History of Frauds

 It would be very interesting to learn that fraud is not a newly invented word. It would also be a misconception to say that technology has led to emergence of frauds in business.

A true history of fraud would have to start in 300 B.C., when a Greek merchant name Hegestratos took out a large insurance policy known as bottomry. Basically, the merchant borrowed money and agreed to pay it back with interest when the cargo, in this case corn, is delivered. If the loan is not paid back, the lender could acquire the boat and its cargo.

Hegestratos planned to sink his empty boat, keep the loan and sell the corn. It didn't work out, and he drowned trying to escape his crew passengers when they caught him in the act. This is the first recorded incident as of yet, but it's safe to assume that fraud has been around since the dawn of commerce.

The First Insider Trading Scandal

In 1792, only a few years after America officially became a nation, it produced its first fraud. At this time, American bonds were like developing-world issues or junk bonds today - they fluctuated in value with every bit of news about the fortunes of the colonies that issued them. The trick of investing in such a volatile market was to be a step ahead of the news that would push a bond's value up or down.

Alexander Hamilton, secretary of the Treasury, began to restructure American finance by replacing outstanding bonds from various colonies with bonds from the U.S. bank. Consequently, big bond investors sought out people who had access to the Treasury to find out which bond issues Hamilton was going to replace.

William Duer, a member of Washington's inner circle and assistant secretary of the Treasury, was ideally placed to profit from insider information. Duer was privy to all the Treasury's actions and would tip off his friends and trade in his own portfolio before leaking select info to the public that he knew would drive up prices. Then Duer would simply sell for the easy profit. After years of this type of manipulation, even raiding Treasury funds to make larger bets, Duer left his post but kept his contacts inside. He continued to invest his own money as well as that of other investors in both debt issues and the stocks of banks popping up all over the country.

With all the European and domestic money chasing bonds, however, there was a speculative glut as issuers rushed to cash in. Rather than stepping back from the overheating market, Duer was counting on his information edge to keep ahead and piled his ill-gotten gains and that of his investors into the market. Duer also borrowed heavily to further leverage his bond bets.

The correction was unpredictable and sharp, leaving Duer hanging onto worthless investments and huge debts. Hamilton had to rescue the market by buying up bonds and acting like a lender of last resort. William Duer ended up in debtor's prison, where he died in 1799.

Fraud wipes out a Former President

Ulysses S. Grant, a renowned war hero and former president, only wanted to help his son succeed in business, but he ended up causing a financial panic. Grant's son, Buck, had already failed at several businesses but was determined to succeed on Wall Street. Buck formed a partnership with Ferdinand Ward, an unscrupulous man who was only interested in the legitimacy gained from the Grant name. They opened up a firm called Grant & Ward. Ward immediately went around raising capital from investors, falsely claiming that Ulysses S. Grant had agreed to help them land fat government contracts. Ward then used this cash to speculate on the market. Sadly, Ward was not as gifted at speculating as he was at talking. He lost heavily.

Of the capital Ward squandered, $600,000 was tied to the Marine National Bank, and both the bank and Grant & Ward were on the verge of collapse. Ward convinced Buck to ask his father for more money. Grant Sr., already heavily invested in the firm, was unable to come up with enough, and had to ask for a $150,000 personal loan from William Vanderbilt. Ward essentially took the money and ran, leaving the Grants, Marine National Bank and the investors holding the bag. Marine National Bank collapsed after a bank run and its fall helped touch off the panic of 1884.

Grant Sr. paid off his debt to Vanderbilt with all his personal effects, including his uniforms, swords, medals, and other memorabilia from the war. Ward was eventually caught and imprisoned for six years.

There may be many other such stories reported or unreported which basically made the foundation for today’s frauds. Here one interesting fact to be shared is fraud Museum, we have heard about Science Museums, Heritage Museums, however we have fraud museum as well.

ACFE Fraud Museum at Gregor Building, Austin

In the words of Joseph Wells, CFE, CPA, ACFE Founder and Chairman

“I’ve always found the lives of fraudsters to be extremely fascinating, While researching my book, ‘Frankensteins of Fraud,’I came across some interesting characters and subsequently found accompanying memorabilia. I started collecting these pieces and — voilà! — the fraud museum was born.”

(Author CA Piyush Baranwal, DISA, Certified FAFP(ICAI),Certified in International Taxation(ICAI)  can be reached at mail@forensicpundit.com or 9818133880)