Fraud?

I try to see in the same way things that are essentially the same. So, I'm going to try to do that with some events that may appear to be different and which, as a result, seem to get different reactions. But are they essentially different?

Fraud is defined as "intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right" or "an act of deceiving or misrepresenting". So, let's look at some recent examples, some regional others in the much wider world. As some are the subject of court proceedings I won't go beyond stating some of the relevant reports seen recently.

Kern Spencer blinded by Cuban light bulbs? (see previous post on this blog).

Was Bear Stearns' collapse just a bad market event? With a lot of red ink still to flow on the outcome of the US subprime mortgage market collapse, a prominent investment bank, Bear Stearns, collapsed several weeks ago. At least one prominent investor is going to court with claims of fraud (see report): a US billionaire accuses the company and employees of duping him and his wife into buying 150,000 shares of the struggling brokerage's stock -- including 100,000 shares on March 14, the day that federal officials first intervened to keep the firm from tumbling into bankruptcy. On March 14, Bear stock was plummeting from US$ 57 to US$ 30 amid rumors that it might fail. Two days later Bear agreed to an emergency buyout by JPMorgan Chase & Co. at US$ 2 a share, a price later raised to about US$ 10. But it was not all bad news as some large hedge funds, betting that Bear would collapse, made millions of US dollars from it (see Wall Street Journal article). On April 3, A US Senate Banking Commission questioned senior officials from the US Federal Reserve, the Securities Exchange Commission, and the CEOs of Bear Stearns and JPMorgan Chase. On April 10, one US Senator asked for an investigation into possible insider trading (see report), requesting that the U.S. Justice Department and the Securities and Exchange Commission investigate stock trading prior to the deal with JPMorgan Chase', and the role of short selling in the collapse of Bear: trading in Bear shares spiked in the days before the buyout.

Was General Electric engineering something? Just two days ago General Electric reported a 6% drop in first-quarter net profit -- largely over trouble in its financial-services businesses -- and cutting its 2008 earnings outlook (see report). It was GE's first major downward earnings revision for years. Consequences? GE shares fell nearly 13%; GE's plunge erased US$ 55 billion from its stock-market value; the major US stock indexes fell more than 2%. Reason? On a conference call with investors, Chief Executive Jeff Immelt put the blame for the miss squarely on Bear Stearns. The 13% stock decline was the largest for GE since the stock market crash of 1987. Mr. Immelt, who had repeated the 2008 forecast on March 13 and called it "in the bag'' in December, blamed the lower earnings on the collapse in credit markets. He said "We had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments and this was something that we clearly didn't see until the end of the quarter." Credible?

Is Cash Plus now cash minus? Jamaica's so-called "alternative investment schemes" have been taken up vigorously as possible sources of quick riches. But, this week Carlos Hill and his Cash Plus group continued a rapid fall from grace and Mr. Hill was arrested (see report) on suspicion that he and others defrauded billions of Jamaican dollars from lenders to the failed alternative investment club Cash Plus Limited (see report). Some J$ 4 billion of investors’ monies cannot be accounted for. The police action came a day after it was announced by Cash Plus’ court-approved co-interim receivership manager, Kevin Bandoian, that Cash Plus would not be able to make good on its promise to start making repayments to its approximately 40,000 lenders by April 14, as Carlos Hill was unable to secure the necessary funding or “access enough liquidity”. Cash Plus amassed a large pool of lenders with its promise of a 10 per cent monthly return on monies loaned to the company. A brief recent history:

2002: Cash Plus Ltd, led by Carlos Hill, started operations in Jamaica.
May 2007: Purchased the Hilton Kingston hotel.
July 2007: Acquired Drax Hall Estates, St Ann.
September 2007: Became sponsors of the National Premier League football. The Financial Services Commission (FSC) issued cease-and-desist orders on Cash Plus, its CEO, Carlos Hill, and Kahlil Harris.
February 2008: Cash Plus announced plans to resume payments of monthly returns by March 31, but indicated that this was contingent on FSC approval.
March 2008: Cash Plus says it is unable to resume payments on March 31 and gave an April 14 date for resumption; court appointed receiver/manager.
April 9: Court-appointed receiver/manager announces that Cash Plus is broke.
April 10: Carlos Hill arrested.

Eliot Spitzer forgot to include himself in his fight for moral rectitude? (See previous blog post.) As attorney general, he prosecuted cases relating to corporate white-collar crimes, securities and internet fraud, and notably pursued cases against companies involved in computer chip price fixing and investment bank stock price inflation (see an interesting article on the basis of his success in fighting Wall Street).

Plucking money from the public in Barbados? Local Bajan "shopping club", PriceSmart, admitted it had overpriced chicken wings last year (see report). In March this year, they were ordered to pay B$ 3,000 cost in seven days or a representative will spend two years in jail. (But do some arithmetic. They sold the chicken at B$ 17.28 per kilo--a retail price greater than $5.36 per kilo--that's a B$ 11.92 per kilo excess, so the fine represents the sale of about 250 kilos. Sounds like they are licking their fingers at getting off so lightly.) The company claimed that it had no plans to cheat the Barbadian public. Their lawyer argued it was an honest mistake based on what the company thought was the "honest and proper fulfilment of the order they placed". So, the company got a little sting, but the customers had been well filleted.

There are regulators or "gate keepers" who have been set up to try to control behaviour in certain areas and they work to different degrees of effectiveness. They have to have facts before they can deal with frauds. But even with facts they can sometimes be unable or unwilling to act. They are usually unable to deal with all the possible misdeeds in the area they cover.

There are also the individuals who are the perpetrators: they should know what they are doing. But few are willing to own up to fraud until they are caught and unequivocally found guilty.

There are the "customers" who take risks knowingly or unknowingly (if they are investors) or seek normal service (if they are shoppers), and then suffer losses. There may be mechanisms to allow them to get back some or all of what they lost, but maybe not. Should they look to blame someone? We tend to get extremely angry when we hear of the frauds and then the losers get nothing back. Do they all deserve sympathy? My view is that if you take a risk then you need to deal with its two sides--the risk and the reward--you can't have your cake and eat it. If you were going about your normal business (like shopping) you deserve a lot of sympathy; this should be clear and more so if the fraud was something like selling spolied or contaminated food as "fresh" or mislabelling medicine and putting people's lives at risk.

Every interaction between people has the potential for fraud or deception. I would not fall into the false sense of security that comes from thinking that somehow there are areas immune from this. Even those in well-established and respected organizations that are supposed to uphold the moral flag at its highest, such as the Anglican and Catholic churches have been guilty of much fraud and deception (especially financial and sexual). I remember with deep unease and really much bitterness the sense of being personally hacked when in the mid-1990s I learned that the very church where I worshipped was now the home of a major embezzeller, when Ellen Cooke, the wife of the rector of St. John's Episcopal Church, McLean, Virginia, and who was national treasurer was accused of and later sentenced for misappropriating US$ 2.2 million of Episcopal Church funds for her personal use (to buy mainly jewelry and a house, see report). I felt hacked both by her own acts as by the apparent blind eye her husband, my rector, must have turned, and her subsequent attempts to claim that "sexism" faced at Church headquarters made her do it". The courts ignored that and sentenced her to five years in jail. The rector resigned. The church congregation, which included several US Congressmen and Colin Powell, was emotionally destroyed.

My personal sense of betrayal is as deep when I hear of athletes in sports that I love and in which I participated being found out to be "drug cheats". Fortunately for me so far, none of my childhood sporting heroes has yet fallen on this needle. But you have to feel for the rest of the US relay team who may lose their gold medals because of Marion Jones' doping convinction (see report)--they have so far refused to give them up--and can taste the added mixed anguish of Jamaica's relay team and some other 30 or so athletes who stand to benefit from any medal reallocation. International Olympic Committee executive board has just held meetings to decide on this.

Somewhere along the way fraud comes from greed, which will always will be one of the seven deadly sins. I don't know how you stop people being greedy.