John Hempton on hotspots for fraudsters

Q: I hear you have a database of dodgy people, listing their actions and associations.  How helpful is this for a short seller?

A: Our database is enormously helpful.

There are also certain hotspots for bad people.  The biggest hotspot is Vancouver, then Toronto.  In the U.S., there's Salt Lake City and Boca Raton.  In Australia, there's Perth and the Gold Coast, in that order.  In the UK there's the AIM market and in Hong Kong there's all sorts.

They all have a reason.

~ John Hempton, "Crisis Talk: John Hempton, CIO of Bronte Capital: 'good things happen to bad people'," GlobalCapital, June 12, 2020

Kevin Duffy on the role of the fraudster

Does the scam artist serve a social function?  Sam Bankman-Fried unwittingly shed light on the corruption of many institutions: venture capital, elite universities, charities, professional sports, Hollywood, mainstream media, ESG rating services, regulatory bodies and the Democratic Party.  Remarkably, he was able to infiltrate their highest levels in the blink of an eye.  Just last May, SBF was rubbing shoulders with the global elites at the World Economic Forum in Davos.

~ Kevin Duffy, "FTX Collapse: Lessons for investors," The Coffee Can Portfolio, p. 8, January 24, 2023

Patrick Boyle lists Victor Lustig's 10 commandments for conmen

So what were Victor Lustig's 10 commandments for conmen?  Maybe they'll help us to spot frauds.

1. Be a patient listener.
2. Never look bored.
3. Wait for the other person to reveal political opinions, then agree with them.
4. Let the other person reveal religious views and have the same ones.
5. Hint at sex talk, but don't follow it up unless the other person has a strong interest.
6. Never discuss illness, unless some special concern is shown.
7. Never pry into a person's personal circumstances (they'll tell you everything eventually).
8. Never boast - just let your importance be quietly obvious.
9. Never be untidy.
10. Never get drunk.

~ Patrick Boyle, "Why We Trust Fraudsters!," YouTube, 20:15 mark, December 9, 2022

(Victor Lustig was a con artist who sold the Eiffel Tower twice and scammed Al Capone.)

Michael Saylor on how Sam Bankman-Fried lost $10 billion of customer money

Here's the diabolical twist: I [SBF] didn't just generate $10 billion of an unregistered security to dump it on the unsuspecting retail.  That would take me 500 trading days, dumping $20 million a day, right?  He didn't do that.  What he did is he generated $10 billion in unregistered security and then just borrowed $10 billion dollars secretly from his depositors and then went and gambled it, traded it, spent it, lost it.  And that is particularly impressive.

[...]

This is also diabolical: FTX said, "we're built by traders for traders" and Sam bragged that they only charged 3 basis points trading fee and he was 30 times cheaper than CoinBase or much cheaper than Binance.  So he's stealing customers off of the other crypto exchanges by, in essence, offering near-free trading.  He's not trying to make money off the trading.  He's trying to get the assets on his platform because once he had the assets on his platform, he basically used FTX as his personal piggybank.

[...]

So Sam basically scraped billions from unsuspecting investors in Silicon Valley.  They should've know better.  He took billions from crypto hedge funds and crypto banks like BlockFi and Voyager.  They should've known better.  And then he took probably $10 billion or more from depositors on his exchange.  They have the best argument.  It's like they were staring at terms and conditions that said he's not going to rehypothecate or use their assets.  He lured them with the promise of cheap trading, high leverage.

~ Michael Saylor, interview with Valuetainment, 5:30, 11:20 mark, December 5, 2022

David Sacks on how a narcissistic fraudster plays to his audience

I just think that these types of guys - you can call it a narcissistic fraudster - they think they can talk their way out of anything.  The average person is not really used to dealing with one of these personality types...  They clearly are smart and articulate and they know what to say and they're crafting their words.  What they've learned in their life is that if they use the precise magic words with the person, they can pretty much convince them of anything, get them to do anything.  And in particular, I would say that investors tend to fall for this, not because investors are dumb, but because investors are so clear about what they're looking for and what they want.  They're predictable.  VCs, especially, we're looking for the 100x outcome.  It's easy for this type of personality to construct a story to essentially stroke the erogenous zones of a VC and sort of trick them.  And so there is probably a positive reinforcement loop that gets created in the minds of one of these people and they start to think that they can basically talk their way out of any situation.

~ David O. Sacks, "There's Something Huge They're Not Telling Us About FTX," 4:10 mark, December 4, 2022

Michael Novogratz on the criminal behavior of Sam Bankman-Fried

Sam is delusional about what happened and his culpability in it.  We could all be dime store psychiatrists.  There's a lot of narcissism there.  There's a lot of grandiosity, but being psychiatrists isn't going to really help.  He needs to be prosecuted.  He will spend time in jail.  They perpetuated a large fraud and it wasn't just Sam.  You don't pull this off with one person...  I'm not saying he even planned this all like a criminal mastermind.  What they did was criminal and they need to be prosecuted for it...  Stanford [SBF's alma mater] is one of the best universities in America and he worked at Jane Street and those guys are fiercely good.  Traders don't forget how they lose money.  It's kind of the DNA of anybody who spends time in this field.  So it's just kind of a pile of malarkey to say, "oh, I didn't understand how much risk we had.  These were huge bets, and they were huge bets made with my money and other depositors' money...  It's "I stole your money and I should've risk managed the money better."  It was the theater of the absurd to some degree...  Some people start off going down the path, they get in trouble and start breaking the law thinking they can get it back.  It's a tale as old as time, right?  And so you might not have started the plan of, "oh, I'm going to go rob everybody," but the moment there was one mistake you start cheating.  And then you start cheating more and then you start cheating more and next thing you know, you've got a $10 billion cheat going on.

~ Michael Novogratz, CNBC interview, December 1, 2022

Peggy Noonan on what drove Elizabeth Holmes

Elizabeth Holmes was just sentenced to 11 years in federal prison for defrauding investors in her famous Theranos scam.  People used to ask why she did it.  By now that’s clear.  She did it to be important.  She wanted to be admired.  She wished to be thought a genius, a pioneer.  She no doubt wanted money, though part of her con was to live relatively modestly—she wore the same black turtleneck and trousers most days.  She wanted status, then and now as Tom Wolfe said the great subject of American life.  And she seemed to think she deserved these things—that she merited them, simply by walking in.  One thing you pick up as you read John Carreyrou’s great reporting, in these pages and his book, is that she seemed not at all concerned with the negative effects of her actions on others.  She didn’t seem to care that investors lost hundreds of millions, people lost jobs, the great men she invited on her board were humiliated.

~ Peggy Noonan, "Psychos in the C-Suite," The Wall Street Journal, December 1, 2022

Derek Van Shaik on the psychological drivers of Sam Bankman-Fried

Many automatically assume crooked rich people want to get rich to be flashy, driving Lamborghinis and be covered in diamonds.  However, there's psychologically more to wealth than merely just the physical objects, such as the associated power of having wealth.  Since the crooked rich usually feel insecure, they are attracted to the power money brings to make themselves feel less insecure.

[...]

For Sam to think he would never get caught and he can outrade everyone stems from hubris and arrogance, which is his elevated sense of self worth.  However, if you look at his body language and behavior, he's quite insecure, constantly looking down in conversation, nervous jitters that test the structural rigidity of chairs, self-comforting hand holds and what appears to be constant nervous stuping smirks...  If you're thinking, "How could Sam be both insecure and arrogant?," it's the opposite side of the same coin.  Extremely arrogant people are extremely insecure.  Their arrogance is a coping mechanism to feel less insecure.  The most secure people are those who can admit when they're wrong, willing to learn and don't feel that they're unbeatable.

[...]

Is Sam a narcissist sociopath?  Possibly, to have that much arrogance, insecurity and apparent disregard for other people.  Sam talks a lot about giving his money away to charity, however constantly speaking of charity is common of a naricissistic sociopath because they are using charity to gain fame, publicity, the appearance of altruism and to hide the truth of who they really are, all the while getting tax breaks.

~ Derek Van Shaik, "How Sam Bankman-Fried LIED Non-Stop to Steal Billions,"  YouTube, 2:30, 5:25, 8:00 mark, 

Peter Elkind and Bethany McLean on what drove Jeff Skilling and brought down Enron

Just as he had when Enron was riding high, Skilling labeled ExxonMobil a "dinosaur" - as thought it didn't matter that the oil giant was thriving while Enron was nearly extinct.  "We were doing something special.  Magical."  The money wasn't what really mattered to him, insisted Skilling, who banked $70 million from Enron stock.  "It wasn't a job - it was a mission," he liked to say.  "We were changing the world.  We were doing God's work."

In the public eye, Enron's mission was nothing more than the cover story for a massive fraud.  But what brought Enron down was something more complex - and more tragic - than simple thievery.  The tale of Enron is a story of human weakness, of hubris and greed and rampant self-delusion; of ambition run amok; of a grand experiment in the deregulated world; of a business model that didn't work; and of smart people who believed their next gamble would cover their last disaster - and who couldn't admit they were wrong.

~ Peter Elkind and Bethany McLean, The Smartest Guys in the Room, p. xxi

Terry Duffy on the baggy shorts image of Sam Bankman-Fried

When you have the greatest quarterback of all time and a supermodel wife doing a commercial, picking up the phones saying, "are you in?, are you in, are you in?".  To me it looks like a pump-and-dump scheme if you watch that commercial, and I watched it again today.  People get very influenced by people like Tom [Brady] and his wife and others - or his ex-wife.  So, no, I'm not surprised.  And I'm not surprised by the baggy shorts and the big t-shirt because it's a gimmick.  And most people that wear a gimmick are also selling a gimmick.

~ Terry Duffy, CEO of CME, CNBC interview with Melissa Lee, 5:00 mark, November 22, 2022

Tim Price on judging character and minimizing the risk of fraud

If people are determined to commit fraud, there is probably not much any of us can realistically do to stop them.  We do recall what won us over to investing in Vietnam, however, some years ago – apart from the extraordinarily attractive valuations and growth prospects of this admittedly frontier market.  We met with the chairman and chief executive officer of the country’s largest securities broker.  We confessed that we had some questions about the standards of corporate governance in the country.  She responded that they had indeed experienced a fraud perpetrated by the bank manager of a local bank.  As a result he had been executed. 

There are, however, certain steps one can take at least to minimise the risk of control fraud and the related risk of catastrophic capital loss.  One is obviously to develop an acute judgment of other people’s character.  One is not to invest in banks.  One is to allow oneself to be naturally drawn to superior allocators of capital, running shareholder-friendly businesses in which they already have a meaningful equity stake.  And one is to diversify anyway, because you simply never know.

~ Tim Price, "There Is Nothing New Under the Sun," Price Value Partners, November 21, 2022

Jeffrey Tucker on market forces revealing reality

I like markets most when they tell the truth.  Politicians don't.  Bureaucrats don't.  Media does not.  But market forces, they can be tricked for a very long time, but in the end there's a hard wall: it's called economic law.  And the numbers in the end have to add up.  So there's nothing Washington can do about this.  We're going to see the truth and I'm excited about these times.  As you say, it's going to be painful, but I'm glad for it because you don't want to live in a world of leverage and fraud and fakery forever living off perpetual motion machines that are going to die out.

~ Jeffrey Tucker, "FTX cryptocurrency scandal is just the beginning," Will Cain Podcast, 28:30 mark, November 15, 2022

Jeffrey Tucker on Sam Bankman-Fried and effective altruism

Will Cain: It reminds me of a company that was founded well over a decade ago and people might remember: Vice.  And Vice had a very charismatic leader who had a flashy lifestyle and said he understood Gen Z, or Gen X, or millennials, or whatever it may have been.  And because of that, he attracted investment from legacy media organizations, hundreds of millions of dollars in increasing rounds of capital raise that continued to push up the valuation of Vice.  And I hear what you're describing now with SBF is he did something similar, although instead of Lamborghinis the way that he got - I think he got - Silicon Valley to give him a ton of money to investing in FTX, or to buy FTT [FTX's token] was through the flashy mechanism of virtue signaling.  That I'm going to give it all away, that I'm altruistic.  And so that sucked in the sophisticated investor?

Jeffrey Tucker: Yeah, that was his value-added to the ongoing cons in this space, and there are many.  But his particular sort of spin on it was to be the innovator of effective altruism, which he describes as a religious conversion.  He realized it was wrong just to make a lot of money, but rather you should make a lot of money and then give it all away.  So just a nice bit of flim flam perfectly constructed for 2019 and 2020.

~ Jeffrey Tucker, "FTX cryptocurrency scandal is just the beginning," Will Cain Podcast, 12:40 mark, November 15, 2022

George Orwell on totalitarianism, force and fraud

A society becomes totalitarian when its structure becomes flagrantly artificial: that is, when its ruling class has lost its function but succeeds in clinging to power by force or fraud.

~ George Orwell

Peter Atwater on the current financial bubble and coming recrimination phase

Major market tops are a process, not a single event. Markets peak on exhaustion; everyone must be in. Meanwhile, in the background, the weakest leave the party first. 

I don’t pretend to know when the market will top – or if it already has for that matter – but what is already clear is what is ahead: "The Age of Screwtiny." 

By “screwtiny” I don’t mean the plain-vanilla kind of investigation and inspection that naturally arises as confidence falls. That is a given. What is coming will be different. Think scrutiny but with an angry attitude intent on finding those responsible and then nailing them to the wall. 

You see, what is ahead will be the third major betrayal in twenty years. After the dot.com debacle and the housing crisis, the crowd won’t take kindly to yet another bubble burst. 

And today’s bubble is different. This time it isn’t tech stocks or real estate; its illusion. Deception has transcended the financial markets. It’s cultural and it is everywhere. From “influencers” on social media to blitzscaled business start-ups, the past decade has been a Gold Rush in fakery.

~ Peter Atwater, "The Coming Age of Srewtiny," LinkedIn, September 22, 2020

Jim Chanos: "The fraud cycle follows the business and financial cycle with a lag"

The fraud cycle follows the business and financial cycle with a lag.  The longer an economic expansion goes on and the longer a bull market goes on, peoples' sense of disbelief is reduced.  And they begin to believe more things that are too good to be true.  Inevitably when the cycle turns down and people get stingier with their capital, since most frauds today are by and large Ponzi schemes or Ponzi schemes once or twice removed, it gets harder to keep the game going because cheap capital's not available and the business models collapse.

Jim Chanos, CNBC interview, April 2, 2020

Bethany McLean on stories of business gone wrong

Stories of business gone wrong are very rarely about bad people setting out to do bad things.  They're almost always this mixture of self-delusion, sheer stupidity, banality, greed - but often greed in the service of ego rather than for the sheer sake of money, maybe a little outright corruption.  But they're these almost Shakespearean stories of very very human weaknesses.  They add up to corruption in the end in many cases, but they don't set out with a deliberate decision to do bad things.

As a journalist you only wish you could find that moment where the leaders of the global financial system sat in a dark, preferably smokey room off Wall Street in 2006 and plotted the demise of the financial system, right?  That would be a great cinematic moment for a journalist, but those moments just don't really exist in these stories.  And so one thing I've learned is that just because really smart people believe in something, it doesn't mean they're right.  And just because they're a true believer, doesn't mean you should be, too.

~ Bethany McLean, "Two Decades of Covering Business: A Journalist’s View, "Mendoza College of Business (University of Notre Dame), April 9, 2019

Kevin Duffy on the changing nature of fraud

As a society, we’ve replaced conscious deceit with self-deceit, targeted fraud with intellectual fraud, and little lies with the Big Lie.

~ Kevin Duffy, May 24, 2019