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What it's like to uncover a $1 billion fraud (stockfraudstory.blogspot.com)
177 points by bsims on Feb 17, 2013 | hide | past | web | favorite | 32 comments

“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.

"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.

I've read so many articles about people that invest in these schemes that promise an insane ROI. They get blinded by greed and eventually get scammed.

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).


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.

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.

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.


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...

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

Considering the time frame for WorldCom, Tyco, and Enron it was especially surprising, but the author states he was 20.

As for the focus on terrorist funding, notably Paul O'Neill credibly claimed to have achieved some of the most important early victories against Al Qaeda through Treasury Department investigations into their funding. In fact, pushing this approach in contrast to the preferred brute force methods of others in the administration lead to him being fired at the end of 2002.

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).

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."

There has always been awareness of white collar crime, especially by those who worked on Wall Street.

Look at the Google ngram that I linked to. In 1997, when you were 13 or so (you mentioned that you were 20 in 2004), the phrase "white collar crime" was at a relative low. Since then, the phrase "white collar crime" has grown in popularity in tandem with your maturation, which would account for your perception that the media is become more aware of it. However, the latest data available show that it is still not as popular is it was in 1996.

It may be the case that people are using the term "white collar crime" increasingly to refer to phenomenon which they used to just call "fraud". Another Google ngram search [1] shows that "fraud" is orders of magnitude more popular than "white collar crime".

There are plenty of other subjects where the popularity of equivalent nouns varies. For example, what do you call the people who fight wars? Soldiers? Troops? Warriors? [2].

[1] http://books.google.com/ngrams/graph?content=white+collar+cr...

[2] http://books.google.com/ngrams/graph?content=soldiers%2Ctroo...

ADM's lysine fixing in the 1990s. The savings and loan debacle of the 1980s and 1990s. Hunt&Hunt's silver manipulation in the 1970s. The Towers Financial Corporation Ponzi scheme of the 1990s. Robert Emmet Brennan's First Jersey Securities pump-and-dump fraud in the mid-1990s.

Political white collar crimes from the 1970s include Watergate and Koreagate.

And as for movies: "Trading Places" was a 1980s movie ending with a foiled white collar crime attempt. "Wall Street" is a 1987 film where Gordon Gecko is convicted of multiple securities violations. "The Insider" is a 1999 film based on a 60 Minutes segment about a tobacco industry whistle blower. John Braithwaite wrote "Corporate Crime in the Pharmaceutical Industry" in 1984.

That you don't know about them doesn't mean they didn't exist or that people didn't know about it.

Might not hurt to feed your information to the websites Bronte Capital and White Collar Fraud (http://whitecollarfraud.blogspot.com/).

"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?

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.

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.

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 ;-)

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

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.)

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.

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.

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...

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?

Based on bsims comments about "extensive military/government background" and the guy being an investor, I would say this person is likely Admiral Inman, Deputy Director of Central Intelligence from 1981-1982, managing director of VC firms since 1990. He left the CIA the same year that the TCP/IP suite was standardized, hardly a point in history when the internet was a major source of intelligence, unless you were spying on DOD researchers.

Being a former Deputy Director means almost nothing about knowledge of current CIA practices and modern methods for intelligence collection.

Can't speak to Washington, but he had a pretty extensive military/government background.

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.

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.

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.

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

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.

>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.

Wow... What incredible story. Unbelievable!

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