
What it's like to uncover a $1 billion fraud - bsims
http://stockfraudstory.blogspot.com/
======
Nrsolis
“You can't cheat an honest man. He has to have larceny in his heart in the
first place.” -- W.C. Fields

In the US, the investor is supposed to be the first line of defense against
stock fraud schemes. Unfortunately, the laws were written to help out the
lower and middle classes from unscrupulous stock scams, not the wealthy
"sophisticated" investors.

SO here's a tip: if you get scammed, don't count on the government to help
you. They've got bigger fish to fry. You need to do your own due diligence,
get your own lawyers/accountants/etc to look things over, and verify every
claim and every representation that someone makes to you. If anything is even
a little bit off DONT INVEST.

I was approached to invest money in two separate projects but ultimately
didn't because there wasn't any way to ensure that I was going to see a good
use of the money. That's how it is: if your only connection to someone is the
use of your money, you better make sure that you understand how and when you
make money on the deal. Otherwise, you're as good as robbed.

Note that this applies to ALL INVESTMENTS. If the company goes under for good
reasons or fraudulent ones, the result is the same. CAVEAT EMPTOR.

~~~
ChuckMcM
_"If anything is even a little bit off DONT INVEST."_

This is so true. I remember be really pressed hard to invest in some natural
gas wells where each well was "owned" by the investors who were paid out
fractionally based on the production, the more wells you were in to the more
you got paid. Someone I know was getting $3000 - $5000 checks a month from
this operation and I was quite curious. But given the scope of things and the
kinds of returns they were promising I was amazed that such a deal would even
be around by the time people got to me. So I asked for a picture of the gas
works. Which was provided but didn't match where they said it was (go go
Google Earth!) and once I tracked down where they said things were going on,
it was near the edge of the live fire missile range which a) meant you
couldn't go out there to take pictures, and b) the US Bureau of Land
Management wasn't about to be writing gas leases on land you might get bombed
on. Sure enough, a call into the local sheriff left no doubt. No wells, no
drilling, anywhere. And he got another data point for his investigation (I
wasn't the first person who called). About 9 months later the whole thing
vanished. I mean literally everyone in charge just disappeared. Sad really.

------
bsims
Appreciate the comments, particularly those that provided specific
organizations and links related to investigative journalism, white collar
crime etc. I also hope the information was helpful to those who are involved
in forming their own organizations, dealing with investors, etc.

Some additional points addressing various comments and themes:

>I’m glad there is additional dialogue about investor due diligence. Others
are absolutely right that if you’re going to invest in a company it is up to
you to do your own due diligence. Go visit the company, speak with customers,
get references.

>I lost no money in this process and was simply looking out for the interests
of a friend and investor.

>The original individual referenced counter sued the State of Idaho for
defamation, after the State originally filed suit against him years ago.
Obviously the State has far greater resources than I do. As much as I’d like
to throw up names, links etc. there is a very real downside and unfortunately
is not something I’m willing to do at this time publicly. If some enterprising
investigative journalist wanted to take the reins I’d be open to helping them
find out information on their own.

>This was posted on Blogger because I didn't want it distracting from other
things I’m working on. I also don’t think my personal site would have been
able to handle the traffic.

>There are legitimate examples of reverse mergers and stocks that aren't
traded on major exchanges. However, the smaller the stock the more chance for
fraud, fewer checks etc.

>International incorporation is a regular practice and employed by companies
such as Apple and Facebook. However the Cayman Islands are simultaneously a
hot bed for fraudulent activity (interestingly as are Vancouver, B.C. and Boca
Raton, Florida).

[http://www.businessinsider.com/facebook-funneled-nearly-
half...](http://www.businessinsider.com/facebook-funneled-nearly-half-a-
billion-pounds-in-the-cayman-islands-last-year-2012-12)

As for Unicorns and sniff tests, if you don’t believe it, that's ok. I
wouldn't have believed it either. It's good you're exercising your right to
question things which was the basis of the post.

------
confluence
This doesn't pass the sniff test. It might be true, but without names, dates,
or companies for verification - it might as well be fiction.

In Unicorns we trust; all others must bring data.

------
bonyt
You said you contacted the SEC and the FBI, did you consider the Secret
Service? They investigate a lot of organized crime when it relates to finance.

Their "dual mission"[1]:

The mission of the United States Secret Service is to safeguard the nation's
financial infrastructure and payment systems to preserve the integrity of the
economy, and to protect national leaders, visiting heads of state and
government, designated sites and National Special Security Events.

[1]<http://www.secretservice.gov/mission.shtml>

------
a_p
As the author is establishing background for the story, which took place from
2004-2008, he writes "'White collar crime', and the attention that it receives
today, did not exist."

I'm going to give the author the benefit of the doubt and assume that he was
being facetious. I suggest that he reword that phrase.

Google ngram of the phrase "white collar crime"
[http://books.google.com/ngrams/graph?content=white+collar+cr...](http://books.google.com/ngrams/graph?content=white+collar+crime&year_start=1800&year_end=2008&corpus=15&smoothing=0&share=)

The OED lists uses of the phrase "white collar" from 1919 onwards.

~~~
bsims
The point was not to establish whether "white collar crime" existed already
but rather to emphasize how little attention was being paid to it at that
point in time.

For example, since then inter-agency task forces have been established, media
has begun covering the topics, books have been written and movies produced.
<http://en.wikipedia.org/wiki/Inside_Job_(film)>

The general awareness is much higher (despite little action taken).

~~~
pyre
Embezzlement is 'white collar crime' and has happened for a long time (and
been the focus of movies). Cheque fraud is also 'white collar crime' and Catch
Me If You Can came out in 2002. You're just associating more public scrutiny
(and therefore more government focus) on banks / investing / Wall Street with
a greater focus on "white collar crime."

------
rgrieselhuber
"Ultimately my investor has never been paid back, and the individual I met as
a possible board member is alive and well, wheeling and dealing in the San
Francisco Bay Area."

So, who is he?

~~~
michaelwww
It sounds to me like someone trying to get feedback from HN on his script. Is
is believable? Sure. Would it make a good movie? Not in my opinion because
there are actual stories with hard facts and names that are just as
interesting, but more so because they actually happened.

~~~
ChuckMcM
I like this explanation. If you were going to write a financial thriller, just
what would it take to be believable, and when does it jump the rails? Can the
reader believe high level CIA officials were duped? How about a complete lack
of interest in oversight bodies? What level of response keeps the tension high
and doesn't make it boring?

I wonder if you could a/b test this with two stories and adwords or something.
Completely automated story generation starting with basic plot. That would be
a cool startup.

------
thisrod
_I contacted people at the Wall Street Journal, New York Times and even had an
in person meeting with someone at the offices of Fortune._

Why not _4 Corners_ or _Panorama_? Investigative journalism might not have a
capitalist business model anymore, but socialism still gets the job done.
Especially for stories that will embarrass rich Americans ;-)

------
hristov
That would be much more useful if we had some names to go with that story.

~~~
ramanujan
Strongly agree. If he names names, something good might come of this now that
it has HN's attention for the day. And if he was going to journalists, he had
a willingness to name names at some point in the past. I understand that these
guys are organized crime, but without names no action can be taken. With the
right push, Anonymous can/will dox the hell out of these guys given enough
details. OP has to judge for himself whether (a) these are really bad guys and
(b) he has the courage to call down the Internet upon them.

(To preempt: yes, Anonymous is not always good. No, I don't believe that
Internet justice is always bad, or that it would be bad in this case,
especially as all formal avenues appear to have been exhausted and the
perpetrator is scot free.)

------
fatbird
Do we have anything like independent verification of this story? I don't find
it implausible, but a single entry purpose-built blog telling an anonymized
tale, is worth the cost of entry.

------
refurb
Great read.

This part left me a bit shocked:

 _His response, "And you found all of this information just by looking on the
internet? Incredible." Let me repeat that, this is the former Deputy Director
of the CIA._

I hope to hell that the guy was a just Washington bureaucrat and it's not
indicative of the CIA's thinking.

~~~
GHFigs
The article doesn't specify _when_ he held that title. Of the dozen or so
living former Deputy Directors of the CIA[1] there are only a few that I would
expect to _not_ to still be surprised at how much you can find out over the
Internet. Heck, I'm still in my twenties and I'm impressed at how easy it was
to narrow it down to one likely candidate.

[1]
[http://en.wikipedia.org/wiki/Deputy_Director_of_Central_Inte...](http://en.wikipedia.org/wiki/Deputy_Director_of_Central_Intelligence)

~~~
refurb
Good catch. I never thought it might have been a deputy director from that
long ago. In that case, it makes a lot more sense that he wouldn't know.

However, don't you think that someone who is involved in intelligence
gathering would have _some_ inkling of the important of the internet in
intelligence?

------
tomwhipple
This story doesn't sound too surprising, as these kind of scumbags are out
there, but it would be helpful to know the names of those involved.

For example, Carl Freer or Rich Jenkins of Gizmondo/GetFugu/Serge fame. see
<http://carlfreerscam.wordpress.com/>.

Sadly, if these folks put as much effort into building a real company as they
did their criminal enterprises, they might actually achieve legitimate success
and not have to run from the FBI.

------
gesman
You either keep doing what you do and keep watching your ass at the same time
or just change your point of view. Watching your own ass usually is much less
attractive activity. It just doesn't smells right, no matter whom you're
trying to hunt down.

------
JumpCrisscross
This sounds like a dispute from a failed exit being aired out online. In
particular, the unilateral and evidence-free labelling of the offending party
as an "organised crime group" smells of vindication (when my phone got hacked
it was clearly terrorism, so I'm sympathetic).

If you find yourself in a similar situation contact your lawyer. You, as a
stockholder, can sue. The courts are the best place to adjudicate this.
_Conditional upon advice from the law firm_ contact the SEC, the state
financial regulators, e.g. DFS in New York, and the state DOJs. This is _not_
to elicit enforcement action, simply to put a time-stamp on the complaint.

> _The con artist would then “help” the company execute a Reverse
> Merger...[then dumped his] stock prematurely or used insider information to
> sell off. This ultimately caused the stock to crash and the public market to
> be stuck with the loss. Meanwhile you, the unknowing founder, probably end
> up in jail._

This is not evidence of pump and dump. There was a dump which _may_ have
violated lock-up terms, fair disclosure, or insider trading rules. But I don't
see a pump, just a reverse merger and liquidation by an investor. The classic
pump and dump involves acquiring a position in an illiquid stock, spreading
false information to get investors to bid up its price, selling out of the
position at a profit, and leaving the market to figure out it overvalued the
stock.

Also, you will not go to jail. You can be incredibly stupid, down to hiring a
chimpanzee chairman who moonlights as a special advisor to the board to take
your company public via a reverse merger (he read about it on StockTwits) who
liquidates his investment on the day the lock-up ends, thereby hosing every
other stockholder, and still be well within the law, which punishes fraud, not
naïveté.

> _Here were a few reasons why it didn't get covered: ...b) Too difficult to
> prove_

The threshold for the Wall Street Journal, Bloomberg, et al to report
purported fraud isn't astronomical. They can claim first amendment protection
and like to break this kind of information for short sellers.

> _The international holding company was actually an organized crime group,
> with offices in Barbados and the Cayman islands committing fraud in the US._

This line set off alarms because I've experienced, first hand, how difficult
it is to get information about a Cayman holding company or trust in person,
let alone remotely, let alone before 2008.

> _In order to silence the class action lawsuit from Texas, the fraud
> portfolio company ultimately filed for bankruptcy and settled with the
> investors._

If this is true, the class action settlement is illegal - you are not allowed
to take payouts from a fraudulent scheme. Further, it is unlikely that the
victims of a fraud would settle via a class action lawsuit (versus privately
and bilaterally), let alone settle at all. The former deputy director of the
CIA could probably manage a phone call to a DOJ.

~~~
bconway
Per the OP (<http://news.ycombinator.com/item?id=5237895>), he did not lose
any money in this. It was a cautionary tale.

~~~
JumpCrisscross
One can take sides without losing money. In any case, the evidence presented
still does not sustain the conclusion. There are also technical mis-
statements. I still believe the more likely explanation is a well-meaning but
naïve individual researching a colleague's issue, coming to a faulty but
understandable conclusion, and then getting ignored by those who could have
pointed out potential leaps in the logic.

~~~
bsims
_> The classic pump and dump involves acquiring a position in an illiquid
stock, spreading false information to get investors to bid up its price…_

This happened. The company paid exorbitant fees for PR and news services to
hype the stock with announcements that were't real in the build up period.

 _> This line set off alarms because I've experienced, first hand, how
difficult it is to get information about a Cayman holding company or trust in
person, let alone remotely, let alone before 2008._

I didn't interface with any of the Cayman organizations directly. What made it
difficult? Just paper trails, continual mailed notices etc?

 _> If this is true, the class action settlement is illegal - you are not
allowed to take payouts from a fraudulent scheme._

Not a lawyer, however the company shut down just before the SEC investigation
was complete, investors settled the lawsuit before fraud was proven, and
evidence dismissed before it could show up in public records…it is very
possible.

As a high frequency trader I’m sure you’re very familiar and aware of how
plausible and possible these things are.

------
ccarnino
Wow... What incredible story. Unbelievable!

