Corruption Wears A Smile
Many of us have a picture of a corporate criminal as a young man (usually) with a sinister smirk and an aggressive demeanor. Someone like Sam Bankman Fried is only tougher. We typically associate criminal intent with someone young and strong. But my experience has been very different than the expected concept.
I was a rookie broker, just out of college, beginning my career in Santa Barbara, California. Santa Barbara has always been a haven for the rich and famous. Today celebrities such as Oprah Winfrey, the Duke and Duchess of Sussex, and JK Rowling call the city by the sea their home.
The same was true back in my day. Wealthy and prominent would sometimes come into our offices to find out how the markets were doing and get a quote on their favorite stock. Remember, this was well before the internet, so to find out today’s market action, you had to call or visit your broker.
This particular morning, I was “broker of the day,” meaning that anyone new client who came to the office would be referred to me. A distinguished-looking gentleman, whom we’ll call Client X, walked through the door. He had just flown into town from New York and was anxious to get an update on prices for the stocks he owned.
He sat down at my desk, and over the next couple of hours, we had a delightful conversation about his businesses, the state of the world, and, most importantly, how his investments were doing in the stock market, not well, as it turned out. The Market back then had just begun what would be one of the worst bear phases in modern history. It would culminate three years later, with many stocks losing 50, 60, and 75% of their value.
It was a time for people like Customer X to keep a sharp eye on their investments. And so, he and I agreed that he would call me regularly while he was at his Santa Barbara home. He had three houses, one in Manhattan, one in Palm Beach, and one here in Santa Barbara.
There was a solid citizen if ever there was one. Someone I could trust and, as a young broker, I could learn from.
And it has often been the case that much of what I’ve learned about managing money and investing has come from my clients and, most recently, my readers. So, thanks to all of you who take the time to comment on these columns.
Now back to our story.
Although our conversations were always pleasant, and Customer X was always gracious, something still made the hairs on the back of my neck stand on edge. He was constantly probing, asking for extra accommodations fitting a man of his stature and position. The phrase: “well, my other brokers let me do such and such,” came often. With the implication: “Well, if you can’t help me, my other broker will.”
Finally, Spring came, and it was time for him to head back east. He had discussed placing a large order for weeks and informed me that he would do that next week as he flew back to New York. I reminded him that we would need a deposit before accepting the order. “Don’t worry. He said his bookkeeper would send the check.”
The next day Client X called me from the airport; he was boarding his flight in just a few minutes. Sorry he hadn’t called earlier, but he wanted to purchase that stock he’d been talking about. As I recall, he ordered 5,000 or 10,000 shares, an unheard-of number at the time.
I was secretly jumping up and down for joy. The commission on this order would be huge! I worked on a strict commission basis, which would make my month. I marched over to the office manager and showed him the order; he needed to approve it before it was given to the teletype operator to send to the Exchange.
“Not so fast,” said the manager. How do we know this client? I explained that I met him when he walked into the office. I didn’t know much about him, but he looked like an upstanding citizen.
“Call that bookkeeper, and get a deposit in here before we’ll do anything.” Crestfallen, I went back to my desk to call the bookkeeper. No answer. Over and over, I dialed, but still no response. Things were getting desperate; the markets closed at 12:30 pm in California, and I was running out of time.
I ran back to the manager; I explained that I didn’t have the deposit, but if we didn’t hurry, the Market would close before I could enter the order. Calmly the manager took my ticket, looked at the stock symbol, and punched it into the quote machine on his desk. “Don’t worry,” he said, “the stock is down in price; we can probably buy it cheaper tomorrow.”
When I finally reached Client X the next day and explained how I could not contact the bookkeeper and place an order without the deposit, Client X became furious. He threatened to sue my company and see that my license was revoked. He had friends in high places and would use all his influence to see that I was fired.
Client X has transformed from a calm, courteous professional into a raving maniac. I was stunned. As best I could remember, I wrote down a recap of our conversation and then reported it to the manager.
Surprisingly he was very understanding. He had seen this sort of thing before. And he was sure that Client X was running some scam. We called our Compliance Department and gave a complete report in case Client X sued the firm.
Days passed, and then weeks, as I breathlessly waited for a call from the firm’s lawyers. But the call never came.
Then months later, I was reading the latest NASD Compliance Report. The NASD was the predecessor to today’s FINRA, the regulatory authority for Brokers and their Firms.
It turns out that Client X had been charged with fraud. He had done in New York just what he intended to do with me.
His deception went like this: he would place two orders with different brokers. One was to buy a particular stock, and the other was to sell the same stock short.
Back then, settlement day, the day the client had to pay for the stock, was a week later (5 business days). But Client X had placed two trades, one long, one short. He would then pay for the profitable trade and deny that he ever placed the other order.
It’s a fraud that’s as old as Wall Street. And one that has been nearly eliminated by modern technology. With today’s computer systems, brokers can know instantly whether a client can pay for a trade. But back then, unscrupulous clients, like Client X, could take the broker for thousands of dollars.
Unfortunately, while that particular scam has gone, new kinds of fraud have taken its place. If anything, fraud is even more prevalent today. Technology has enhanced the fraudster’s ability to mislead and misdirect, which is the heart and soul of today’s scams.
Believe it or not, over the years, I’ve encountered several Client Xs who appeared honest and trustworthy but were not. Here are a couple of ways to identify whether you’re dealing with potential fraud.
First and foremost, ignore the facade. Remember that: “Corruption wears a smile.” The con man or woman is always pleasant, especially initially. The fraud needs to work to “win” you over,” and gain your trust. The scam will only work once you go along with them.
Next, as yourself whether this person can perform fraud. In the case of Client X, if his strategy of placing two orders had been successful, he would have taken thousands of dollars from the losing broker. The fact that he was constantly flying around the world made his strategy more effective. Putting pressure on the broker to place the order while he was “up in the air.”
Finally, the fraudster asks you to “bend the rules.” He knows that company policies usually ask for a deposit, but surely you can make an exception for him, just this once. After all, he is unique, a person of influence and great power, and should be entitled to some accommodation.
Put these attributes together, and you have the perfect profile of Client X: easy-going, pleasant personality. Has the connections and contacts to commit the fraud. Being well-known, even famous within his community, puts you in a difficult position where you must compromise your standard rules and procedures.
Ignoring their public persona and asking whether these conditions for potential fraud exists has helped me avoid many bad actors.
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