10 NOTORIOUS WALL STREET CROOKS

10 Notorious Wall Street Crooks
By Robert Grimminck, Toptenz, 20 April 2016.

Probably the most lucrative crime someone can commit is defrauding investors on Wall Street. Just to give you some perspective, the men on this list combined to steal nearly US$200 billion, all while living the life of extreme luxury.

This list should also be a lesson when it comes to investing. If you want to keep yourself safe, always research your investments and remember that when it comes to investing, if something sounds too good to be true, then it probably is.

10. Charlie Ponzi

Charles Ponzi moved from Italy to New York City in 1903. Before starting his fraud scheme, he was arrested twice: once for passing bad checks in Montreal, and then for smuggling Italian immigrants into America. He spent a total of five years in prison for both crimes.

In 1918, Ponzi realized that international reply coupons (IRCs) purchased in other countries could be exchanged for American postage that was more valuable. So Ponzi had agents working in other countries who would buy IRCs and then mail them to him. Ponzi would exchange the IRCs for the more valuable stamps, then sell the stamps, and keep the profit. He supposedly made 400 percent off of these transactions.

Wanting more money, Ponzi took funds from investors and this is when the fraud began. He promised investors insanely good returns in a short amount of time, such as a 90 percent return after 50 days, or that they would double their money in 100 days. In reality, what Ponzi was actually doing was keeping the money and paying out old investors with new investors’ money. The scam made Ponzi very wealthy and at the schemes’ peak, Ponzi was earning as much as US$250,000 every day. And remember - we’re talking about early 20th century money here.

The problem with a Ponzi scheme is that it can only go on for so long. Sooner or later, the scam is exposed when someone looks at the paper trail, or new investors are too hard to find and too many old investors want to withdraw their money. Ponzi’s scheme fell apart in August of 1920 when The Boston Post investigated him and figured out what he was doing. The paper published a series of exposés about his scam and Ponzi was arrested for fraud and larceny.

In just a few months, Ponzi stole US$20 million, when accounting for inflation that is about US$237 million in 2016. The scheme also caused six banks to go out of business. Ponzi was arrested and pleaded guilty to mail fraud. He did 14 years in prison and died while living in poverty in Brazil in 1949.

9. Roland Arnall

Throughout many of these entries, we will talk about the 2007-2008 market crash. It is considered by some to be the worst financial crisis since the Great Depression in 1929. One of the main causes of the crash was the bursting of the American housing bubble due to bad subprime mortgages. Subprime lending is giving loans to people who don’t have any credit or poor credit. In hindsight, this was probably not the best idea because the reason people don’t have good credit is because they have a history of failing to repay loans. Or if they had no credit, the first thing they shouldn’t start off with is a mortgage. Yet, many banks freely gave out these subprime loans.

The second biggest lenders of subprime mortgages was the Ameriquest Mortgage Company, which was founded by Roland Arnall in 1980. As early as 1996, the company was accused of predatory lending, which, as you can probably tell by its name, is not legal. Predatory lending is using dishonest means when loaning out money, in the case of Arnall’s Ameriquest, they were accused of charging massive upfront fees, interest rates that were higher than promised, and loans that were supposed to be fixed rates, but were actually variable. In 2006, in the lead up to the housing market crash, 49 state attorneys were investigating Ameriquest for deceiving borrowers, falsifying loan documents, and pressuring appraisers to overvalue homes. To end the investigation, Ameriquest Mortgage agreed to pay US$325 million. Things finally fell apart for Ameriquest in 2007 when the housing market crumbled, which caused Ameriquest to close and its assets were sold to Citigroup. In 2010, the now defunct Ameriquest agreed to pay another US$22 million to lenders for their practices in the lead up to the meltdown.

Arnall never admitted wrongdoing, despite agreeing to pay out hundreds of millions of dollars, which is quite a bit of money for an innocent person to pay out. In the lead up to the 2004 elections, Arnall was one of the largest donors to President George W. Bush, and on August 1, 2005, Bush nominated Arnall as ambassador to the Netherlands. He was given the position and he held office from March 2006 to March 2008, when he resigned and returned to America. Shortly after doing so, he passed away at the age of 68.

8. Martin Shkreli

Nicknamed “The Teen Wolf of Wall Street” and the reigning champion in the Most Punchable Face in the Galaxy competition that we just now created (congrats on your win, Martin!), Shkreli first rose to international notoriety in September of 2015. That’s when his company, Turing Pharmaceuticals, announced that they would be raising the price of a lifesaving AIDS treatment drug from US$13.50 to US$750 per tablet, which is a 5,556 percent price increase. While Shkreli’s price gouging made him look like a sleazy parasite that preyed on sick people, what he did wasn’t illegal. However, Shkreli finds himself on this list for his long history of sketchy behavior when it comes to investing and trading.

Shkreli’s first run in with the Securities and Exchange Commission (SEC) was when he was 19. He was interning at a trading company and suggested shorting a biotech stock. Shorting is essentially betting that a stock will go down in value. The company followed Shkreli’s advice and the stock dropped. As a result, they made a large profit, which prompted an investigation by the SEC. In this case, he was eventually cleared of any wrongdoing.

In 2009, Shkreli started MSMB Capital Management, a hedge fund company that specialized in short-selling biotech companies. It was during this time that Shkreli gained some notoriety in the trading world because after a company’s stock would lose value, Shkreli would use his social media accounts to publicly berate the company.

In February of 2011, he founded the pharmaceutical company Retrophin. In the same month, Shkreli lost US$8 million in bad investments. However, he didn’t tell any of his investors that, and instead he wrote them letters as if nothing had gone wrong, even though MSMB had less than US$60,000 in assets and had stopped trading. To cover up the fact that MSMB was broke, Shkreli funneled money from Retrophin to pay off debts owed by MSMB and Shkreli’s own personal debts, which is against the law. He also backdated some transactions to make it look like Retrophin had invested in MSMB, which is also illegal.

In 2013, investors of Retrophin became wise to Shkreli’s shady business practices. To appease them, without asking the board of directors, Shkreli forced Retrophin to pay off angry investors US$11 million. This led to him being forced out as CEO in September of 2014. Retrophin sued Shkreli for US$65 million in August of 2015, for mismanagement of funds.

In February of 2015, Shkreli founded Turing Pharmaceuticals and bought the rights to the AIDS treatment drug Daraprim, which is the drug that he inflated the price of months later. He also bought another pharmaceutical company called KaloBios.

In December of 2015, Shkreli was arrested for securities fraud and was accused of running a Ponzi scheme. After his arrest, he stepped down as CEO of Turing and was forced out as CEO of KaloBios. After being arrested Shkreli claimed his innocence on social media. He bemoaned that he was being publicly shamed and he was being targeted because of his legal price gouging.

Most recently, in February of this year, Shkreli did the seemingly impossible; he somehow increased his smackablity when he appeared in front of congress and smirked while pleading the fifth. His trial is set for 2016.

7. Jordan Belfort

In 1989, 27-year-old Jordan Belfort and his partner, Danny Porush, started a company called Stratton Oakmont and ran a scheme called a “pump and dump.” How pump and dump scams work is that brokers hype up a stock by getting a lot of people to invest at once. This is usually done in cold calls, and the brokers tell potential investors information about the stock that is misleading, exaggerated, or are just flat out lies. Once a lot of people buy the stock, it makes it look more valuable and the price of the stock goes up. The hedge fund or the brokers, who already own a lot of the stock because they bought it at a low cost, sell it once the price is inflated, in addition to taking commissions.

By 1992, the SEC tried to shut down Stratton Oakmont, but not much would happen for another two years until Belfort was banned from trading for life. In 1996, the company was forced to liquidate its assets after being kicked out of The National Association of Securities Dealers and they were forced to pay massive fines.

In 1998, Belfort was arrested. In many investigations involving organized crime syndicates, the authorities usually go after low end criminals and make them wear a wire to catch the kingpins. Well, the complete opposite happened with Belfort. He wore a wire and ratted on everyone beneath him. In 2003, Belfort was sentenced to four years, and ultimately spent 22 months in a cushy, minimum security prison for stealing US$200 million. He was fined US$110 million and has only paid about 10 percent of his debt. In the future, he is only forced to pay using 50 percent of his salary. Currently, he is a motivational speaker and lives in Australia to avoid payments. It is believed that he has a personal net worth still in the millions.

While defrauding investors, Belfort lived an incredibly lavish lifestyle that included drugs, alcohol and prostitutes. Of course, if you want to see how excessive Belfort’s lifestyle became, Martin Scorsese spends a lot of time on it in the adaptation of Belfort’s book, The Wolf of Wall Street.

6. Ivan Boesky

When a lot of people think of greedy stockbrokers, the first person that comes to mind is Gordon Gecko, the antagonist of Oliver Stone’s 1987 film, Wall Street. Well, Gecko is actually based on a real person, Ivan Boesky.

Born in 1937 in Detroit to Russian immigrant parents, Boesky married the daughter of real estate tycoon Ben Silberstein in 1962. Silberstein knew that Boesky only married his daughter, Seema, because she was rich. In 1966, Boesky and Seema moved to New York City, into an apartment that Silberstein paid for. Boesky worked for two investment companies before launching his own brokerage firm, Ivan Boesky and Company, in 1975 with US$700,000 from his wife’s family.

Over the next decade, Boesky was very successful, but a lot of the money that he made was through insider trading. Insider trading is learning information that hasn’t been made public that may alter a stock. In Boesky’s case, he would find out when a company was about to be acquired and purchase stock in the company. Then, the price of the stock would skyrocket when it was announced they were being purchased. In 1984, it’s believed that he made US$65 million after Chevron purchased Gulf, and when Texaco purchased Getty. The next year, he made US$50 million when Philip Morris acquired General Foods.

In the mid-1980s, Boesky was worth US$280 million and was one of the richest Americans. In May of 1986, at the commencement for the School of Business Administration at Berkeley, he was quoted as saying, “Greed is all right, by the way. I want you to know that. I think greed is healthy. You can be greedy and still feel good about yourself.” In that same month, a man who sold Boesky inside information was arrested, and he told investigators that Boesky was involved with insider trading. In September of 1986, Boesky struck a secret deal with federal investigators. Using wire taps, Boesky was able to gather information on 14 people at five different brokerages. In November, the deal was made public. Boesky was fined US$100 million, banned from selling securities, and sentenced to three years in prison. He spent 22 months behind bars (what is it with Wall Street jerks and 22 month prison stints?) before being released on good behavior.

In 1991, he and his wife divorced. She agreed to pay alimony of US$23 million, plus another US$180,000 every year. Currently, Boesky lives in a mansion in San Diego with his new wife.

5. Raj Rajaratnam

In 1991, Sri Lankan-born Raj Rajaratnam became president of the hedge fund he owned, Galleon, when he was just 34-years-old. Rajaratnam specialized in technology stock and during the 1990s tech boom he was incredibly successful. By 2009, he was personally worth US$1.8 billion, and thought to be the richest Sri Lankan in the world. However, Rajaratnam didn’t reach those lofty riches honestly.

Rajaratnam’s legal problems started in 2001, when a former Intel employee, Roomy Khan, admitted to insider trading; she had given Galleon information about Intel and pleaded guilty to fraud. At first, there were no repercussions for Rajaratnam and Galleon, but in 2004, it was discovered that Rajaratnam had set up a sham tax shelter to hide US$52 million of income. He was forced to pay US$20 million in fines and penalties because of it.

Strangely enough, Rajaratnam continued to do business with Roomy Khan and even hired her to work at Galleon. With her permission, the FBI tapped her phone and collected evidence on Rajaratnam and traders at Galleon. This led to Rajaratnam being arrested on October 16, 2009, for insider trading. Within days, Galleon’s investors pulled their money and the hedge fund closed by the end of the month.

While Rajaratnam was on trial, 21 former Galleon employees were arrested for insider trading and 11 of them pleaded guilty. Rajaratnam pleaded not guilty, but was ultimately convicted and sentenced to 11 years in prison. It is believed that through his insider trading, he made US$63.8 million. At the time, it was the biggest case ever made against a hedge fund.

4. Charles Keating

Charles Keating was a paradox of a man. He was staunchly Catholic and a strong advocate against pornography, but he was also a notorious Wall Street criminal who defrauded 23,000 investors of hundreds of millions of dollars and cost taxpayers billions.

In 1984, Keating bought Lincoln Savings and Loans. Instead of just writing traditional mortgages, Keating used customers’ money in highly risky investments through another company he owned, American Continental Corporation. He would use good looking women as salespersons and then he exhorted the staff to prey on “the weak, meek and ignorant.” The staff would also convince investors to exchange their secure bonds for junk bonds. Besides just using investors’ money for another company, Keating also used the money for his own personal use, and straight up stole US$34 million.

In 1986, federal regulators were trying to crack down on Lincoln, and Keating decided to give donations and gifts, totaling US$1.3 million, to five American senators, including John McCain. The “Keating Five,” as they came to be called, advised that the charges against Keating should not be pursued. Their advice wasn’t taken and investigators found that Lincoln had US$135 million in unreported losses and it was more than US$600 million over the federally mandated risky-investment ceiling. Amazingly, Keating was able to operate Lincoln for another two years before he declared bankruptcy and was arrested for fraud.

In total, between US$250 million and US$288 million, which were people’s savings accounts and mortgages, was lost, and the scandal cost taxpayers US$3.4 billion. Keating claimed he was a scapegoat and even a martyr. He was originally sentenced to 10 years in prison, but won an appeal. In 1999, he was sentenced to time served, meaning he only served four-and-a-half years in prison after wiping out thousands of people’s savings. He died in November of 2014 at the age of 90. Out of the Keating Five, they all pretty much escaped unscathed; only one senator, Alan Cranston, was reprimanded.

3. Allen Stanford

Texas born Allen Stanford launched Stanford International Bank in 1991 on the Caribbean Island of Antigua. By 2008, which was the height of Stanford’s “success,” he was worth US$2.2 billion, and was one of the richest men in America. He owned a small island and did ridiculous things with his money, such as spending US$12 million to lengthen his yacht six whole feet. He even built an 18,000 square foot castle in Florida. It had 57 rooms, a tower, and a moat. After a year of living in it, he got bored and had it demolished.

When the housing market crashed in 2007, investigators started a crackdown on Wall Street investors and looked into Stanford’s business. It turned out that he was running a giant Ponzi scheme, and he was arrested in June of 2009. It’s believed that Stanford stole US$7.2 billion from over 20,000 investors and none of them recovered any of their money. What’s worse is that it is believed that as early as 1997, the SEC knew that Stanford was running a Ponzi scheme, and there were four instances of it being reported. Yet, the SEC never notified the Securities Investor Protection Corporation, which is a corporation meant to protect investors from shady stockbrokers. The SEC denied that they ignored or covered up the fact that Stanford was running a Ponzi scheme.

Stanford was convicted on 13 of 14 fraud-related charges. He sentenced to 110 years in prison and ordered to pay back US$5.9 billion, which he doesn’t have because he spent it all. Stanford claims he is innocent and that he was a scapegoat.

2. Jeff Skilling and Kenneth Lay

Enron started life as an interstate pipeline company in 1985. Kenneth Lay was the CEO and in 1990, he hired Jeff Skilling to focus on trading commodities in deregulated markets. Over the next 10 years, the company grew rapidly. From 1996 to 2000, Forbes called it the most innovative company in America. Enron was the seventh biggest corporation in America, the sixth largest energy company in the world, and in 2000 they posted revenues of US$111 billion.

Things started to fall apart for Enron in 2001 when the price of stocks started falling and Skilling, who succeeded Lay as CEO in February of that year, encouraged his own employees to put their money into Enron stock, even though he was selling off his own. On August 14, 2001, Skilling unexpectedly resigned as CEO and Lay took over again. This signaled that Enron was in trouble. In October of 2001, Enron announced massive losses and the SEC started to investigate the company. On December 2, Enron declared bankruptcy.

So what happened? Well, it was a rather complicated swindle and Enron used a bunch of shady practices to defraud thousands of people. One of the main ways they were able to cheat the system, and is thought to be the primary cause of Enron’s downfall, goes back to 1992, when Skilling convinced federal regulators to let Enron use an accounting method called “mark to market.” This allowed Enron to record projected earnings as current income, even if the money may not be collected for years, if it was collected at all. It would be like someone saying they have US$150,000 because they make US$50,000 a year and plan on working for the next three years, despite the fact that the situation could change dramatically over that timeframe. Amazingly, the sixth biggest corporation in America was allowed to get away with this type of accounting for almost a decade.

At the time, this type of accounting made it difficult for anyone to know how much money Enron was really making. By counting their projected income, they claimed it was US$111 billion in 2000, which made their stock look more valuable than it really was. An added bonus of this scam was that Enron didn’t have to pay higher taxes because it was projected income and not actual income. The problem was that Enron wasn’t making any money. In fact, they were losing money and then hiding it in shell companies.

After the bankruptcy, shareholders in Enron lost over US$63 billion. Both Lay and Skilling were arrested and were found guilty on May 25, 2006. Shortly after the verdict, on July 5, Lay died and a judge overturned his conviction because he wouldn’t be able to appeal it. Skilling was sentenced to 24 years, but in 2013 that was reduced by 10 years and he could be released as early as 2017.

1. Bernie Madoff

In entry number 10, we talked about Charles Ponzi and his infamous scheme, which you’ll notice is a crime a lot of these people committed. Well, that is exactly what Bernie Madoff did, but he was much more successful at it than even the scheme’s namesake. Where Ponzi had run his scam for several months, Madoff was able to run his for 20 years. It’s believed that his scheme started after the market crash of 1987. His scheme promised high returns of anywhere from eight percent to low double digits every year. Of course, this attracted thousands of investors, including Steven Spielberg, Kevin Bacon, Kyra Sedgwick, and Sandy Koufax.

One of the reasons Madoff got away with it for so long was that he had been a respected banker since the 1960s. He helped launch the National Association of Securities Dealers Automated Quotations (NASDAQ) and he was the chairman of the NASDAQ for three years. So, people just assumed that Madoff was really good at investing and could be trusted. However, other people, including Madoff himself, said that many people just turned a blind eye to his shady dealings.

Madoff’s scheme fell apart on December 10, 2008. That’s when Madoff told his brother and two sons, who worked in a legitimate part of the business, that the investment wing of the company was a fraud and there was no money left. Madoff’s sons turned him in the next day.

It’s believed that Madoff “only” made US$20 billion, but he stole a total of US$65 billion from investors. After he was arrested, investors demanded their money back, but out of all the money he stole, he only had between US$200 and US$300 million, meaning many investors will never recover much - if any - of their money. Madoff was sentenced to 150 years in prison in June of 2009.

Top image: Bernard Madoff's painted portrait. Credit: thierry ehrmann/Flickr, CC BY 2.0.

[Source: Toptenz. Edited. Top image added.]