Proof that Fraud is the Biggest Business in America

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One of my lines in recent years has been “Fraud is the fastest growing business in America.”

I am clearly behind the times. It appears that the many years of rapid growth had led to the inevitable result, namely, that fraud is the biggest business in America.

Below is a page from the agenda for the fall 2015 conference for the Council for Institutional Investors (hat tip jx3). From its About Us:

The Council of Institutional Investors (CII) is a nonprofit, nonpartisan association of corporate, public and union employee benefit funds and endowments with a focused policy mission: to be the leading voice for effective corporate governance practices for U.S. companies and strong shareowner rights and protections.

You can see the full agenda here. See who is the lunch speaker (the 12:15-1:30 slot). Bear in mind that this is the only presentation on the state of the economy during the entire conference.CII_fall_2015_agenda_web

This is David Chaves’ bio:

Supervisory Special Agent David A. Chaves is a senior FBI Agent assigned to the New York division. He serves as the securities fraud program manager for the most visible securities cases prosecuted over the last decade. He is widely recognized as the chief strategist in coordinating these complex white collar investigations and for infiltrating corrupt participants in the hedge fund industry through the use of sophisticated techniques, undercover operations, and wire taps.

He is a securities fraud subject matter expert and lectures to audiences in both the public and private sector on securities fraud cases including Madoff, Galleon, and Perfect Hedge investigations. Prior to joining the FBI he was a civil litigation attorney in Boston, MA.

And not only that, but as you saw, CII is composed of long-term investors like pension funds. Their choice of Chaves as a speaker suggests that the CII is bullish on fraud, as in they expect it to continue to be a top performer in the US.

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  1. Mike


    Boy, I guess I am just naive, but I don’t get that inference at all.

    While I am in no doubt that corporate America at the HQ level is mostly about influence at the political level, it is entirely unclear to me that this particular speaker at that conference is a providing manual for how to cheat.

    Keep up the good work on the trade traitors, but try to me a little less opaque for folks like me,

    1. Nick

      Indeed, I’d expect this kind of paranoia in a zerohedge post, but not here. Tisk,tisk….

      1. tegnost

        Maybe you could cite some enforcement actions undertaken by the fbi agent that would make me believe he was at the conference to warn that egregious behavior will not be tolerated? Almost seems like another andrew bowden moment where he’s going to be looking for a trip through the revolving door, you know, “you’re such great people and i know how to keep you out of trouble…

      2. citizens divided

        You may want to take careful note to whom is likely behind the curtain at Zerohedge

    2. PhilK

      a manual for how to cheat

      What? A manual for “corporate, public and union employee benefit funds” to cheat Wall Street?

    3. Tom

      Agree with Mike – If you don’t supply a transcript of the gentleman’s talk, this post feels like a mighty leap to conclusions.

      1. Yves Smith Post author

        Wow, can you lighten up?

        And did you actually LOOK at the agenda?

        You have someone who presents himself only as an expert on financial fraud lecturing on “Economic Outlook” to an audience of investors managing very large amounts of money.

        Please tell me how you square that. The only way I could was via the joke at the top of the post.

    4. alex morfesis

      and on the 13th week…

      they cooked the books…

      derivatives took the old school

      “look at the footnotes in the back of the 10q”

      for signs of financial nonsense to a different dimension…

      but it was always there for people to see…derivatives need counter-parties…

      were enron, worldcom and madoff cooked books or counter-parties that quickly got thrown under the bus so no one would have time to ask bigger questions…

      even captain “free float” and his sidekick munger have fun check kiting corporate revenues…

      i will gladly pay you tuesday for a burger today…

      when textron was using its rating to operate a general finance company operation, it handed out money for shop floor financing of inventory at rv and mobile home companies…if one did not fall asleep reading thru the papered over complexity, one might have found a disclosure of a counter-party with textron financial…if one back traced the name it might just have been one of the myriad of B/H companies that just happened to be selling those very same rv and mobile homes being financed on those shop floor vendor financing deals…so was it a guarantee, was it a kick back…was it an off book financing vehicle so one did not see the disclosure of risk associated with getting a dealer to take the inventory and be able to book it as a sale when in fact the parent is guaranteeing the financing thru a derivative contract

      the emperor has never worn any clothes and there was never enough gold in any vault to back any currency

      but at least now, ab (after bloomberg), one can read thru disclosures and run parameters to try to make sense of the nonsense

      or at least try to…

    5. Yves Smith Post author

      Did you bother looking at the agenda?

      Do you guys have no sense of humor?

      Do you not appreciate the ridiculousness of having an expert on financial fraud speaking on “Economic Outlook,” indeed being the ONLY speaker in the entire conference giving a talk about the economy?

  2. Christer Kamb

    I´m not surprised the investment-business today is about how to make big bucks fast instead of investing in the real economy. Why do you ask? Well if you look behind you will see investments BY companies have been stagneting since the 80´s while investments IN companies have been rising since. That my friends is about the financial era that started in the early 80´s and it shows that money-managing has been slowly out-crowding the real economy in many ways, not to talk about the brain-drain from real business to banking and worse from banking to shadow banking and hedge-funds. It´s more about trading and marketing, not producing. When it comes to easy money there will always be fraud. Simple!

  3. Christopher Fay

    If we could be optimistic we can hope for a bull market in pursuing and prosecuting fraud.

    Let’s dream

  4. ex-PFC Chuck

    From the bio you quoted:

    He serves as the securities fraud program manager for the most visible securities cases prosecuted over the last decade. He is widely recognized as the chief strategist in coordinating these complex white collar investigations and for infiltrating corrupt participants in the hedge fund industry through the use of sophisticated techniques, undercover operations, and wire taps.

    My memory must be going, because I don’t remember very many people going to jail for securities fraud over the past decade, especially since January, 2009.

  5. Tom

    He must be asleep at the switch as not one banker has gone to jail while over $100 billion in fines has been paid. Keeping in mind, that the FBI is supposedly chasing criminals, not traffic violators.

    I’d rather he be out arresting people than giving speeches to fairly unknown associations – but – maybe they are his exit strategy as his next lawyer job.

    1. Christer Kamb

      FBI was tipped on Madoff but did not investigate. At least not with interest it seemed. Madoff could continue another few years.

      1. NotTimothyGeithner

        Madoff’s mistake was turning himself in. If he had sat tight, he would probably be an under secretary at commerce.

    2. washunate

      That’s one of the points of the political focus on international terrorism. It shifts manpower and strategic vision away from domestic white collar crimes.

      The FBI itself called fraud an epidemic in direct Congressional testimony. That’s about as direct as you can be to your bosses (the political class) without being grossly insubordinate.

  6. John Merryman

    There are a lot of guilty parties in that.
    One it is the nature of the beast that a process which isn’t growing will be consolidating and the problem with capitalism is that it conceives of money as a commodity and store of value, rather than a social contract and voucher system. So now it’s all about that bubble of notational wealth, not a strong social and civil network.
    Those riding the wave are doing just that. They have little control over it and when it crashes and that enormous bubble of notational hope vanishes, many of them will be used as piñatas, as fear takes over.

    1. craazyboy

      “Money as a store of value” does NOT equate to “asset bubbles”.

      The reason I know this is because I have some money, but did not buy common stock with it. At the moment, my net worth notational value has suffered greatly by not buying into the fraud.

      Capitalism does not necessarily have to devolve into market speculation – we just pulled out all structural impediments to ensure that it does.

      1. John Merryman

        Lol. Your net worth “consolidated.”

        If you go back to the 70’s, inflation was whittling away at the value of money and it was presumably cured by Volcker raising interest rates, which is done by the Fed not buying much treasuries and selling some of what they do have. Which reduced the growth of the money supply.
        Now it really didn’t work until 82, by which time the deficit had grown to 200 billion, which was real money in those days. So what is the difference between the Fed selling bonds it had and the Treasury issuing new ones? Not much, except that the government could do a good bit of Keynesian pump priming with the money it was skimming off the economy.
        So ask yourself, who was buying these bonds? Not the air traffic controllers. It was the people with a lot of extra money. Did anyone point out that as inflation is caused by excess money in the system, the problem must lay with those with an excess of money? Not ever. That was swept very far under the rug.
        Think how money really functions, as a form of voucher system. Would it make sense to store enormous amounts of extra vouchers, or would this rather quickly crash the system? So how do you go about keeping those extra notes busy?
        Would it be logical to just tax off the excess and either burn, or put them to public uses, or would that be political suicide? So why not just do the polite thing and borrow them up? It would work for awhile. By which time, it becomes someone else’s problem.
        Money is a bookkeeping device. Period. It is a promise make by someone else and we would all like plenty of those, but eventually someone has to pay, or it all blows up.

      2. John Smith

        ” – we just pulled out all structural impediments to ensure that it does.” craazyboy

        Yep, with no or light regulation should go no or light government privileges.

        Our system combines heavy government privileges with light regulation. How can that not be dangerous?

  7. JTMcPhee

    Maybe Yves was having a little fun with this? And with us serious readers? Irony and snark are so hard to detect in this complicated world, where so much is awry and so much that might be laughworthy is too depressing or complicated to contemplate…

    Government-wide, since at least Reagan Revolution, “enforcement” of laws against destructive activities of Bidness has been the province of place holders. I left off after trying, finally, after 13 years of efforts to be an effective enforcement attorney with the US EPA out of frustration at the kayfabe, at being told that the agency was now a service organization to help Bidness “comply,” so jail terms and meaningful penalties enforced against people with that other kind of “agency” were no longer needed. And of course “the law,” that plastic putty, has been changed — stuff like declaring that “petroleum and petroleum products” are not hazardous, and are not pollutants or contaminants. I’d look up the pitiful proud announcements of, e.g., EPA criminal enforcement “successes” for the last fiscal year, but too depressing…

    The grabbers and fraud artists rely on the ignorance and pitiful resilience of the rest of us.

  8. Steven Greenberg

    In my continuing series, “What part of no freakin’ customers do you not understand?”, I’ll comment on the remark:

    “Well if you look behind you will see investments BY companies have been stagnating since the 80´s while investments IN companies have been rising since.”

    If you have excess manufacturing capacity and high unemployment and underemployment, why would any sane company invest in more capacity? The only way a company can expand is to take market share from some other company,. Buying that company is one way to do it. Besides, buying other companies eliminates competition. Since we don’t enforce anti-trust laws anymore, this concentration is relatively easy to accomplish.

    The only way this is going to change is to increase the consumer demand, and make it harder to concentrate the supply side. This has nothing to do with companies coming to the realization that they should supply more and concentrate less. The system has to demand it (incentivize, if you must use that phrase), and the companies will respond. I am not talking tax incentives, we’ve had plenty of that. The idea of tax incentives goes back to my opening statement “What part of no freakin’ customers do you not understand?”

    1. MaroonBulldog

      Ah yes: Y = I + C + G + (X – M), so make C grow that Y may grow, because I is going to be stagnant until grows.

      That formula may hold the key to solving many problems, but the problem at hand is fraud, and growing C and Y will not solve fraud. It will not reduce it. It will increase it. Because, the more wealth there is in society, the more there is to steal, The people who steal big now will only steal bigger in the future if the opportunity to do so is there.

      Too much is never enough for the perpetrators of fraud.

      1. John Zelnicker

        So, is that a reason to keep a lid on C, to avoid increasing fraud? Just askin’

  9. DJG

    I think that we all recognize that once the government put Martha Stewart in jail for securities fraud, all was right in the land. And it temporarily stopped her from publishing recipes for home-made marshmallows, too.

  10. bayoustjohndavid

    From the 2007 McLaughlin Group end of the year review show

    MR. MCLAUGHLIN: Most underrated: Corruption in America. We’ve seen it on the corporate level, Enron, and on the political level, Abramoff. But this is the tip of the iceberg. Sadly, corruption in America is ingrained in almost every aspect of our lives.

    Unfortunately, only the transcript is still up at the website, so you can no longer hear how emphatically McLaughlin said the last sentence. Since McLaughlin isn’t some Zero Hedge conspiracy theorist, but is about as establishment, mainstream, and well-connected as you can get, that has to be the WTFingest quote that ever failed to get a WTF. Somebody should really ask him to go into more detail, reminding him of who was power when he said it. Not to be pro-Democrat, but to keep him from making partisan talking points and evading the issue.

    Reading the transcript, you can see that in Dec. 2007*, McLaughlin and Buchanan both knew that Bear Stearns and the subprime crisis were just the tip of the iceberg and much worse was coming, but a few months later the official story was nobody saw the 2008 crash coming. You think the corruption that is “ingrained in almost every aspect of our lives” had something to do with nobody seeing the crash coming? Since tone and nuance are to convey in a comment, that’s meant as a rhetorical question.

    IIRC, McLaughlin and Buchanan, definitely Buchanan, were more emphatic about the financial crisis not being contained in 2007 than comes across in the transcript.

    1. JEHR

      The transcript no longer is available, at least to my computer, although I get a 1 second glimpse of the transcript before I get “Server Not Found.”

    2. armchair

      I spent multiple hours a day in the last months of 2007 on Nouriel Roubini and Brad Setser’s website. It was free back then and the comments section was amazing. Those were interesting times in the way that the Chinese proverb suggests that it is unlucky to live in interesting times. I learned a lot by paying attention back then. Looking back, my biggest impression is that the era of post WWII economic cycles has ended. The exact end point may be hard to nail down, but the ugliness of the 2007 crash was a signal, that we were back to a boom and bust economic cycle like what pre-dated the Great Depression. History does not repeat itself like a TV show in reruns, but the overall similarity between the pre-Depression economy and the present economy is that we are in an under-regulated free-for-all for hustlers and the mega-rich, just like before the Great Depression.

      1. downunderer

        I remember the net commentaries in the years before 2008 also, and I keep on wondering why nobody else seems to, and why 2008 is/was treated as a big surprise and turning point. I remember more than one career mortgage officer telling sad tales of the forces that made them ignore their expertise and professionalism to just keep on pumping those obviously false documents through the system. The alternative was to be replaced by the younger guy who knew nothing, and did none of the usual checking, but who would reliably keep the paper flowing.

        I (roughly) remember a guy from WaMu who assessed a development as 30% complete after visiting it as part of his job, then got told that the number had to be more like 75-80% complete to match the previous assessments and the loan schedule. And that phoney report was essential because the borrower was on the insider’s list of “Friends of [whatsisname]”.

        I remember what an impression it made on me that I, a total outsider, could know such stuff because of the net, and corroborate the feeling I got from Enron, which was that nothing that big could go on without so many people knowing all about it that it must be a general practice that the Enron guys just pushed a little beyond the limit.

        So 2008 was no surprise to me, just confirmation of what I knew: everybody is going to go on ignoring massive fraud and criminality because all those with high offices and big voices and the right connections are in on it, making huge fortunes from it, and they’ll agree on their stories in all the major media.

        And so it came to pass, and now we are watching the waters recede ahead of the arrival of the next tsunami. Some folks wander the exposed sands picking up shells and sneering at others who try to warn them, dismissing and dissing the truth-tellers with the vocabulary (“alarmist” “doomcryer” “conspiracy theorist” “populist” “socialist”) provided by those who earn their share of the loot by telling everyone that all we need is more deregulation.

      2. Lambert Strether

        I’ve heard it said that after 2008, the elite realized they can’t run the same scam again. “It’s over.” However, they have not been able to come up with a new scam yet. (The shafting sharing economy; robots; Mars!; startups, etc.)

  11. JTMcPhee

    …of interest also (there are so many of these gatherings, where various kinds of political-economic cancers and parasites and pathogens get spread) is the sponsorship of the “reception” at the end of the conference — Robins Kaplan LLP does what kind of law, has what kind of practice again, has its shiniest toothiest sharks out there trying to rainmake what kind of business? It’s fun reading what the Firm has to say about itself:

    And thus the dys-incentives (not DIS-, DYS as in “disease state”) grow, day by day, unchecked until the damage to the stolid, diligent, unprotesting, Boxer of a host starts getting really ill. At which point the pathogens can really proliferate… until, as the line in the police soap operas almost always appears, “I smell decomp…” but not enough of the force is doing the forensics and really looking for the killer(s)… who have the best defense money can buy anyway, and if Heaven forbid they get actually convicted of something, they can cut the best possible deal with help from these folks and others in the business:

    National Prison and Sentencing Consultants, Inc., NPSC, is a prison consulting, research and investigative firm that assists federal and state offenders and their attorneys with all aspects of potential federal criminal sentencing. and matters relating to the Federal Bureau of Prisons We have built a national clientele and offer our services throughout the United States investigating, preparing and implementing sentence reduction strategies. We also assist white-collar offenders with prison sentence reduction strategies and preparing for a term of incarceration providing emphasis with the federal prison system

    Our staff has been featured on MSNBC®, ABC News, The Abrams Report®, Fox News, Forbes Radio, Canadian Broadcasting Company, Inside Edition, and we have been extensively quoted and interviewed in Forbes, Wall Street Journal, New York Times, Newsweek, People Magazine, Chicago Sun-Times, The Washington Post, The Associated Press, The New York Times, The Times (of London), The Los Angeles Times, The Chicago Tribune, The Denver Post as well as numerous other national and international print and electronic media outlets.

    We work closely with our client and their legal team to ensure that incarceration is the last possible alternative for the court and ultimately for our client….

    We offer assistance to our clients, federal and state offenders and their lawyers in plea review, post-plea and conviction stage proceedings and, if necessary, post incarceration stage of their criminal proceedings. We provide pre-plea as well as post-conviction and sentencing services, including state parole assistance. Our entire focus is to minimize or eliminate the amount of time one spends “behind the wall.” We also assist in the placement and designation to federal prison, camps and minimum security facilities. NPSC’s founder was formerly a practicing lawyer and a federal “white collar” offender that was incarcerated in several federal prisons with different security classifications.

    We do not provide legal advice or provide legal services and are not a substitute for your lawyer. Rather, we work with our clients, their lawyers and family with proposed plea agreement review, Pre-Sentence Report (PSI/PSR) evaluation and commentary; sentencing guideline departure investigation and analysis; prison designation and classification services and post-conviction assistance. We assist our client, their family and legal team to minimize the amount of time the offender will be incarcerated. We believe that our services may be of assistance in minimizing the actual time our client spends in prison and may reduce their security classification and, hence, affect the nature the and type of facility they are assigned.

    Now isn’t that special?

      1. JTMcPhee

        No spoof, and there’s a dozen other businesses iin the same racket. Correction consulting advice on sentencing guidelines, even if the sh-t does the perp walk, he can get his people to ensure warmed towels and short or no time, and what part of his magical money pot did Mike Milken have to disgorge?

        Nothing is ever what we think it is, and you can’t be too cynical, ever…

  12. Stuart Gittleman

    Chaves’ focus at fund adviser compliance confabs I attended as a reporter was on insider trading, billionaires ripping off mere millionaires but also managers of retirement & pension plan money if they traded actively. He may fit the CII agenda but his advice has to trickle – no, pour – down before it can have much of an impact. Since, as NC reports, these managers don’t care about being raped on fees (WHY THE F NOT?) he may be an interesting sideshow & “evidence” that the DOJ/SEC/FBI is hard(ly) at work.

    1. Yves Smith Post author

      Yes but please look at the agenda. The point is he is slotted as a lecturer on the economy, and he’s the only speaker in the entire conference presenting on that topic.

  13. NOTaREALmerican

    Adults do fraud. Children do morals.

    Adults do duplicity too. Fraud + duplicity = opportunity !

    Bullshit, ask for it by name!

  14. Chauncey Gardiner

    Why was an FBI official responsible for investigating criminal securities law violations speaking at this meeting? Illustrates to me the embedded and pervasive nature of the problem we are dealing with. Besides the “Economic Outlook” speaker from the FBI, it was also interesting to see all the “Networking Breaks”. Would someone please open the revolving door in the back, to let in a little fresh air.

    Also appreciated the Council’s subject focus on “Investing for the Long-Term” in an environment rife with fraud, corruption and short-term performance bogies.

    I am struggling to recall any securities fraud criminal prosecutions of executives at the “Too Big To Fails” over the past ten years.

    1. susan the other

      I know. I thought CII’s focus on long term investing was strange in a world that probably will never grow again. They probably finessed this reality with FBI bravado. Get enough muppet fund managers to invest long term and insiders can finally get out.

  15. TedWa

    According to Bill Black the FBI can not consider fraud committed by banks to be fraud, only consumers and users can commit fraud. So, yeah, bail out the banksters and you give free reign to fraud with impunity. Change the definition of the word fraud to never include banksters, and you have the TBTF queen bees producing hundreds and thousands born out of fraud. Not a bug, a feature

  16. MaroonBulldog

    We may be in danger of passing the level of fraud that Alan Greenspan would consider “optimal” for our economy! If that happens, then someone, maybe the government, may have to do something about it!

  17. susan the other

    Conferences like this one should be offset by Truth Conferences wherein it is fully acknowledged that there will never be a return on your investment again and quite possibly you will lose much of it, if not to fees then certainly to new markets that have nothing in common with today’s markets. This might as well be another Bernie Madoff Investor Conference. It’s very depressing.

  18. dk

    Fraud has always been the biggest game.

    It just wasn’t always this easy to recognize and measure it in detail. That is of course in part a byproduct of its vast proportion these days. But the use of automation makes fraud both easier to perform, and easier to recognize and track.

    Which just goes to show that automation can easily become a complete waste of time and resources, creating problems that offset its benefits. Automation fosters inattention, and using more automation to refocus attention lost through automation is still a net loss of resources.

  19. gordon

    This blog did a post on tax havens/fraud in 2010 which produced some useful links in comments (though I don’t know how many of those links are now dead):

    There is still the website of the (US) Assoc. of Certified Fraud Examiners, including their roundup “Report to the Nations” (latest ed. 2014):

    PriceWaterhouseCoopers also has done reports on fraud, though the format is awful:

    One of my favourites:

    “…The author opens his book with a little-known operation from the Iraq War; it began immediately after the U.S. occupation of that country and continued until the summer of 2004. Air Force C-17 cargo planes transported $20 billion in cash from the vaults of the New York Federal Reserve Bank in East Rutherford, New Jersey, to Baghdad. The ostensible purpose of this cash, much of which had never been formally appropriated by Congress, was to revive the country’s shattered public services and pay Iraqi civil servants.

    “The program was so hideously mismanaged that $11.7 billion of the $20 billion was unaccounted for, disappeared, or was stolen. As one might expect in a Middle East culture of baksheesh, an unknown quantity was pocketed by Iraqi politicians. But another, also undetermined, amount was skimmed by mid-level and junior U.S. military officers in charge of counting and distributing the cash; Risen mentions the cases of some who were caught depositing suspiciously large sums in their bank accounts in the United States…”.

    1. gordon

      From the FBI:

      A rather famous Taibbi article:

      By (US) State, with links to Federal Trade Commission:

      More on Iraq:

      Katrina fraud, and a meditation on who are the consumer fraudsters:

      1. OpenThePodBayDoorsHAL

        This is a good piece of Congressional theater, if nothing else. The woman (Fed oversight) has no earthly clue how to do her job, or even why:
        Disagree with Lambert that after 2008 the elite thought they couldn’t run the same scam and haven’t found a new one. They’re well into the same scam as ever: total control of the money spigot for the benefit of those closest to it.
        As far as ZeroHedge goes, tin foil conspiracy etc. I don’t care who runs it, they remain the single place with the best analysis and “real-think” there is. Look back a few years and one by one their conspiracy “theories” have all become conspiracy “facts”. Whatever DID happen to the inquiry into that Malaysian plane “Putin shot down”, you know, the pretext we used to restart the Cold War and threaten the world with annihilation again?

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