This is in response to
the article: "Gangster Bankers: Too Big to Jail" and ensuing conversation on Hacker News.
Disclaimer: Due to the
nature of this story, I had to omit certain details for legal and security
reasons. I am not a lawyer, and my interpretation of these events and legal
ramifications may have changed since they occurred.
For context, this story takes place primarily between 2004
and 2008; before Bernie Madoff and the collapse of Lehman Brothers. The US had
recently been attacked on 9/11, President Bush was in office, and the national
priority was the war in Iraq/Afghanistan. Newsrooms weren't covering financial
markets as investigative journalism was being cut from budgets, the FBI was
spending their time on terror hunts, and right under our noses billions of
dollars were being funneled illegally overseas. “White collar crime,” and the
attention it receives today, did not exist.
I was 20 years old at the time this happened. I had founded
my first company one year prior. Things were going well and I had 8 seed stage
investors supporting the company. Our largest investor, a great guy and farmer from
Oregon, had the ability to appoint a Board member to the company. He introduced
me to an individual whom he had invested in previously as a possible selection
for the board seat. Little did we know, the individual he introduced me to was
a professional con artist. My investor would later lose his investments to this
person. Here is my account of the story and some of the things I learned.
1) Trust
your gut
The first thing that gave me a weird feeling was how many
things in common the con artist and I had. He grew up in the same area, had the
same background and said all the right things. However when recounting the
conversation afterwards I realized I couldn't tell you a specific thing about
him, what exact school did he go to, what exact city did he live in, what was
the exact name of his previous company? A good con artist can empathize enough
to get close to you, but not enough to get themselves stuck in a corner.
2) Pay attention to
legal names and details
I ultimately found the information leading to the con
artist’s discovery by doing a reverse phone number/address look-up which showed him
having a slightly different last name. This led me to search his old name, and
realized he was using an alias. It is
common in fraud for individuals and companies to use slight variations of their
name. e.g. “Brian” instead of “Bryan” or "Simms" instead of "Sims," or
variations of company names such as, “ABC International,” “ABC International
Group.” This is easier to lose in the paper shuffle and is easier to blame on a
“clerical error.”
3) State to state
laws are a joke
It turned out the con artist had changed his name and was
hopping from state to state committing securities fraud. His former state of
Idaho knew him as Person A, but California knew him as Person B. I contacted
the Department of Corporations in each state after learning Idaho had sued him
for securities fraud. Bottom line, when someone leaves your state and crosses
state lines, the previous state doesn't care. You could do this seven or eight
times before it popped up on a federal level.
4) Pump and dumps
happen a lot
If you've seen the movie Boiler
Room, it isn't far from the truth. The way the con artist would make money was
by acquiring stock in young, often real, companies using a different name, with
other people’s money, eventually claiming it as his own. What start-up company
wouldn't want an investor’s money, right? Wrong. The con artist would then
“help” the company execute a Reverse Merger, often referred to as a “Backdoor
IPO.” Reverse mergers allow a shell company to acquire a real company and
become an instantly tradable stock so investors have the ability to sell the
stock on the open market which is how the con artist could get quick liquidity.
Usually there is a lock-up period, but the insiders ultimately dumped their
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.
5) Isn't it
somebody's job to be regulating all this?
Yes, and they’re really bad at it. A 20 year old was able to
uncover something multiple government agencies could not. Here are some
examples:
a) I contacted the states to notify
them that the individual was committing tax evasion and owed back taxes. They
said call the IRS.
b) I called the IRS and informed
them I had legal proof, his name, aliases, address and even his bank and
routing information obtain from my investor. Their response: "I'm sorry sir,
unless you have his legal identity and Social Security Number there is nothing
we can do." Wait, so if someone changes their name you don’t pursue them? This
seems a little self-defeating.
c) The con artist was foreign to
the United States, so in the height of the national security scare I figured a
foreign person in the US changing his identity might be of interest to Homeland
Security. Nope, they don’t deal with stock related issues. That is the SEC's
job (Securities and Exchange Commission).
d) I contacted the SEC with the
information, which they ignored. I would find out years later that there were
three different SEC offices (New York, SF, and Philadelphia) that were all
investigating the same case but didn't know it.
e) I used the FBI's online form to
submit information the fraud to their white collar crime group. Never heard
back. Years later I read an article talking about how 20,000 agents from the
FBI were reassigned to fight terrorism and away from financial crimes. And we
wonder how the banking meltdown happened?
6) Death of the
investigative journalist
With the government not investigating the fraud, I went to
the media. 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. Here were a few reasons why it
didn't get covered:
a) Young college
drop-out/entrepreneur is not a credible source
b) Too difficult to prove
c) Legal ramifications and costs
were too high for the media outlets
d) Not enough readership interest
e) News rooms had cut most
investigative journalists
7) Follow the money
It turned out the con artist was only one fraction of a much
bigger puzzle. Through exhaustive investigation of public financial documents
and research on edgar.sec.gov, I realized that there was not just one pump and
dump, but a whole series of pump and dumps organized by an international
holding company, in excess of $1 billion. Each pump and dump ranged from $100mm
to $300mm and there were about six to seven of them over a four to five year
period. The international holding company was actually an organized crime group,
with offices in Barbados and the Cayman islands committing fraud in the US.
8) Pump and dumps
have a number of similar things in common
Some of the consistent things that were done in each pump
and dump were:
a) Have some type of product an
average investor might not understand, typically technology or medical related
b) Create products in a long
development cycle. e.g. "Waiting for FDA approval"
c) Have general traction overseas,
which is harder for investors to vet
d) Get "big name" people behind the
companies to get social acceptance
9) Too big to be
scammed
Two years into this search, I found that a separate group of
wealthy investors, out of another state, had filed a class action lawsuit
against one of the portfolio company pump and dumps. The group included a
descendant of an unnamed, multi-generational billionaire family and a former
Deputy Director of the CIA. I called them up to share the information I had
uncovered. I’ll never forget when someone walked to my office and said, "ABC is
on the phone for you." I proceeded to share my information and what I had
uncovered.
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. While you would think his contacts could help push the
investigation along, it turns out losing a little bit of personal money is a
whole lot less important than everyone finding out a Former Deputy Director of
the CIA and prominent investor was conned.
10) Too little, too
late
Finally, after several years of notifying the SEC of the
pump and dumps, they launched an official investigation. Since I notified them
the stock lost over 90% of its value.
11) News began
disappearing
With all of the attention being paid, the organized crime
group started erasing their trails. Websites started coming down. Press
releases began disappearing. And even scarier, the few news stories actually
written about the investigations were removed from media websites. I had to
take screen captures to be able to actually prove what I was saying to be
correct.
12) Bankruptcy and
settlement
In order to silence the class action lawsuit from Texas, the
fraud portfolio company ultimately filed for bankruptcy and settled with the
investors. As part of the terms, investors with insider information were
required to not discuss details of the case. These same investors who were on
the verge of bankruptcy after losing all of their money had to take the deal.
The organized crime group effectively severed one of its companies for the rest
to survive.
13) Fraud and
terrorism
This is the point where you start to feel like a raving lunatic
claiming there are organized crime groups tied to terrorism…but it's true. When
I started this crazy investigation, I knew nothing about reverse mergers, SEC
filings or fraud. So do you think it is ironic that more than three differing
circumstances had people or organizations linked indirectly to terrorism?
Probably not. At this point, if an idea seems too crazy to be true, it probably
is.
In reality the United States would be much better off if it
focused on the funding sources for terrorism as opposed to terrorism or drug
trafficking itself.
14) End result
The portfolio company shut down. The class action investors
settled. The SEC stopped investigating because they had nothing left to pursue.
The organized crime group slowed down their deal flow, probably due to too much
attention. The man behind the fraud bought a 20 bedroom mansion in Barbados with a private
beach.
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 I guess the moral of the story is watch your ass out
there and don't be afraid to ask questions.
Please direct all comments to Hacker News. Thanks to dbcooper
