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July 22, 2004

News & Opinion: Crime Always Pays

By: 800-CEO-READ @ 7:39 PM – Filed under: Management & Workplace Culture

With so much business news taken up this summer with news of arrests and handcuffs, what better beach reading than a selection of titles from the new Library of Larceny series? This spiffy, perfectly realized series of retro-pulp paperbacks from Broadway Books re-introduces great book from the past on corporate crime, both large and small. The first five titles include: Ponzi: The Incredible Story of the King of Financial Cons by Donald Dunn, by J.R. Yellow Kid Weil, Where the Money Was: The Memoirs of a Bank Robber by Willie Sutton, McGoorty: A Pool Room Hustler by Robert Byrne, and The Telephone Booth Indian by A. J. Liebling The Ponzi title is such a treat that Ive asked the author, Donald Dunn, to answer a few questions about his book and the lessons it carries to our economy today. Pardon the length, but hes just too much fun! By the waywhats your favorite tale of corporate misdeed? Please comment. Q) This week we saw Enron former CEO Kenneth Lay in handcuffs, and anyone with email receives numerous pitches for untold riches. Does the core message of your book have any lessons for these current trends, and if so, can you share them? A) Despite Ken Lay being called the most accomplished confidence man since Charles Ponzi by Sen. Peter Fitzgerald, theres a world of difference between Lay and his predecessor. Lay headed an actual company with billions of dollars in revenues, thousands of employees, worldwide offices and other real assets that Enron investors could point to as assurance that their money was well-placed; Ponzis victims had only his word that his secret scheme would return 50% or 100% for each dollar. And where Lay can defend himself by saying that others Jeffrey Skilling, Richard Causey, and nearly 30 more already indicted caused all the companys problems, Charles Ponzi sought nothing less than full credit for his skill at bilking some 30,000 people out of $15 million in the first six months of 1920. I knew human nature, he wrote. I was a better salesman by instinct than others are by training. So, yes, the core message of the book is that anyone -- anyone at all may lose money in a criminal enterprise unless he or she is continually on guard. And even then, especially when the investment opportunity comes via a trusted friends inside tip or a get rich quick chain-letter email that promises a big return for a relatively small sum, the odds of getting burned are great. Q) Do you believe investors learned something from Ponzi? A) If by investors, were talking about the public in general, the tremendous prevalence of Ponzi schemes during the 85 years since his rise and fall in Boston would indicate that, no, people are supremely susceptible to a con at any time. That most basic vice, greed the desire to make more money than a bank or insurance company or the stock market might return on an investment assures the con artist of a steady supply of victims. Countless Ponzi schemes are flourishing all over the world at this very moment. Ponzis investors, on the other hand, did learn something. A few lucky ones and these included certain public officials, police officers, and the like who willingly and knowingly lent their names to the soundness of his enterprise cashed in their promissory notes early on, and doubled their investments. (In some cases, they had not actually put in their own money; Ponzi loaned them the investment sum so he could proclaim that Judge So-and-So believed in his venture.) And then there were the 30,000-odd other investors who learned that their hard-earned life savings, grocery money, rainy day funds, etc. could disappear almost overnight. After several years of bankruptcy hearings and court rulings, many grim-faced investors got 30-cents for each dollar invested. Q) Were there any healthy outcomes from the Ponzi scandal? A) Perhaps the most important development was the creation of the U.S. Securities and Exchange Commission in 1934, some 14 years after Ponzis operation opened the decade of the Roaring 20s. In that period, some 20 million investors large and small snapped up $50 billion worth of securities only to see half that value vanish in the 1929 Wall Street collapse. (It can be speculated that if Ponzi hadnt been busy in 1934 fighting deportation to his native Italy he would have asked payment from the government for the name bestowed on its new consumer-protection organization, the SEC; Ponzis infamous firm was, after all, the Securities Exchange Company.) Another healthy outcome, perhaps, was the Pulitzer Prize given the Boston Post for exposing Ponzis scheme. (A cynic might note that the papers expose came only after it had run a series of articles about the mysterious millionaire who was making people rich -- articles that sent crowds waving fistfuls of dollars into Ponzis clutches.) Q) Your book shows Ponzi to be less of an out-and-out and unscrupulous rogue than an ambitious man who responded poorly to events beyond his control. Is it fair to say that? And how, ultimately, would you characterize Ponzi? A) The question reflects the views of a particular reader, or perhaps is a welcome comment on the authors writing talents. Another reader might see things quite differently. The facts are these: Charles Ponzi was an out-and-out crook who evidently never worked an honest day in his life, and never wanted to. He stole millions from thousands of people, stole money from his own wife and her family, bribed judges and the police, forged checks, smuggled illegal immigrants into the U.S., and blithely told of many other criminal acts in his privately published autobiography. And yet, he seemed to be a thoroughly likeable character a smiling, happy-go-lucky weaver of amusing tales, a person able to convince himself and others that his fertile mind would devise one out or another, so that in the end everyone would prosper. With millions of ill-gotten gains in his 30 bank accounts, he took out a life insurance policy that would pay off the creditors if he died before he found a way out of his big scheme. Boastfully, he spoke at luncheon meetings of New England financiers, double-talking his way through elaborate explanations of how he could afford to pay investors huge profits, or how he would use his investors money to buy a fleet of steamships. (In present-day bizspeak, its diversification or synergy.) His primary defense at his various trials was his contention that if the governments of the U.S. and Commonwealth of Massachusetts had not closed the Securities Exchange Company when they did, he would have via one scheme or another eventually made enough money to pay the profits he had promised to those who believed in him. How can any writer not like a person who has so much hope, so much faith in himself, a person who never doubts that tomorrow will be better? Oh, yes, and he dearly loved his mother and his wife. Q) How much of the explosiveness of Ponzis tale can be attributed to the mindset of the average investor at the time, and to the prevailing economic and cultural climate? A) As the SEC points out on its informative website (www.sec.gov), there was a great surge of investment opportunities in the wake of the First World War as the 1920s dawned. Easy credit was available, rags to riches stories abounded in the unfettered press of the day, and a public shrugging off wartime restrictions and shortages wanted to get in on the action. Its been said that Ponzi schemes flourish in periods when inflation is high, wages are static, and typical returns on investments are low such as banks offering just 2% or 3% on deposits. Then, individuals might look for alternative ways to make their savings grow. But its also true that Ponzi schemes flourish when wages are high and inflation is low, and investors feel that they can safely put any excess cash into what might be deemed as higher-risk opportunities. In other words, Ponzi schemes can and do operate at any time, anywhere. (This author helped to expose the Access to Capital scheme in Zimbabwe in mid-1990s, testified in the 1977 trial of a Ponzi operator in Long Island, NY, and watched in disbelief as the government of Albania fell in 1997 after it endorsed a dozen disastrous pyramid programs.) ----------------------------------------------- In conclusion, yes, there are books and pamphlets and guides and websites and consumer reporter folks on TV and radio that can provide helpful hints on how to recognize a Ponzi scheme. Some basic warning signs: The return-on-investment is guaranteed, and markedly higher 10%, 50%, 100%, perhaps than obtainable almost anywhere else. And investors are encouraged to tell others about the potential for profits that theyve discovered. But the schemes surface in tremendous variety some appearing very simple, like Ponzis secret method of profiting from the purchase and sale of postage stamps, and others as complex as Enrons far-flung operations in 30 countries. Some investors quickly recognize a Ponzi scheme, but put their money into it anyway figuring that the people who get in on the pyramid early can take their profits (from cash paid in by later investors) and run. The trouble, of course, is that only the originator of the scheme knows which investors are early ones and which are the latest suckers. And at all times, the beauty of a pyramid scheme beautiful, that is, to the originator is that the person who puts money into it often makes it his or her job to bring in the next investors. The customers truly become the salespeople.