For every credibility gap, there is a gullibility fill.
Michael J. Comer, Corporate Fraud (Gower, 1998)
It is around noon on a Sunday, preferably sometime in the two decades from the middle 1980s to the eve of the financial crisis. A brunch of eggs benedict or perhaps a fluffy smoked-salmon omelette washed down with Bloody Marys or Bucks Fizz has put you in just the right mood. You reach for one of the better-regarded Sunday-newspaper business sections. In these circumstances, about what do you wish to read?
Naturally, about a fraudster. But what kind of fraudster?
(after George Orwell)
In his 1946 essay ‘Decline of the English Murder’, George Orwell wrote about a golden age of British domestic homicide that he believed ran from about 1850 to 1925. His ‘ideal’ murder involved a respectable middle or lower-middle class household, sex and poison. Outsized cases such as that of Jack the Ripper did not, he believed, really count.
The murderer should be a little man of the professional class — a dentist or a solicitor, say — living an intensely respectable life somewhere in the suburbs, and preferably in a semi-detached house, which will allow the neighbours to hear suspicious sounds through the wall…He should go astray through cherishing a guilty passion for his secretary or the wife of a rival professional man, and should only bring himself to the point of murder after long and terrible wrestles with his conscience.
In a similar way, our own, somewhat shorter, golden age of fraud had its own conventions. Yes, there were truly outsize frauds – Bank of Credit and Commerce International (1991, £13 billion), Bre-X (1997, $4.4 billion) and Barings (1995, £827 million). And they were hugely entertaining – BCCI was quite staggeringly crooked and almost certainly insolvent from day one, Bre-X recruited investors by claiming to have hit a huge gold find in Indonesia (it hadn’t) and the antics of Nick Leeson in the Barings Singapore office (he appeared to be a genius by the simple expedient of hiding details of his loss-making trades in a drawer) gave rise to the expression ‘rogue trader’.
But none of these really touched on the essence of this high noon of fraudulence. Neither did those cases involving alleged – most of the defendants were acquitted – attempts to rig the stock market (Guinness, Blue Arrow) in order to maintain or inflate share values.
Allegedly fraudulent attempts desperately to keep crumbling corporate empires in business (Maxwell, Brent Walker) don’t really cut the mustard either. And it should be born in mind that Captain Bob, despite the undoubted handicap of being dead, was an unindicted co-conspirator in the 1995-96 trial of his sons and others and, like them, he was found not guilty.
No, the echt fraudster from this period, and the fraud of which he is the architect, is, like Orwell’s suburban murderer, on a more modest scale but, for that reason, his (it is always a man) rise and fall is far more engaging.
Barlow Clowes, Garston Amhurst Associates, Robert Miller, Roger Levitt, Wessex Trust – all share certain common features. First, and most important, there are the investors, later to be transmogrified into ‘the victims’. In every case, the investors will have been recruited on the basis that the (usually charismatic) front man has hit on a previously unidentified way of making above-average returns. Maybe a tax scheme, maybe an ‘innovative’ form of company investment, maybe something complicated involving foreign currency, perhaps a property-related wheeze or a chance to share in the growth of a fast-expanding far-away economy (Malaysia was popular in the early Nineties), maybe something connected with insurance products.
The more shameless of the fraudsters will give interviews to the more pliable of the journalistic fraternity (i.e. not the likes of Paul Lewis or Michael Gillard) and explain that his particular get-rich-quick scheme is ‘energising’ what had been a ‘sleepy’ investment scene and, what is more, doing so while cutting the small investor in on profitable action previously reserved for a ‘cosy club’ of professional insiders. This (combined with his claims of ‘financial innovation’) is key to explaining the market-beating returns that will be used in the early days to bring in the investors and build the front-man’s image as a financial wizard – that he is an honest practitioner ending the rip-off practices of the past.
The irony ought not to need explaining.
Despite slick PR, the fraudster will inevitably attract attention from media troublemakers who will be posing awkward questions about the ‘sustainability’ of the ‘investment model’, a polite way of asking if our man is a crook. His response in private will be to threaten libel action and in public to bemoan the fact that ‘the British do so hate success’.
Then follows ‘the event’, the first pebble that turns into an avalanche. It could be the withdrawal of a major individual or corporate backer. It could be a surprise audit. Or an announcement smuggled out late Friday afternoon, when financial hacks are already heading for the pub, stating that ‘temporary operating difficulties’ mean investors’ money will be briefly unavailable.
This is the fraudster’s cue for an interview on Moneybox or similar in which he assures one and all that this is merely a technical hitch, that everyone will be paid and, indeed, that he has plans for further expansion, possibly in partnership with a large, un-named backer.
After a few eerily quiet days, the roof falls in and regulators, or the police or administrators – or all three – turn up at the fraudster’s offices. Shortly thereafter, a number of key rituals are played out. One, the fraudster is arrested in a dawn raid. Two, it emerges that the cupboard is bare and that the only ‘assets’ available to pay investors are racehorses, yachts and Mediterranean villas (fraudster, for the enjoyment of). Three, the mandatory uselessness of the regulator comes to light as it emerges that the relevant agency was asleep at the switch for years.
And four – the emergence of the victims, whose pitiable condition will be paraded in the media as it turns out that they entrusted the fraudster with their life savings. Elderly investors make particularly good copy and help fuel demands for compensation which, in light of the abovementioned regulatory failings, will probably be paid.
Onward to the court case and the likely (but by no means certain) conviction and jailing of the fraudster. All that remains is for the media to report on his ‘cushy’ life at Ford Open Prison in Sussex and claim that he is running a fresh investment racket from a payphone in the nick.
That is the cycle of the classic fraud from our golden age. Should I sound suspiciously knowledgeable on this subject it may stem from the fact that I covered the whole area for The Guardian from 1990 to 2000, which takes us back to where we started, with our post-brunch newspaper reader on the hunt for a juicy fraud. What was the special appeal of the fraudster to the discriminating consumer of business news?
In part, I suspect that the crookery of the fraudster was comforting to those very many middle-class Brits with a personal prejudice against financial services practitioners, whom they secretly or not so secretly considered spivs. Lovingly-compiled details of the fraudster’s inevitably-vulgar lifestyle of conspicuous consumption will provide delicious confirmation of these prejudices.
In part, it may be explained by the fact that frauds in the golden age were relatively easy to understand. For a start, they usually involved paper rather than digital information. Furthermore, most frauds involved some variation on what Americans call a Ponzi scheme, known as ‘teeming and lading’ in Britain – the ‘returns’ paid to existing investors are funded not by dividends or capital growth but by the cash put in by new investors. A chain letter, in other words.
Finally, I suspect that part of the appeal of golden-age fraud stories was the pleasure in seeing the investors come unstuck. This was rarely voiced, but to a certain type of broadsheet newspaper reader the ‘victims’ had only themselves to blame for seeking too-good-to-be-true ‘market-beating’ returns. These greedy suburbanites and the fallen fraudster deserved one another.
Orwell lamented that homicide in the 1940s seemed to have abandoned the old conventions and cited a particularly brutal and pointless killing committed by two drifters, the so-called cleft chin murder. Similarly, the ‘LIBOR rigging scandal’ confirms that fraud’s golden age is over, given our newspaper reader is unlikely avidly to consume endless tedious semi-comprehensible detail about attempts to fix the London Inter-Bank Offered Rate.
Golden-age fraud was, I suspect, killed off by tighter regulatory requirements, in particular those that made it very much harder for financial advisors to handle their clients’ money, the sine qua non of a classic fraud.
Orwell blamed partly the ‘false values of the American film’ for the decline of the English murder. By contrast, the new world seems to be upholding the old standards – one of America’s largest recent frauds was a huge Ponzi scheme that cost investors $18 billion, one based on traditional false record keeping.
Bernie Madoff, sentenced to 150 years in prison, take a bow.