Frauds and Scams Galore
There have probably been “Fraud Artists” aka “Con Men” before history was recorded. No doubt a caveman once bartered a known, inferior piece of wood to be used as a club, in exchange for a woolly mammoth hide. The tradition of cheating others has continued ever since, within more modern schemes.
The following are some real-life examples, all ending in the Con Man (OR Con Woman) being caught. All the fraudsters lost their good reputations (some didn’t care and just moved on), several went to prison and at all times, those in the know had to be – or should have been – sleepless and worried about being caught and possibly headed to “The Slammer.”
Wouldn’t it be less stressful to invest time and energy in an honest careeer involving job satisfaction and occasional vacations while building a retirement nest egg? Let these stories illustrate the perils of what might appear to be an easy path to fortune but which actually require more work and worry than any path honestly pursued.
START-UP BUSINESSMAN
JM (fictitious initials) enjoyed working for himself by creating new businesses. The business itself might have involved a “bricks and mortar” actual building and a few employees but JM’s dishonesty was eventually discovered in its administration: misrepresenting his education and his asset / liability disclosures to obtain bank financing plus disavowing oral agreements with partners.
ES also enjoyed working for himself, but he was an “idea” person, not able to finance business opportunities he investigated. It was unlikely that banks would be satisfied with the risk of lending to ES without a successful track record of owning businesses and paying creditors fully and promptly.
ES knew of JM’s interest in launching new businesses. ES heard that a major product manufacturer intended to sell one of its currently unproductive product lines- a sports drink. ES thought the product could be re-branded successfully. ES approached JM with the idea of forming a 50/50 partnership to proceed based on their respective contributions: ES’ idea for the business opportunity plus JM fully providing any cash beyond what the partners could borrow from a bank. Both partners would share business administration once it was launched.
During the prolonged negotiations to purchase the product line, JM fraudulently persuaded ES that the major corporation would not deal with their new business so the purchase of the product line could only be completed with an existing corporation owned by JM and his wife. JM assured ES that his equal business interest would be protected by an eventual employment agreement. However, soon after the product line was sold to JM and his wife, JM terminated ES’ business relationship because ES had never made any cash contribution to the new business.
ES sued JM and the new corporation for loss of estimated profits. Pre-trial investigation revealed documents confirming that ES and JM had respective 50% ownership in earlier business ventures and that JM advised the bank financing this deal that he was an Ivy League graduate (he was not) with an MBA (never achieved anywhere). The jury verdict confirmed the 50% partnership agreement and awarded ES $2,100,000 in lost profits plus $500,000 in punitive damages to punish JM for his intentional interference with a business relationship.
A SCHOOL LEARNS ITS LESSON
A private school offering technology courses to adults decided to sell its small campus building and relocate to a larger facility, 10 miles away. One of the problems with the building to be sold was a leak in the furnace. The school’s chief administrator poured a bottle of boiler sealant into the furnace which therefore passed initial inspection during the sale process. However, boiler sealant is only a temporary solution (literally and figuratively). When the crack in the boiler was discovered soon after the sale, expert investigation concluded the boiler crack had not just occurred but must have been known – and concealed – by the seller before the sale.
The school’s buyer sued the fraudulent seller and produced expert testimony in support of its legal argument claiming fraud by the school’s intentional failure to disclose the equipment’s significant malfunction. The court agreed and awarded the buyer the cost of replacing the furnace.
INVESTMENT ADVISOR
Bernie Madoff started a small investment firm with money entrusted to him by several investors, to whom he promised returns far above the current market average. These particular investors were “in it for the long haul” so they didn’t need to receive periodic cash distributions but were content to receive paperwork “confirming” their basic investments growing “by leaps and bounds.” On those few occasions when investors requested some cash from their individual, entrusted funds, Madoff was able to pay them from funds recently deposited with him from newer investors.
This is called a “Ponzi Scheme” – participants are promised returns on “investments” usually in stocks, but which are actually paid for by the new investors, while a central leading figure takes a large and undisclosed portion as never agreed upon “commission”.
A Ponzi scheme is related to – and often confused with – a Pyramid scheme where financial returns to early investors are based on recruiting new members to make investments (from which the central fraudster deducts undisclosed and never agreed profits). This business model eventually becomes unsustainable when earlier participants cannot be fully compensated because new participants cannot be recruited forever to provide new cash to cover the fraudster’s withdrawals.
Ponzi and Pyramid schemes are unlawful. Leaders are almost always caught eventually and sentenced to long prison terms. Bernie Madoff was sentenced to decades in prison, where he died. Meanwhile, all his investors lost most of their savings and many had to severely limit their standard of living.
AUTO MANUFACTURER
Volkswagen was eager to sell more vehicles in the expanding diesel fuel market. Governments began to regulate diesel fuel emissions for air quality by utilizing testing equipment on cars provided to the testing authorities. VW was able to pass those tests by covertly modifying its emission system to understand when a test was occurring in contrast to regular consumer driving conditions.
Eventually a company employee (“Whistleblower”) complained confidentially to the U.S. Environmental Protection Agency (EPA) about VW’s fraudulent testing. The EPA responded with more sophisticated testing, confirmed the impermissible diesel emissions, and levied a multi-million dollar fine against the VW corporation. Of course, management claimed the problem on an unintentional malfunction in its emission systems and / or the work of a “rogue” technician trying to cover up his own mistakes.
VW thus suffered payment of a large fine plus some initial bad publicity. Presumably some employees were also terminated.
PHONE SCAMMER
MF recruited coworkers (HE bribed them with payments of $922,000 over five years) in a call center to use their credentials to unlock AT&T phones. He sold the illegal phone-unlocking service through online retailers, somehow making millions of dollars for himself. Eventually AT&T software detected the problem and traced it to the scheme’s lower-level participants, who cooperated with the government’s law enforcement agency to identify the ringleader to reduce their potential prison time (eventually 18 months in return for their cooperation).
MF was extradited to the US from Pakistan and in September 2021, was sentenced to 12 years in a US prison for the crimes he admitted to, which caused significant financial losses to AT&T, some of which had been passed on to consumers through increased prices.
Were the $1,000 a night hotels and a $30,000 watch worth 12 years in prison?
FAKE COUPONS
Beethoven translated the music in his head into black notes on paper. Michelangelo painted ceilings from his imagination. LT perfected the art of counterfeiting merchandise coupons which were virtually indistinguishable from genuine coupons.
The “tools of her trade” were glossy paper, corporate logos, and a computer to stitch together text, pictures, and bar codes to make what are known as “Frankenstein” counterfeits, all the while keeping track of everything on a spreadsheet.
Over three years, LT and her husband cheated manufacturers and merchants out of more than $31,000,000 by producing bogus coupons that gave customers merchandise at steep discounts in exchange for payments to fraudsters LT and her husband.
The FBI has been cracking down on such operations in recent years. The LT operation was based in Virginia, but the FBI has also apprehended a “dark-web or dark-side coupon group” involving 87 participants in Texas, spanning 23 states. In August 2020, a grand jury indicted 12 people in California for a scheme to steal millions of dollars’ worth of electronics with fraudulent discounts.
Of course, LT and her husband were eventually caught by law enforcement when one of their customers reported suspicion of their fake coupons to the police. Both pled guilty: LT to counterfeiting and her husband to mail fraud. She was sentenced to 12 years in prison for being the mastermind and he to 7 years in prison for aiding and abetting the criminal scheme.
GOVERNMENT BENEFIT CLAIMS
Falsely claiming insurance government benefits is one of the oldest scams in the modern world. Since LT and her husband believed they had mastered a difficult scam: forging merchandise coupons (see above), they believed it would be relatively easy to collect benefits from the US government’s Medicaid and Supplemental Nutrition Assistance Program for which they were not legally entitled.
LT and her husband were sentenced to 12 years in prison for this scheme, to be served concurrently with their prison terms for fake coupons.
INCOME TAX EVASION
When LT applied for Medicaid benefits, she failed to report her husband’s legitimate income and the money made from their coupon scam. If she had reported the scam income, she would not have qualified for Federal Medicaid assistance. So, the coupon scam led to additional Federal criminal charges involving Medicaid fraud and income tax evasion.
Editor’s note: LT and her husband were not so smart after all. Perhaps after bragging to fellow prisoners about their triple crimes spree, they will take the rest of their 12 and 10 year prison sentences to review the wisdom of their criminal efforts and conclude that they should have borrowed money to purchase a legitimate business franchise (e.g. McDonalds, 7-11 and Dairy Queen for a few examples) and together use the same amount of energy to earn an honest living, file accurate tax returns and sleep peacefully in their home, dreaming of vacations and retirement instead of line-ups for prison food.
ANTIQUITIES ARTS DEALER
NW owned and operated a New York city gallery known for its expertise in ancient Asian artifacts, selling items to major museums in Australia and Singapore plus auctioning off other such art objects at famous auction houses Christie’s and Sotheby’s. The sales price of the sold items ranged from $100,000 to $1,500,000.
For decades, NW bought the items she later resold, from known dealers of illegally exported antiquities based in Afghanistan and Pakistan. However, she admitted that she often knowingly provided her buyers with false statements confirming they had been acquired from a private collector.
In addition to her intentional fraud, NW was willing to not ask questions about the legality of some of the antiquity art she was buying, which showed possible signs of having been looted, such as dirt and debris encrustation on the objects, which would not have existed on objects lawfully obtained in the first place.
Purchasers of the illegally sold items were unaware – often buying them sight unseen through remote bidding at auctions. After the sale, suspicious buyers retained experts for close inspection of the art objects, who in turn notified law enforcement that the objects were likely illegally obtained (“looted”). Investigation followed, culminating in NW’s arrest and guilty plea, for which she agreed to pay $1.2 million in forfeitures and fines. She is likely to also be imprisoned for several years pursuant to Federal sentencing guidelines for fraud.
NEW, REVOLUTIONARY! TECHNOLOGY
Elizabeth Holmes graduated from Stanford University, a school with a high degree of peer recognition for the career achievements of many of its graduates over the years. Ms. Holmes became the public face of a start-up business, Theranos, based upon – what she described to be – revolutionary technology to determine from one or just a few drops of blood, a myriad of diseases and predictors of disease.
Ms. Holmes filed required documents with the government to create a corporation, issue stock and solicit investments in her company. Her solicitations for funding included statements of fact regarding the already proven performance of this new equipment’s technology. Additionally, she included the corporate logo of several well-known corporations, indicating those corporations were business partners, without first receiving their consent.
While investors continued to pour major funding into Theranos, one employee working on the technology knew that it had not achieved results as advertised to the public. The employee spoke confidentially to a newspaper, which published an expose leading to criminal fraud charges when Theranos filed for bankruptcy.
Ms. Holmes defended herself at the jury trial by trying – unsuccessfully – to charm and persuade the jury that her statements were more possibilities than actual accomplishments and that any investor should have appreciated the risk when investing in new technology. She was convicted and sentenced to prison for several years.
‘GO FUND ME’ (for my secret ‘get rich quick’ scheme)
According to the online request for donations, an adult female’s car ran out of gas on a busy highway exit ramp during an evening storm. A homeless man living under the highway gave the lady his last $10 to buy gas. In appreciation, the lady and her husband wanted to upgrade his housing, clothing, medical care, and basic living conditions.
Contributions soon poured into the Go Fund Me website, totaling over $300,000. The husband-and-wife team provided some (actually, very little) of that money to the homeless man, who revealed the truth after the background story to the donations request went ‘viral.’ A lawyer volunteered to assist the homeless man understand who was or were the actual beneficiaries of the donations. Soon it was learned that the husband-and-wife team had used most of the money to pay for an exotic car and several vacations.
The ‘Go Fund Me’ business calculated the amount which should have been paid to the homeless man and paid him that amount in full, to maintain the integrity of their business, which discloses – in advance – to donors its small deduction from any contributions, to cover its business expenses.
Meanwhile, the local prosecutor filed criminal fraud charges against the couple, who each pled guilty and were sentenced to prison; the fraud creator (‘mastermind’) for 5 years, his girlfriend for 2 years, which should be sufficient time behind bars for each of them, with little else to do other than taking the time to realize that their cleverness would have been put to better use in working toward honest careers.
