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The SchemeThe ancient roman satirist, Juvenalis, answered the question Why do you write satire? by responding: "It is difficult not to write satire" (given the ludicrous state of the world). And so, in a similar vein I say: "It is difficult not to write about fraud!
It has been some years now since I graduated from law school in, beginning what has turned out to be a meandering yet enduring inquiry into the nature of financial fraud. As the hours and years of research accumulated, I became curious as to the origin of my fascination with the subject. After a period of deliberation, I recalled an incident from the Minnesota State Fair in the 1960s.
I must have been between 5 and 10 years old at the time. It was a hot, sunny, day in late August or early September. My mother had taken me to the Fair, and at my insistence we were strolling through the Midway. The smell of pronto-pups, cotton candy, and mini-donut fryers tantalized me. I was enthralled the games of skill and chance, and the wonderful prizes they offered. I pestered my mother to give me some money so I could play, and she refused. She said the games were all rigged so that nobody could win. I kept after her. Eventually, she gave in and agreed to pay for a single game. I carefully searched until I found one that I was sure could be easily won.
The game consisted of rolling a small rubber ball up a ramp where winning the prize involved dropping the ball into a series of concentric circles at the end of the ramp. Even the outer circles provided a prize. My mother gave me the dollar and, feeling important, I handed it to a sweaty, unshaven, overweight man with a cigar stub in his mouth, getting three balls in return. As I rolled the balls I discovered that, due to the physics of the ramp, if the ball was going fast enough to reach the top, it would launch off into the air, missing the circles completely. After increasingly desperate tries, I turned away, crestfallen. Yet, the worst was still to come. My mother angrily challenged the man "You should give him his money back! This game is rigged, nobody could get that ball in! How can you cheat a little kid like this!" The carney, smirking, responded with the equivalent of "You pays your money, you takes your chances." She refused to let the matter drop, and the fat sweaty carneys in the adjacent booths joined the fray. They spoke loudly thorough their cigar stubs, with familiarity and disrespect: "Hey, lady, what's your problem?" This is my only childhood memory of mom demanding a refund and not getting it.
While the game of the ramp and the concentric circles is probably not in the legal sense a fraud, it provides many object lessons thereof. Keeping this in mind, I will let my tale reveal its lessons unaided, adding only one observation: The game of ramp and concentric circles operates in full view, openly disclosing its mechanism. Yet, after examining it with an uninformed eye, one draws inaccurate conclusions about how it really works. Only in hindsight does the flaw seem obvious. This is analogous to one of my favorite accounting misrepresentations, the financial statement that accurately discloses all, while leading the uninformed reader to an entirely mistaken sense of optimism.
Completely lacking in subtlety at the other end of the spectrum, although equally fascinating, lies the extremely uncomplicated accounting fraud of Charles Ponzi of Boston. It is to this 1920's period piece that I now draw the reader's attention.