How it Started: A Brief History of Business Fraud and Scams

Fake money, fake buildings, fake people - the history of business scams is colorful. Image: Canary & Shield

It seems that every breakthrough in technology and trade offers new opportunities for certain individuals to create mayhem. The history of fraud, impersonation and extortion is colorful and unrelated to technology as its impetus, with most sources pointing at the Greek sea merchant Hagestratos in around 300BC as the first individual attempt at fraud. Having insured his trading vessel using a form of cargo and ship insurance known as a bottomry; he raised a loan against the cargo and planned to keep the proceeds and use the insurance to pay off the loan. His attempts to scupper his ship were uncovered and the hapless fraudster drowned whilst trying to evade capture.

Accelerating forward to 193AD and Emperor Publics Helvius Pertinax, only 87 days into his reign, was undone by the 200+ strong Praetorian Guard who assassinated the emperor for short-changing their wages and demanding tighter discipline. Turning fraud into a team sport, they then hit on the idea of auctioning off the title of Emperor, netting some 250 gold pieces per person (Worth as much as much as $1.5Bn today). Setting a trend for selling something they didn’t own, the buyer, Didius Julianus, was quickly dispatched by the eponymously named Lucius Septumus Severus leading to a period of civil war known as the Five Emperors for obvious reasons.

Fast forward to the 1820’s when Scotsman General Gregor McGregor went one step further and sold something that didn’t exist. He used his impressive war record to claim he had become a Prince by acquisition of the “Island of Poyais”, selling property on the mythical island to investors and even striking an exchange rate for a made-up currency in perhaps the first Forex (foreign exchange) scam ever recorded.

It’s not clear whether George C. Parker knew of McGregor but he certainly surpassed his exploits by managing to sell ownership of the very real Brooklyn Bridge a total of 4,160 times during the 1880’s to people he convinced could install toll booths at either end in order to extract enormous returns, several who tried were removed by the police. Emboldened he also sold Statue of Liberty, Madison Square Garden, Ulysses S. Grant's tomb, and the Metropolitan Museum of Art, as well as several theatrical events. Arrested several times, he walked out of a court in 1908 using a Sheriff’s coat and hat that had been left on a chair. He was very popular inmate and raconteur in Sing Sing, some 30 miles from the scene of most of his scams, where he spent the last eight years of his life.

Forward to 1925 Paris and ‘Count’ Victor Lustig (If that was his name as he had almost 50 known aliases, far more than Frank Abagnale Jr imagined in his own fictional biography). He created a profile of a French government minister in Paris, setting himself up in a lucrative salon and inviting scrap metal merchants to bid for the dismantling of the Eiffel Tower - not once but twice. Facing imminent arrest, he high-tailed it to New York where he was finally arrested in 1925 and incarcerated in a maximum security prison in Manhattan, from which he escaped by walking out the front door! Recaptured, he was sent to Alcatraz where he died of pneumonia in 1947. 

Charles Ponzi is universally known for his eponymous “scheme”. An Italian immigrant, he arrived in New York in 1903 with $2.50 in his pocket having gambled his savings on the voyage. Failing to establish himself in the City whilst also gaining a reputation for short-changing customers in retail jobs he moved to Montréal, Canada where he worked his way from teller to bank manager at Banco Zarossi. The bank had made some bad property investments and couldn’t fund their advertised high rate of returns for depositors from interest payments so used new deposits to pay off older investors, and it planted a seed in Ponzi’s mind. The bank failed and the owner fled to Mexico with the bank’s remaining cash. Penniless, Ponzi tried check fraud and was rewarded with his first prison term, writing to his mother in Italy and saying that he had secured a position as "special assistant" to a prison warden!

1919 finds Ponzi in Boston trying to sell business services to European businesses when he was asked by a Spanish company about the use of USPS International Reply Coupons for their catalog business. These coupons could be bought in a number of countries and exchanged for stamps in a third country to facilitate “reply paid” correspondence which was perfect for reply paid mail. Ponzi realized that the depressed rate of the Lire meant that cheap IRC’s (Priced in Lire) could be sent to the US and exchanged for $ stamps that could be resold with a margin of 400%. He went on the hunt for investors to fund the capital costs of his scheme. Immediately he was able to return to investors a $750 dividend against an initial investment of $1,250. Word spread quickly and in 1920 Ponzi established the Securities Exchange Company, but instead of bothering with the costs of procuring and handling IRC’s, Ponzi merely paid the dividends from money received from new investors, just like Banco Zarossi. The speed of return accelerated the business and by June 1920 investors had deposited over $2.5M, a sum so large that Ponzi took a controlling interest in his bank.

The Boston Post began to investigate his business dealings, so Ponzi sued them for libel and won $500,000 settlement. Undeterred, the Post teamed up with Clarence Barron, the head of Dow Jones & Company to dig deeper into Ponzi. They showed that for Ponzi’s business to work the company would need to handle more than 160 million IRC’s when there were only a total of 27,000 in circulation. A run on deposits followed which revealed his bank had made multiple unsecured loans to Ponzi himself. Five banks went under as a result of the failure of SEC and he owed some $20M (or $240M today). Arrested on a Federal 86-count charge of wire fraud, Ponzi was jailed on a plea bargain and sentenced to five years, serving three and a half. On his release he was deported to Massachusetts on state charges which he appealed to the Supreme Court giving rise to the landmark ruling that a federal plea bargain doesn’t prevent State charges under the double jeopardy ruling.

Ponzi has had many modern imitators. Bernie Madoff, the most notorious exploiter of Ponzi’s “scheme” defrauded his investors of over $65Bn in direct losses and fabricated gains spanning some thirty years. He was sentenced to 150 years in a Federal prison but died 11 years later. Sam Bankman-Fried whose FTX cryptocurrency exchange founded in 2019 managed to fraudulently lose $11Bn in just four years was indicted on several charges that included fraud as he essentially used client funds as his personal bank account. He was sentenced to 25 years in  Federal prison and $11Bn in forfeiture. 

So where does technology fit in the landscape of fraud? It plays a checkered role, sometimes good and sometimes bad. Join us in Part 2 where we explore today’s landscape.