Honesty is for the most part less profitable than dishonesty.
— Plato
Hope is necessary in every condition.
— Samuel Johnson, 18th Century
Sometimes I lie awake at night, and ask,
Where have I gone wrong?
Then a voice says to me,
“This is going to take more than one night.”
— Charles M. Schulz, 20th Century
THEY COOKED THE BOOKS
A Humorous Look at the World of White-collar Crime
By Patrick M. Edwards
Smashwords Edition
Big Island Publishers
Hilo, Hawaii
2011
| — | — |
THEY COOKED THE BOOKS
A Humorous Look at the World of White-collar Crime
© 2011 by Patrick M. Edwards
Back cover and portrait
© 2010 by R. W. Smith, Hilo, HI
No part of this book may be reproduced, copied, used, or transmitted in any form or by any electronic or mechanical means including information and retrieval systems, or otherwise, without the expressed written permission of the author and/or publisher. All existing copyrights worldwide are in effect with this work.
Library of Congress Control Number: 2011914170
Business & Economics / Business Ethics
ISBN: 9780982934715
Big Island Publishers, LLC
RR #2 Box 4755
Pahoa, HI 96778
Cover & interior design by
David G. Barnett
Fat Cat Graphic Design
This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each person you share it with. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.
| — | — |
CONTENTS
ACCOUNTING FRAUD
4. Birds of a Feather Flock Together
5. If You Lie Down with Dogs, You’ll Get Up with Fleas
8. The Rotten Apple Spoils the Barrel
EASY MONEY
11. They Could Sell You the Brooklyn Bridge
15 Pull the Wool over Someone’s Eyes
16. A Wolf in Sheep’s Clothing
A FOOL AND HIS MONEY ARE SOON PARTED
17. Believe Only Half of What You Hear
19. It Sounds Too Good to be True
20. Fools Rush in Where Angels Fear to Tread
21. You Can Fool Some of the People All of the Time
TAKEN TO THE CLEANERS
22. Never Give a Sucker an Even Break
23. There’s a Sucker Born Every Minute
24. Taken for an Arm and a Leg
26. It’s Not Worth the Paper It’s Written On
27. Now You See It, Now You Don’t
WHAT’S DONE IS DONE
29. That’s Water Under the Bridge
31. What’s Done Can’t Be Undone
32. It’s all Over but the Tears
33. It’s Not the End of the World
LIVING THE HIGH LIFE
40. The Love of Money Is the Root of All Evil
41. The Rich Get Richer, the Poor Get Poorer
42. Power Corrupts, Absolute Power Corrupts Absolutely
MUM’S THE WORD
46. Ask Me no Questions and I Will Tell You no Lies
49. There Is Honor Among Thieves
EXPOSED TO THE LIGHT OF DAY
56. The Handwriting Is on the Wall
THIS IS A FINE MESS YOU’VE GOTTEN YOURSELF INTO
60. That’s a Fine Kettle of Fish
61. Going to Hell in a Hand-basket
62. The Straw that Broke the Camel’s Back
THE TRUTH, THE WHOLE TRUTH, NOTHING BUT THE TRUTH
67. The Truth Will Come to Light
68. A Guilty Conscience Needs No Accuser
69. Honesty Is the Best Policy
A DOSE OF ONE’S OWN MEDICINE
70. What Goes Around, Comes Around
71. The Chickens Come Home to Roost
76. Let Him Stew in His Own Juices
FLEW THE COOP
82. You Can Run, but You Can’t Hide
THROW ‘EM IN THE CLINK
83. Crime Doesn’t Pay (Or Does It?)
85. Lock ‘Em Up and Throw Away the Key
86. The Bigger They Are, the Harder They Fall
87. You’ve Made Your Bed, now Sleep in It
88. Revenge (Vengeance) Is Sweet
BEAT THE RAP
94. It’s a Miscarriage of Justice
BUSINESS AS USUAL
95. A Leopard Can’t Change His Spots
96. You Can’t Make a Silk Purse out of a Sow’s Ear
98. It’s Déjà Vu all over Again
100. It Takes a Thief to Catch a Thief
THAT’S ALL, FOLKS
| — | — |
Preface
This book’s genesis was on one of those rare, warm San Francisco summer days. Instead of there being a bitter chill due to the wind and fog that often blow in from the Pacific, which once caused Mark Twain to say, “The coldest winter I ever spent was a summer in San Francisco,” it was delightfully pleasant.
As part of my daily routine as a pharmaceutical sales rep, I stopped in at a client’s pharmacy expecting the usually good-natured proprietor to brighten my already sunny day. Instead, I got a gloomy story about a particular stock the pharmacist had bought.
“They cooked the books,” he said. “I lost all my money.”
He was in no mood to chat, so I bade him farewell; and as I approached the front door, lightning struck: “They Cooked the Books.” What a misfortune for Tony, but what a wonderful title for a book on Wall Street fraud!
People use a multitude of expressions about fraud: “Taken to the cleaners,” “The cat’s out of the bag” and “Living high off the hog,” I wondered when these sayings came about and what their original meanings were.
Today, we use these expressions in everyday speech, and the examples above are just a fraction of those that can apply to the topic of Wall Street fraud. During my research for this book, I found more than 500 that could apply and chose the most relevant 100 to include here.
My goal in writing this book is to present the origins, meanings and examples of well-known expressions used by many, on a daily basis, to refer to white-collar crime, especially Wall Street fraud.
In studying a hundred of the most relevant, I was intrigued with how far back the phrases’ origins go, and how the meanings of most haven’t changed much over the years. Most that have changed are expressions dealing with the white-collar fraud so prevalent in the 19th and 20th centuries. The idiom “cooking the books,” for example. Originally it meant altering the ingredients of a recipe, but its contemporary meaning has to do with accounting fraud.
Hence, this book is about the origins of phrases, idioms and proverbs dealing with the topic of crime – in particular, the white-collar crime so rampant in society today. In fact, the idiom “white-collar crime” first appeared in 1939, when Professor Edwin Sutherland said, “There is a vast difference between white-collar and blue-collar crime, and high social status has a lot to do with the distinction. White-collar crime is often committed by a person of respectability in the course of his or her occupation.”
An idiom is defined as a group of words whose meaning is different from the meaning of the individual words; hence, “cooking the books,” in its modern usage, is an idiom dealing with accounting fraud. In contrast, a phrase can be defined as a group of words that carry a particular meaning when used together, such as “creative accounting.”
No discussion about white-collar crime would be complete without the proverb as a main character. Just the word “proverb” conjures up thoughts of right and wrong, so it should come as no surprise that one of the most well known proverbs – “The love of money is the root of all evil”- is a chapter in this book.
Some of my examples, not specifically relevant to fraud, are included because they are especially interesting, come from well-known people, or are commonly used. In most cases, the italics within the quotes referenced in this book are my own emphasis.
Having been a victim of white-collar crime myself on more than one occasion, I could not refrain from including some of my own views. An example is found in Chapter 1, “Accounting Fraud,” where I talk about the rather ineffective regulation of the securities market by the SEC. Another is the epigraph at the beginning of Chapter 27 (one of more than 100 in the book), which is a satirical quote by me: “What is the Security and Exchange Commission? It is a government agency that facilitates the exchange of your securities for useless investments.”
— Patrick M. Edwards, 2011
| — | — |
There are lies, damn lies, and statistics.
— Benjamin Disraeli
PART 1
ACCOUNTING FRAUD
| — | — |
The SEC roars like a mouse and bites like a flea.
— Harry Markopolos
“They cooked the books.” “I lost all my money in the stock because the company used ‘creative accounting’ to make it look like the company was thriving.”
Many of us have heard this, or similar, and some have experienced it. A company alters its books to present a glowing balance sheet to the market, resulting in an undeserved increase in its stock price. When this is exposed to the light of day, hundreds of investors lose their shirts, though the top executives will have bailed out before the stock “tanked.”
The idiom “cooking the books” seems to have first appeared in 1636, coined by the Earl of Strafford in his Letters and Dispatches, where he states, “The proof was once clear, however, they have cooked it ever since.”
These words refer to changing the ingredients of a recipe, and not the alteration of a balance sheet. Modern usage began in the 18th century, when the Scottish author Tobias Smollett wrote in his book, The Adventures of Peregrine Pickle, “Some falsified printed accounts, artfully cooked up, on purpose to mislead and deceive.”
Bill Condie used the idiom in a piece appearing in the [London] Evening Standard in April 2005: “‘Cooking the books is like a crack habit,’ says former Enron CEO Kenneth Rice, who admitted to cooking the books twice to hide weak results in one of the first cases involving the failed giant conglomerate to reach the courts. ‘I called it one more hit of crack cocaine,’ Rice said.”
In a Beetle Bailey cartoon, written by Greg and Mort Walker and appearing in newspapers on May 15, 2009, a new recruit had this exchange with Sergeant Snorkel:
“I was under investigation for corporate fraud, so I joined the army.”
“Do you have any military experience?” Snorkel asked.
“No, but if you need someone to cook your books, I’m your man.”
Can Wall Street ever be reformed?
Starting soon after the Great Depression, the Feds made many attempts to get that type of financial miscarriage – perpetrated by Wall Street firms and leading to investors losing a lot of money – under control. The Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC, are only two of many bills signed into law since then in an effort to bring this type of financial industry injustices to a halt.
The piece of legislation with the most profound effect for keeping Wall Street in check was the Glass-Steagall Act, which was signed into law by Franklin Delano Roosevelt on June 15, 1933. Virginia Senator Carter Glass and Alabama Congressmen Henry Steagall argued that a single bank entity should not control financial products with such widely varying levels of risk that could cause damage to the American public. This post-Wall Street crash legislation prevented commercial banks from merging with investment banks, thus eliminating the opportunity for the high-rolling investment guys to get their hands on limitless supplies of depositors’ money. Glass-Steagall was nothing short of a barrier that stayed in place for more than sixty years, but major U.S. banks wanted it abolished.
Fast-forward to 1999, when after many attempts by the powerful banking lobby to repeal Glass-Steagall, President Clinton finally yielded and signed into law the Financial Services Modernization Act (also known as Gramm-Leach-Bililey). One key impact was the repeal of Glass-Steagall. In April of 1998, though, a merger occurred prematurely in direct defiance of Glass-Steagall (while federal regulators sat idle) when Citicorp and Travelers/Smith Barney merged into Citigroup, which was then able to sell securities, take deposits, make loans, underwrite stocks, and sell insurance.
A large number of corporate fraud cases throughout the 1990s prompted the SEC to institute yet another law to regulate the securities industry. In an article titled “Bush Tells Wall Street to Stop Cooking the Books,” by Toby Harnden on the website thetelegraph.co.uk. (July 2002), Harnden writes, “Confronting his toughest domestic challenge since September 11, President George W. Bush told Wall Street yesterday that its ‘days of cooking the books, shading the truth and breaking our laws’ had to end.” Bush referred to signing into law the Sarbanes-Oxley Act, which set new or enhanced standards for all U.S. public company boards, management and public accounting firms, stating it included “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt.” Due, possibly, to the agency’s incompetence, this new act had little effect on its ability to prosecute fraud on Wall Street.
Madoff whistleblower Harry Markopolos, in his 2010 book, No One Would Listen, A True Financial Thriller, has this to say about the SEC: “After [Bernie] Madoff’s collapse, we would succeed in exposing the SEC as one of the nation’s most incompetent financial regulators…. The last thing any of us expected (after Markopolos’ fraud investigation team submitted the last documents titled, “The World’s Largest Hedge Fund is a Fraud,” to the SEC in November 2005) was that the New York office would take the evidence and basically bury it…. In retrospect, I don’t know why I was surprised. Expecting the New York office to respond any differently than it had in the past was sort of like handing the Three Stooges a rubber mallet and expecting them not to hit each other over the head with it.”
Even federally formed corporations are not immune to balance sheet manipulations. In his book, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (2009), Lawrence G. McDonald writes: “Four days before Christmas, December 2004, Franklin Delano Raines—named for the thirty-second president of the United States—had suddenly quit his exalted post as chairman of the board of the Federal National Mortgage Association (Fannie Mae)…. He accepted what was being called an early retirement, but in truth, he was trying to duck out from under shocking allegations of accounting irregularities—to increase his multimillion-dollar bonus.”
“A Wall Street Giant Falls from Grace” was a headline in the Orange County [CA] Register in April 2010. In that letter, which appeared in the Opinion section, Orange County Treasurer Chriss W. Street writes, “Goldman Sachs continues to demonstrate its truly global ability to bring misery to the world and profits to itself. A panel of senior European Union officials has launched an investigation with Goldman’s culpability for the near-collapse of the Greek economy…. Goldman found a way to miraculously make hundreds of millions by cooking the books for Greece to appear $10 billion richer.”
In an article titled “Analyst: Citigroup Is Cooking The Books,” published at foxbusiness.com in August 2010, Charlie Gasparino writes, “An all-out war has broken out between Citigroup CEO Vikram Pandit and a prominent securities analyst [Mike Mayo of the securities firm CLSA] who is saying that the big bank may be cooking the books by inflating its earnings through an accounting gimmick, FOX Business Network has learned.”
In his foreword to Markopolos’ book No One Would Listen, David Einhorn writes, “One time I pointed out to a Wall Street analyst that a certain company was ‘cooking the books.’ The analyst responded that it made him more confident in his bullish recommendation because such a company would never disappoint Wall Street.”
| — | — |
[Some] Accountants are the witch-doctors of the modern world and willing to turn their hands to any kind of magic.
— Sir Charles Eustace Harman
Statistics are often used to create some of the most common misleading financial statements. “Creative accounting” (also known as “balance sheet manipulation”) is the practice of producing financial accounts that suit a particular purpose, but do not really show the true value of the company or its profitability. Sometimes an accountant may wish to show favorable profits to determine bonuses, or at other times, losses to owe less tax. A healthy balance sheet is presented to get a bank loan, and an unhealthy one so that management can get a buy-out bargain.
The term “creative accounting” – a modern label for “cooking the books” – seems to have been first uttered in the 1968 film The Producers. In that movie, Professor Irwin Corey claims his CPA isn’t exactly crooked, though the government is questioning him about his “creative accounting.” Another phrase, “Hollywood accounting,” gets its name from what is said to be its frequent application in the entertainment industry. Expenditures can be inflated to reduce or eliminate a project’s profit, thereby reducing the amount that the corporation must pay in royalties.
The 2002 accounting scandal at Enron was the first of many high profile, 21st-century companies practicing innovative or aggressive accounting procedures. In his book Unaccountable Accounting: Games Accountants Play, Abraham J. Briloff, professor emeritus at CUNY’s Baruch College, begins with a corporate president interviewing three auditing firm representatives. The president asks:
“How much is two plus two?”
#1 replies: “It’s four.”
#2 replies: “It ranges from three to five.”
#3 replies: “What do you want it to be?”
“Creative accounting” is here to stay. In this decade alone, there have been a multitude of corporations, including such household names as AIG, WorldCom and Qwest Communications, known to have committed accounting fraud.
American humorist Evan Escar (1899-1995) nailed the situation when he defined “statistician” as “a man who believes figures don’t lie, but admits that under analysis some of them won’t stand up.”
In April 2009, Eric Dash wrote a New York Times article called “Creative Accounting Helps Citigroup Return to Profit,” He writes: “After more than a year of crippling losses and three bailouts from Washington, Citigroup said it had made money in the first quarter of the year. But the headline number—a net profit of $1.6 billion—was not quite what it seemed. Behind that figure was some fuzzy math. Like several other banks that have recently reported surprisingly strong results, Citigroup used some creative accounting in the earnings reported Friday, all of it legal, to bolster its bottom line at a pivotal moment.”
Bill Moyers and Michael Winship, in an April 2010 post titled Crocodile Tears on Wall Street at the website smirkingchimp.com, talk about fraud on Wall Street: “To simply call all of this creative accounting is to do it an injustice. This is corruption, cynicism and greed on a scale that would make the Roman Emperor Caligula cringe. Or rather, the Emperor Nero. He didn’t just poison the citizens of Rome; legend has it that he burned the place down, fiddling around in the ashes, just like our Wall Street tycoons.”
Michael Lewis, in his New York Times best-selling book The Big Short: Inside the Doomsday Machine (2010), writes, “All these subprime lending companies were growing so rapidly, and using such ‘goofy [creative] accounting,’ that they could mask the fact that they had no real earnings, just illusory, accounting-driven, ones. They had the essential features of a Ponzi scheme.”
Markopolos used yet another term for “creative accounting:” “Enron’s Ken Lay and Jeff Skilling had bankrupted that company and defrauded millions of energy consumers of billions of dollars; and WorldCom’s Bernie Ebbers had been convicted of using phony accounting to defraud investors of as much as $11 billion.”
Another term, “aggressive accounting,” was used by New York Times Op-Ed columnist Paul Krugman in his book The Great Unraveling, Losing Our Way in the New Century (2005). Klugman writes, “Here’s a scary question: How many more Enrons are out there? Other companies have engaged in aggressive accounting, the art form formerly known as fraud. But how likely is it that other major companies will turn out, behind their imposing facades, to be little more than pyramid schemes?”
In an October 2010 business section of The New York Times, Catherine Rampell’s article “Creative Accounting in California” asks a question: “Why worry about budget deficits when you can merely assume they won’t exist?” Rampell refers to an Associated Press story by Don Thompson: “California lawmakers got their first look Wednesday at a proposal that attempts to end the state’s record-long budget impasse…. The deal reached late last week…does not contain new taxes or fees. Instead, it relies on a series of assumptions and accounting maneuvers….”
| — | — |
Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened.
— Winston Churchill
In 1796, Edmund Burke wrote, “Falsehood and delusion are allowed in no case whatsoever; but, as in the exercise of all virtues, there is an ‘economy of truth.’” Plain and simple, the idiom “economy of truth” is a euphemism for lying, and more specifically, it is the conveyance of an untrue version of events by leaving out important facts.
Being “economical with the truth” is used euphemistically to describe a person who lies or deliberately withholds information. There is little reference to the use of this phrase in the U.S., but it appears frequently in the British media.
It was used in the 1986 “Spycatcher Trial” and entered modern usage after British Cabinet Secretary Sir Robert Armstrong used it in evidence. (The trial was being conducted to prevent publication of a book by a former British M15 internal security agency operative.)
Lawyer: “What is the difference between a misleading impression and a lie?”
Armstrong: “A lie is a straight untruth.”
Lawyer: “What is a misleading impression—a sort of bent untruth?”
Armstrong: “As one person said, it is perhaps being economical with the truth.”
In 1992, Alan Clark of the Matrix Churchill Arms Company in England was accused of illegally exporting munitions machinery to Iraq. During his trial, the attorney for the British Government department responsible for managing the import and export of goods and services (HM Customs) embellished the expression:
Clark: “Well, it’s our old friend, being economical, isn’t it?”
Lawyer: “With the truth?”
Clark: “With le verite (the truth).”
Clark and two others were eventually cleared, as reported in the London Evening Standard article headlined, “Iraqi Arms Deal Trial Collapses.”
Faisal Islam on Channel 4 [London], February 4, 2009, is quoted using the phrase: “A depressing slipup, or economical with the truth?” Islam reports, “Gordon Brown talks about taking action to bring the world out of depression, a word seized on by conservatives and a slip that may prove costly. After Prime Minister’s warnings about the dangers of talking down the British economy, his use of the dreaded ‘D’ word is bound to come back to haunt him.”
In a January 2009 blog posting at bnet.com, titled “Five Ways to Tell if Staff Are Lying,” Julian Goldsmith writes, “With unemployment on the rise, more people will do anything to get jobs or keep them. This can mean being economical with the truth, on CVs, at job interviews, in disciplinary sessions and reviews.”
In his book Colossal Failure of Common Sense, Lawrence McDonald asks, “Have you ever noticed how, both in life and in corporations, one small piece of economy with the truth often leads to full-blooded deceit, and the copper-bottomed, southern-fried lie?”
Accounting Fraud
| — | — |
4: Birds Of A Feather Flock Together
For the most part fraud in the end secures for its companions repentance and shame
— Charles Simmons
People with similar characters and backgrounds, especially the propensity to commit fraud, are attracted to one other, which is a critical component in pulling off an act of fraud. The ancient Greek philosopher Democritus (circa 360 B.C.) stated: “Creatures flock together with their kind, doves with doves, cranes with cranes and so on.”
In 1545, a papist satire by William Turner, titled The Rescuing of Romish Fox, used the expression, “byres of a keened and color folk and flyer always together.” And in the 1599 Dictionarie in Spanish and English, English lexicographer John Minsheu wrote, “Birds of a feather will flock together.”
Numerous other printed accounts throughout time use this phrase, such as James Joyce’s classic book, Ulysses, first published in its entirety in 1922. In it, Joyce writes: “I have more than once observed that birds of a feather laugh together.”
The Enron accounting scandal of the early 90s, involving Kenneth Lay and Jeffrey Skilling, is a perfect example of two “bad boys” who “flocked together” to instigate the downfall of a once small-but-honest company, and who caused investors to lose millions. Lay faced up to 45 years in prison and huge monetary fines but died of a heart attack before being incarcerated.
“8 Banks Close in Calif., Fla., Mass., Mich., Wash.” headlined an April 2010 article by Bob Chapman at theinternationalforecaster.com. Chapman writes: “The lineup goes down the block and around the corner for prosecutions against Goldman Sachs…and the public picks up the bills. The CEO of Goldman is Lloyd Blankfein, who says he is doing God’s work…. and Fabrice Tourre, a Goldman VP, has had a civil complaint leveled against him by the SEC. As we say, birds of a feather flock together.”
A January 2010 article titled, “Barack Obama really, really (hearts) Nancy Pelosi” appeared in the latimes.com. In this “Top of the Ticket, Political Commentary From Andrew Malcolm” blog post, Malcolm states, “Most of all Obama needs…Nancy Pelosi to herd this House-full of cats [House of Representatives] to defy mounting pressures from the party’s left and come along with him [on his healthcare legislation].”
The post generated this comment from a reader: “Birds of a feather flock together. Unfortunately, the birds in this flock turn out to be buzzards, picking over the stinking remains of what is left of a legislative slaughter that includes Universal Health, Cap ‘n’ Trade, and a stimulus bill that stimulated nothing but taxpayer anger….”
Also at latimes.com, the October 2010 post “Carly Fiorina says Sarah Palin is qualified to be president,” ran in the PolitiCal column. Anthony York reports, “U.S. Senate candidate Carly Fiorina said Monday that Sarah Palin has the credentials to be president. ‘I certainly think she’s qualified to be president of the United States,’ said Fiorina in an interview on CNN’s The Situation Room.” This generated the comment: “As they say, birds of a feather flock together! I fear for our country when people support candidates like Sarah Palin, Rand Paul, Sharon Angle, Christine O’Donald, Michele Bachmann and the like. Ms. Fiorina, you will not get my vote with this endorsement.”
| — | — |
5: If You Lie Down With Dogs, You’ll Get Up With Fleas
The fact that a great many people believe something is no guarantee of its truth.
— W. Somerset Maugham
“People who associate with disreputable characters will be harmed.” This quote first appeared in J. Sanforde’s 1573 Garden of Pleasure, and is similar to the Latin “qui cum canibus con-cumbunt cum pulicibus surgent” (he who lies down with dogs will rise with fleas).
On the Columbia Journalism Review website, Ryan Chittum’s November 2009 post is titled “McClatchy: Goldman Laid Down with Dogs.” Chittum writes that McClatchy Newspapers had been “looking much more closely at how Wall Street fueled the mortgage crisis and how it was deeply connected to the shadier parts of the housing industry.” He quotes McClatchy’s writer Greg Gordon: “…One of Wall Street’s proudest and most prestigious firms helped create a market for junk mortgages, contributing to the economic morass that’s cost millions of Americans their jobs and their homes.”
David Seaton uses the phrase about the impeached Chicago Mayor Rod Blagojevich, in his News Links blog post of December 10, 2008:
Lie down with dogs, get up with fleas, is a self-explanatory Spanish proverb, which teaches that although we may not even belong to the same species, too much intimate contact with lesser beings can have disagreeable consequences for us. The saying is, in essence, the national and international significance of the Blagojevich scandal: Chicago politics are as corrupt as it gets and no matter how clean you are…there is no way you can lie down with those dogs without developing at least a mild rash.
Joseph Farah writes, in his January 2010 Between the Lines blog post titled “Lie down with the dogs:” “There is an old axiom that says, ‘If you lie down with dogs, you wake up with fleas.’” He continues: “Years ago, my good friends at Google decided to lie down with dogs anyway—despite my warnings. Like many corporate giants of the past, Google chose to get in bed with the totalitarian Chinese government—agreeing to censor search results to please its hosts in Beijing.”
| — | — |
It is difficult but not impossible to conduct strictly honest business. What is true is that honesty is incompatible with the amassing of a large fortune.
— Mahatmas Gandhi
At one time, corporations appeared to be so trustworthy that they were rarely suspected of wrongdoing, but now it seems that people on Wall Street can do whatever they want without being asked questions. The idiom “above suspicion” refers, of course, to someone or something that is so trustworthy as to never be suspected of wrongdoing.
According to English historian Charles Merivale, in his 1850 book A History of the Romans Under the Empire, the phrase “above suspicion” came into being about 62 B.C. and was used in connection with Caesar’s second wife, Pompeia. According to rumors circulating at the time, her name was linked with Publius Claudius, a notoriously dissolute man of the time. Caesar did not believe such rumors, but made it clear when he divorced her that even Caesar’s wife must be “above suspicion.”
On the website silicon.com, Will Sturgeon’s October 2006 post “Beating Fraud – Can Business Intelligence Help?” states: “Banks are understandably an attractive target for fraudsters. But SAS’ Director of Marketing Strategy [Peter] Dorrington said nobody is immune – every company with a revenue stream is a potential target and no employees should be above suspicion.”
In McDonald’s A Colossal Failure, he uses the phrase: “Everywhere you looked there was something that seemed fishy, and no U.S. corporation was above suspicion; there were too many guys headed for the slammer.”
In an April 16, 2010 huffingtonpost.com article about Dean Pope, a keynote speaker who addressed the National Association of Bond Lawyers, the writer refers to his speech titled “Be Above Suspicion.” In it, he says, “Lawyers practicing in the municipal securities market should make sure they are above reproach.… This means that we assume the worst and so advise clients that, like Caesar’s wife, we and they must be above suspicion.”
On April 28, 2010, businessinsider.com published an article written by Mike “Mish” Shedlock titled “Merrill Accused of Same Fraud as Goldman Sachs.” He writes: “That Merrill Lynch now stands accused [of investor fraud] should not surprise anyone. Nor will it be any surprise if Morgan Stanley and Citicorp are accused of similar dealings. Indeed, it may be interesting to see who is not accused.”
This led to the following reader comment: “Most confidence games start as the name implies, with gaining confidence of the mark or pigeon. Goldman, like Madoff and Enron, simply assumed they were above suspicion and used confidence to take candy from babies.”
A similar-meaning idiom, “above board,” means to be open, transparent and without trickery and certainly should apply to a company’s accounting practices. Some speculate that “board” refers to the deck of a ship, which concealed pirates below decks in order to lull victims into a false sense of security.
Or “above board” may have originated in card playing, when players were required to keep their hands above the table (the “board”) to be seen playing fairly. Beaumont and Fletcher’s 1616 play The Custom of the Country includes this line: “Yet if you play not fair play and ‘above-board’ too, I have a foolish gin here, I say no more” [laying his hand upon his sword].
| — | — |
No man is above the law and no man is below it, nor do we ask
any man’s permission when we ask him to obey it.
— Theodore Roosevelt
The definition of “above the law” is a person or legal entity, such as a company or corporation, which considers itself exempt from the laws that apply to everyone else.
The origin of “above the law” dates to at least the 17th century, but was popularized by the 19th-century British constitutional theorist A.V. Dicey. Dicey emphasized three aspects of “The Rule of Law,” his second point being that no one is “above the law,” and everyone is equal before the law regardless of social, economic, or political status.
“The Rule of Law,” itself, is an ancient idea. Around 350 B.C., Plato wrote, “Where the law is subject to some other authority and has none of its own, the collapse of the state, in my view, is not far off, but if law is the master of the government and the government is its slave, then the situation is full of promise and all people enjoy all the blessings that the gods shower on a state.”
In a March 2010 interview that Charlie Rose conducted with Michael Lewis, author of the bestselling book, The Big Short, Lewis talked about corporations who act as if they are “above the law.” “People on Wall Street could do whatever they wanted without being asked questions, but that era has now changed,” said Lewis. “Wall Street firms have misallocated trillions of dollars and destroyed a great deal of wealth and in that period they have paid themselves more than they had ever paid themselves.”
Elizabeth Weintraub wrote an article titled “Big Banks Push Sellers to Commit Mortgage Fraud,” for about.com. She writes, “Some short sale banks think they are above the law. Short sales are supposed to be transparent transactions, but some short sale banks encourage sellers to commit mortgage fraud. They do it openly because the banks don’t seem to care, or perhaps they are above the law.”
An April 2010 post at wallstreetgeek.blogspot.com: “Well…well…! As it turns out, Wall Street is not above the law after all. While we expect much of the Street is calling the SEC charge against Goldman Sachs a witch hunt, we cannot imagine the SEC filing the kind of charge it did today without darn solid proof of wrongdoing. So Wall Street is not ‘above the law….’”
MIT Professor Simon Johnson wrote the April 2010 article “Goldman Sachs: Too Big to Obey the Law,” at huffingtonpost.com, where he talks about Wall Street investment banks being too big, too important, and acting like they should be exempted from the laws that apply to everyone else. This inspired a comment: “These large banks have set themselves apart and determined that they are above the law. They are not above the law!”
A May 2010 cnn.com post authored by Ben Rooney and titled “Wall Street Cops Get Tough” talks about how the SEC is stepping up its enforcement efforts significantly in the wake of failing to spot the largest Ponzi scheme on record last year (by Bernie Madoff). Rooney writes:
The government unveiled two high-profile cases of financial fraud Thursday as federal regulators look to crack down on Wall Street shenanigans. The Securities and Exchange Commission said Pequot Capital Management, a Connecticut-based hedge fund, agreed to pay $28 million to settle insider-trading charges dating back to 2001. Separately, federal law enforcement officials arrested a New York-based investment advisor, Kenneth Ira Starr, on charges of running a $30 million fraud that implicated a local politician. Rooney then quotes IRS special agent Patricia Haynes, “Today’s legal action sends a signal to those would-be investment fraudsters that they are not above the law.”
An October 2010 post by Barry Ritholtz on ritholtz.com, titled “Why Foreclosure Fraud Is So Dangerous to Property Rights,” talks about why rampant and systemic foreclosure fraud by banks is so dangerous to the American system of property right and contract law. Ritholtz’s concluding point: “There is simply no reason we should tolerate unlawful property seizure merely when it is done by banks. They are not the State, not the King, and not above the law.”
| — | — |
8: The Rotten Apple Spoils The Barrel
We are inclined to believe those whom we don’t know because they have never deceived us.
— Samuel Johnson
Even if only one person in a corporation is initially practicing deceit, he or she will eventually draw others into the fraud, “spoiling” those nearby. The proverb “The rotten apple spoils the barrel,” in various forms, can be traced back to 1340 and the Latin Pomum compunctum cito corrumpit sibi junctum (A rotten apple quickly infects its neighbor).
Benjamin Franklin used a variation in 1736, writing in his Poor Richard’s Almanack: “The rotten apple spoils his companion.” One hundred fifty years later, in 1885, it appeared in the English publisher Henry George Bohn’s handbook of proverbs.
In All the President’s Men (1974), Carl Bernstein and Bob Woodward write, “…Gordon Liddy got up and made a speech about how this one bad apple, McCord, shouldn’t be allowed to spoil the whole barrel.” And in 1987, President Reagan’s Secretary of State George Schultz said, on Meet the Press, “The rotten apple in the barrel is in the form of Nicaragua.”
In a 2006 Beacon News [Aurora IL] article titled “MetLife Among the Best for Annuities,” Malcolm Berko writes about the annuity market with disdain, stating that annuities pay the highest commission to the salesman, and their annual expenses plus contract clauses and poor performance “sock it to the client.”
Berko continues: “These annuities, like rotten apples, spoil the barrel. The salesman receives a twelve to fifteen percent commission when you buy their product, the annuity company charges its clients as much as four to seven percent per year for expenses and management fees, the selling broker gets a continuing annual fee (as much as one percent) for every year you own that annuity, and the annuities’ mutual funds contain some of the worst-managed and cheapest funds in the business.”
Bethany McLean and Peter Elkind used this phrase in their 2003 book The Smartest Guys in the Room, The Amazing Rise and Scandalous Fall of Enron, writing: “The board was duped. I don’t see any other answer. These things could not have happened without [CEO Jeff] Skilling being a part of it….” And, “There was nothing there for the board to have reason to suspect something was wrong….” They wrote, “A few bad apples spoiled the barrel.”
| — | — |
Men must have corrupted nature a little, for they were not wolves, and have became wolves.
— Voltaire
PART 2
EASY MONEY
| — | — |
It looks like more than 13,000 people were caught up in that Madoff Ponzi scheme. You know what a Ponzi scheme is? That’s where you throw good money after bad, or as the government calls it, a stimulus package.
— Jay Leno
Ponzi artists are “confidence men,” meaning they win trust through exaggerated claims of special knowledge and influence, promise much higher returns than other investments and so get people to part with large sums of money. In fact, the phrase “con artist,” a uniquely American one, is derived from the phrase “confidence men.” In his 2010 book House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, William D. Cohan writes: “Wall Street is a confidence game as much as anything, for counterparties on routine trades to start asking pointed questions about things as fundamental as cash and liquidity is not likely to be good for business.”
A “Ponzi scheme” occurs when an unrealistic investment return is promised to investors, and then a second group of investors is used to pay off the initial group. After exorbitant returns are earned by investors (paper profits only), most stay in the investment and even add to their positions, and word spreads of this “fantastic opportunity” for huge gains.
In these types of scams, known as “affinity fraud,” a fraudster usually exploits the trust and friendship of an identifiable group, according to Tom Ajamie and Bruce Kelly in their 2010 book Financial Serial Killers, Inside the World of Wall Street Money Hustlers, Swindlers, and Con Men. The SEC elaborates: “Affinity fraud refers to investment scams that prey upon members of an identifiable group, such as religious or ethnic communities, the elderly, or professional groups.” Ponzi schemes certainly fall into this category, and as Ajamie and Kelly write, “The fraudsters who promote affinity scams frequently are—or pretend to be—members of the group.”
It was first called a Ponzi scheme in Boston in 1920, when one of the most fraudulent investment rackets in history occurred. Charles Ponzi, an Italian immigrant, devised a scheme centering around international pre-paid postal reply coupons, which had a fixed exchange rate set in 1906. World War I had since devalued many of the world’s currencies. Ponzi converted dollars into devalued currencies, and then bought postal coupons at the fixed, 1906 rate. If the value of a foreign currency dropped by 60 percent, Ponzi could buy American stamps at a 60 percent discount and then sell them at face value. Through his Security Exchange Company, he recruited friends to invest with the promise of a 50 percent return in 45 days and a hundred percent in 90 days.
However, this scheme of making money with postal reply coupons was essentially a come-on to lure investors into his scam. As in all ploys of this type, the fraud was eventually exposed, causing 10,000 investors to lose most of the $10 million they had invested.
In 1920, Charles Ponzi was convicted of mail fraud and sentenced to five years in federal prison. Immediately upon his release, he was arrested by the state of Massachusetts for larceny, convicted, and sentenced to seven years in state prison. After years of public denial, Ponzi finally admitted his fraudulent ways to a journalist on his deathbed in 1949 in Rio de Janeiro.
Wall Street’s biggest Ponzi scheme ever came to light in December 2008, after Bernard L. Madoff confessed to his sons that his business was a fraud. (His sons turned him in to the SEC.) The former NASDAQ chairman (1990, 1991, and 1993), “Bernie” Madoff was arrested for securities fraud, investment advisor fraud, mail and wire fraud, money laundering, perjury, and making false filings with the SEC. His investors, who lost a reported $50 billion, were banks, pension and asset management funds, insurance companies, and individuals—many of whom were “bled dry.”
As early as 2000, Markopolos, the independent fraud investigator and Madoff whistleblower, sent the SEC information on fraud being perpetrated by Bernard Madoff. Markopolos said that Madoff was either front-running stocks [a form of insider trading] or running the largest “Ponzi scheme” in history. In his book, No One Would Listen, Markopolos writes: “[The SEC] being the industry’s watchdog was deaf, blind, and mute.” And, “We had invested countless hours and risked our lives, and had saved no one—although eventually, after Madoff’s collapse, we would succeed in exposing the SEC as one of this nation’s most incompetent financial regulators.”
Markopolos summed up Madoff’s arrest poignantly. “Finally, on December 10, 2008, he supposedly told his two sons that his investment business was a fraud, basically, a giant Ponzi scheme. Early the following morning, December 11, 2008, two F.B.I. agents knocked on his front door and asked him if there was an innocent explanation. He shook his head. ‘There is no innocent explanation.’ The two agents immediately placed him under arrest. The largest Ponzi scheme in history had finally collapsed.”
Was he ashamed of what he did? It was apparent throughout the prosecution process that he had neither guilt nor remorse, even though many of his victims were his friends.
Dr. Mari Terzaghi is a Manhattan psychologist quoted by Michael Lewis in his 1999 book, The Money Culture. Of Madoff, and other Wall Street thieves, she says, “It is through their work they are regaining a sense of omnipotence that they once had in childhood. Many of these people are narcissistic and treat other people as need-satisfying objects. They feel as though they deserve to take.”
In The Madoff Chronicles, Inside the Secret World of Bernie and Ruth (2009), author Brian Ross writes: “It would turn out to be the biggest financial crime in the history of Wall Street, far eclipsing the 1980s insider trading scandals involving junk-bond financiers Michael Milken and Ivan Boesky. They were small-time operators compared to Madoff.” Ross continues, “From Madoff’s point of view, the incompetence of the SEC [in the agency’s 2007 investigation] had once again kept him in business.”
And as reported in The New York Times by Diana B. Henriques on June 29, 2009, Madoff was sentenced to 150 years in prison. She writes, “Mr. Madoff, looking thinner and more haggard that when he pleaded guilty in March, stood impassively as Federal Judge Denny Chin condemned his crimes as ‘extraordinarily evil’ and imposed a sentence that was three times as long as the federal probation office suggested and more than 10 as long as defense lawyers had requested.”
Finally! People who committed white-collar crime were being sentenced appropriately for the inexcusable fraud they perpetrated against investors. Madoff “faced the music,” got “tarred and feathered,” and ended up “stewing in his own juices.” Too frequently, I believe, people committing white-collar crime either get away “scot free” or are sentenced to very little jail time and end up allowing other fraudsters to think “crime does pay.”
| — | — |
The public will believe anything, so long it is not founded on truth.
— Edith Sitwell
The earliest surviving written use of this phrase was in a 1608 comedy by English dramatist John Day called, “Law-Trickes, or, Who Would Have Thought It?” He wrote: “What a cock and bull he told my father.” In 1621, Robert Burton used the saying in his book, The Anatomy of Melancholy, where he wrote, “Some men’s whole delight is to talk of a cock and bull over a pot.”
The early 17th-century French term “coq a l’ane” is defined in Randle Cotgrave’s A Dictionarie of the French and English Tongues (1622) as meaning “An incoherent story, passing from one subject to another.” The literal translation of “du coq a l’ane” is “from rooster to jackass,” which nicely fits with “cock and bull.” It later passed into the Scottish language as “cockalayne,” which has the same meaning.
Perhaps the most intriguing account is from the north Buckinghamshire town of Stony Stratford, now part of the city of Milton Keynes and famous for the origin of a cock and bull story. Dating back to the late 18th century, Stony Stratford was an important coach stop between London and the north, and passengers were a great source of current news. The town’s two main inns, “The Cock” and “The Bull” (both still exist), developed a rivalry as to who could furnish the most outlandish and scandalous tales.
A November 10, 2009 comment at the message board scam.com talks about mortgage fraud in Arizona: “Watch out for a company out of Arizona that is scamming people left and right. This company is called Consolidated Opportunities and they give you the biggest cock and bull story about how they will set you up with your website that harvests leads for the mortgage industry and then they proceed to tell you that they will give you a $12,000 ad campaign for only $6,000….”
The vulgar, 20th-century American slang expression bullshit is more commonly used, but both mean a fanciful and unbelievable tale where the intent is to deceive. A “bullshit artist” is someone who habitually exaggerates, flatters, or talks nonsense.
In the 2006 book Confessions of a Wall Street Analyst, A True Story of Inside Information and Corruption in the Stock Market, by Daniel Reingold and Jennifer Reingold, the authors write, “Ed [Greenberg, a telecom analyst from Morgan Stanley] took one look at my house and almost started laughing. ‘You ought to come to Wall Street and hit the big time,’ he said. ‘I’m serious. You’d be good at it, you’d make plenty of money, and you’d get to do analysis all day long instead of just parroting management bullshit.’
“Parroting management bullshit? I was offended—until I realized that he was absolutely right. That’s exactly what I’d spent much of the last year and a half doing in investor relations. My job was not to express my own opinions but rather to pass on the company’s party line.”
On the website dealbreaker.com, in April 2010, Bess Levin posted an article titled “Is A London-Based Investment Banker About To Make A Few Millions Pounds Off Lloyd Blankfein?” She refers to “an absurd story [that] appeared in the Wall Street Journal, which quoted an unnamed senior London-based investment banker, who’d said he’d bet a bunch of people at Davos a few million pounds that Lloyd Blankfein would be out as CEO of Goldman Sachs within two years. It was ridiculous…! All of this is ‘bull shit,’ obviously.”
| — | — |
11: They Could Sell You The Brooklyn Bridge
If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.
— Paul Newman
The expression “They could sell you the Brooklyn Bridge” originated in America in the first half of the 20th century, when, as a joke, newly arrived immigrants were asked if they wanted to “buy the Brooklyn Bridge.”
In C. David Heymann’s 1989 book titled A Woman Named Jackie: An Intimate Biography of Jacqueline Bouvier Kennedy Onassis, he wrote, “At that moment, she [Jacqueline Kennedy Onassis] could have sold me anything, from an Edsel to the Brooklyn Bridge.” In the weekly newspaper Crain’s New York Business, the following appeared in 1989: “Forget the Brooklyn Bridge. What investors want now are Brooklyn Banks.”
It’s similar to the phrase, “He could sell ice to Eskimos,” which alludes to a highly persuasive speaker, or a slick salesman or con artist that is able to talk you into buying something unnecessary. In 1992, Abigail Van Buren, “Dear Abby,” wrote, “This agent was a traveling salesman, and a very successful one. Man, what a line he had! He could sell sand to the Arabs, and ice to the Eskimos.”
The Internet supplies numerous examples. A March 2010 huffingtonpost.com post by Janet Tavakoli is titled, “Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold” and states: “Congress should act immediately to abolish credit default swaps in the United States because these derivatives will foment distortions in global currencies and gold.” It spawned a comment: “…Think it through and you will see what I mean. I’m here to sell you the Brooklyn Bridge. Now I’m back to sell you a promise that, if the other guy can’t pay for the Brooklyn Bridge (you see, I sold it simultaneously to ten thousand of you…), I’ll guarantee payment. Now I’m going to take that contract and sell it….”
On MSNBC’s newsvine.com, a September 2010 article about a weight-loss scam was titled, “Acai Berry Scam: You’ll Lose Money, Not Weight,” and it generated this comment: “If anyone believes there is a quick fix to losing weight, how about I sell you the Brooklyn Bridge.”
A post on huffingtonpost.com (October 2010) titled “Scores of Republicans Who Opposed Stimulus Sought Funds In Private Letters,” was based on a story from the Center For Public Integrity. Documents obtained from the Center For Public Integrity state: “Scores of Republicans and conservative Democrats who voted against the $787 billion American Recovery and Reinvestment Act subsequently wrote letters requesting funds for projects in a massive, behind-the-scenes letter writing and phone call campaign.”
That generated a comment, “Anybody surprised? Really? I’d like to sell you the Brooklyn Bridge and throw in the Everglades for good measure….”
In “Would You Buy the Brooklyn Bridge in New York City?” an April 2010 examiner.com article by Pauline Dolinski, she writes: “Brooklyn was settled in 1636 by Dutch Farmers…. The building of a bridge was first considered in 1857…. Work began in 1870…[and the bridge] finally opened in 1883.… According to the Museum of Hoaxes, the bridge became the subject of scams as soon as it was built, and was said to have been sold many times….”
| — | — |
It is always the best policy to speak the truth — unless, of course, you are an exceptionally good liar.
— Jerome K. Jerome
“It’s a snow job” is a slang expression that originated during World War II and alludes to the idiom “snowed under.” Contemporary usage has someone giving someone else a “snow job,” which means to deceive, persuade, or overwhelm with insincere talk, usually, but not always, having to do with swindling money. Another resource alludes to snow as making things appear differently that as they really are; or to hide fine print.
In February 2005, a U.S. NewsWire article reads, “U.S. Representative McCrery was accused of selling a snow job in his dire predictions about the future of Social Security.” It continues: “The Campaign For America’s Future began airing ads today on Louisiana television about the Washington-style snow job Representative James McCrery, R-La., is pulling on the people of Louisiana on Social Security. Treasury Secretary John Snow plans to visit Louisiana this week to bolster Rep. McCrery’s support for President Bush’s privatization plan that cuts guaranteed Social Security benefits.”