LAFAYETTE BAR ASSOCIATION Fraud Scams and Schemes Learning

LAFAYETTE BAR ASSOCIATION Fraud Scams and Schemes Learning From History Presented by: Kyle P. Saltzman, CPA, CFE kyles@dsfcpas. com DECEMBER 15, 2017

Original material for this presentation is protected under copyright and assignment to Louisiana State University for use as part of the 2015 LSU Fraud Conference. Portions of the materials are reproduced in whole or in part under permission and release.

Introduction Fraud: A misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. Fraud may also result from silence or inaction. LCC Art 1953; Acts 1984, No. 331 § 1, eff. Jan. 1, 1985

Introduction Ø Fraud generally involves one or more of the following elements: Ø Deception Ø Misrepresentation of material facts Ø False or altered documents (legal documents, expense invoices, etc. ) Ø Evasion (deflection and disinformation)

Introduction Ø Two General Types of Fraud: Ø External Fraud – primarily investment fraud perpetrated by an individual or groups of individuals attempting to voluntarily separate a person or business from their assets, will include identity fraud Ø Internal Fraud – business fraud perpetrated by employees or business partners attempting to misappropriate business assets

Introduction Ø Fraud scams and schemes are an integral part of American history and literature Ø “There is a sucker born every minute” Ø Falsely associated with P. T. Barnum (carnival/circus promoter) Ø Properly attributed to Chicago crime boss Michael Cassius Mc. Donald (1860)

Introduction Ø Fraudsters have become celebrities: Ø Author bestselling autobiographies Ø Subject of documentaries and screen plays Ø Broadway has embraced celebrity fraudsters Ø Frequent lectures and presenters at professional conferences Ø Hired as government employees or consultants

Frank Abagnale, Jr. The World’s Greatest Con Artist “Technology breeds crime, and it always has. ” “Today sitting at home in an apartment with a PC you can reproduce just about any type of document, including currency and paper. ”

Introduction “Every developed civilization, every social change, every notable invention brings a fresh manner of parting the sucker and his money. It may be and actually is only a disguised evolution of an older swindle, but it is new to the victim and therefore attractive. ” Edward Smith, Confessions of a Con Man: A Handbook for Suckers, New York, 1923, p. 175

Introduction Ø Fraud scams and schemes have not fundamentally changed throughout American History Ø Economic opportunity attracts entrepreneurs AND fraudsters equally Ø Technology augments historic fraud scams and schemes Ø Fraudsters exploit emerging technologies and markets

Types of Scams and Schemes Ø Soft Scam Ø Misrepresenting genuine products or companies Ø Usually an opportunistic, spontaneous act Ø Exaggerated insurance claims Ø Removing employer supplies from premises (misappropriation of assets) Ø Borrowing without intent to timely return

Types of Scams and Schemes Ø Soft Scam Ø A questionable practice of downplaying negative business traits and overemphasizing the positive ones Ø Caveat Emptor – let the buyer beware… buyer responsible for checking quality of goods

Types of Scams and Schemes Ø Hard Scam Ø A premeditated, planned and deliberate act ØA Con Ø A Hustle Ø A Swindle Ø A Flimflam Ø A Bamboozle

Types of Scams and Schemes Ø Hard Scam Ø Business scam Ø Involves non-existent company, shell company or fictitious product Ø Fraudster creates illusion of a product or company Ø Investors/victims recruit potential investors who recruit other potential investors

Types of Scams and Schemes Ø Bad Investment Scam Ø An actual product or company with extremely high market and/or financial risk Ø Highly leveraged syndications and private placements Ø Recapitalization of financially impaired or bankrupt company Ø Funding for previously undercapitalized R&D in emerging technologies

Types of Scams and Schemes Ø Bad Investment Scam Ø Investors are assured a high ROI with limited risk Ø High ROI and limited risk are assured to the investor due to the fraudster’s self-professed, but undisclosed: Ø Proprietary knowledge or methods, Ø Experience, or Ø Insider information

Types of Scams and Schemes Ø Affinity Scams Ø Scams targeting members of identifiable groups; Ø Ethnic groups Ø Church or Religious groups Ø Professional associations Ø Often the fraudster is a member of the targeted group

Types of Scams and Schemes Ø Internet Scams Ø A rapidly expanding platform for perpetrating historic fraud scams and schemes Ø Internet provides a virtually infinite population of potential victims Ø Internet provides anonymity for fraudster Ø Fraudster does not have to be located proximate to victim Ø Often incorporates other types of fraud including identity theft and violent crimes

Types of Scams and Schemes Ø Pyramid/Ponzi Schemes Ø Pyramid Scheme Ø Potential investor is offered a distributorship, franchise or exclusive product Ø Promoter represents that direct sales will be profitable, but the sale of shares of exclusive distributorship/franchise will be more profitable Ø Once the supply of potential investors is exhausted, pyramid collapses

Types of Scams and Schemes Ø Pyramid/Ponzi Schemes Ø Ponzi Scheme Ø Fraudster solicits investors in a business venture promising high ROI Ø Fraudster does not invest all of the investor funds, if any Ø Initial investors ROI is paid with newly solicited investors’ funds Ø Investors recruit other investors, recommending fraudster based on the fictitious ROI Ø Scam collapses when insufficient new investors are solicited to fund ROI of current investors

Historic Fraud Scams and Schemes Ø Patent Medicine Ø Medicine fraud in North America arrived with the Pilgrims landing at Plymouth Rock Ø Includes deceptive medicines, miracle elixirs, tonics, ointments, and ancient cures Ø The term grifter and grifting refers to the traveling doctor who hawks his miracle cure and disappears before the scam is discovered

Miracle Liniments and Tonics

Historic Fraud Scams and Schemes Ø Patent Medicine Ø Medicine fraud in North America arrived with the Pilgrims landing at Plymouth Rock Ø The grifter often enlisted an accomplice in the crowd, a shill, who enthusiastically testifies to the benefits of the patent medicine Ø Celebrity, hired actor and man-on-the-street testimonials continue to be an integral part of product and investment scams

Historic Fraud Scams and Schemes Ø Patent Medicine Ø The term Snake Oil arrived with the expansion of the railroad into the western territories Ø Originally a topical ointment prepared by Chinese indentured laborers from Chinese water snake oil Ø The topical ointment was rich in Omega-3 acids Ø Effective in reducing muscle/joint pain and inflammation from arthritis and bursitis

Historic Fraud Scams and Schemes Ø Patent Medicine Ø The term Snake Oil arrived with the expansion of the railroad into the western territories Ø Chinese Snake Oil achieved mythical status Ø Since Chinese water snakes are not indigenous to the western territories, various species of rattlesnake were substituted by peddlers of Snake Oil

Historic Fraud Scams and Schemes Ø Modern patent medicine scams Ø Weight loss, hair re-growth, increased sexual performance, skin care, anti-aging creams Ø Mass media advertising Ø Ø Ø Newspaper advertisement Infomercials Internet advertising Ø Targeting based on data mining and profiling Ø Ø Direct mail Internet solicitation; popup, email and social media

Historic Fraud Scams and Schemes Ø Land Swindles Ø Land swindling grew rampant with western territory expansion and continues as a major fraud scam in the 21 st century Ø Victims were often immigrants Ø California gold fields Ø Western Pennsylvania petroleum fields Ø Western territory farm/grazing land

Historic Fraud Scams and Schemes Ø Modern Land Swindles include the sale of fictitious surface and subsurface rights Ø Oil & Gas exploration and production interests Ø Foreign vacation homes and residences

Historic Fraud Scams and Schemes Ø Mail Order Fraud Ø Fraudulent scheme to intentionally deprive another of property with use of mail Ø This distribution method began to achieve prominence with the expansion of the post-Civil War national rail network and boomed after 1890 with lowered postage rates Ø The internet has simply become the new communications medium from which mail order fraud is perpetrated

Historic Fraud Scams and Schemes Ø Mail Order Fraud Ø Mail order firms quickly began assembling and exploiting detailed customer purchasing data Ø Commonly referred to as Suckers List, Buyers List or Mailing List Ø Prospective customer lists have been a commodity since the advent of direct marketing in the 1870 s and were the forerunner of current consumer data mining Ø Who hasn’t been contacted by a prince from a foreign country needing your help to convert $2, 000 of his country’s foreign currency? ? ?

Historic Fraud Scams and Schemes Ø Mail Order Fraud Ø Prospective customer lists augmented by public records continue to be an essential resource for brokerage house Boiler Rooms Ø Customer contacts are not random cold calls Ø Customer lists and profiles are assembled to maximize transaction probability

Historic Fraud Scams and Schemes Ø Securities Fraud Ø Major securities frauds have coincided with historic US stock market crashes Ø Eliminating competing macro-economic theories, the causes of the historic stock market crashes have common causation ……. Fraud, Greed and Unregulated Speculation

Historic Fraud Scams and Schemes Ø Securities Fraud Ø Securities fraudsters were among the first to exploit transformative new communications technology Ø Peddlers of stock scams and proprietors of bucket shops exploited the telegraph and stock ticker to manipulate investors Ø Coinciding with expanding residential telephone service the telephone house, boiler room or bucket shops employed battalions of commission based salesmen to sell high risk, worthless or fraudulent securities

Why is Fraud Successful? Ø U. S. citizens have a false sense of security Ø False perception that regulatory agencies efficiently enforce anti-fraud statutes Ø False perception that the Legislature and Executive branches empower federal and state agencies to aggressively enforce anti-fraud statutes Ø Fail to understand information relating to emerging technologies and markets

Why is Fraud Successful? Ø The general public engages in risky behavior and fails to recognize the treat of fraud Ø Fails to learn from the extended history of fraud scams and schemes in the U. S. Ø Sacrifice common sense for the illusion and lure of Easy Money

Why is Fraud Successful? Ø Fraud as a profession Ø Fraudsters are intelligent, creative and motivated Ø Fraudsters understand fraud schemes Ø Fraudsters understand human nature (the psychology of the mark) Ø Fraudsters understand control systems and forensic procedures (related to both external and internal fraud)

Why is Fraud Successful? Ø Fraud as a profession Ø Fraudsters understand cost benefit analysis Ø Fraudsters understand exploit societal laws Ø Fraudsters corrupt the judicial process

Why is Fraud Successful? Ø Fraudsters have become folk heroes and urban/rural legends Ø Released fraudsters capitalize on their previous crimes Ø Author best-selling biographies Ø Lectures and speaking engagement honorariums Ø Become the subject of movies and documentaries

Why is Fraud Successful? Ø Fraudsters have become folk heroes and urban/rural legends Ø Fraudsters have been glamorized by Hollywood Ø Oceans 11 (1960 and sequels) Ø The Hustler (1961) Ø The Sting (1973) Ø Wall Street (1987) Ø The Grifters (1990)

Why is Fraud Successful? Ø Fraudsters have become folk heroes and urban/rural legends Ø Fraudsters Ø Boiler have been glamorized by Hollywood Room (2000) Ø Catch Me If You Can (2002) Ø Confidence (2003) Ø American Hustle (2013) Ø The Wolf of Wall Street (2013)

Conclusion The fundamental fraud scams and schemes have not changed through history, technology has augmented them and magnified the economic consequences

Conclusion Ø Common sense is the greatest fraud deterrent: Ø “No matter who says what don’t believe it if it don’t make sense. ” Ø “There’s no such thing as a sure thing, Let the other fellows run on the rope if they want to, but you keep your money in your pants. ” Ø “Never take another man’s bet. He wouldn’t offer it if he didn’t know somethin’ you don’t. ”

Effective Fraud Prevention

Conclusion Ø “Fraud Friday” Email Blast Ø Contact by email to be added to mailing list: Ø kyles@dsfcpas. com