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High and Mighty Crooked
Enron Is Merely the Latest Chapter In the History of American Scams
By Peter Carlson
Washington Post Staff Writer
Sunday, February 10, 2002; Page F01
The lords of Enron cooked their books. They overstated their profits
by hiding a billion dollars in losses, thus driving up the price of
their stock. Their accountants winked at the subterfuge, then
shredded the documents. Before it all came crashing down in the
largest bankruptcy in history, the executives got rich while their
employees and stockholders got screwed.
It's an outrage! It's a scandal! And it is, of course, a time-honored
American tradition.
America has a grand and glorious history of stock chicanery. In the
early days of our history, stock market skulduggery was a perfectly
respectable way to achieve wealth, although not quite as respectable
as slave trading
or stealing land from the Indians.
Much of America's awesome industrial colossus was built on financial scams. The 19th-
century railroad barons considered stock fraud an indispensable business tool, as much
a part of their working lives as bribing legisla
tors or hiring Pinkertons to beat the bejesus out of union organizers.
Stock scamming is the kind of crime that attracts people who are well-bred,
well-dressed, well-mannered. Financial crooks tend to be respectable, patriotic folks
who demonstrate their patriotism by giving large sums of mo
ney to America's hardworking politicians, asking nothing in return except perhaps the
teensy tiniest little amendment to the tax code.
Some of the greatest names in American history made their fortunes through shameless
chicanery -- Vanderbilt, Morgan, Rockefeller, Stanford, Gould, Kennedy. But you don't
have to be a blue blood to succeed at financial sw
indling. America is the land of opportunity, a place where a poor Italian immigrant
named Charles Ponzi could rise from rags to riches by inventing a scam so beautiful
that it still bears his name.
"Really, there is no limit to the cons and swindles that have been seen over the
years," says former labor secretary Robert Reich, a connoisseur of big-money scams.
"The human mind is capable of inventing very innovative
products and services -- and also extraordinarily innovative swindles."
The Enron scandal brings back fond memories of the great American scams of yore. Here
is a rogue's gallery of America's financial crooks, a small sampling of the scalawags,
schemers and scoundrels who have bilked and swin
dled Americans over the centuries:
Wall Street's First Scandal
In the 1790s, when stocks were sold outdoors on Wall Street, speculator William Duer
nearly destroyed the fledgling market.
British-born, Eton-educated, a former member of the Continental Congress and a New
York judge, Duer had made his fortune selling supplies to George Washington's army.
After the Revolution, Alexander Hamilton appointed him
assistant secretary of the treasury, but Duer quit the job when he learned that
federal law prohibited Treasury officials from speculating in federal securities.
Free of this inconvenient rule, Duer promptly began using his inside knowledge of the
Treasury Department to speculate in bank stocks, using large sums of money borrowed
from banks and his rich friends. Meanwhile, an audi
t of Duer's books at the Treasury Department found $238,000 missing. Hamilton ordered
the Treasury to sue Duer for the money.
That caused Duer's financial empire to collapse, which bankrupted many of his
creditors, bankers and brokers, which in turn caused a financial panic on Wall Street.
While Duer went to debtors' prison, 24 Wall Street broke
rs met under a buttonwood tree in 1792 to draw up the first rules to regulate trading.
" 'Tis time," Hamilton wrote, "there should be a separation between honest Men &
knaves, between respectable Stockbrokers . . . and mere unprincipled gamblers."
"Finding that line of separation," wrote John Steele Gordon in "The Great Game," a
history of Wall Street, "has occupied the finest minds of Wall Street and the
government ever since, with mixed results at best."
Robber Barons
The Civil War was quite unpleasant for many Americans but it was great for Wall Street.
Many of the era's foremost robber barons -- J.P. Morgan, John D. Rockefeller, Andrew
Carnegie, Jay Gould -- dodged the draft by paying $300 to hire a substitute. This
modest investment left them free to spend the war year
s getting rich instead of getting shot. Many on Wall Street, including Morgan, made a
fortune speculating in gold, the price of which rose against the dollar with each
defeat of the Union Army. Appalled, President Lincoln
announced that he hoped every gold speculator "had his devilish head shot off."
Meanwhile, Morgan was financing a deal to buy 5,000 rifles from an Union Army arsenal
in New York for $3.50 apiece, then sell them to the Union Army in Virginia for $22
each. The rifles were defective -- causing soldiers
to shoot their thumbs off -- but a judge ruled the deal legal. Morgan earned a 25
percent commission, plus interest.
But those profits were peanuts compared with the money made in the railroad business
after the war.
In the 1860s, the federal government subsidized the building of a transcontinental
railroad by granting millions of acres of free land to two railroad companies, the
Union Pacific and the Southern Pacific. Eager to line t
heir pockets at the expense of their stockholders, Union Pacific management formed a
dummy construction company with an impressive-sounding French name, Credit Mobilier,
and hired Rep. Oakes Ames as president. Credit Mobi
lier charged Union Pacific about $100 million to build the railroad -- nearly twice
what the job actually cost. The rest of the money went to Credit Mobilier's
stockholders, a group that included many of Ames's congressio
nal cronies and Vice President Schuyler Colfax, who had been bribed with cheap stock
to look the other way.
There were congressional hearings and angry editorials and a federal lawsuit, but
ultimately the scammers of Credit Mobilier went free, considerably richer for their
very modest labors.
Fleecing the Commodore
The most colorful stock swindle in American history came in 1868, when Commodore
Cornelius Vanderbilt, proprietor of the New York Central Railroad, attempted to take
over the rival Erie Railroad, which was controlled by t
hree of the most crooked rascals ever to sell stock -- Daniel Drew, Jay Gould and Jim
Fisk.
Vanderbilt, one of America's richest men, instructed his brokers to buy every Erie
share they could find. Drew, who was Erie's treasurer, responded by printing up more
Erie shares -- tens of thousands more. Peeved, Vander
bilt prevailed upon a judge he had on his payroll to issue an injunction forbidding
Erie to issue any more stock. Drew responded by getting a judge who was on his payroll
to order Erie to keep printing stock.
"If this printing press don't break down," said the flamboyant Fisk, "I'll be damned
if I don't give the old hog all he wants of Erie."
When Vanderbilt's judge issued a warrant for the arrest of Drew, Fisk and Gould, the
trio fled across the Hudson River to New Jersey with $7 million of Vanderbilt's money.
They took up residence in a Jersey City hotel and
hired cops armed with cannons to protect them from arrest.
Next, the battle shifted to the legislatures of New York and New Jersey, where agents
for each side generously spread around bribe money, hoping for favorable legislation.
Gould himself appeared in Albany, carrying a trun
k that was, the New York Herald reported, "stuffed with thousand-dollar bills which
are to be used for some mysterious purpose in connection with legislation."
Ultimately, Vanderbilt failed to take over the Erie. But he wasn't hurt too badly: He
managed to unload his 100,000 Erie shares in London. The real losers in the affair
were Erie's other stockholders, who saw the value of
their shares diluted by nearly half.
Ponzi's Scheme
Charles Ponzi came to America around the turn of the 20th century, a poor Italian lad
armed with nothing but a dream and a devious mind.
He started out with small swindles that didn't always pay off -- he was jailed in
Atlanta and Montreal -- but he refused to give up his dream.
In Boston in 1919, Ponzi founded the presciently named Securities and Exchange Co. and
guaranteed investors a 50 percent profit in 45 days. And he kept that promise -- for a
while. The first investors were paid with money
obtained from later investors. Thrilled, they touted Ponzi's magic to their friends.
By the summer of 1920, Ponzi was taking in $250,000 a day -- so much cash that he was
stashing it in desk drawers, file cabinets, even
wastepaper baskets.
He bought hundreds of suits, a dozen gold-handled canes, a limousine and a 20-room
mansion in the tony Boston suburb of Lexington. He should have taken the money and
run. He couldn't keep paying early investors with the m
oney from later investors, particularly since he wasn't actually investing the money.
The Boston Post unmasked his scam and he spent a decade in jail.
On his way to prison, a reporter asked him to explain his actions, saying that the
public deserved an explanation.
"The public deserves exactly what it gets," Ponzi replied. "No more, no less."
Master of Hounds
After the stock market crashed in 1929, Congress investigated Wall Street, exposing
countless instances of chicanery, skulduggery and plain old fraud. Liberals called for
the creation of a federal agency -- the Securities
and Exchange Commission -- to regulate and police the market.
Richard Whitney, president of the New York Stock Exchange, disagreed. Whitney told
Congress that the stock exchange could police itself without any interference from
meddlesome bureaucrats.
Alas, Whitney proved to be an imperfect spokesman for his message. Despite his
impressive Establishment credentials -- Groton, Harvard, master of hounds at the
prestigious Essex fox hunt -- Whitney was as crooked as a pre
tzel. He formed a company to produce an apple liquor called Jersey Lightning but the
hooch didn't sell and the company's stock tanked. So Whitney started stealing. First
he stole $150,200 worth of bonds belonging to the N
ew York Yacht Club. Then he stole $667,000 from the Stock Exchange Gratuity Fund,
which had been set up to aid the widows and orphans of brokers.
Caught by stock exchange officials in 1937, Whitney demanded that they cover up his
crimes. "After all, I'm Richard Whitney," he said. "I mean the stock market to
millions of people."
When he was sentenced to five to 10 years in Sing Sing, cynics chortled as they
recalled the title of his much-quoted speech to the Philadelphia Chamber of Commerce:
"Business Honesty."
Slippery as Oil
At first, Anthony "Tino" De Angelis was known as "the salad oil king." Later, he
became known as "the great salad oil swindler."
A former Bronx butcher, De Angelis was the president of Allied Crude Vegetable Oil, a
major player in the commodities markets of the 1950s and '60s. Allied borrowed
millions of dollars to speculate in vegetable oil future
s. The loans were secured by warehouse receipts for millions of pounds of salad oil
that Allied stored in huge petroleum tanks in Bayonne, N.J.
But the tanks were not full of salad oil. They were full of water, with just enough
oil floating on top to fool the inspectors. De Angelis had conned some of America's
biggest banks and investment firms out of $175 millio
n. When the scandal broke in 1963, it nearly bankrupted two large brokerage houses.
De Angelis spent seven years in federal prison -- years he later described as among
the best of his life. "There you had peace. It was tranquil," he said. "You come
outside and try to make a living and all the big guys tr
y to shoot you down."
Phony, Phony, Phony
"It was like fixing a horse race," recalled one of the masterminds of the Equity
Funding swindle of the 1960s and '70s. "We were always rigged to win."
Equity Funding sold an investment package that was a combination of mutual funds and
life insurance. Customers bought a mutual fund whose dividends paid the premiums on
the insurance policy. Equity then sold the insurance
policies to reinsurance companies. This was profitable but not profitable enough for
Equity's officials. They decided they could make more money by creating fake insurance
policies, selling them to the reinsurance compan
ies and pocketing the money.
This fraud worked well for nearly a decade. Equity officials made millions and
Equity's stock rose from $6 to $90. But in 1973, says Charles R. Geisst, author of
"Wall Street: A History," the scam collapsed when an Equity
employee, dissatisfied with the size of his Christmas bonus, blew the whistle. After
that, Equity went bankrupt, investors lost $300 million and a dozen Equity honchos
went to prison.
The Wall Street Journal explained the scam to its readers in one of the most
delightfully surreal paragraphs ever to grace its august pages:
"The customers didn't exist. Their mutual fund shares didn't exist. The funded loans
didn't exist. The phony customers' phony pledges of their phony fund shares to buy
phony insurance ultimately became numbers on a comput
er tape, which then printed out phony assets for Equity Funding Corp.'s phony books."
Greed Is Good
"Greed is all right, by the way -- I want you to know that," Ivan Boesky told an
audience of business students in 1985. "I think greed is healthy. You can be greedy
and still feel good about yourself."
Boesky lived those words. He made hundreds of millions of dollars trading in stocks
and bonds but he always wanted more. In an interview, he admitted that he fantasized
about climbing atop a huge pile of silver dollars: "
Imagine -- wouldn't that be an aphrodisiac experience?"
Seeking ever more wealth, Boesky paid Dennis Levine, an investment banker with Drexel
Burnham Lambert, millions of dollars for inside information on corporate takeover
bids. Boesky then used the information to speculate i
n the companies' stocks, making tens of millions more. It was insider trading at its
most lucrative.
When Levine was caught by the SEC, he ratted on Boesky. When Boesky was caught, he
ratted on several other Wall Street wheeler-dealers -- including Michael Milken,
Drexel's legendary "junk bond king." Boesky even lured Mi
lken to a hotel room, where they discussed their illicit deals in a conversation
recorded using a microphone hidden in Boesky's clothes.
When the smoke cleared, Boesky served about 18 months in prison and paid a $100
million fine. Milken did three years and paid $200 million. Drexel went bankrupt.
Boesky's story inspired the 1987 movie "Wall Street," with Michael Douglas playing a
reptilian character named Gordon Gekko -- who recited, nearly word for word, Boesky's
now-legendary "greed is good" speech.
Wall Street's Next Scandal
The list of financial scandals goes on and on: Ivar "The Match King" Kreuger, Bernie
Cornfeld, Robert "Fugitive Financier" Vesco, the savings and loan crooks of the '80s.
Now, as congressional committees, investigative re
porters and the SEC struggle to unravel the Enron scandal, concerned Americans might
be forgiven for wondering:
Given the history of wheeling, dealing, scheming and scamming in the
world of high finance, can we expect to see more of these scandals in
the future?
"It's never going to change," says Gordon, the Wall Street historian.
"As long as there's a great deal of money to be made on Wall Street,
there will always be people of dubious morals coming up with new ways
to fleece the sheep. Welcome to capitalism."
© 2002 The Washington Post Company
End<{{{
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