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 BULL
STREET
– The art of the Con
Theft comes in all sizes and shapes and it ranges from the
pickpocket in the subway train to the sophisticated criminal that plots for
hours on a way to separate you from your money without you even being any the
wiser. This is usually done by magical accounting.
One of the most sophisticated thefts that I ever beheld was
one pulled off by an old acquaintance of mine who appeared on the surface to
be a great business man. He ran a small public company that had supposedly developed
a sophisticated new type of software that was used in place of a cash-register
at checkout counters of retail stores. His software would do just about everything
that software could be imagined to do, at least that is what he told me along
with the rest of the investment community. He said it would keep an exact inventory
of the store’s merchandise, segregate sales tax from regular sales and keep
a record for restocking while naturally at the same time ringing up the day’s
receipts.
My friend, Bob the con man, was of impeccable character
and when he was in New York, we would often have dinner together and just chat.
He could talk amazing knowingly on just about any subject. Bob was also a preacher
who would donate his time to churches in his area that did not have a pastor.
He would drive as much as 500 miles each way just to give a sermon on Sunday
morning to an unrepresented flock. He was a truly religious man with a wonderful
family, and wanted to return something to the community he lived in. His boys
were just starting to go into his software business and he was extremely proud
of them and used to tell me that it was they that had written the software programs
that had made the company successful Moreover, Pastor Bob had been married to
one woman for over 40-years and to the best of my knowledge his eyes never roved.
However, all that glistens is not gold and the first clue that
something may be wrong with Bob and this idyllic lifestyle came down like a
thunderbolt. We were walking down the street together heading towards a restaurant
when he said, “This is 86th Street, I have a customer of this street,
why don’t I introduce you to him and you will see what a great product my company
produces?’ This sounded fine to me and we soon entered small but elegant department
store which specialized in products for the house. He asked for the owner who
soon arrived. My friend introduced himself and the owner immediately went into
an uncontrollable rage. “Your software doesn’t work, it is ruining my business,
I have called your people and told them to get it out of here and if I ever
see any of you again, I will call the police.” Or something to that effect.
My friend did not seem to be all that taken aback
by the experience but I felt terribly bad for him. Such a nice man, the store
keeper probably just got a bad copy of the software. However, this was only
the beginning of a longer episode.
Not too much later I was reading the papers and saw that the
Securities and Exchange Commission was conducting an investigation into my friend’s
company and that they had also called in the local police. My first reaction
was, “you can’t arrest a man for turning out bad software, so what on earth
were they talking about.” I soon found out.
The earnings of my friend’s company had recently
started to climb geometrically, which certainly didn’t make any sense if the
software didn’t work. However, sales were climbing, and they were rising particularly
sharply in Europe. “Maybe there was something about the software that made it
perform better overseas,” I thought to myself. However, I didn’t have long to
think about what was going on, within a few more day, just about every law enforcement
agency that could possibly get involved in something criminal was crawling around
his plant and when I tried to get through to him on the phone, I was told that
he had suddenly left town and no one knew either where he was or when he would
be back My immediate thought was the fact that the SEC ruins more lives over
their shoot first and investigate later form of enforcement but that did not
happen to be the case here.
Finally the reason for their actions became apparent.
It turns out that he was selling this software that didn’t work through a network
of European software dealers. Simultaneously he was giving this group of sales
people, freely tradable stock in his company in exchange for some consulting
work[43] that they were doing for his company. What was effectively happening
was simply this; they would buy the software, he would simultaneously send them
a bill for what they had purchased along with a substantial amount of freely
tradable stock in his public company. Software as we know is highly replicable
at little or no cost once the original program is written, so any additional
sales become almost pure profit. The more software he sold the higher his stock
went. Simultaneously, his cohorts The Europeans would sell their stock to pay
for the software and spilt the profit with the company.
This became the ultimate Ponzi scheme and it was
truly of the first magnitude. Sales could be increased whenever the conspirators
pressed the button. The only factor that was decisive in this process was the
price and volume of the company’s stock. However, the more phony software ware
that was purchased, the higher the earnings, the higher the earning the better
price they could sell the stock at and the more software that they could purchase.
Overall, this was becoming what we on Wall Street would call a growth company
and a number of the analysts were now not only taking an interest in the company
but were also recommending the stock. The ultimate self-fulfilling prophesy.
In reality, all of this could well have been accomplished by
nothing more than a series of bookkeeping entries and no software ever really
had to be delivered. However, by delivering even a poorly conceived product,
the black and white laws on the subject could become highly skewed. If people
wanted to buy a lousy product and never use it, that was probably their own
prerogative and if Bob wanted to use his ever increasing stock price to pay
for more and more consulting, who could argue that?
One would have thought that this was close to the perfect crime
because under normal circumstances, even if the participants were caught, without
someone on the inside giving testimony that they were purposely manipulating
the stock, it would seem almost impossible to convict anyone of anything. Making
bad software is not a crime, rigging a market or using consulting stock to make
money is but, go and prove it. If my friend had not been accidentally tripped
up, he would now probably be the richest man in the world. However, as fate
would have it, the last I heard from him, he was living in a country that had
no extradition treaties with the United States and had been indicted on about
100 counts. His concept has become exceedingly popular among thieves and I have
seen a number of variations on this theme since Bob left town, but how do you
prove. The only thing I can tell you is this, be very careful when you buy stock
in a company that manufacturers software that pays enormous consulting fees,
they may just know Bob.
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