the 20th century. The first common thread BOOK REVIEW: that ran through the book was that most of these individuals did not see themselves as Frankensteins of evil; however, they all knew that they had stepped out of bounds. The second 1 common thread was their insatiable Fraud appetite for wealth and power to the very end. The third common thread is in some 2 ways they generally may have some Graham Mitenko inordinate amount of control over their victims. Although all of the stories were very interesting, in the interest of time and brevity I have summarized the five that I found the most interesting. The approximate decade of their malfeasance is During a year of major fraud and in brackets following their names. deception in the American and world economic systems, a report on a book My Favorite Five and Their Claim to Fame about fraud might be a little like taking “coals to Newcastle”. As this book Cassie Chadwick (sec. 1900’s). – demonstrates through the telling of its Cassie was born in Canada in the second stories, there is little new under the sun half of the 19th century. She was able to when it comes to fraud. The prime convince the bankers in Cleveland, Ohio ingredients (perhaps it should be spelled (one of America’s wealthiest cities at that ingredients) are 1) an over confident time) that she was the illegitimate daughter investor, 2) a conman (or con-woman) who of Andrew Carnegie (the wealthiest person has ice water running through their veins, in the world at that time). The interesting 3) an ideal setup; not too good, not too bad, part about this is that she herself never and 4) time to execute a perfect plan. directly spread the rumor. Instead she left Students today are just getting their eyes hints and let certain facts slip, so that opened to the fact that sometimes, what is others would get the impression that it was stated as fact from a company’s side of the so. ledger is fiction by any other definition. After a series of failed marriages she “Frankenstein’s of Fraud” delves eventually married a physician in Cleveland into history, the schemes and the lives of with connections to the “Millionaires' Row” the 10 most notorious business frauds of (the Rockefellers, the Hannas, the Hays and the Mathers). In one of her more notorious

1 Wells, Joseph T., Frankensteins of Fraud. moves, she “accidentally” dropped a piece Obsidian Publishing Company, Austin, TX, 2000. of paper so that her husband’s banker ISBN # 1-889277-25-8. would find and read it. The paper described 2 Graham Mitenko, D.B.A., Department of a $2 million inheritance and substantial Finance, Banking, and Law; University of Nebraska at stock in a railway. She swore the banker to Omaha; Omaha NE 68182. Email: [email protected]. absolute secrecy. All of this documentation

Economics & Business Journal: Inquiries & Perspectives 135 Volume 3 Number 1 October 2010 BOOK REVIEW: Frankensteins of Fraud Mitenko was of course, fake. However, as her story against a Boston financial reporter made its way through the banking investigating Ponzi’s company). Ponzi lived community, most of Cleveland’s premier well, mansion, heated swimming pool, air could not wait to lend her money based on conditioning (both very rare at the time) her inheritance. In all, somewhere in excess and a yacht. of $20 million dollars, which she spent on It all came “crashing down” in “schlock” and keeping her story alive (by August 1920. The Boston Post estimated hiring and paying the bankers to look after that 160,000 IRCs would have had to be her fake estate). issued produce this type of profit. In reality When it all came crashing down, her only 27,000 were ever issued. Then the trial was covered around the world and was banking commissioner for the State of even attended by Andrew Carnegie. He Massachusetts investigated Mr. Ponzi’s wanted to see the woman who duped some company and when the company started of the most conservative bankers by bouncing checks, he ordered the banks not employing his name. to honor the checks. Ponzi was sentenced Charles Ponzi (sec. 1910’s). – Born in to five years in prison, was released after Logo, Italy, Charles Ponzi name will forever 3.5 years and then went on to his next be part of the lexicon of financial landscape. fraudulent scheme; Florida land The term “Ponzi Scheme” in which the development. The rest of his life was spent capital of current investors is used to pay in and out of jails and running from the law. back the promised returns of past investors He ended up in Rio de Janeiro where he is derived from his scandal. After numerous died, destitute, in ill health and broke. small business failures (with questionable None of the money was ever recovered. ethical behavior) Charles hit upon his Ivar Kreuger (sec. 1920’s). – Born in “goldmine”. This involved in the investing Sweden and became the first international in international reply coupons (IRCs). These (world) financier in the 20th century. He were a type of guaranteed return postage, founded a construction company in the first which due to changing exchange rates and part of the 20th century that purchased the inflation could be worth more in the patent and employed the “steel in purchased country than the redeemed concrete” method of building structures. country. The Ponzi claimed that of the IRCs The money that he made from his world- could bring a huge profit. wide construction companies financed his Ponzi sold the IRCs paper promising most lucrative venture and the one he 45% in 45 days and 100% in 90 days. At the became known for “Swedish Match”. In an height of the scandal he was selling era where matches were a fact of everyday $250,000 of useless paper a day. Two life, Ivar ended up controlling 75% of the things prolonged this fraud; 1) Most people world’s supply of not only matches but their did not take the profit but kept reinvesting, inputs wood, sulfur etc. He became known so Charles did not have to come up with as the “Match King”. In his quest to control any money as the contracts ended, and 2) the world match production Ivar sought out the burden of proof in liable law suits at financing and eventually purchase some that time were on the investigators. Any large banks (in countries with lax banking hint of fraud was vigorously pursued by laws) to facilitate this end. Ivar also Ponzi’s attorneys (he won a $500,000 suit controlled some large investment

Economics & Business Journal: Inquiries and Perspectives 136 Volume 3 Number 1 October 2010 BOOK REVIEW: Frankensteins of Fraud Mitenko companies to make sure that his public but this time he met “Dutch” Schultz in offerings were successful. prison and established a loose and on-going At his zenith in 1929, Ivar Kreuger partnership. was estimated to have a personal wealth of Phillip Musica was fascinated of how $100B (2006) and control over 200 much money could be made in the companies worldwide. These included; “bootlegging” trade. He had a plan to get Kreuger & Toll AB. (the holding company for alcohol from the Feds and supply it to the the all of Kreuger’s corporations), IT&T, mob. Phillip founded the Adelphi Diamond Match, USA; Ericsson Telephone, Pharmaceutical Manufacturing Company, Alsing Trading Co, England, Deutsch Bank, under the alias Frank D. Costa. The Union de Banques – Paris, The Bank of company was in the hair tonic and Sweden, The Commercial Bank of Holland, cosmetics business, which entitled the and five of the largest top 10 construction company to receive 5,000 gallons of raw companies in the world. He had substantial alcohol a month, with government blessing. loans ($42B in 2006 dollars) to17 world This alcohol was then sold as hair tonic, countries including Italy Sweden, France, primarily to bootleggers who bought his Greece and Turkey. tonic and distilled out the alcohol to make The market crash in 1929 and the beer and liquor. Musica eventually sold the subsequent world economic downturns business, changed his name to Dr. Frank D. spelled the end for the Match King. Kreuger Coster, and used the profits to purchase was solvent until mid-1931 when McKesson & Robbins Pharmaceuticals fluctuations in the foreign exchange rates which moved him to Wall Street. dealt a death blow to his companies (he had During this time the company’s a huge investment in post WWI Germany auditors, Price Waterhouse, didn't verify and the Mark was becoming worthless). inventories. Dr. Coster set up an elaborate Ivar Kreuger took his own life, in Paris, in ruse of running a fake warehouse and the spring of 1932. Some $250M in claimed customer list (W. W. Smith) in Montreal, assets was never established. Because of that combined accounted for (a reportedly) this financial debacle, the U.S. enacted $8M worth of inventory. In fact the some very tough rules and regulations that Montreal offices were nothing more than a were enforce until the 1990s. When they drop box where documents were sent, were finally relaxed, this opened the door stamped, and secretly returned to Dr. for the Enron and Madoff scandals. Coster. The scam was so successful that it Dr. Frank D. Coster (sec. 1930’s). – allowed Philip Musica (Dr. Coster), to Dr. Coster was born in Naples, Italy (Philip become upwardly mobile, purchase a large Musica). He was a small time con who hit mansion, luxury auto, and yachts. He was the big-time, with the help of his family. He so successful that he was asked (and imported groceries from Italy, and bribed declined) to run for President as the tax officials on the NYC docks to under-bill Republican in 1936 against FDR. The end his invoices, thus avoiding importation came in 1937, when a clerical error forced duties. Got caught; did time. Next, Musica the company to account for their moved into the human hair (wig) business. inventories. The company borrowed $2M on non- Dr. Frank D. Coster was unmasked as existent inventory. Got caught; did time, Philip Musica. The good Dr. committed

Economics & Business Journal: Inquiries and Perspectives 137 Volume 3 Number 1 October 2010 BOOK REVIEW: Frankensteins of Fraud Mitenko suicide. It was further established that a President Jose Figueres. Figueres passed a majority of his management team was law to guarantee that Vesco would not be made up of his 4 brothers, (under different extradited. This was reversed in 1978, when surnames and unbeknownst to the President Rodrigo Carazo (1978-1982) corporate board). When told of the fraud repealed what was popularly referred to as and the subsequent suicide, the board the "Vesco Law." decided to fire him anyway. As one board On the move once again, Vesco first member put it “I guess he just couldn’t face went to Nassau and then to Antigua. While the Musica”. in Antigua he tried unsuccessfully to buy a Robert Vesco, born in Detroit, nearby island called Barbuda and establish Michigan the Fugitive Financier. (sec. it as his own country. 1970’s) Robert Vesco dropped out of In 1982 he moved to Cuba. Cuba engineering school to trade in aluminum could provide him with treatment for his contracts. He made enough money to buy a painful urinary tract infections. It also small aluminum plant and then borrow would not extradite him to the U.S. money against the plant to International In 1989, while living in Cuba, Vesco Controls Corp. (ICC), a sprawling was indicted on drug smuggling charges. miniconglomerate whose subsidiaries Then in 1990, Vesco once again crossed included Fairfield Aviation and Moeller Tool paths with Donald Nixon. Nixon went to Corp. In his never ending search for Cuba seeking to partner with the financing, Robert Vesco ran into Bernie government in conducting clinical trials Cornfeld. Cornfeld ran Investors Overseas drug, called Trixolam. Vesco had the Services Inc (IOS), a mutual fund in contacts and introduced Nixon to high perpetual financial trouble. Vesco did a ranking government officials. The Cuban hostile take over of IOS and proceeded to government agreed to provide laboratory loot the company’s funds. facilities and doctors to conduct the trials. After the protracted takeover battle, Results from the studies were positive. it was estimated that Vesco made off with Vesco (no quite understanding how hundreds of millions of dollars. He did this the Cuban system worked) attempted to by parking funds in a series of “dummy” defraud Nixon and the Cuban government companies (In 1973 the SEC’s estimate was (Castro among them) out of the company $230 M). Vesco attempted to thwart the profits. The Cuban government sentenced SEC investigation by contributing Vesco to 13 years in jail. Vesco reportedly substantial moneys to the Nixon election died of lung cancer in November 2007 and campaigne through Nixon’s nephew, was buried at Colon Cemetery in Havana. Donald Nixon. This did not work, and in However, these reports of his death have February 1973, with criminal charges been disputed. against him imminent, Vesco took the The other five individuals (who had corporate jet and fled to Costa Rica along equally intriguing stories) I will leave for the with about $200 million worth of IOS's readers to discover. They are: investments. In Costa Rica Robert Vesco 1) Stanley Goldblum – Creator of the bought freedom, of a sort. Vesco donated Equity Insurance Funding Fraud. (64,000 $2.1 million to Sociedad Agricola Industrial fake policy holders) San Cristobal, S.A., a company founded by

Economics & Business Journal: Inquiries and Perspectives 138 Volume 3 Number 1 October 2010 BOOK REVIEW: Frankensteins of Fraud Mitenko

2) Crazy Eddie Antar – Electronics 5) Michael Milken - was indicted on chain mogul, “I must be crazy to sell for 98 counts of racketeering and Securities such low prices.” fraud in 1989 as the result of an insider 3) John Bennett – Ponzi scheme, the trading investigation. money was stolen from Christian religious organizations and charities, in the, publicly The Lesson: (As my grandfather discovered by an accounting teacher at a used to say) "As you build better college in Michigan. mousetraps, the mice get smarter." 4) Mark Whitacre – Division All in all, a fascinating read. president at ADM, FBI whistleblower who was embezzling from the company.

Economics & Business Journal: Inquiries and Perspectives 139 Volume 3 Number 1 October 2010