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May 22, 2018

Two centuries of investment fraud

The largest area of investment fraud today is in cryptocurrencies.  Fintech, Biotech and other fields have fraud, and of course, fraudsters still pose as producers in film investment, including schemes links to tax breaks, and realtors in real estate.

Every few years, in the 1980s, in 2000, in 2008, the market crashes partly because trusted names get involved in the fraud (or fraudsters become trusted names.)  While the 2008 crash has been attributed to the Euro crisis and to the collapse of lending agencies to Ninja loans, if you scratch the surface in both cases you’ll see fraud in a massive scale.  This kind of fraud isn’t new, and it’s not likely to go away any time soon either.

The recent cryptocurrencies scheme, where celebrities are being used in ads to promote a questionable product, is nothing new. Back in 1907, 111 years ago, newspapers like the Hope Pioneer in North Dakota warned that: People should be careful for references, for big men’s names are often obtained by fraudulent means and unauthorised – References should never be taken for granted.

People should be careful for references, for big men’s names are often obtained by fraudulent means and unauthorised – References should never be taken for granted. – John Mitchell, 1907.

Now, a lot of people think that they can detect whether someone is telling the truth by gut alone.  There’s a lot of nonsense floating around about “emotional intelligence,” but these same people who claim to be filled with emotional intelligence and common sense often end up complaining that they were swindled by a large company or political candidate.  John Mitchel has some sound advice there that we could listen to today:  “Common sense – the shrewd, natural ability to make accurate judgements – is always at a disadvantage unless one has the best information upon which to act, and about the most it can do for a man under such circumstances is to cause him to get the real facts before forming a judgement or decision.”

“Common sense – the shrewd, natural ability to make accurate judgements – is always at a disadvantage unless one has the best information upon which to act, and about the most it can do for a man under such circumstances is to cause him to get the real facts before forming a judgement or decision.” – John Mitchell.

The problem has always been worse because the big companies can hire “crooked lawyers” and “unscrupulous advertising agencies.”  Therefore, many of the fraudsters from the 1980s, 2000, and 2008 are not only unpunished, but still working in the financial sector, still defrauding people.  While it is getting increasingly easy to libel a famous actor and get away with it, the crooks in Wall Street and Silicon Valley are largely shielded from criticism until convicted in a court of law.

But what about big data, and computer algorithms designed to detect the truth and lies?  Well, we all know about the AI conversations that end up with offensive speech.  The fact is, when you know how a program is structured, you can easily create something to fool the algorithm.  The algorithm finds that people who use the number 3 are more honest than people who use the number 7, then the sophisticated fraudsters will use three more than 7.  The algorithms are always behind the fraudsters.

Another problem is many of the fraudsters are working within silicon valley, or in the social sciences.  They have an interest to create algorithms that cover their tracks, and wrongly convict their accusers.

While Big Data is useful for seeing customer trends, we need to study microdata to find out if someone is being honest or not.  This doesn’t mean we need to spy on people, but just ask the simple, common sense questions of traditional research.

When Ptara had an office in town, big data still showed us as working from home.  However, another company that was using the address as nothing more than a postal address, was shown as a resident in that office.  For that and other reasons, we decided that having an office in town was too expensive.  It was ironic that, despite spending a lot of money and having a certifiable physical presence at Loveden House for two years, the biggest companies in the world, using the latest technology, couldn’t place us correctly.

We all know about fraud at the government level, with the Teapot Dome Scandal being taught about at every high school in America (or every good high school, at any rate).  We know about centuries of banks going bankrupt in the UK without any financial impact on the country as a whole, insurance companies who didn’t have enough assets to pay out.  What we forget about is that innovation fraud is much older than silicon valley.

In May 1901, the Minneapolis Journal reported on an incident where the American representative to Copenhagen was not only taken in by a fraud, but spread the word to foreign investors, meaning an entire industry was betting on an invention that didn’t exist:

Several months ago, Consul Freeman reported from Copenhagen that a Danish inventor had invented a process for preserving butter. Immediately, the consul’s mail began to show letters from nearly every important dairy district in the United States, asking about the process and how it could be obtained. Subsequent investigations showed him that the invention was a fraud, and he now says as much. In a supplementary report to the state department, from which I quote in part:

The alleged inventor applied for a patent, but his application was rejected. The sealed package of butter which was presented as a test of the process bore a notary’s certificate as having been sealed up in 1900, but it was proved that the butter had been preserved only a few weeks, the date, “February, 1901,” having been surreptitiously changed to read “February, 1900.”

So, that was a simple fraud, known as the “Danish Butter Fraud,” which was nothing more than the change of a date on butter.  The problem is that men of politics have always had too much faith of men of innovation, and so celebrities, including politicians, have a tendency to promote every new invention as the panacea to all our ills, whether it works or not.

If you work in project management, you’ll know that this leads to many costly, often failed projects, from the Denver Airport to the attempts to process all the data in the NHS.  Even the Windrush scandal can probably be traced to politicians having too much confidence in new technology.

Of course, technological innovation has always been a favourite line for fraudsters.  It’s much easier for them to fake it, if the majority of their customers don’t understand it.  Even 100 years ago, new technology was a risky investment.  As the East Oregonian reported on the 9th of January, 1914:

HEAD OF RADIO PHONE FIRM SENT TO PRISON

NEW YORK,. Jan. 9. -James Dunlop Smith, president of the Radio Telephone company, was sentenced by Judge Hunt to spend a year and a half in the federal prison at Atlanta and to pay a fine of $5001 for conspiring to swindle investors in the stock of the corporation through use of the mails. Elmer Burlingame, agent of a subsidiary company, was sentenced to two and a half years’ imprisonment and fined $10,100.
The Ellsworth company, a subsidiary which handled the parent corporation’s stock, was fined $10,500.
The government charged that investors in Radio stock were swindled out of $1,000,000 by the false representations of the defendants.

What about the attacks on Facebook?  That’s the other side of the same coin.  When you put these innovators on a pedestal, you get more angry when they fail to be as great as you expect.  Instead, we should see Silicon Valley engineers for what they are, humans.  They work no harder, are no smarter, and are no more or less trustworthy than anyone else.

Every industry has its bad apples, its great innovators, its opportunities and its frauds. And, the film business is no exception. In 1929, the Evening Star of Washington DC, using news from the Associated Press, reported:

Given 1-to-10-Year Sentence.

LOS ANGELES. November 2 (AP).— Herbert R. Jackson. 42. confessed “bucket shop” operator and head of the Hollywood Investment Co., yesterday was sentenced to serve 1 to 10 years in San Quentin Prison. He was convicted recently on grand theft charges.
Hollywood citizens. Including movie actors, testified they lost $100,000 entrusted to Jackson.

So, Hollywood will fool you with smoke and mirrors, but technology firms will engineer a scheme that ten times as much from your pockets.

So what is a safe investment?  Well, any investment, however honest, has the potential to lose money.  But, some businesses are obviously riskier than others.  100 years ago, Hollywood was a growth industry, where big fortunes could be made, or lost, very quickly.  In 1936, one actress looked to put her money in the newspaper industry instead.

Gloria Stewart has Yen for the Newspaper Game

Wants to invest some surplus funds in a going weekly

By Henry Sutherland

UP Hollywood Correspondent
Hollywood, Jan. 26 (UP) Gloria Stewart, Fragile film blonde, is shopping for a weekly paper for a safe investment for uneasy Hollywood dollars.

Sadly, newspapers, in the digital age, no longer are a safe bet.  Nothing is, really.

But, at least in the old days, when the media was printed and the post office network was centralised, it was easier to identify fraudsters and stop them.

Bond Investment Fraud.

The Post Office Department today denied the privileges of the mails to the Home
Investment Association, a bond investment concern, having offices at Rochester, Utica. Batavia, Phoenix, Elmira, Cortland, Corning, Clifton Springs, and Buffalo, N. Y., and Cleveland, Ohio. – The evening times., September 26, 1896

Why can’t they deny them the use of the mail these days?  Well, with the post office competing with private couriers, they apparently need to accept all the business they can get.  The same goes for the phone company and others.

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