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New Technology, Old Scam

10/16/2002Clifford F. Thies

Perhaps you have received an e-mail such as the following (which I have edited):

I am _____, the personal assistant/in-law to the late General Robert Guei of Cote D'Ivoire who was killed in an arranged military mutiny last week.

I wish to solicit for your confidential assistance to receive the total of US$56M (Fifty-six Million United States Dollars) urgently without revealing my identity. There is an urgent need to do so in order to relocate my family and the new orphans of the late general and his aged mother. There is US$40M deposited in two financial homes in Europe and US$16M deposited in cash in a security company here in Africa.

We have resolved to give you 20% of the total sum only upon confirmation of the money in any account of your choice either personal or company where the incident of taxation will not take much tool on it.

Should you decide to help us, contact me immediately via email with your personal phone and fax numbers for easy and confidential communication and for more details. We have concluded a wonderful plan to conclude the transfers in two weeks. Please note that this transaction is 100% confidential and will never endanger you or us in any way.

Or this one (which I have also edited):

I am ____, Chairman, Ministerial Contracts Evaluation and Implementation Committee in the Federal Ministry of Aviation. My position is very sensitive. I am due for retirement any moment from now, after many years in service. 

I require urgently, your unreserved assistance in providing me with a safe and reliable bank account with full details VIZ: Name and Address of Bank, Telephone, Telex and Fax Number anywhere in the world where I can transfer the sum of $25.5Million United States Dollars. 

The purpose of transfer is to take care of my retirement by investing in a viable business you might deem fit to advise. 

Since the inception of the present government, series of contracts have been awarded by the Federal Ministry of Aviation based on supplies. The above sum (US$ 25.5 m) has shown in record as surplus from some of the over‑invoiced contracts carried out in the last developmental quarter. Presently, I have arranged for the money to be kept in coded bank account with the central Bank of Nigeria until I am able to source for a reliable expatriate partner whom I can present as the rightful beneficiary of the fund. You will take the status of the contractor who executed the contract and I will arrange the supportive documents for the transfer. 

25% will go to you for making available to us a company or personal account number, giving me your unreserved assistance and keeping strictly the rules of this transition until transfer of the fund is affected. 5% is for any contingencies and all miscellaneous expenses incurred during the course of the transaction procurement of vital documents, tips and all expenses including phone/fax bills, hotel bills, taxes and bank charges must be reconciled upon confirmation of the payment by Central Bank of Nigeria (CBN). 70% will be shared between me and a few colleagues of mine whose help will be highly needed throughout this period in question. 

These are obviously scams.  They appear to be promises to share enormous amounts of money of dubious origin, playing on a mix of sympathy and greed.  If there is anything real about them, it is that they are efforts to obtain your money.

Sometimes, in this scam, the sucker's money is simply taken out of his account after receiving the necessary access codes.  More traditionally, the fool is to be separated from his money in a follow-up conversation, after he goes for the bait, in which he is told that he has to advance some money because of a glitch in the transfer of the loot.

Except for the use of contemporary technology, there's nothing new about it.  The "Nigerian scam," now involving a number of African countries, has been around since 1991.  Originally, it was circulated via the mail.  Only recently has it gotten circulated via the internet.

Perhaps the first such major scam in American history was the Great Ingraham Hoax of 1865.  In this scam, an enormous estate, worth six to ten million dollars (which was a lot of money back then), was said to be left by an Englishman to his American granddaughter.  But, because of problems in recovering the estate, a person representing himself as an attorney for the American heiress offered $100 from the estate for each $5 advanced to cover the expenses involved in the effort.  See the scrip illustrated below issued by this person.

The most famous scam in American history was the Ponzi Scheme of 1920.  In this scam, Charles Ponzi, an immigrant to this country, promised investors 50 percent interest for ninety days (an amazing 200 percent annual rate of interest, even ignoring compounding!).  And, for a while, he actually was paying 50 percent interest for ninety days.

People started lining-up to turn their money over to him, altogether 40,000 did, investing an average of $300 each. How could he pay such a spectacular rate of interest?

Well, it is now obvious, once he got his scheme going, he was able to pay interest to old investors from the money provided by new investors.  Very little money was actually invested in productive assets.  But, the supply of suckers—while large—is limited, and soon he was forced into default.

When he was arrested, he was found to have had a criminal record, forgery, to be exact.  Then, after serving some time in jail, he returned to his native Italy and got a job in the Italian airlines.  There, he helped Mussolini run the planes on time until he lost his job after he turned informant when he was refused a share of a kick-back scheme.  Petty thieves like Charles Ponzi should know better than to mess with organized crime!

Ponzi schemes are alive and well in the world today.  In Albania, in 1997, when that country was freed from its ultra-orthodox communist regime, the ex-communist bosses ran banks based on the ponzi scheme that duped the majority of the people of the country.  They thought, now we're a free country, we should be rich like the Italians just across the Adriatic.  First of all, they weren't quite free, just a little less repressed than they had previously been.  But secondly, freedom only gives you the opportunity to increase wealth by hard-work and entrepreneurship.  Choosing well makes you rich.  Choosing badly makes you poor.

In Haiti, this year, the Clinton Administration-installed dictator Aristide got a ponzi scheme underway by recommending "cooperatives" run by his left-wing cronies.  Supposedly, these co-ops were going to make enormous profits for their member-owners because, as any good communist knows, the managers of capitalist enterprises are nothing but leeches on the economy.  When this ponzi scheme went bust, Aristide was not without an explanation.  The United States was to blame!

I should point out that capitalism is a very flexible system, and can include cooperatives as well as proprietorships, partnerships and corporations, as well as other forms of business.  We have many fine cooperatives in our country that don't rely on government grants of monopoly but rather on their ability to serve their member-owners well.  But, there is nothing magical about these cooperatives, and they don't offer anybody the kind of returns promised by scam artists.

The California Department of Corporations identifies the top ten frauds of today as:

  1. Promissory notes.  E.g., nine-month promissory notes, offering high rates of interest, and claiming to be unregulated by the SEC by reason of some technicality (not unlike the original Ponzi scheme).         
  2. Internet fraud.         
  3. Telemarketing fraud.         
  4. Investment seminars and financial planning.         
  5. Affinity group fraud.  This typically involves offering members of ethnic or religious groups "special deals" on investments or diamonds or other commodities.         
  6. Abusive sales techniques by broker-dealers and agents.         
  7. "Viatical investment scams." This typically involves the offer to sell shares in life insurance policies of people suffering from aids or other terminal illnesses.         
  8. High tech investments.  This typically involves the offer to sell shares of ownership of high tech products or services to unsophisticated investors.         
  9. Entertainment.  This typically involves the offer to sell shares in movies supposedly having enormous profit-potential without disclosure of the risks involved.         
  10. Multi-level marketing / Ponzi schemes / Bunco. A catch-all category including a variety of scams.

A common thread running through many of these frauds is that the normal structures for evaluating the worth of new or risky ventures are represented to be untrustworthy.  Banks, insurance companies, pensions, mutual funds, finance companies, venture capitalists, and so forth, take some care when making investment decisions to consider the risks involved, including the risk of fraud.  To be sure, this effort doesn't guarantee anything, it just improves the odds.

Sometimes, a person happens to be in a better position than a financial institution to evaluate the risks involved in an investment.  Or, because of family or other connections, can influence the risks involved.  For example, your brother wants to go into business for himself and needs some initial capital.  You know your brother is an honest and hard-working person.  At the least, you're willing to trust him with a few thousand dollars because he's your brother.

And, often in scams, the scam-artist will try to convince the sucker that this is an occasion when you are in a better position than a financial institution to evaluate the risks involved.  For some reason, financial institutions—not even venture capitalists—won't get involved.  However, you—a person picked at random, whose only qualifications are, first, you have some money and, second, you don't have any particular expertise—you can make a lot of money if you do.

Normally, the pool of suckers is limited to people who are at least somewhat ignorant of the capitalist system, and therefore don't know what is reasonably possible in terms of investment returns.  Suckers tend to think that profits are based on theft and exploitation, instead of on hard-work and entrepreneurship, and they want a piece of the action.

But, there are times when there is a society-wide outbreak of foolishness and greed.  At these times, the normal rules of investments seem to be repealed, and the values of assets such as real estate and stock prices rise higher and higher without any connection to earning power.  Among such times have been the Dutch Tulip Mania, the Mississippi Bubble, the South Seas Bubble, and, more recently, the Japanese Balloon Economy of the 1970s, and the Dot.Com Balloon Economy of the 1990s.

In these Financial Manias, something real is almost always involved.  In 16th Century Holland, the growing wealth of the middle class following the country's independence and adoption of free trade, meant that more and more people would want luxuries like tulips in their lives, objects of beauty and not merely of survival.  The production of tulips, however, cannot be easily increased. So, demand initially outstripped supply, and tulip bulbs rose in price.

After the rise in price (it is now obvious) was irrationally extrapolated into further rises in price, the Tulip Mania got underway, leading eventually to a bust when rationality suddenly returned to the country.

Much the same thing happened during our Dot.Com Balloon Economy.  The internet is truly a marvelous advance in technology.  It offers many advantages both to the way we do business and to the way we enjoy life.  But, it did not usher in nirvana.  The stock market (it is now obvious) got ahead of itself, way ahead.  I can hardly believe the extent to which I myself bought into it!

And along with the outbreak of foolishness and greed comes an outbreak of corporate fraud and theft.  Look at the aftermath of the Panic of 1837.  During the 1830s, a speculative boom got underway in our country, with some reason.  The west (meaning places like Mississippi and Illinois) was being opened, canals and railroads were tying our markets together, and immigrants were flocking to our lands.  The values of real estate and of corporate stocks were soaring, and banks were rapidly expanding the money supply.

Then, for reasons historians debate, it all fell apart.  And when it all fell apart, the fraud and theft and recklessness got uncovered.  Yes, during the panic, the banks suspended.  But, following the panic, when the banks were to resume, many proved unable, that is, failed, and many of them because of embezzlement, defalcation and insider-dealing.  (These are all fancy words describing bank robbers who enter the bank by the back door.)

I have come across dozens of bank failures during that time due to the criminal activities of bank officers, directors and employees.  Most spectacular was the failure of the Schuylkill Bank of Pennsylvania, whose cashier stole $1.3 million and then absconded to Texas.

Another speculator failure involved the Mississippi & Alabama Rail Road & Banking Corporation (AKA the Brandon Bank) of Mississippi.  Upon its suspension, great concern arose for its solvency, and the market value of its banknotes quickly fell to 9¢ on the dollar.  A federal marshall was sent to arrest the bank president.  However, the bank president and two other directors of the bank left the state for Texas, taking with them 300 slaves, 50 of them and ten whites armed.  "The Marshall," the Vicksburg Sentinal reported, "went in pursuit, but could not overtake them."  In view of the army amassed by the fleeing bank president, I wonder how vigorously the marshall pursued them.

Not every "bankster" made his way to Texas (possibly to be reincarnated a century later as an Enron executive).  The president of the Bank of Tennessee, for example, when he was caught, hung himself in his jail cell.  According to one estimate, sixty banks failed in the aftermath of the Panic of 1837, at an aggregate loss of $132 million.  The country languished in recession through 1842 or '43.

We, in America, should not gloat over the misfortunes of the Albanians and Haitians, or of those who kept their money in stocks following the Panic of 1837 or the Crash of 2000.  We have our own ponzi scheme to worry about.  A massive ponzi scheme that threatens to bankrupt our entire country.  I'm talking about Social Security.

Social Security worked marvelously for the first couple generations in the program.  They paid little or nothing into the system, and retired on benefits provided by taxing the working-age generation.  The working-age generation was promised that one-day it would be their turn to live off of somebody else.  

For longer than five decades, a growing population provided an expanding tax base from which to support those receiving benefits (even so, the social security tax rate kept being raised).  Then, the passing-through of the "baby-boom" generation allowed Social Security to reap a bonanza of revenue, which was "invested" in the federal government's deficit instead of in productive assets.

Now, the aging of the baby-boom generation looms ever so large before us, and it is growing clear that there will be no fix.  If you want to see what will happen in the United States, look to the welfare states of Europe.  There the disaster will happen first and worst.

Being susceptible to scams, both on an individual basis (being a sucker) and as part of society (being subject to occasional financial manias and to disasters of fiscal policy), is part of life.  Our vulnerability makes us nervous and joining-in is a temptation.

Most of us enjoy the idea of scamming the scammer, as played-out in the 1973 movie "The Sting," starring Paul Newman and Robert Redford, and the winner of the Academy Award for best movie.  There's a certain justice to it.  But, I think the best advise regarding scams is always, "if its sounds to good to be true, it probably is."


Contact Clifford F. Thies

Clifford F. Thies is the Eldon R. Lindsay Chair of Free Enterprise at Shenandoah University in Winchester, Virginia.

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