(cc onttinued f rom fro n t fflapp ) Financial from Tulip Mania $29.955 USAA / $335.95 CAN bibliography, History of Greed also details: Sarna • 400 years of fi nancial fraud—from everyday to Bernie Madoff fraud to the odd and unusual • Accounting fraud (phantom sales), option fraud (backdating), auction rate securities, hedge Praise for he “greater fool” theory of economics states fund fraud, Ponzi schemes, promotion fraud HISTORY OF GREED that it’s possible to make money by buying (pump-and-dump scams), and money laundering Tpaper (securities), whether overvalued or • How to detect fraudulent schemes “David Sarna is a visionary technologist. He is also a sophisticated and not, and later, selling it at a profi t because there will • How government only fi xes yesterday’s fi nancier. He has written a readable, comprehensive, fascinating, and well-researched always be an even greater fool willing to pay the problems book that explores troublesome aspects of the fi nancial system in a way only an higher price. Many described in this book profi ted experienced insider could.” GREED by peddling such worthless junk to foolish . If it’s too good to be true, it probably is. If they say —Jay N. Goldberg, Senior Managing Director, Hudson Ventures But for some people—Bernie Madoff, Norman Hsu, you can’t lose, you probably will. History of Greed Sholam Weiss, and “Crazie Eddie” Antar, aka the shows that there really is no such thing as a free “A comprehensive review of what has happened to us in our fi nancial markets over and “Darth Vader of Capitalism”—overvalued securities lunch, while also detailing how not to become the over and over and over again. It’s an important history, written with wit and delivered were not enough. Outright fraud was their way of “greater fool.” with wisdom. Undoubtedly, History of Greed will become required reading for anyone life. History of Greed is the compelling inside story serious about understanding the capital markets.” of the names you know—Charles Ponzi, Baron DAVID E. Y. SARNA is a —Frederick L. Gorsetman, Founder and Managing Member, Rothschild, Lou Pearlman—and the names you Oxbridge Financial Group, LLC serial entrepreneur who founded don’t—Isaac Le Maire, the world’s fi rst “naked” three companies, sold one, and -seller. It’s also our story—why we ignore the successfully took two public. He 400 years of financial fraud in the making lessons of the past and fall prey, most every time, to is also a technologist and a writer. From the earliest fi nancial scams of the seventeenth century, through the headline- the promise of easy money. Mr. Sarna is also the creator of several popular blogs, grabbing Wall Street scandals of our times, History of Greed provides a comprehensive SM SM including GreedWatcher.com , GoogleGazer.com , history of fi nancial fraud. In it, David E. Y. Sarna exposes the true and often For thousands of years, alchemists unsuccessfully SM and EyeOnTheCloud.com . He has authored four riveting stories of how both naïve and sophisticated investors alike were fooled by tried to turn worthless base metals into gold. Where books, written over 120 articles, was a founding unscrupulous entrepreneurs, lawyers, hedge fund managers, CPAs, Texas billionaires, science failed at turning nothing into something, regional director of the Microsoft Developers political fundraisers, music managers, fi nancial advisers, and even former Mossad business succeeded. Sometimes we praise the Network, and is a popular and award-winning agents. From the people behind the fi nancial fraud and how they did it to why people creators of derivatives, collateral debt obligations, speaker with multiple national television appearances continually fall prey to scam artists, Sarna outlines what actions you can take today subprime mortgages, credit default swaps, or auction on Fox, CNN, and MSNBC. to protect yourself from becoming the victim of tomorrow’s “too good to be true” rate securities as Wall Street’s new fi nancial wizards, the creators of “magic paper.” Other times, we vilify Jacket Designn: Michael J. Freelann d investment opportunity. History of Greed details how markets are manipulated, books Jacket Illustraatiot n: © MPI/Gettyy Images and prosecute them as scam artists. Sometimes, it’s Author Photograaph:p Leora L. SSarna, RN are cooked, Ponzi schemes are hatched, and how the government only closes the barn door once the cows have all escaped. hard to tell who is who. History of Greed reveals the GREED inside secrets of how the markets really work, and how scam artists abuse them to gain an unfair edge or to outright steal. It describes how luftgescheft David E. Y. Sarna (“air business”), wizardry, dishonesty, and fraud are used to swindle people. Along with a comprehensive Foreword by Andrew Malik (co n tinnuedd on bbackk fl a p)

EAN: 9780470601808 ISBN 978-0-470-60180-8 Overall Matte Finish ffirs.indd vi 6/24/10 7:44:21 AM Praise for History of Greed

“David Sarna has written an important, readable, erudite, and compelling book that delves into all of the dark corners of the fi nancial markets in a way that only one who is a knowledgeable intellectual like David and who has seen, as David has, the inner workings of the markets can do.” —Andrew Malick Chairman, Needham & Co.

“David Sarna has provided a close-up, insider’s view of some of the shenanigans going on in and around the fi nancial capitals of the world. It is very readable, entertaining, and almost funny until you realize all the lives that have been hurt by the combination of at best amoral and more correctly criminal acts aimed at investors of all stripes who foolishly expected and chased outsized returns. Sarna describes all this against a backdrop of regulatory complacency, along with overgenerous bonuses and salaries for the titans of fi nance and industry who added little if anything to the quality of life for those who did not ride the gravy train with them.” —Jonathan Harris, CPA Retired Senior Partner, Big Four accounting fi rm

“David Sarna is a visionary technologist. He is also a sophisticated investor and fi nancier. He has written a readable, comprehensive, fasci- nating, and well-researched book that explores troublesome aspects of the fi nancial system in a way only an experienced insider could.” —Jay N. Goldberg Senior Managing Director, Hudson Ventures

“A comprehensive review of what has happened to us in our fi nancial markets over and over and over and over again. It’s an important history, written with wit and delivered with wisdom. Undoubtedly, History of Greed will become required reading by anyone serious about under- standing the capital markets.” —Frederick L. Gorsetman Founder and Managing Member, Oxbridge Financial Group LLC

ffirs.indd i 6/24/10 7:44:19 AM “Fascinating! I did not think the trading of securities and reading about it could be that absorbing.” — Carl Nisser Counsel, McGuire Woods Former Judge at Svea Court of Appeal, Stockholm

“History of Greed is right on the money and quite timely. I found a lot of information and much I did not know, and I have been around the industry for a while. It made me feel like a dunce once I saw how the manipulative trading on the over-the-counter (OTC) stock market really works.” —Philip Fox Insurance Executive and Former Broker

ffirs.indd ii 6/24/10 7:44:20 AM History of Greed F inancial F raud from T ulip Mania to Bernie Madoff

David E. Y. Sarna

John Wiley & Sons, Inc.

ffirs.indd iii 6/24/10 7:44:20 AM Copyright © 2010 by David E. Y. Sarna. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Sarna, David E. Y. History of greed : fi nancial fraud from tulip mania to Bernie Madoff / David E. Y. Sarna ; [foreword by] Andrew Malik. p. cm. Includes bibliographical references and index. ISBN 978-0-470-60180-8 (hardback); ISBN 978-0-470-87769-2 (ebk); ISBN 978-0-470-87742-5 (ebk); ISBN 978-0-470-87770-8 (ebk) 1. Fraud— Case studies. 2. Commercial crimes— Case studies. 3. Avarice— Case studies. I. Title. HV6691.S27 2010 364.16'3 —dc22 2010010929 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

ffirs.indd iv 6/24/10 7:44:20 AM For my family, with all my love

ffirs.indd v 6/24/10 7:44:21 AM ffirs.indd vi 6/24/10 7:44:21 AM Contents

Foreword xi Acknowledgments xiii Introduction xv

Chapter 1 Selling Air 1 Why Now? Chapter 2 Crash Postmortem 7 How Greed, Hubris, and Lack of Supervision Did Investors In Chapter 3 Why We Do It 14 Bubbles and Fraud Chapter 4 20 Its and Storied Past Chapter 5 The Perils of Greed 31 It’s All for the Easy Money Chapter 6 The Elements of Financial Fraud 36 A Case Study with “Crazy Eddie” Antar Chapter 7 “Other People’s Money” 43 The O.P.M. Leasing Fraud Chapter 8 Smaller-Company Fraud 48 The “ISC” Story Chapter 9 Selling Long and Short 58 But Mostly Short

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ftoc.indd vii 6/24/10 7:44:59 AM viii contents

Chapter 10 63 Improper Short Selling and Other Abuses Chapter 11 PIPEs 73 Investing Unfairly Chapter 12 Promotion Fraud 91 Pump and Dump Chapter 13 Leaks, Front-Running, and Insider Trading 100 Test Yourself Chapter 14 Fictitious 108 A Pump-and-Dump Scam with Intrigue Chapter 15 Parachute into Prison 116 U.S. v. Schrenker Chapter 16 Affi nity Group Fraud 121 Scamming Your Own Community Chapter 17 Twentieth-Century Ponzi Schemes 127 Larger and Longer-Lasting Scams Chapter 18 Hit Charade 132 Lou Pearlman Chapter 19 Hedge Fund Ponzi Fraud 137 Hedge Funds Are for Big Boys Chapter 20 Madoff and the World’s Largest 146 The Mother of All Ponzi Schemes Chapter 21 How Madoff Got Away with It 161 Who Helped Plot in the Mother of All Ponzi Schemes; Who Can Be Made to Pay? Chapter 22 Madoff Plea and Its Aftermath 186 Governments Go after Merkin, Kohn, and Maybe Others in the Mother of All Ponzi Schemes Chapter 23 Mopping up after Madoff 204 Lawyers Feast on Madoff Feeders in the Mother of All Ponzi Schemes Chapter 24 Other Recent Ponzi Schemes 225 Madoff was a Crook but He Had No Monopoly on Recent Ponzi Schemes Chapter 25 Stanford Group 244 Massive $7 Billion, Multinational Fraud Comes to Light

ftoc.indd viii 6/24/10 7:45:00 AM Contents ix

Chapter 26 Ultimate Chutzpah 259 The Strange Tale of , Esq. Chapter 27 Detecting Fraudulent Financial Schemes 266 How Much to Regulate? How Much to Verify? Chapter 28 Fraudulent Offerings 285 A Short Look Chapter 29 Auction-Rate Securities 287 A $330 Billion Fraud? Chapter 30 $132 Million Tax-Free Exchange Fraud 301 Section 1031 Chapter 31 Not Smart 306 The Smart Online Trading Scam Chapter 32 Boiler Rooms 314 Where the Heat Rises Chapter 33 Accounting 319 With Examples Chapter 34 Stock Option Frauds 325 Alchemy That Benefi ts Insiders Chapter 35 Odd and Unusual Financial Frauds 329 Not Your Everyday Fraud

Afterword What Does the Future Hold? 333 Notes 338 About the Author 382 Further Reading 384 Index 387

ftoc.indd ix 6/24/10 7:45:00 AM ftoc.indd x 6/24/10 7:45:00 AM Foreword

n my more than 40 years on Wall Street, I’ ve had the opportunity to participate in more than 1,000 transactions, but I have written I very few Forewords to books. However, when David asked me to write the Foreword to History of Greed, I couldn’ t say no. David Sarna has written an important, readable, erudite, and compelling book that delves into all of the dark corners of the fi nancial markets in a way that only one who is a knowledgeable intellectual like David, and who has seen, as David has, the inner workings of the markets, can do. Ever since the Dutch invented shares and limited liability com- panies as we know them around the year 1602, capital markets have fueled the growth of countless companies, created millions and millions of jobs, and produced great wealth for nations, entrepreneurs, and investors. I’ ve had the good fortune to be associated with some of the most successful capital raises of all time, through initial public offerings of such technology companies as Intel, Cray Computing, Tandem, Lotus Development, and Qualcomm. I have also lost money on many start -ups that didn’ t make it. That is okay. Win some, lose some. It’ s the price we pay for free markets; and in the long run, the winners have more than made up for the losers. Unfortunately, some are not content to merely compete in free markets; they seek to rig the game through fraud and deception, casting a pall on the entire fi nancial industry. As early as 1609, the governors of

xi

flast.indd xi 6/23/10 8:29:22 AM xii foreword

the Dutch imposed limits on unfettered naked shorting to keep the markets fair and open to all. Training a spotlight on the market’ s dark corners, illuminating wrongdoing for all to see, does a service to honest investors. As the late Sy Syms said since 1959 until his passing in 2009, “ An educated consumer is our best customer.” By explaining what’ s going on in clear language understandable to laypersons, but with detail suffi cient to satisfy the consummate professional, David shows the various ways that crooked individuals have corruptly sought to gain an unfair advantage through deception or outright theft, serving as a warning that what looks too good to be true usually is. In 1817, Chief Justice John Marshall of the Supreme Court, writing for the majority in Laidlaw v. Organ , made caveat emptor (let the buyer beware) the supreme law of the land in the United States. Caveat emptor is an implied warning to a buyer that the goods he or she is buying are “ as is, ” or subject to any defects. Some use the rule as justifi cation to mislead or cheat. This is wrong. It is not a rule designed to shield sellers who engage in fraud or bad- faith dealing by making false or misleading representations about the quality or condition of a particular product or offering. It merely summarizes the concept that a purchaser must examine, judge, and test a product before buying it. The excesses discussed in this book highlight the need for compe- tent regulation to ensure that the principles of transparency, equitable handling, and adequacy of disclosure are observed, together with fair and even- handed enforcement to deter and punish wrongdoers. Only then can integrity be restored to the markets, to the benefi t of all of us. History of Greed serves as a warning of what can go wrong when these simple principles are forgotten. It is required reading for anyone trying to understand how fi nancial markets really work. Andrew Malik Chairman, Needham & Co.

flast.indd xii 6/23/10 8:29:23 AM Acknowledgments

’ d like to acknowledge with thanks the unwitting contributors to this book: all of the gullible and greedy retail investors; naive I and/or larcenous entrepreneurs; avaricious PIPE writers; dishonest and placement agents; willfully blind lawyers, accountants, stockbrokers, and investment bankers; the army of jaded and crooked promoters; and all of the money -loving service providers who have, over the years, given this author an expensive education in all the ways in which they cheat, lie, and steal. They all know who they are, and they are consigned to anonymity as partial penance for their many misdeeds. Without them, there would be no securities fraud cases to write about. Many people helped in the preparation of this book — too many to enumerate them all. Thanks are due to my editor, Debby Englander; to Kelly O ’ Connor, development editor; to my publisher, Joan L. O ’Neil; to Adrianna Johnson; Tiffany Charbonier; Claire Wesley, Produc- tion Editor; and to all the other nice folks at John Wiley & Sons who strived behind the scenes to make this book the best possible; to Jen Westmoreland Bouchard, principal of Lucidité Writing, LLC (www. luciditewriting.com), who edited, prepared the bibliography, and kept it all in accordance with the Chicago Manual of Style; to my agent, Bill Gladstone of Waterside Literary Agency, who believed in me from the fi rst e- mail; to Scott -Martin Kosofsky, who introduced me to Bill; to Cape Cod Compositors for the index; and Michael Freeland for the cover design.

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