Fraud is NOT GOOD For Us! (a response)

This post is a response to “Fraud Is Good For You! (guest post) by “Gus,” publisher of Swindler’s Monthly: The Premier Journal for Cons Everywhere, now on hiatus as Gus serves time in federal prison for something he says he’s “completely and utterly innocent of”. Fraud Is Good For You! was published on Brucenomics on January 20, 2011.

Gus’ arguments for the economic benefits of fraud

Gus makes three main points in this essay. First, he claims “Fraud creates jobs — that’s something the Fed can’t seem to do! Second, Gus reminds us, “Fraud does not create or destroy wealth — it merely redistributes wealth”. And lastly, Gus claims that “Fraud is good — fraud gives people hope.”

Fraud creates jobs – something the Fed can’t seem to do

Yes indeed, fraud employs a whole fleet of attorneys, administrative assistants to attorneys, process servers, court reporters, judges, defense attorneys, expert witnesses, etc. In the end, when cons are caught it also goes to create jobs at federal prisons too. But do these jobs create wealth for anyone but those involved in the legal system? No, and even Gus, you’ll admit that!

Fraud does not create or destroy wealth — it merely redistributes wealth.

Right on the second part, Gus! But to whom does it redistribute the wealth? First it goes to the cons who spend it lavishly and/or hide it in offshore banks. Second, it goes to attorneys and their minions. Lots of it goes to attorneys and their minions. For example, in the Madoff case, almost all of the money has gone into the legal “eagles” or should we just say “birds of prey”?

Take the Madoff case (and please do!). “But because of several appeals and legal challenges only $325 million has been distributed to 1,232 Madoff account holders. Oh, yeah, and another $797 million has been paid out by the Securities and Investor Protection Agency (SIPC), a US government agency” (bold and italics mine)  Source: “Frustration mounts over Madoff backlog” Financial Times, December 12, 2011.

The Madoff trustee only accepted 2,425 of the more that 16,500 claims submitted. In addition, many of the victims of Madoff’s fraud who actually got money from Madoff are themselves being sued in order to pay off other victims who didn’t. The Madoff Victims Committee complains of being ripped off by not only by Madoff but by the SEC, the IRS, and SIPC. And truly all of us perhaps should be complaining about being ripped off.

Those SIPC millions were an advance from us, US taxpayers, to the Madoff trustee (i.e., the lucky attorney hired by the government to collect money that the con stole from victims and distribute what is left after the “trustee’s expenses” are deducted). Will we ever get that SIPC loan to Madoff’s trustee back? Don’t hold your breath!

The real howler here, Gus, is that Madoff stole at least 67.7 billion dollars of expected income from his victims, ($18 billion in actual funds), and all the Madoff trustee can pay the primary victims is a measly one billion dollars, with most of that borrowed from US taxpayers?  That’s a pretty lousy return on an investment in fraud, don’t you think, Gus?

Fraud is good — fraud give people hope

Now this, Gus, is quite true! Fraud does give good people hope. But it only does so as long as the fraud isn’t discovered by those good people. We can all agree that Bernie Madoff made a lot of people happy while his pyramid scheme paid out. Maybe some of his victims even died happy. But their descendants who inherited their ill-gotten wealth and the rest of Bernie’s victims who are still alive certainly did not have hope after Madoff’s scheme collapsed.

In a way, you could compare fraud to being slipped at “mickey” or “date rape drug” at a bar. You feel great, or maybe think you feel great while it’s lasts, but you feel terrible the next morning. The morning after Bernie Madoff confessed to the feds, a lot of people didn’t feel hope. They felt outrage, grief, anger, and eventually despair. And now what many now feel is utter despair.

The true outcomes of frauds

Most frauds are never prosecuted in court, nor is any money collected on behalf of victims. They are too “small potatoes” for the government to bother with. The true outcome of any fraud is that the victims wind up with peanuts, if anything. And by victims I mean every sheep who gets fleeced.

Those frauds that are prosecuted tend to wind up paying the victims “pennies on the dollar”. That means that all the people who depended on the primary victims of a fraud for payments are themselves fleeced as those victims no longer have the means to pay them for their work or services.

Fraud not only spreads the despair; it makes the victims themselves unwitting perpetrators of fraud on others. Victims of fraud feel guilty that others they promised to pay are not paid. They feel fearful that fraud will happen again, and often it does, because (1) cons have lists of names of victims they sell to each other, (2) victims without money are often at the mercy of other cons for goods and services because the victims can only afford to pay the lowest cost for after they’ve been defrauded.

There is a multiplier effect from fraud, just as there is from unemployment benefits. But while unemployment benefits create more jobs as the unemployed spend their benefits (paid by the employer who enjoyed the fruits of their labor while they were employed by that employer), fraud creates unemployment as more and more people associated with the primary victims do not get paid what they are owed by the victims.

And then there are the “secondary and tertiary victims” of the fraud. Many large frauds involve several layers of fraud involving “feeders”. Feeders are the legit (or semi-legit) brokers, insurance agents, or other financial “professionals” who fail to do their “due diligence” before collecting monies on behalf of the con from even more victims. These clients of the “feeders” are the secondary victims.

The victims of tertiary “feeders” who send money up to the secondary layer of “feeders” who are funding the cons are tertiary victims. These secondary and tertiary victims have no rights to anything the government trustee collects; they have to sue whatever “feeder” fooled them — if they have anything left to sue with and that feeder has anything left to pay them with.

The biggest amount due to the Madoff trustee is $7 billion from the Jeffrey Picower estate. Picower was himself a victim of the fraud, and his this estate is now tied up indefinitely in two lawsuits. When (or if) those cases are ever resolved, the Madoff trustee estimates investors would receive a grand total of 14 cents on every dollar they actually lost.

Nope, Gus, fraud, doesn’t create wealth, it destroys it. Fraud redistributes wealth but not to the real victims of the fraud. And the hope that fraud engenders is nothing but a phantasmagoria, a pretty horrifying one at that.

Follow Nancy Humphreys on Twitter @brucenomics

1 comment so far ↓

#1 Raoul Martinez on 02.09.12 at 9:40 pm

An interesting subject, fraud. I also learned a new word, “phantasmagoria.” Thank you Nancy. RAOUL

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