average Americans discovered the stock market. Manipulators (read, “crooks”) formed stock pools to drive prices up artificially when they would, of course, sell. Another pump and dump. This one big enough to inflate prices of companies like Chrysler, RCA and Standard Oil.

The bubble burst in 1929 and stock pools were a big reason. The SEC was created. The first head of the SEC was a speculator and former pool insider, Joseph Kennedy.

And Then there’s Ponzi:

Carlo Pieto Giovanni Guglielmo Trebado (“Charles”) Ponzi.

How does he stack up against Bernie?

Stay tuned until next week.

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Source: Seeking Alpha


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