The unifying characteristic remains consistent. The perpetrators are greedy and are convinced that they are smarter than investigators who will never be able to unravel their web of deceit.
Michael J. Clark, Former FBI Special Agent
Something in the American psyche both glorifies and vilifies the criminal capitalist. Stories of bootstrapped “rags-to-riches” men and women dazzle the public, while the details of someone defrauding the working people result in cries for blood. Financial crimes have taken many forms in the U.S., but they all share commonalities.
“The unifying characteristic remains consistent,” says Michael J. Clark, a former FBI special agent and current lecturer at the University of New Haven. “The perpetrators are greedy and are convinced that they are smarter than investigators who will never be able to unravel their web of deceit. Often, they are wrong—though it sometimes takes considerable time for them to be brought to justice.”
A senior lecturer at the University of New Haven, Clark teaches graduate courses in financial crime investigation, criminal justice, and advanced investigation. He previously taught classes in financial crime at the International Law Enforcement Academy in Budapest. For 22 years, Clark served as a special agent in the FBI, conducting investigations into fraud, financial crimes, and public corruption.
In some financial crimes, the perpetrators are single individuals, and their complicity is never in doubt. In more corporate cases, however, investigators are often faced with a room full of people shrugging their shoulders and pointing the finger somewhere else. Proving intent can be tricky in a compartmentalized corporate structure, especially in one with a culture of corruption. According to Clark, a lot of the willful blindness of top executives in corrupt schemes comes from their high salaries and bonuses. True ignorance of what is happening in a company is relatively rare, and it is up to investigators to prove it.
“You prove intent by putting the puzzle together from the bottom up,” Clark says. “The statements of other employees eventually lead you to the key perpetrators. Then you have them turn on each other. White collar criminals don’t like the thought of a 20-year jail sentence.”
Greed can look glamorous until it is exposed for what it is, and often the line between an outright thief and a business genius is incredibly narrow. Albert H. Wiggin, a one-time leader of Chase Bank, would be considered a criminal under current financial regulations for his short sell of company stock during the Great Depression (netting him $4 million in private gain), and yet he is still ranked by Harvard Business School as one of the great American business leaders of the 20th century.
In fact, plenty of infamous white-collar criminals have been hailed as triumphant innovators. The battle to define the line between criminal and genius is also the battle between the power of provable facts and the power of wishful thinking.
“If it’s too good to be true, that’s one red flag,” Clark says. “Others include vague promises, unrealistic promises of returns, unprofessional documentation, and failure to provide documentation of investments.” The red flags always stick out in retrospect, but it is up to investigators to see them through a thick cloud of greed. ‘
Read on to get a look at the top financial white-collar crimes in U.S. history, and whether the perpetrators got away with it—which, as you’ll see, is sometimes a complicated question to answer.
Born in a small town in Northern Italy, one of the most famous names in white-collar crime arrived in Boston in 1903 with less than $3.00 in his pocket. Having gambled away the entirety of his life savings on the ship that carried him to America, Charles Ponzi’s ambitions seemingly never suffered.
Unburdened by scruples (and perhaps a little too quick of a study of the American economic mindset), Ponzi was fired from his first stateside job for shortchanging his customers, and this pattern would continue for the rest of his criminal career.
A college dropout, Ponzi’s practical form of higher education took place when he began working as a teller, and eventually a manager, at Banco Zarossi in Montreal, Canada. Ponzi witnessed firsthand how Zarossi was able to offer double the interest on deposits than other banks did and grow quickly as a result. As the bank’s real estate loans turned bad, founder Louis Zarossi began funding his competitive interest payments with the deposits of new customers, before eventually fleeing the country with a large portion of what remained. The bank failed, and Ponzi lost his job, but he learned a lesson.
By 1919, Ponzi finally found an opportunity to put that lesson into practice. The idea, like most successful business ventures, began with the exploitation of an obscure loophole. In this case, it was a form of arbitrage—i.e., buying an asset in one market, and reselling it in another at a higher price. In this case, the arbitraged assets were international reply coupons (IRC), which were, effectively, stamps.
In theory, Ponzi could buy an IRC in Italy and resell it in the U.S. at a market rate but also at a 400 percent profit. Turned down by banks for funding, Ponzi crowdsourced his idea into the Securities Exchange Company. He offered people a 50 percent return on their investment within 45 days or a 100 percent return within 90 days. Indeed, he paid many of his early customers at the promised rate, but he didn’t buy and sell any products to fund this—and he technically didn’t have to.
Ponzi’s scheme involved paying old investors with new investors’ money. As word of the incredibly high rates of return spread, new investors streamed in across several states, and the company’s profits grew. At its peak, three-quarters of the Boston Police Department had invested, while other people mortgaged their homes to invest, and re-invest. Ponzi had yet to purchase any IRCs, let alone convert them into actual profits—he would have needed several ocean liners full of such IRCs to make good on even a fraction of his promises at that point.
Instead, he focused his efforts on maintaining the scheme, while also pouring money into legitimate ventures, including the purchase of a macaroni company and entertaining ideas of taking a controlling interest in a major bank. While even the most rudimentary financial analysis of Ponzi and the Securities Exchange Company would have revealed the scam that was at work, greed’s blinding effect was in full swing, and by mid-1920, Ponzi was collecting more than a million dollars a week.
The Fourth Estate brought down the scam. Ponzi had fought off earlier criticism from journalists, even successfully sued for libel because of an article that questioned his business’s legitimacy, but The Boston Post finally found someone to do the simple math.
To cover investments made with the Securities Exchange Company, Ponzi would need 160 million IRCs, while there were less than 30,000 in circulation at the time. If that wasn’t damning enough, slightly more rigorous math revealed that even though the IRCs could be arbitrated at a substantial profit, the cost of purchasing and transporting each unit would total out to a financial loss.
After a series of such stories ran in the Post, a run on the Securities Exchange Company saw Ponzi hand back $2 million to shaken investors, while he simultaneously handed out coffee and donuts and told them they had nothing to worry about. But the damage was done. State attorneys and banks got involved. When checking the books, they found no books, but they did find the Securities Exchange Company—and Ponzi—to be at least $7 million in the red.
Ponzi’s investors lost around $20 million, which amounts to almost a quarter billion dollars in 2018 terms. Initially charged with 20 counts of federal wire fraud, he talked himself down to a single count and served three-and-a-half years in prison. Upon release, he was hit with ten state larceny charges, which, acting as his own lawyer, he talked down to a not guilty verdict. While appealing a further ten larceny charges, he began running a scheme in Florida where he sold bits of swamp land to investors, promising a 200 percent return within 60 days. Ponzi repeated such schemes, to less and less success, after his eventual second stint in jail and deportation back to Italy. He spent his final years in poverty.
Fool me once, shame on you; fool me twice, shame on me. While there has been some debate over the proper wording of that saying, there is no question of whether history repeats itself. That is precisely what happened with the case of Bernie Madoff, the son of a plumber who pulled off a $65 billion fraud that swindled almost 5,000 investors and resulted in multiple suicides.
Madoff’s scheme was nearly identical to Ponzi’s. He promised investors astronomical returns and paid old investors with new investors’ money. The only meaningful changes were to the scope and scale—for 30 years, he maintained the outward appearance of investment success in what amounted to simply “one big lie,” in Madoff’s words.
To allow the scheme to live as long as it did, Madoff and his employees took perfunctory, sometimes cartoonish, steps to achieve the outward appearance of legitimacy. They backdated trades, counterfeited financial statements (and tossed them around like a football to give them the look of aged and weathered documents), and recruited celebrity clients whose participation lent the operation a semblance of credulity.
A whistleblower called attention to the infeasibility of Madoff’s returns as early as 2003—to achieve the stated returns, Madoff would have needed to buy more options than there were in existence. Though it took until the financial crisis of 2009 and the series of withdrawal requests that ensued, investigators finally began to ask the right questions. And as soon as they did, the whole scheme collapsed.
Madoff pled guilty to felony counts of wire fraud, mail fraud, securities fraud, money laundering, making false filings with the SEC, and more. Soon after, his son and criminally complicit business partner, Mark Madoff, hung himself. Bernie Madoff is currently serving a 150-year sentence at a relatively relaxed correctional facility in Butner, North Carolina. His victims are still awaiting repayment.
The late 1990s brought about a slew of innovative and highly educated white-collar criminals, and the executives at Enron led the charge. Kenneth Lay and Jeff Skilling, both fierce proponents of deregulation, turned their energy-trading and utilities company into a powerhouse that rewrote the rules of the game.
One of their more ingenious inventions was known as mark-to-market accounting, where Enron could book future profits on the day a deal was signed, rather than when those profits were realized. Since the deals were made for dynamically-priced energies and utilities, the hypothetical profits could be whatever Enron wanted them to be. This resulted in some astounding earnings and a soaring stock price, but it ended in calamity when the hypothetical future did not match the reality.
The corporate culture put forth by Lay and Skilling prioritized stock price above all else. This culture, combined with operations in deregulated markets, led Enron’s traders to carve out loopholes in pricing schemes—in some instances, asking a power plant to purposefully go offline to raise the price of electricity—and, at the upper echelons of the financial department, to concoct Byzantine methods of hiding debt and booking false profits that even fooled some of the biggest banks in the world.
The coup-de-grace came when, dogged by questions in the media and from regulators, top executives sold their shares at enormous profits (around $2 billion) while many of the rank-and-file were locked out. The stock price tumbled from a peak of nearly $100 to mere pennies, and the resulting bankruptcy cost 20,000 people their jobs, pensions, and retirement funds.
Many top executives at Enron cooperated with the government’s investigation in return for leniency. Most of the fingers pointed at Lay and Skilling, who both claimed they were misled by the people around them. In 2006, Skilling was convicted of 19 counts of securities fraud and wire fraud. He was released to a halfway house in 2018. Lay was convicted of six counts of securities fraud, but, before sentencing, died of a heart attack while on vacation in Colorado.
Another darling of the 1990s, WorldCom, a telecommunications firm headed by Bernie Ebbers, could do no wrong in the beginning. It had gone on a rampage of acquisitions in the 1990s and capped off with a $37 billion merger with MCI—the largest merger in corporate history at the time. In 2000, when a $129 billion merger agreement with Sprint was nixed by regulators in the U.S. and Europe, all of WorldCom’s aggressive growth came to a halt.
With the winning streak over, WorldCom’s stock price began to sink. More egregious signs of trouble lay just below the surface, and a small, internal team of auditors at WorldCom worked together, in secret, to uncover them. What they found and turned over to the SEC resulted in the largest bankruptcy in American history.
In the late 1990s, WorldCom had aggressively bought up excess network capacity, leasing it from third parties, and even investing in enormous projects like an underwater cable that would connect Europe and North America. When the expected growth in traffic did not meet expectations, WorldCom was left with heavy liabilities and a massive amount of underutilized network capacity. Through a bit of magical accounting reminiscent of Enron, WorldCom reclassified this extra network capacity as a depreciating asset, rather than the massive expense it was.
This strategy had been suggested years earlier by a mid-level CPA and dismissed by top WorldCom execs for its failure to meet Generally Accepted Accounting Principles (GAAP), but when financial pressure set in, it was precisely the model they used to overstate their income by more than $3 billion in 2001 and just under $1 billion for the first quarter of 2002.
By the conclusion of a more extensive investigation, more than $11 billion in misstatements was revealed. Directed and approved by senior management, this fraud was enacted with the specific purpose of manipulating the company’s stock price by appearing to meet its earnings estimates, and it resulted in thousands of employees and investors losing their jobs, savings, and pensions.
Several top executives and a top-five accounting firm were charged with complicity in this massive fraud. They all pointed their finger at the same man: CEO Bernie Ebbers, colloquially known as the Telecom Cowboy for his preference for blue jeans and cowboy boots in the boardroom. In 2002, Ebbers, a former milkman, stood in front of his fellow congregants at Easthaven Baptist Church and told them he was not a crook: “No one will find me to have knowingly committed fraud.” He said the same thing to Congress just before invoking his Fifth Amendment rights.
In 2005, Ebbers was convicted of nine felonies: securities fraud, conspiracy, and seven counts of filing false statements with securities regulators. He remained a free man while his case was under appeal, but, in September of 2006, Ebbers drove himself to prison in his Mercedes and began serving a 25-year sentence. Under the terms of a civil settlement, he agreed to relinquish a significant portion of his possessions and cash to repay those injured by his actions, after which he was left, on paper, with less than $50,000 in assets.
Once seriously considering a career in dentistry, Jordan Belfort, better known as the Wolf of Wall Street, got his start selling Italian ice out of styrofoam coolers at the beach. It was not until 1989 at age 27 that he started the now notorious and ill-fated penny stock brokerage: Stratton Oakmont. At its height, Stratton Oakmont employed more than a thousand brokers and was involved in stock issues valued at over a billion dollars.
The scheme was simple enough. Buy a bunch of penny stocks. Pump up the price through misleading statements to convince an unwitting investor to part with their money. Generate some cheap hype, then cash out the shares at a healthy profit. In some cases, the penny stocks were for bogus companies that Belfort had started himself; in other cases, he refused to let regular investors cash out to sustain the stock price until he’d made a killing.
These insane trading techniques earned Stratton Oakmont a massive share of profits and a total of $3 billion in revenue, and it cost unwitting investors some $200 million. The cycle continued until 1996 when Stratton Oakmont was finally permanently expelled from the securities industry by regulators. By 1999, Belfort was being indicted for securities fraud and money laundering.
Belfort served less than two years in jail, where he split a cell with Tommy Chong who encouraged him to write The Wolf of Wall Street. The book, the first of two, would net Belfort a $500,000 advance from Random House and $1 million (not including royalties) for the rights to make a Scorsese-DiCaprio film. Hinging upon the mix of infamy and fame his escapades garnered, he parlayed himself into a motivational speaker and peddler of his own proprietary sales techniques.
While he had initially agreed to pay back more than $110 million to the victims, Belfort and his lawyers have continually appealed for that amount to be reduced, even as Belfort has publically flaunted his new financial gains. Having only paid back 12 percent of his restitution to date, a U.S. district judge ruled in December 2018 that the government could garnish up to 100 percent of Belfort’s interest in one of his privately owned companies. With that, Belfort might finally begin to live up to one of the core rules he dishes out on Twitter and at his speaking engagements: give more than you take.
Matt Zbrog is a writer and freelancer who has been living abroad since 2016. His nonfiction has been published by Euromaidan Press, Cirrus Gallery, and Our Thursday. Both his writing and his experience abroad are shaped by seeking out alternative lifestyles and counterculture movements, especially in developing nations. You can follow his travels through Eastern Europe and Central Asia on Instagram at @weirdviewmirror. He’s recently finished his second novel, and is in no hurry to publish it.