The Golden Age of Fraud

Bag was just a young pup in the mid-1970s when under the tree one Christmas morning did appear a heavy package addressed to Bag’s entire family. Us kids gathered around & tore off the wrapping together. Inside was state-of-the-art technology… A VCR. The technology was so new; not one of us kids had a clue what it was, or what it did. But, like most kids when it comes to tech, we learned quickly. Until that day, movies were only watched on network tv…on their schedule - with commercials every few minutes - and anything even remotely spicy edited out or dubbed over. The Vcr changed all that - it was like a new world opened up.

    Among the first movies Bag watched on that VCR were two absolute classics, The Sting and The Godfather. The Sting revolves around a group of con men headed by Paul Newman and Robert Redford who orchestrate a highly sophisticated, elaborate ruse to defraud a mob boss (played brilliantly by Robert Shaw) of a suitcase full of cash.  The key to making their scheme successful was their attention to detail and the ability to incite hate and anger in the Shaw character towards Newman. Once Shaw became blinded by rage and the idea of revenge, all rational thought went out the window, leaving himself and the suitcase full of cash, exposed.

    Oddly enough, the same lesson about keeping your emotions in check was also displayed in The Godfather. As a young boy watching that movie for the first time, it was easy to like the larger-than-life character Sonny Corleone (played by James Caan). Sonny seemingly had it all - charisma, power, women, money - but the one thing he didn’t have, was the ability to keep his emotions in check. In fact, letting emotion override rational thought is what got him killed. In sharp contrast, his brother Michael (played by Al Pacino) was all about cold, calculating, rational thought. He was successful precisely because he never let his emotions get in the way.  To him, it was all, for lack of a better term - “strictly business.”

   Speaking of business seems every time Bag catches up on the latest in business news; the lead story is about some fraud where innocent investors lost billions. In October, Trevor Milton of “Nikola” fame was convicted on multiple counts of fraud for having duped investors out of billions by claiming his company was bringing to market an electric vehicle with a battery that would revolutionize the industry. The idea of a Utah Valley State college dropout solving the quest for a longer-lasting EV car battery, where thousands of scientists before him had failed, seemed dubious. But he produced a video commercial showing his vehicle cruising down an open road at high speeds. Investors bought it, hook-line-and-sinker, without ever doing any due diligence. What Trevor didn’t disclose was that the vehicle didn’t have a working engine. Instead, he had the vehicle towed to the top of a large hill, and let gravity do the work.

And then of course, in November, Elizabeth Holmes of “Theranos” fame was sentenced to 11 years in prison for duping investors out of Billions by claiming she was going to revolutionize the medical industry with her discovery: “The Edison device.” Elizabeth was touted by the financial press as a “prodigy …and a godsend doing the lord’s work” … She claimed her “Edison device” (presumingly named such because Tesla was already taken) could perform hundreds of tests from a single drop of blood, effectively eliminating the need to have vials of blood drawn with needles. Once again, a college dropout solving the science, where thousands before had failed, seemed dubious. But, the board of directors she put together was a literal who’s who of political power, including George Shultz, Sam Nunn, Henry Kissinger, et al. Bag has to give Elizabeth credit. Had she put Doctors (or anyone with medical training) on the board instead of wealthy elitist, ignorant government apparatchiks, her con likely would have never gotten off the ground.

    Not to be outdone by Trevor & Elizabeth, we have the arrest of Sam Bankman Fried of “FTX” fame in December. Touted by Forbes magazine as a “Crypto genius …. and the next Warren Buffet.” He stands accused of defrauding investors out of billions by repeatedly touting how “good risk management” was his exchange’s competitive advantage. In theory, the FTX business model was a sound one. FTX stood in-between buyers and sellers of crypto and shaved off a percent or two from all transactions. Hard to go wrong doing that. It seems Sam crossed the line though, when he took money out of depositor’s accounts, sent it to his sister company (Alameda research), and began using those funds, as the SEC claims, “as his own personal piggy bank.” Those shilling for Sam & FTX included Shaquille Oneal, Tom Brady, Larry David, and Gisele Bundchen, not to mention various venture capitalist firms. Once again, Sam's con would never have worked if any of these parties bothered to do even the slightest bit of due diligence.

   Bag continues to be amazed at how people get taken in by these cons. The one thing all the victims of these frauds have in common is turning their backs on facts, reason, and evidence in favor of unbridled emotion. The political left, environmentalists in particular, so badly wanted to believe Trevor Milton & his “green” longer-lasting battery were going to put the evil Elon Musk in the poor house; that their hate got the best of them, and just like Robert Shaw in the Sting, they jumped in with both feet, leaving themselves exposed. Perhaps they would have been better off heeding the advice of Michael Corleone when he said:

“Never hate your enemies, it affects your judgment….”

   Many of those who lost money investing with Sam & Elizabeth did so because they bought into the specious idea of a young “Genius” solving the world’s problems. Once someone is accepted as a genius, there is no point in trying to understand what they are doing - because, lets face it, they are a genius, and us plebes, in all likelihood, are not. Since comprehending what these geniuses are doing is not possible, Investors are left to make decisions on something other than rationality. Seeing the uber-wealthy Kissengers, Bradys, Shaqs, etc, all piling in; leaves investors feeling left out, triggering primitive emotions like Greed & Envy. So they pile in based not on the merits of the investment, but on who else is on their side of the trade. Doing what others are doing is not an investment strategy - It’s how Ponzi schemes are perpetuated.

   The next time you hear somebody touted as a genius or a prodigy out to revolutionize the world, you better check your pockets, because someone has their hand on your wallet. If the goal is to make money in the investment world, it is essential to check those emotions at the door, as they have no place in the investment arena.  You must be as ruthlessly analytical as Michael Corleone, and pay attention to every detail like Redford & Newman, or your portfolio is likely to end up looking like Sonny on the Causeway.